Hippo Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with the three months ended March 31, 2022 unless noted. Hippo operates insurance services, an insurance-as-a-service platform, and a Hippo-branded homeowners insurance program.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $39.8 million | $24.5 million | +62% |
| Net earned premium | $13.8 million | $9.0 million | +53% |
| Commission income, net | $17.4 million | $11.5 million | +51% |
| Net investment income | $5.4 million | $0.4 million | +$5.0 million |
| Net loss attributable to Hippo | $(69.8) million | $(67.6) million | Loss widened $2.2 million |
| Adjusted EBITDA loss | $(52.1) million | $(48.5) million | Loss widened $3.6 million |
| Operating cash flow | $(35.7) million | $(58.6) million | Cash use improved $22.9 million |
| Total Generated Premium | $244.9 million | $153.7 million | +59% |
Gross written premium rose 62% to $189.5 million. Revenue growth reflected increased premiums and commissions, growth in Insurance-as-a-Service, and higher investment yields. Higher weather-related claims and reinsurance loss-participation features contributed to the larger net loss. Gross loss ratio was 76% in both periods; net loss ratio increased to 273% from 250%. The filing reports no conventional debt balance; liabilities were $1.062 billion, primarily insurance reserves, unearned premiums, reinsurance premiums payable, and other operating liabilities.
Liquidity, cash flow, and balance sheet
- At March 31, 2023, cash and cash equivalents were $188.9 million, restricted cash was $31.8 million, and investments were $431.4 million. These sum to $652.1 million, including restricted cash.
- Cash, cash equivalents, and restricted cash declined $23.8 million during the quarter to $220.7 million. Operating activities used $35.7 million; investing activities provided $13.8 million, mainly from investment maturities and sales; financing activities used $1.9 million.
- Total assets were $1.605 billion, total liabilities $1.062 billion, and total stockholders’ equity $543.0 million. The Federal Home Loan Bank borrowing capacity was $40.3 million, with no amount outstanding.
- Management says funds on hand are expected to support cash needs until revenue and other income cover operating expenses, working capital, and capital expenditures; it may seek additional financing, but availability and terms are not assured.
Material changes and management commentary
- Total Generated Premium grew 59%, driven by channel growth, premium retention, rate increases, geographic expansion, and growth in third-party programs. Hippo was authorized to sell homeowners policies in 40 states, versus 37 a year earlier.
- Adjusted EBITDA losses worsened, principally due to named catastrophic weather events and other weather losses, partly offset by revenue growth. Hippo Home Insurance Program segment Adjusted EBITDA loss increased to $44.3 million from $39.7 million; Insurance-as-a-Service Adjusted EBITDA was positive at $3.2 million.
- Management said the Hippo Home Insurance Program’s non-PCS loss ratio, excluding reserve releases, improved to 60% from 78%, reflecting 2022 pricing and underwriting actions. PCS catastrophe experience included unusually heavy rain and snow in parts of California.
- For 2023, the company expects to retain approximately 40% of premium on its primary homeowners treaty before catastrophe protection. The filing gives differing builder-channel retention estimates: approximately 58% in the notes and 53% in MD&A.
- In March, the Board authorized up to $50 million in share repurchases; $0.2 million had been spent by quarter-end, leaving $49.8 million available. On April 18, a subsidiary paid approximately $26 million in cash for an Austin property intended for office use.
- The company recorded $3.6 million of incremental stock-based compensation from a one-time employee stock-option repricing, including $1.4 million recognized in Q1. The company also realigned reporting into three segments beginning in Q1.
Risks, contingencies, and outlook
- Catastrophe exposure, claims estimates, loss participation provisions, and reinsurance costs can materially affect results. Reinsurance reduces risk but does not release Hippo’s insurers from obligations to policyholders if a reinsurer defaults; reinsurance recoverables were $300.6 million.
- Gross loss reserves were $305.2 million at quarter-end. Management estimates reserves using assumptions that may differ from actual claims and payment timing. Prior-year net loss development was slightly favorable by $0.1 million.
- A civil action brought by Eyal Navon includes claims against Hippo and its co-founder; Hippo denies the claims. Fact discovery was ongoing, and a trial date was set for November 6, 2023. The company said it did not believe pending proceedings were likely to have a material adverse effect.
- No specific full-year revenue, earnings, or cash-flow guidance is provided in the supplied filing text. Management’s outlook includes continued investment in technology and customer acquisition, expected improvement as pricing actions earn into results, and risks from competition, customer retention, regulation, weather, and access to capital.
Most important facts for investors to verify
- Resolve the filing’s inconsistent 2023 builder-channel expected retention figures of 53% and 58%, and assess actual retention after catastrophe protection.
- Track claims development, catastrophe losses, loss participation, and the 273% net loss ratio alongside reported gross and program-level ratios.
- Assess cash runway using operating cash use and liquidity available to the parent and regulated insurance subsidiaries; account for the $26 million post-quarter property purchase and insurance capital requirements.
- Review the status and potential exposure of the Navon litigation, as well as the recoverability and credit quality of reinsurance balances.
- Monitor the effect of the $50 million repurchase authorization and stock-based compensation on liquidity and per-share results.