Hippo Holdings Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Hippo underwrites, administers, and markets personal property and commercial insurance, with a focus on homeowners’ coverage. Comparisons below are against the corresponding 2021 periods unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $28.7 million | $20.9 million | $53.2 million | $37.9 million |
| Net loss attributable to Hippo | $73.5 million | $84.5 million | $141.1 million | $279.8 million |
| Adjusted EBITDA loss | $55.8 million | $42.3 million | $104.3 million | $78.0 million |
| Net earned premium | $11.2 million | $10.2 million | $20.2 million | $19.0 million |
| Commission income, net | $12.9 million | $6.5 million | $24.4 million | $11.6 million |
| Net loss ratio | 261% | 210% | 256% | 204% |
| Gross loss ratio | 78% | 161% | 77% | 177% |
- Growth and losses: Revenue increased 37% in Q2 and 40% for the first half, driven principally by commission income. Despite lower GAAP net losses, adjusted EBITDA losses widened in both periods, reflecting higher retained losses, employee costs, and acquisition-cost amortization.
- Loss experience: Gross loss ratios improved substantially, mainly because 2021 included severe catastrophe losses, including Winter Storm Uri, and 2022 benefited from releases of prior-year reserves. Net loss ratios worsened as loss participation features increased retained losses and higher catastrophe reinsurance costs reduced net earned premium. The filing reports $6.0 million of favorable net prior-year development for the first half.
- Cash flow: First-half operating cash use was $88.4 million, versus $69.2 million in 2021. Investing cash use was $403.2 million, primarily from investment purchases; financing cash use was $2.6 million. Cash, cash equivalents, and restricted cash totaled $324.5 million at June 30, down from $818.7 million at year-end 2021.
- Liquidity and balance sheet: At June 30, cash and restricted cash were $324.5 million; fixed maturities and short-term investments totaled $454.3 million. Total assets were $1.629 billion, liabilities $878.0 million, and stockholders’ equity $751.4 million. No conventional debt balance is listed on the balance sheet; the company reported $13.5 million of available FHLB borrowing capacity and no borrowings under that facility.
- Margins and expenses: Insurance-related expense, technology and development, and general and administrative expense rose sharply year over year. Sales and marketing expense declined. Stock-based compensation was $15.9 million in Q2 and $29.3 million for the first half.
Material changes and operating developments
- Total Generated Premium, a company-defined non-GAAP operating metric, rose 29% to $204.1 million in Q2 and 27% to $357.8 million for the first half. Gross written premium increased, but first-half net written premium declined to $15.3 million from $19.3 million as ceded written premium grew.
- Hippo said its insurance program was approved in 40 states at June 30, 2022, up from 37 a year earlier. Management attributed premium growth to expansion across channels and states, partnerships, rate increases, and Spinnaker-supported non-Hippo business.
- Loss and loss adjustment expense reserves were $268.8 million gross of reinsurance at quarter-end; related reinsurance recoverables on unpaid losses were $214.3 million. Reinsurance contracts include loss participation and commission-adjustment features that can increase the company’s retained risk.
- Cash and investment balances shifted materially: short-term investments rose to $351.7 million from $9.1 million at year-end, while cash and cash equivalents fell to $277.5 million from $775.6 million. The filing attributes the investment cash use primarily to purchases of securities.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing gives no quantified revenue, earnings, or cash-flow guidance. Management expects continued investment in technology, hiring, marketing, and growth; it warns losses may increase in the near term and says profitability is not assured. Management also expects sales and marketing costs to rise in absolute dollars in future periods, while potentially declining as a percentage of revenue over the long term.
- Reinsurance and catastrophe exposure: Management describes reinsurance as central to its asset-light capital model. The 2022 treaties have increased use of loss participation features, which may cause retained risk to exceed the company’s pro-rata share. Reinsurer availability, pricing, performance, and catastrophe severity remain important uncertainties.
- Liquidity needs: The company says its cash and investments are expected to fund needs until revenue and other income cover expenses, working capital, and capital expenditures. It may seek additional debt or equity financing, but availability and terms are not assured. Insurance-subsidiary dividends are subject to regulatory restrictions.
- NYSE listing: On July 19, 2022, Hippo received notice that its average closing share price had been below $1.00 for 30 consecutive trading days. It had six months to regain compliance, subject to possible extension, and planned to seek stockholder approval for a reverse stock split. Failure to regain compliance could result in delisting.
- Legal matter: A lawsuit naming Hippo and its executive chairman was in early stages. The court overruled Hippo’s second motion to dismiss on July 22, 2022; the company said it could not estimate the likelihood or magnitude of a potential loss.
- Other commitments and unusual items: A subsidiary had an agreement to purchase Austin office property for approximately $30 million in cash at closing; the filing also disclosed $12.3 million of future obligations for leases not yet commenced and $11.7 million of future rent payments under a lease with the seller. The filing does not clearly state whether the property purchase had closed by the report date. Prior-year comparisons of net loss are affected by large 2021 non-cash fair-value losses and interest expense on instruments settled in 2021; 2022 results include non-cash warrant fair-value gains.
- Key risks: Continued operating losses, reserve-estimation uncertainty, severe weather and catastrophe claims, reinsurance counterparty and renewal risk, insurance regulation and rate approvals, competition, data privacy and cybersecurity, dependence on third-party technology and data, and potential need for additional capital.
Investor verification priorities
- Track cash burn and liquidity, including how cash, restricted cash, and invested assets change as the investment portfolio and operating needs evolve.
- Assess whether commission and premium growth can translate into improved adjusted EBITDA and sustainable profitability, given sharply higher operating expenses and stock-based compensation.
- Monitor gross and net loss ratios, prior-year reserve releases, catastrophe losses, and the effect of reinsurance participation features and XOL costs on retained risk.
- Verify progress on the NYSE minimum share-price requirement, any reverse stock split proposal, and continued listing status.
- Follow the Austin property purchase and related lease obligations, the unresolved litigation, and the availability and cost of future reinsurance and capital.