Q2 2021 earnings call transcript

Hippo Second Quarter 2021 Earnings Transcript

C O R P O R A T E P A R T I C I P A N T S

Assaf Wand, Chief Executive Officer

Stewart Ellis, Chief Financial Officer

Richard McCathron, President

Chris Mammone, Investor Relations

A N A L Y S T P A R T I C I P A N T S

Christopher Martin, KBW

Arvind Ramnani, Piper Sandler

Matt Carletti, JMP Securities

Chris Mammone, Investor Relations

Thank you, operator. Good afternoon everybody and thank you for joining Hippo’s Second Quarter

2021 Earnings Conference Call.

Earlier today, Hippo issued a Shareholder Letter announcing its second quarter results, which is also available at investors.hippo.com. Leading today’s discussion will be Hippo’s Chief Executive Officer

Assaf Wand, President Rick McCathron and Chief Financial Officer Stewart Ellis. Following management’s prepared remarks, we will open up the call to questions.

Before we begin, I would like to remind you that our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of the presentation. Forward-looking statements include, but are not limited to, Hippo’s expectations or predictions of financial and business performance and conditions and competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or from our forecasts, including those set forth in Hippo’s Form 8-K filed today.

For more information, please refer to the risks, uncertainties and other factors discussed in Hippo’s

SEC filings. All cautionary statements that we make during this call are applicable to any forward- looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in Hippo’s SEC filings. Do not place undue reliance on forward-looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating, altering or otherwise revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Running through some of the technicalities associated with the recent public listing event. The transaction was accounted for as a reverse recapitalization and Reinvent Technology Partners Z will be treated as the acquired company for financial statement reporting purposes. Hippo Holdings Inc., prior to the business combination, was deemed the predecessor and Hippo, after the business combination, will be the successor SEC registrant, meaning that Hippo’s financial statements for

1 periods prior to the consummation of the Business Combination will be disclosed in Hippo’s future periodic reports. No goodwill or other intangible assets were recorded, in accordance with GAAP. For more details, please see our filings with the SEC.

Additionally, during this conference call, we will also refer to non-GAAP financial measures such as

Total Generated Premium and adjusted EBITDA . Our GAAP results and description of our non-

GAAP financial measures with a full reconciliation to GAAP can be found in the second quarter 2021

Shareholder Letter which has been furnished to the SEC and available on our website.

And with that, I'll turn the call over to Assaf Wand, Co-Founder and CEO of Hippo.

Assaf Wand, Chief Executive Officer

Thank you Chris, and thank you all for joining us today.

We are incredibly proud to report our Q2 financial results for the first time as a public company. This was a quarter that was not only reflective of what we told you we would do, it was reflective of who we are. Our Q2 performance showed Hippo’s growth strategy coming to life.

We achieved 101% YoY growth in Total Generated Premium during the second quarter, reaching

$159 million. Our Q2 results demonstrate the power of the Hippo Platform and the power of the

Hippo Strategy, and I couldn’t be prouder of the effort and determination of the Hippo team that drives these results.

Looking ahead, we have growing visibility and confidence that we will not only meet the expectations we previously set for the year, but exceed them. Accordingly, we are increasing our full year guidance for Total Generated Premium from $544 million to $565 million.

At Hippo, we are transforming the home insurance market with a fundamentally different experience

Q&A

Operator

Christopher Martin with KBW, please proceed.

Christopher Martin, KBW

Hey guys, congrats on the IPO and posting your first earnings call. And I'm sure there seems to be a bit of relief to go through the last few months and get to here today, but it's probably just going to get harder as everything is maturing and growing at the same time. But I have two questions here. And the first one, I'd like to begin with a theme that the media has picked up and what some investors have been interested in. Can you comment, I guess you'd say the seemingly high level of redemptions after the IPO? And does this have any impact on potential growth of the company or strategy that you might be implementing?

Stewart Ellis, Chief Financial Officer

Hi Chris, this is Stewart here. Happy to speak to this one. I think first, it's important to understand that we structured the transaction to take us public with a large PIPE relative to the size of the cash and trust and so pro forma for the transaction, at the end of the second quarter, as we said, we have more than $900 million on the balance sheet. And the short answer to your question is that the redemptions don't change any of our plans with respect to investing in our business over the next few years to pursue our long-term goals. I’d also like to highlight, one thing that we mentioned in the in the earlier portion of the call, is that we have also just signed partnerships with both Ally Financial and Incline as carrier partners for our MGA and that in and of itself will also reduce the capital that we otherwise would have needed to support our growth. So while the redemptions weren't, obviously what we hoped, we don't expect that they will have any impact on our ability to invest in the future or to pursue our plan.

Christopher Martin, KBW

Okay, yeah, great. That makes a lot of sense, especially those announcements last week, which I imagine didn't come online 13 days ago, whatever it is now. And the other one is just looking at the growth of premiums has actually outpaced revenue here. And as far as the significant increase in headcount—we’re seeing some commentary in the personal lines players, both by your peers, and some of the other top 10 names, and even these advertising platforms themselves have talked about how customer acquisition costs are on the rise, and kind of either near term hindrance to growth or even scaling back and attempting growth, because of what the market is right now in the marketing, advertising sales. And then, you know, you'd mentioned there the increase in sales and marketing

8 expenses, were not aligned necessarily with how much growth you've had. What have you sort of seen in your target markets? And what does that kind of mean for broader expansion plan if the personal lines are seeing this type of expense growth on the customer acquisition side? And are there anything that's been outside of your expectations?

Stewart Ellis, Chief Financial Officer

Thanks again, Chris, this is Stewart again, I'll take this one as well, I think first thing to understand about Hippo as distinct from some other players in the industry, is that we've always pursued an omni channel distribution strategy. It's been our core belief, to design our entire experience from the very beginning around what is best for our customers. And on the distribution side, that means that we want customers to be able to buy a policy from Hippo, where they want to buy a policy from Hippo, that might be through our website, it might be by calling us on the phone, it might be through an existing agent relationship that they already have. It might be from the home builder, that they're just buying a new home from, like Lennar. There are a lot of different ways that people might want to buy policy, and we want to be present in all of them. One of the benefits to us of the omni channel distribution strategy is that it is resilient to fluctuations in advertising costs or other things that might be going on in any one component of our channels. And it's also cash efficient in a way that helps us to expand new geographies, since the partner and the agent channel in particular, are things that we pay for based on collected premium over time. So the question about advertising expenses and acquisition costs is, I think it's important to keep that in mind that we're always very disciplined, as we think about spending money in direct consumer advertising channels. That said, we have not seen increases in our own sector, for our business in need costs or other things in the funnel. So we feel very, very strongly about our distribution strategy. We're not scaling back our investment in sales and marketing. In fact, because of our strong unit economics and high customer retention, we feel like you know, now is the time to get aggressive. We want to continue to invest going forward, I think you'll start to see us spend more building and improving and expanding the nationally recognized brand that we hope to build, so that everyone can start to hear the Hippo story directly from us. So we feel good about our distribution strategy. And we feel like we're on track.

Operator

Thank you, Mr. Martin. The next question comes from Arvind Ramnani with Piper Sandler, please proceed.

Arvind Ramnani, Piper Sandler

Thanks for taking my question. I just wanted to really get your thoughts on bundling, you know, certainly announced a partnership with Metromile. But why don't we get your thinking on, you know,

9 why don't you take in a more purposeful approach to launching your own auto product versus bundling with Metromile.

Assaf Wand, Chief Executive Officer

Thanks, Arvind, this is Assaf, I’ll take this one. I actually want to break it down into two components.

There's a micro and a macro component. So on the micro level, we just believe in focus. And our focus is to be the best home production platform in the world. Now, what you realize is that there's actually no correlation between some of the different lines. For instance, auto is a high frequency and low severity and home is a low frequency and high severity product. There is also some misalignment and so it's not exactly the same claim organization, it's not the same people that need to do it, it's not the same underlying experience. It's just a different line where there's not enough synergy. However, we always want to offer our customers the best policies in the market for what they need. We do not create products if we don't have enough conviction inside that we can offer our customers something which is utilizing technology better, using data in a better way, or just giving them a better customer experience. And in this case, for auto we just couldn't get that conviction.

Hence, we partner with some of the best of breed providers in the market. For this its Metromile for some of our customers, and that is our approach for how to do everything. So our customers are still going to get a bundle. They're just not going to get two products that are being produced by Hippo. So that's on the micro level. Now, I want to raise another point, which is our thinking about it in the macro level. What you're seeing in trends in the world, especially in the world of FinTech is that the world is actually unbundling. And you also see this in insurance because for every Geico product that is being sold by essence, you’re unbundling someone else's home and auto bundle. But back to the point of this unbundling trend. Just think about your life before, I don't know five to 10 years ago, Arvind, you used to go to your bank. And in the bank, you used to have your savings and your checking account. you used to take your credit card, you used to take your student loans there, your mortgage, you used to do your trading in the bank, everything used to be bank-centric. But right now, moving forward five to 10 years further. Your credit card is with the airline that you're using. You take your student loan from one provider, you take your mortgage from another provider, and you're trading with another company. The world is moving to an area of best of breed products that are very customer centric and are easier for customers to actually engage with. And that's what we believe would happen in insurance. And we have a lot of belief that Hippo is going to be one of the biggest benefactors of this trend.

Operator

Thank you, Mr. Ramnani. The next question comes from Matt Carletti with JMP Securities. Proceed.

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Matt Carletti, JMP Securities

Thanks for taking my questions. First off, I just want to follow up on some of Chris's questioning on customer acquisition costs. And just ask kind of a follow on in the sense of can you talk a little bit about how you view LTV to CAC by distribution channel, are they relatively similar or are there wide variances in kind of which channel a customer comes through to Hippo?

Stewart Ellis, Chief Financial Officer

I'll take this one. There are some variances and they spring from the different structural way that these channels work. So in the direct-to-consumer channel, it works like a traditional customer acquisition funnel where we will spend advertising dollars upfront to bring people to the website or to bring people to the phone. And some percentage of those leads will turn into customers. And so when you when you have a situation like that you have acquisition cost up front, and then you earn that acquisition cost back over the life of the customer. Typically, customer lifetimes in homeowners insurance are pretty lengthy relative to a lot of other consumer products. It's a service that when people sign up, they tend to stay with their home insurance provider. So the average industry customer lifetime is in excess of eight years. And when we look at our data, we see very high customer satisfaction, we see very high net promoter scores. And we see very high premium retention. And I mentioned our first year retention in this quarter was 88% on a premium basis. And for cohorts that have entered their second and third years, the numbers just go up from there. And so we have upfront acquisition costs in the in the direct channel followed by being able to benefit from the full economics of that customer down the road. In the other two channels, the economics work slightly differently. We don't pay anything upfront to external parties to acquire a customer through an independent agent, or another insurance company or through a partner. We share premium that is collected from those customers over time. And so in the purest sense, there is no LTV to CAC, because there's not really any CAC. And so the way we think about this internally, is we take the first year of premium that we would share with that partner. And we treat that as customer acquisition cost, even though it's not marketing capital at risk. And when you do that math, it starts to approximate what you'd see in a traditional technology LTV to CAC ratio. The producer and the partner channels, when crafted on this basis, have a slightly higher LTV to CAC than the direct-to- consumer. And so the way I tend to think about this is we pay more for a direct to consumer customer. And then we get to keep more because the lifetime value is higher. And in the other two channels, because we pay a little bit less, the lifetime value is less. On a blended basis, we think it's five to six times at our long-term loss ratio targets. The direct will be slightly lower than that on a ratio basis, and the other channels are going to be slightly higher than that on a ratio basis. But all of this, the higher and the attractive unit economics for us stem from the fact that we have very high customer retention relative to some other lines of insurance.

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Matt Carletti, JMP Securities

That’s really helpful. Thank you. The next question, I want to ask was you commented a little bit about the Ally and Incline partnerships. I was hoping that beyond capital leverage, can you peel back the onion a little bit on your strategic thinking there? And then from a numbers perspective, should we expect any real loss ratio impact as these come on or any impacts related to some of the other underwriting actions I think Rick spoke about.

Richard McCathron, President

Hey, Matt, this is Rick, I'll go ahead and answer that question. As you mentioned, Stuart already addressed sort of that support of our capital like structure, which reduces the amount of capital we need, and the use of our own capital to support our growth. But the Ally and the Incline partnership does is it essentially doubles our underwriting capacity, which certainly makes our capital-light structure work well. The question that you were, I think, driving towards is what does it do from a loss ratio or underwriting perspective? And the use of multiple carriers allows us to further segment our underwriting customers, both existing and new customers across multiple underwriting companies.

So over time, as you have segmented business further, you generally see a more positive underwriting result because you are placing them with the right carrier, the right risk, the right underwriting guidelines, etc. So we believe that having multi-carrier does support improvements in our underwriting model.

Matt Carletti, JMP Securities

Thanks for that, last one, if I can just want to touch on the loss ratio. Can you break it apart for us and help me with you mentioned a few items? Obviously, the hail in the quarter in Texas, some adverse development from Uri last quarter, which I think that there's a number put on that 14 points, and then kind of the general severity from supply chain and labor shortages, things like that. Can you help us quantify kind of how much impact the hail had in the quarter and then your best assessment of kind of how much that severity is impacting things currently.

Stewart Ellis, Chief Financial Officer

We generally have not broken out the specifics of individual storm events or series of storm events.

We did breakout Uri on a gross basis this quarter the development there, simply because we wanted to help people understand a little bit because that was such an anomalous storm. But on a net basis

Uri really didn't have any negative development to us. And so the impact I think in in Texas, it's important to understand for us because our book of business is more concentrated in Texas, than in other areas of the country. because historically, we started in California and Texas. And so in 2019, something like 65% of our new premium was coming from Texas. But we've been diversifying away

12 from Texas over the past couple years, so 33% in Q2 of 2020. 19% in this quarter. We will have some legacy exposure to severe convective storm risk, the hailstorms that happened in Q2. What I can say, as I mentioned before, is this was truly an unusual year, in the second quarter was the third worst on record since PCS started breaking out the loss ratio. The growth that we are experiencing in areas outside of Texas, though, should bring this down as a source of volatility in our overall portfolio going forward. And the other things that we're doing on the loss side operationally to add new data sources, to bring on new smart home initiatives, to bring on products within homeowners like the HO5 and the HOA product that are not going to be subject to this kind of this kind of loss risk, I think will help us over time. But this is obviously something historically Q2 has been a bit of a seasonal peak for us. And this was just a bit higher peak than we've experienced in the past.

Matt Carletti, JMP Securities

And then from a broad severity standpoint, is there any way you can help us think about kind of your view there of what that's driving higher? And then obviously, I would assume it's just a lot of pricing to try to combat that going forward.

Richard McCathron, President

Yeah I’ll go ahead and take that one. Yes. I mean, it's clear, I think every insurance company in the sector is talking about increase in severity, predominantly because of supply chain issues, because of labor shortages. COVID had a massive impact on that. We are seeing that go down, so we think that that was a temporary blip. But we of course monitor that significantly. We're constantly monitoring both frequency and severity numbers, we're constantly looking at how we can reduce those beyond just pricing actions. When Stewart mentioned our product expansion, and as I mentioned in the opening comments are doubling down on our HO5 new construction, our strategic partnership with

Lennar, we're putting IoT devices, water shut off valves, all these sorts of things in new construction houses that dramatically improve the loss ratio for those.

Matt Carletti, JMP Securities

Thank you very much for the color, very helpful and best of luck.

Operator

The next question comes from the line of Christopher Martin with KBW. Please proceed.

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Christopher Martin, KBW

Hey, guys, thanks for taking my questions here again, circling back. Just wanted to see if you can comment on with all the things that are in your numbers you’ve given and the growth you've shown and then with your discussion around the flattening of the loss ratio, break down the geographic diversification, the tightening of the model for rate optimization, looking at balance sheet approach, are you able to comment at all on a path to profitability, either at the EBITDA level or not necessarily explicit guidance, but just a discussion on getting towards that breakeven and where it goes from there in the future.

Stewart Ellis, Chief Executive Officer

We did put a forecast out publicly earlier this year, so I direct folks to that for historical reference. But I want to talk for a moment about the way we think about the path to profitability. We know that the at scale, well diversified book of business that is properly priced where we assigned the right price to the right risk, there is an opportunity to be profitable in home insurance. We also know that by partnering with our customers, and using the technology that we have that Rick mentioned and that we've talked about previously, it is possible to help our customers avoid losses from happening in the first place.

And our belief is that when you combine that true customer-centric model, the technology that we use that gives us access, not only to the ability to help our customers avoid loss, but two preferred pools of customers through partners like Lennar and other home builders, through mortgage servicers where people are actively shopping for home insurance, that there is an opportunity to bring loss ratio to an advantageous level. What we believe internally is that we are at the very beginning of taking share in this incredibly large market. And as long as our return on investment in sales and marketing and customer acquisition is high, we should continue to invest aggressively, because we're nowhere close to bumping up against market share constraints. And one of the biggest drivers, as we've mentioned of the high return on investment is the fact that our customers are having a good experience with Hippo, and they're staying with us. And so when we have a strong unit economics, and we have a business that we know can be profitable on a long-term basis, it makes sense to invest in scale. And so we will continue to be opportunistic. As I said, we're at the beginning of the journey here. So we think that as long as there's opportunity, it makes sense to continue to invest.

Obviously, we're very disciplined as we think about spending money on growth. But in a real way, as we've talked, growth is the path to profitability, you know, the more geographic diversification we have in our business, the less volatile our loss ratio will become, and the greater confidence we will have in continuing to make those investments. So we see a very virtuous cycle here, that we'll be able to keep going for many years. Rick, do you want to say anything in addition to this question?

Richard McCathron, President

Yeah. Thanks, Stuart. And, Chris, thanks for the question. A couple other things. As I mentioned earlier, the leading indicator of what we're doing is early term losses, the frequency of early term

14 losses. And the actions that we have taken clearly show an improvement. When you're looking at the reduction of 40% and 37%, respectively, you're really seeing a reduction in early term losses. And one thing to remember is that our cohorts are very young, compared to other cohorts, as those cohorts age over time, and we have a larger book, a larger portion of our business, that's renewal business, that in itself, in addition to the geographical diversification, and the growth in other places, will absolutely get us where we need to be.

Christopher Martin, KBW

Awesome that's really great. Thanks a lot and good luck.

Operator

Thank you, Mr. Martin. Thanks, everyone for joining. This concludes today's conference. You may now disconnect.

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