Hippo Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the Hippo Holdings Q2 Earnings Call. My name is Alex. I'll be coordinating the call today. I'll now hand it over to your host, Call. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and thank you for joining Hippo's 2nd quarter earnings conference call. Earlier, Hippo issued a shareholder letter announcing its results, which is available at investors. Hippo.com. Leading today's discussions will be Chief Executive Officer and President, Rick McArthur and Chief Financial Officer, Stuart Ellis.

Speaker 1

Following management's prepared remarks, we will open up the call to questions. Before we begin, we'd like to remind you that our discussion will contain predictions, expectations, forward looking statements and other information about our business are based on management's current expectations as of the date of this presentation. Forward looking statements include, but are not limited to, Hippo's expectations or predictions of financial and business performance, historical results and or from our forecast, including those set forth in Hippo's Form 8 ks filed today. For more information, please refer to the risks, uncertainties and other factors the call back to the call for questions. Please note that the call is being discussed in

Speaker 2

Hippo's SEC filings, in particular in

Speaker 1

the sections entitled Risk Factors. All cautionary statements are applicable to any forward looking statements We make whenever 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 revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law. During this conference call, we will also refer to non GAAP financial measures such as total generated premium and adjusted EBITDA.

Speaker 1

Our GAAP results and description

Speaker 2

of our non GAAP financial measures with a full reconciliation

Speaker 1

to GAAP can be A description of our non GAAP financial measures with a full reconciliation to GAAP can be found in the Q2 2023 shareholder letter, which has been furnished to the SEC and available on our website. And with that, I'll turn the call over to Rick McArthur, our President and CEO.

Speaker 3

Good morning, everyone. At the beginning of this year, We talked about our 3 major segments for the first time, presenting our 2023 outlook for each. I'm encouraged by our progress against key metrics in all three segments during the quarter. Growth in our total generated premium or TGP and revenue is exceeding expectations and we're holding the line on our fixed costs. Unfortunately, catastrophic losses during Q2 overshadowed continued improvement in our core gross loss ratio.

Speaker 3

However, I want to be clear. We remain confident in our long term vision and that we are on track to be adjusted EBITDA positive by the end of 2024. In our services segment, we are ahead of plan on TGP and revenue, while remaining within our fixed cost budget. At a time when insurer appointments are tough to come by, our First Connect platform is using its technology to facilitate business between agents and carriers. Its carrier store, which launched in October, already supports over 80 carriers, connecting them to thousands of independent agents.

Speaker 3

In Q2 'twenty three, we facilitated 14,800 agency appointments, up over 30% from Q1 2023 and up over 400% from the prior year quarter. We also continue to see strength in our Hippo agency, where we sell insurance to consumers on behalf of third party carriers. Our builder business has continued to grow quickly, and our year over year premium retention for 3rd party products rose to 110%, up from 98% in the prior year quarter. And finally, with our Hippo home care services, we are helping a growing number of homeowners improve their home's health. Our recently launched home health app across 10,000 monthly active users and the team continues to make great progress on an exciting roadmap of products and services designed to help homeowners better protect and maintain their homes.

Speaker 3

When we first introduced our Insurance as a Service segment, we characterized its earnings stream as steady, growing and diversifying. In a quarter of significant earnings volatility for many insurers, we believe our results validate this characterization. Adjusted operating income for the 2nd quarter was $5,000,000 as Spinnaker's diverse portfolio of short tail risks and expense discipline continued to deliver adjusted operating income growth. We're also well ahead of plan for top line growth. TGP is up 112% versus the prior year quarter as we expanded capacity with existing partners.

Speaker 3

Spinnaker's experienced team, strong financial rating and the ability to leverage Hippo's tech platform continues to attract potential new partners as well. Our Hippo Home Insurance Program segment continued to exceed our targets for growth and diversification during the quarter. And our core gross loss ratio of 62% year to date It's comfortably within the 60% to 67% target we communicated at the beginning of the year. Unfortunately, the broader U. S.

Speaker 3

Homeowners insurance industry experienced significant catastrophe losses in the quarter. Leading insurers have already reported 1,000,000,000 of dollars of losses stemming from hail and severe conductive storm events in the Central U. S. These events in Texas and Colorado also impacted Hippo, leading to significantly higher PCS cat losses than in normal years and a Hippo home insurance program gross loss ratio of 178%. Hippo is responding with rate hikes, increased deductibles for wind and hail perils, slowing policy growth and non renewing policies in certain regions.

Speaker 3

We remain committed to achieving underwriting profitability. For a nimble tech company like Hippo, these challenges and the resulting market dislocation are an opportunity. Our technology allows us to make the necessary changes faster than traditional insurers, while also continuing to grow in less cat exposed geographies, further adding to our diversity. For example, In Texas, where our hail losses were severe this quarter, we've already responded with filings to raise rates and deductibles where needed. As always, these filings are subject to regulatory approval.

Speaker 3

Excluding the effects of severe weather events during the quarter, Our Q2 2023 KPIs for each of our segments were ahead of the expectations we shared at the beginning of the year. And the actions we are taking in response to this weather should help reduce the volatility of our future financial results The long history of insurance is one of innovation and change. Some opportunities arrived suddenly after major loss events like Hurricane Andrew. Some came after legislative actions like the passage of Prop 103 in California. Some came when the innovative spirits of great companies lead change in the distribution and pricing of products like auto insurance.

Speaker 3

We believe the U. S. Homeowners market is in the early days Thank you. And now I'd like to turn the call over to Stuart to review our Q2 financial results in more detail.

Speaker 2

Thanks, Rick. Overall, we've made great progress this year in moving towards our goal of turning adjusted EBITDA positive by late 2024. Our KPIs for growth, operating expense management and core gross loss ratio are all ahead of expectations. Unfortunately, our results were heavily impacted by a series of major hail events in Texas and Colorado, but we are taking decisive actions to reduce our exposure to these risks and to further improve our ability to hit our long term profitability goals. On a consolidated basis, our Q2 TGP and revenue growth is ahead of plan, up 56% 66% year over year, respectively, Grew more slowly than revenue, rising to $76,000,000 from $71,000,000 in the prior year quarter and declining year over year as a percentage of revenue of our operations and are excited about the potential for more gains here.

Speaker 2

Because of the outsized catastrophic weather losses, Our net loss attributable to Hippo was $108,000,000 or $4.61 per share for the quarter compared to a loss of $74,000,000 or $3.25 per share in the prior year quarter. And our Q2 2023 adjusted EBITDA loss was $88,000,000 an increase from $56,000,000 a year ago. Despite the higher than expected weather losses, our balance sheet remains strong with cash and investments at the end of the quarter of $565,000,000 Statutory surplus at our insurance company Spinnaker increased during the quarter to 173,000,000 I'll now provide a bit more detail on our Q2 results at a segment level. In our Services segment, we continue to attract new customers and grow in all three of our businesses. Service at TGP was up 35% year over year during the quarter, ahead of our full year guidance of 30% for 2023.

Speaker 2

The year over year premium retention rate for 3rd party products at our Hippo Agency continues to strengthen coming in at 110%, up from 98% in the Q2 of 20 While we're still in the early days of development of our Hippo Home Care offering, we're seeing some early successes driving user engagement, The leading indicator of adoption and retention, growing the number of unique users completing recommended maintenance actions in the Hippo Home app by over 60% from March to June. Our adjusted operating loss in this segment was $10,000,000 an increase of 17% compared to a loss of $8,000,000 in the prior year quarter, but improved from $11,000,000 in the Q1 of 2023 as we continue to invest in our platforms to provide differentiated services for our customers across all our businesses. Turning to our Insurance as a Service segment. TGP growth accelerated from a year ago, growing 112% year over year due to a combination of new programs and growth at existing programs. Revenue grew 103% versus Both TGP and revenue results are tracking well ahead of our guidance.

Speaker 2

Adjusted operating income was $5,000,000 in this segment compared to a loss of $1,000,000 in the prior year quarter due to the increase in revenue I just mentioned, expense discipline And continued program diversification. In the Hippo Home Insurance segment, TGP was up 10% versus the prior year quarter with continued growth across all channels and over 90% of new TGP fitting our target Generation Better customer profile. We made progress on geographic diversity as well, with 71% of new TGP coming from outside of our 2 largest states, Texas and California. Revenue grew 39% year over year, faster than TGP, driven by growth in net earned premium, which grew 100% year over year to $12,000,000 versus $6,000,000 in the prior year quarter as our 2023 reinsurance treaty becomes a more significant driver of our financials. The segment's adjusted operating expenses, excluding loss and loss adjustment expense, declined to $28,000,000 or 124 percent of revenue from $37,000,000 or 2 26 percent of revenue in the year ago quarter.

Speaker 2

As Rick mentioned earlier, the most significant driver of our Q2 financial Comfortably in line with our guidance of 60% to 67%. This was an improvement of 12 percentage points versus the prior year quarter and reflects the substantial progress our team has made on pricing and underwriting improvement. Unfortunately, We suffered outsized catastrophic weather losses along with the rest of the industry that overshadowed these improvements. Most of the losses were caused by 5 major wind and hail events in Colorado and Texas, and most of the claims will be linked to our 2022 reinsurance treaty. The Q2 impact of these PCS cat losses was $110,000,000 on a gross basis $51,000,000 on a net basis, And we expect an additional $13,000,000 to $15,000,000 over the remainder of the year due to their impact on the loss participation features embedded in our reinsurance treaties.

Speaker 2

While it would be easy to simply chalk this up to bad luck, we are planning to take decisive actions to reduce our future exposure to wind and hail with the explicit goal of reducing the volatility of our financial results going forward. These actions include increasing deductibles for wind and hairl perils, selected non renewal policies in high risk regions and increasing the rates we charge for cat exposed properties across our portfolio. Our goal and expectation is to have a homeowners insurance program that consistently produces underwriting profit. And we believe being more aggressive in these areas during the rest of this year will help accelerate our path to achieving this goal. In addition to these actions, we took steps during the quarter to reduce our dependence on the reinsurance market and the costs associated with not retaining the risk we underwrite on our own balance sheet.

Speaker 2

During the quarter, our Spinnaker Insurance Company subsidiary Announce the successful sponsorship of our first cat bond. The $110,000,000 cat bond was upsized 10% from our initial target size, reflecting strong investor confidence in Hippo's approach. The bond provides multiyear catastrophe protection I'd like to close by updating our 2023 guidance to reflect the performance and learnings from the first half of the year. We are increasing our 2023 TGP guidance to $1,100,000,000 as strong growth in our Services and Insurance as a Service segments We'll likely only be partially offset by TGP declines at our Hippo Home Insurance Program segment over the second half of twenty twenty three as we take aggressive action to reduce our catastrophic exposure. We expect revenue to be up 49% for 2023, an increase from our previous guidance as stronger than expected growth at Services and Insurance as a Service is moderated by a flat outlook For the Hippo Homeowners Program segment, based on encouraging progress made during the first half of the year, We expect our full year core gross loss ratio to be at the low end of our previous 60% to 67% guidance.

Speaker 2

Reflecting the significantly higher PCS defined cat losses in the first half of the year, we now expect our full year PCS cat growth loss ratio to fall within the 45% to 50% range, up from our previous guidance of 28%. Turning to adjusted EBITDA. We now expect our adjusted EBITDA loss to be in the range of $208,000,000 to $218,000,000 versus previous guidance of 147,000,000 reflecting the impact of weather in Q2, partially offset by better than expected results in other segments. Finally, we would like to reiterate our expectation of turning adjusted EBITDA positive by the end of 2024.

Operator

You. Our first question for today comes from Yaron Kinar of Jefferies.

Speaker 1

Sorry, Ron. You still there?

Speaker 4

Yes, I am. Go ahead. So my first question just goes back to the cats. Obviously, a large catalog this quarter. Can you maybe try and quantify it in terms of what level of tail event

Speaker 5

Right now, we're still evaluating and still developing. But I think in the second quarter, We've seen very much similar to the industry. We experienced 22 cat events. Over 80% of those loss Five individual events, main the 2 largest ones happened in DFW, Texas and the other Suburban Denver, Colorado, both of those events happened with large scale over 1.5 inches in diameter. The losses were incurred in both our HO3 book of business and also in our builders book.

Speaker 5

Over the last couple of years, we have been reducing exposure These losses through, as Stuart and Rick both mentioned, through reducing exposure, increasing held deductibles, Increasing rates aggressively. We are looking though to aggressively accelerate those efforts in wake of these events. These are clearly not long tail events. These are events that are happening quite often within the industry. So we recognize the need to take aggressive action quickly.

Speaker 5

As Rick had mentioned, we've already made 2 filings in Texas to address rate and increasing held deductibles there. We're continuing to review the rest of the book for opportunities to continue to mitigate against the volatility within

Speaker 4

Got it. And actually, you have my second question, but the firm. So the actions or the responses that you laid out ultimately are pretty much the actions that you've been talking about for the last several quarters. So it's just is it just a matter of scale or the degree of aggressiveness in which you're pursuing the rate increases and the deductible changes and so on?

Speaker 3

Yes, Yaron, it's Rick. Good morning. What we've told everybody since we've been Since we went public is that our sort of portfolio improvements in diversification, pricing, underwriting actions was a multiyear And we've been in we're sort of in the middle of that multiyear process and we said that last quarter. The difference I think is what we and rest of the industry is recognizing is some of these cat events are happening so frequently that some of them are almost becoming uninsurable. And so what we've done is we said, look, we've missed our number on our cap pick for the quarter.

Speaker 3

We need to make sure That we mitigate that type of thing happening when we get into health season next year. So the short answer is we are getting more aggressive in pricing, more aggressive in location and diversification, more aggressive in underwriting actions One advantage that Hippo has is even if we are not interested in selling a Hippo manufactured product, We have an agency and that agency has partnered with over 80 carriers to sell a combination of product lines including E and S and some DIC So we still can provide customers with a holistic home protection opportunity even if it means selling a 3rd party insurance portion of that protection In an area that we believe is overly cat exposed. So short answer is more aggressive.

Speaker 4

Got it. And hence, we see maybe the lower guidance for Hippo home insurance program

Speaker 3

And the services and insurance as a service absolutely shining spots for us as a company. And we also recognize that when we started this journey more than 6 years ago, we didn't have the full view that we have now of what a generation better customer looks like, who's more likely to partner with us in our home care offerings. And now we know what those customers look like. As Stuart mentioned, over 90% of our new business is coming from those types of customers. And so there is the sort of legacy book that we've been working on.

Speaker 3

We're just going to work more aggressively on it, which means that That will likely be flat to down on the Hippo insurance program, where the others will continue their upward trend.

Speaker 4

Got it. And then one last one and then I'll go back into the queue. Can you maybe explain the mechanics why the lost quarter was to drive

Speaker 2

Happy to take that one. So when we think about the mechanics of the reinsurance treaty, We do our best to match the recognition of revenue and costs from a timing standpoint. So we'll earn out the corridor over the remainder of the treaty. And if the weather is better than planned In Q3 and Q4, then that amount, that better than planned amount will positively affect the corridors in those periods. But The corridors and the loss participation features generally are tied to our earned premium over the course of the treaty year.

Speaker 4

Got it. Thank you.

Operator

Thank you. Our next question comes from Matt Carletti of JMP.

Speaker 2

Maybe just sticking with the cats for a moment. I think you had mentioned that these are going to impact the 2022 treaty. Can you give us a little bit of color on Sure. So I think that the primary difference in the reinsurance structure between 2022 2023 is that we're retaining more risk on the 2023 treaty than we were on the 20 22 treaty. That said, I think really the biggest the reason why we made a point to note that is the 2022 treaty We'll sort of earn out and be over at the end of the 2023 calendar year.

Speaker 2

The 2023 treaty relates some policies that are written in 2023 and will have an impact on both the 2023 2024 calendar year. So we'll see some impact in the loss participation features in the second half of this year because These properties are on the 2022 treaty. The impact in 2023 sorry, in 2024 calendar year will be significantly smaller Because most of

Speaker 3

the properties are not insured on the 2023 treaty. Yes. One thing that I'd just like to add is that, I just want to make sure We're very clear. All of the efforts that we're taking in the Hippo Insurance Program segment So I think it's very important to recognize that our portfolio will not look the same next year as it does this year And in an accelerated fashion.

Speaker 2

Okay, perfect. And then just one kind of follow-up. There's been a lot of news in the market regarding BESTU. I just want to ask if particularly through Spinnaker, if you guys have any exposure there or what it might be?

Speaker 3

Yes. It's a really good question and I'm hearing lots of fronting carriers and program carriers struggling with this Unfortunate circumstance. We have no exposure to what's going on with Vesto. I think it shows that the high bar we have in the Spinnaker portfolio. As additive to the core, it's not something where we're prepared to take outside risk yes.

Speaker 3

And that's something that we think diversifies the total exposure, diversifies our consolidated gross loss ratio, adds premium and fee based revenue to the parent. And as a result, we have a very high underwriting threshold, not just on the types The programs excuse me, not just the type of products that these programs are offering, but also the programs themselves and the support that they have

Operator

Thank you. Our next question comes from Tommy McJoynt of KBW. Your line is now open. Please go ahead.

Speaker 6

Hey, good morning guys. Thanks for taking my questions. What percentage of your retained premium and risk is Texas now? And do you have an estimate for kind of what the Texas specific state loss ratio was in the quarter? And then when you talk about going out and pursuing rate increases, any way you could quantify how much you think you need?

Speaker 5

Texas at this point from an exposure standpoint is about a quarter of the book. It is decreasing as time has gone on and has over the last 2 years. We'll continue to manage that. And it's not just amount of exposure, it's also the deductibles that we Apply on it and those have doubled over the last year as well. So the exposure is about a quarter.

Speaker 5

It's down from over half of the book A couple of years ago. So significant trend, that's a function of both Texas decreasing And exposure over the last few years, but also the growth in the book in other regions as well.

Speaker 3

Yes. Just Tommy, just to reiterate, This it was always part of our plan to reduce the exposure that we have in Texas as a percentage of the whole. That's what Chris and his team have been working on for the last couple of years. As Chris mentioned, deductibles in Texas have doubled And our exposure has been reduced 60%. So we're well on the path.

Speaker 3

The path is just going to accelerate. And

Speaker 2

Tommy, this is Stuart. I think one more thing to note. It's a bit hard to characterize risk retention or percent of retained risk at a state level because the actual percentage of risk that we retain varies by the nature of the event. So, we are more exposed to these small cat events than we would be to a very large cat That would benefit from the protection of the XOL tower. So it's a little bit tough to characterize it by state, but we can look at it kind of in aggregate when you think about the peril.

Speaker 2

It's probably a better way to think about risk retention.

Speaker 6

Okay. Got it. Thanks. And then my next question is, as we look out to 2024,

Speaker 2

Yes. Thanks. It's a good question. I think The answer to that question is something we'll talk about at the end of this year, beginning of next year when we give guidance because The cat load is going to depend on how successful we are at reducing the exposure to some of these perils. And as both Rick and Chris have said, That is a top priority for us as a company.

Speaker 2

It doesn't do us any good or anyone to have this kind of volatility in the financials. And so we're looking to reduce the exposure with the express goal of lowering the volatility and therefore the cat load in 2024.

Speaker 6

Got it. And then just my last question, the CAD bond that you guys issued over the quarter, just mechanically, how does that kind of flow through the financials, like what's the kind of financial impact of that?

Speaker 2

It'll just be recognized like reinsurance. The Spinnaker is the sponsor. But the way the mechanics work is, we've signed a reinsurance deal with an XOL style deal with the entity that issued the bond. So it's just a layer in our overall XOL Tower and we'll be accounted for that way. Got it.

Speaker 2

Thanks, Drew.

Operator

Thank you. Our next question comes from Alex Scott of Goldman Sachs. Your line is now open. Please go ahead.

Speaker 7

Hey, first one I had for you is just on one of the comments that was made in the I noticed you said that you believe the U. S. Homeowners markets in the early days of a challenging period. I just wanted to see if you could extrapolate on that and sort of unpack what you mean by that, what you're seeing. I mean, I think some of the comments

Speaker 3

Yes. No, happy to Alex. It's Rick. I think there's a couple of major things that are obvious. I think Climate change is real.

Speaker 3

Weather events are becoming more frequent in areas that maybe weren't having them as Frequently, size of hail in places like Colorado have increased. So the industry is going to have to figure out a solution for things like hail and wildfire exposure. And it's really going to take a combination of Consumer is kicking in, the industry kicking in, the regulators kicking in, and frankly, some of the people that do things like build roofs. We need to make sure The homes are more hardened against some of these exposures. You have a hail loss now.

Speaker 3

The only entity that's getting hurt by the hail loss are the insurance companies because pricing of roofs have gone up dramatically. We need to make sure that we all have sort of a dog in this hunt and make sure that we all participate in a solution. And it's going to be a creative one. We've already got several things that we're working on, to contribute to it. But I think that's the biggest issue is the climate change.

Speaker 3

I think inflation trends continue. I think the use of data is becoming more pronounced. I think AI and underwriting is going to become a larger portion of what the industry does. There's already some companies doing this sorts of thing. I think it's sort of early stage.

Speaker 3

And as I said in the letter, there were companies that solved some of these things either after Andrew or after Prop 103 In California, they came up with innovative solutions. I think homeowners insurance carriers are going to have to do the same thing. Our view has always been to protect the joy of homeownership and we think home insurance is a portion of that. We think we're doing a lot of other proactive steps and measures with our home care offering. And we think we're prime.

Speaker 3

We think our tech is So we think we're well positioned, but the industry has challenges as it relates to property exposure.

Speaker 4

Got it.

Speaker 7

The other thing I wanted to ask you about is just the pricing action and so forth and What you're communicating about gross written premiums being more flat. Could you talk about how you can handle that in terms of trying to leverage the agency channel? I mean, is there an opportunity to still retain some of these people even if Your price isn't the best and you can sort of still retain it as a total generated premium? Or do you expect retention to actually come down for the firm overall. How are you thinking through all that?

Speaker 3

Yes, I think you nailed it. And I think that's the advantage that we have at Hippo is we have an agency. And so if we are going to exit a risk it. We can provide that customer. So our goal is to retain every customer, even if it's not a manufactured Hippo home insurance policy and continue to offer them the home services and home care to go along with agency services in placing We think home care actually improves the attritional losses of an exposure because of the proactive nature of what we do with home care.

Speaker 3

And so yes, Generation Better customers, we absolutely want to retain as many of them as we can, whether it's in the agency or through our Hippo insurance program. But we also recognize that there has to be solutions on the weather events. And so you might have a generation better customer in an area that you're massively over concentrated With weather and that's not acceptable to us. And so we need to balance the 2 and we think we found the right balance. We just need to execute.

Speaker 7

Got it. If I could ask one more follow-up. I'd just be interested on the placed premiums written. I think it went up from around 42% to 73%. Can you help us think through how much of that is agency growth versus MGA?

Speaker 7

And could you talk at all about how the MGA business performing and if there's anything from my catastrophes that we need to think about and like the trajectory of commissions over the next 12 months.

Speaker 2

I think I can take a stab at that one. This is Stuart. I think there are a lot of questions embedded in there. And so if this doesn't answer your question, happy to try to clarify or to follow-up offline. But yes, I think the Mixture of written premium and placed premium has to do with a couple of things.

Speaker 2

First, Anything that we would sell through our agency as a 3rd party product is going to be in the placed premium category. Secondly, as we've talked about in previous quarters, we have started within the MGA writing business on 3rd party carriers instead of Spinnaker. And so that would also shift the mix within the MGA from written premium to placed premium. But I think that the specifics there are within the MGA are going to be going forward a lot more related to The nature of the risk that we are writing and whether it makes sense for us to put that risk on the program itself or to try to place that with a 3rd party As opposed to trying to think about which balance sheet we're writing it on because whether that we write it on a Spinnaker balance sheet or whether we write it on one of our partner balance sheets, If it's written by the MGA or if it's underwritten by the MGA and placed by the MGA or written by the MGA, That's ultimately going to be on the reinsurance. And ultimately, the risk of that policy will be something that we're going to be participating in, in some way or the other.

Speaker 2

So I think the bigger driver of the economics, while the mix of written in place is indicative of shifting more to selling third party products, The bigger driver of the economics over the next 6 months and then into 2024 is going to be what we've talked about earlier on this call, which is the aggressive action we're taking to reduce the exposure to catastrophic events and to try to reduce the overall

Speaker 5

Yes. This is Rick.

Speaker 3

I want to just add a couple of things because I know it can Essentially talking about there are 3rd party programs we sell or 3rd party products we sell. And then there are 3rd party balance We use to sell the Hippo Home product. So you need to sort of bifurcate those 2, when you're thinking about written versus placed.

Speaker 7

Understood. So the business that's going to 3rd party carriers through an MGA And so forth. I mean, there's nothing notable in terms of loss sharing that we need to think about sort of coming in through the commissions line over the next

Speaker 2

Yes. Nothing beyond what we've already talked about. I think The loss participation features that are in the reinsurance treaties are almost for the most part within our primary homeowners product Our carrier neutral, meaning we would end up experiencing the economics in roughly the same way, Regardless of whether we write that policy on Spinnaker's balance sheet or on a partner balance sheet. Obviously, if it's a policy that's being written by our agency where a 3rd party carrier is doing the underwriting, We're just serving as an agent as opposed to an MGA, and we don't have any exposure to risk at all. And when we think about How to demonstrate that in our financial results.

Speaker 2

The best way to think about that is, if it's premium that's coming through our services segment, We are acting as an agent and don't have exposure to risk. If it's coming through our, HIPAA Home Insurance Program segment, We're acting as the underwriter and would therefore have some exposure to risk depending on the amount we retain in the treaty. And then in the middle of the insurance as a service, we have tail exposure and a little bit of risk participation. But mostly, as you can see in the results for this quarter, The results are not as volatile with respect to weather or other events.

Speaker 7

Got it. Thanks for all the answers.

Operator

Our next question comes from Pablo Singzon from JPMorgan.

Speaker 8

The first question I had is about the services business. I was Wondering if you're seeing reduced appetite from 3rd party personal lines underwriters impacting your ability to grow in that business?

Speaker 3

Yes, I think hey, Pablo, it's Rick. I think the and we sort of mentioned this in the shareholder letter. The industry, anybody that writes property insurance right now in a traditional way is tending to back off. But we are also seeing Either newer players or E and S players step in to fill that gap a bit. And our strategy is to have a combination

Speaker 2

So it's harder to get carriers to partner with, in a hard market, but they're there. And I do think we're going to see more and more E and S players step into areas that have been problematic over the last several years. Yes. And I'll just add one thing. I think, as we make progress in our Hippo home care business, We are going to be an attractive place for carriers who are looking for incremental business to turn because our customers will be proactively protecting and maintaining their home.

Speaker 2

They will be putting the work in to reduce the risk where possible. And those are exactly the kind of customers that We at Hippo would want on our book, but if we have too much concentration in a given area, we think they're the kinds of customers that any carrier would want on theirs. And as we all know, home insurance is not an optional product. There will be someone whether it's other carriers, E and S providers or states We're stepping up to take the risk and we think that the relationships we have and the work that our customers are doing to protect their homes will be an attractive policy.

Speaker 3

Yes. And I think that's a great add that Stuart made. Also remember there are markets of last resort that we act as an agent for. So Whether it's the California Fair Plan, whether it's TWIA, whether it's Citizens, there are solutions that we can sell

Speaker 8

Understood. And then shifting to Spinnaker, I was hoping you could provide more color on the growth there. I was looking for I was looking for you to distinguish between new programs and existing programs and how the growth is split between that and I suppose also how growth is

Speaker 3

Yes, Pablo. I'm going to answer part of your question and ask Stuart to jump in and answer part of it as well. When you're trying to differentiate between new programs and existing programs, you also have to add a 3rd category, which is an existing program that is moving from 1 fronting carrier to another fronting carrier. So most of the growth that we've had at Spinnaker in our Insurance as a Service segment is either existing programs That we've had for a long time or programs that have left one particular fronting carrier and are coming over to Spinnaker. So these are oftentimes well established programs.

Speaker 3

It's oftentimes because their previous front door didn't have the capital or capacity So those are the majority of the 2. We do add New programs that are brand new programs, but I'd like to reemphasize the high bar we have and our belief that that program is doing the right things to produce a positive underwriting result.

Speaker 2

Yes. And then, Pablo, the second part of your question, we don't generally break out on a quarterly basis the business line specific premium at Spinnaker. That information is available in the statutory filings on sort of on a less frequent basis. But because the business model at Spinnaker, It's sort of more program dependent as opposed to line dependent and we're primarily a fee based business. The line of business is less of a driver of the economics than the size of the premium from any given program.

Speaker 3

Yes. The last thing Pablo that I would add is that, rest assured when we are looking at what programs we want to add to Spinnaker, We're looking for those that diversify the overall exposure at the holding company level, not ones that add to the overall exposure. So we generally are looking for things that give us more balanced and reduced volatility on a quarter by quarter basis as opposed to those that are more layered on or additive to that volatility.

Speaker 8

Yes. That makes sense. And then the last one for me just on the, HIPAA homeowners program. As you think about the actions you're taking, so non renewing, price increases changing terms. Which of those do you think will be the most impactful over the next year or 2?

Speaker 8

And I suppose the bigger question is what gives you the confidence that You're re underwriting the book fast enough to accommodate the higher reinsurance retention you're picking up. Thanks.

Speaker 5

Yes. So we are the most efficient way to reduce exposure is obviously moving it from our balance sheet. And as Rick mentioned, there's ways that we can do that, not renewals 1. Another is actively Remarking that business to our agencies and for retaining those customers within the Hippo brand. The but There are regulatory restrictions within the markets and restrictions about what we can do.

Speaker 5

We want to make sure that we're compliant. So we're looking at all other options, including deductible which can be very efficient in reducing exposure as well. And Yes. There are other ways in terms of rate increases that we make sure that the business that we retain is adequately priced and we build some volatility protection in just an adequate margin on that business as well. So anything we do is going to be a combination of all of those things.

Speaker 5

It's going to be heavily driven by each market circumstance in each state, whether it's regulatory or market environment. But it will be

Speaker 4

a state by state deal.

Speaker 3

Yes. Pablo, one thing I would add too is when we're successful in achieving the reduced volatility and Limiting our exposure to weather, that actually also improves the reinsurance economics of the business. Our PMLs go down, Which is a reinsurance treaties are a driver of our financial success. So there's that Added benefit of what will our 2024 treaty look like with reduced PMLs.

Speaker 8

That makes sense. Thank you for the answers.

Operator

Thanks Pavel. Thank you. Our next question is a follow-up question from Yaron Kinar from Jefferies.

Speaker 4

So one, I think the shareholders letter you provide the gross prior year development of about $19,000,000 favorable.

Speaker 2

That's, Naron, this is Stuart. It's $2,500,000 on a net basis.

Speaker 4

Favorable. Is that favorable, 2.5?

Speaker 2

Yes, sorry, favorable. And Yaron, I think on a gross basis, it's more like $19,000,000 of prior accident year Favorable development, not 12. Okay.

Speaker 4

Oh, I thought I said 19. Apologies. I just Sorry, go ahead.

Speaker 5

No, no. I just want

Speaker 3

to emphasize that that's favorable in both.

Speaker 4

Got it. And then maybe moving away from the quarter and circling back on another question that was asked earlier. So if we look at reinsurance arrangements, if we look past this too. Does Hippo or does Spinnaker use reinsurers with LOCs as collateral. And if so, how does the company verify the quality

Speaker 5

of the collateral?

Speaker 3

Yes. We this was kind of tied to the best two comment that I answered before. So just to be clear, we have no exposure to what happened there. We also, I'm not aware of any collateralized reinsurance market we use for 3rd party programs. But if we have any, We absolutely verify funds.

Speaker 3

We don't just take the letter of credit and say we're good to go. We actually verify funds on a regular basis. Back to the point of when we bought Spinnaker, it was a thinly capitalized fronting carrier. And the DNA of Spinnaker is very much one of protecting the capital in that entity and that DNA has not changed.

Speaker 4

Understood. Thanks so much.

Operator

Thank you. Our next question is a follow-up question from Alex

Speaker 7

The question I had is just on the cash balance on your balance sheet and thinking through some of the challenges you outlined, a little bit more cats this year, some additional repricing maybe that's being communicated as necessary since your Investor Day, etcetera. How does that change the trajectory of the cash balance itself. I think at the Investor Day, you projected that it would go down and trough out at $400,000,000 Certainly, there's some necessary amount of cash in Spinnaker, etcetera, that's needed for the business. The required capital, something less than $400,000,000 at the Investor Day. Just given that that is like maybe a close enough buffer that people have to keep an eye on it.

Speaker 7

Has that trajectory changed materially as a result the cats and sort of the new view of where pricing needs to go and so forth.

Speaker 2

Yes. Thanks for the question, Alex. This is Stuart. I think the short answer is the end result has not changed very much, but let me walk you through it. So At the Investor Day, we said yes, we would return cash flow positive with around $400,000,000 in cash.

Speaker 2

We then Subsequent to the Investor Day announced a $50,000,000 stock buyback program. So if you if we execute that program Over the next couple of years, the trough balance would be around $350,000,000 In the second quarter, when Severe weather started resulting in greater losses than what we had had in our plan. We stopped repurchasing shares as part of that program. We're trying to be somewhat conservative there because we want to maintain a sufficient cash cushion. We haven't paused the program completely, but we only bought 85,000 a few a little over 85,000 shares in the quarter, which is less than a couple of $1,000,000 So we have that as a lever that we can pull.

Speaker 2

If it looks like we want to Sort of stay within the $350,000,000 of cash trough that we had talked about before. And the net impact of these cash is Kind of in the same ballpark as the size of the repurchase program. So we will continue to have the ability to buy shares in the market, but We are going to be more cautious there because of the higher cat events this quarter. We still are committed to

Operator

We currently have no further questions for today. So I'll hand back to Rick McCatheron for any further remarks.

Speaker 3

We appreciate each of you joining us and asking the thoughtful questions. We look forward to executing our plan and talking again next quarter. Have a great day.

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Earnings Conference Call
Hippo Q2 2023
00:00 / 00:00