Hippo Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Hippo provides homeowners insurance and related services through agency, managing general agent, and insurance-carrier operations. The August 2, 2021 business combination with RTPZ was accounted for as a reverse recapitalization; prior-period operating results reflect Old Hippo.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $21.3 million | $13.0 million | $59.1 million | $35.2 million |
| Net loss attributable to Hippo | $30.9 million | $38.6 million | $310.7 million | $87.4 million |
| Adjusted EBITDA loss (non-GAAP) | $48.4 million | $23.9 million | $126.4 million | $64.3 million |
| Net earned premium | $10.9 million | $4.7 million | $29.9 million | $8.7 million |
| Loss and loss adjustment expenses | $26.3 million | $8.7 million | $65.0 million | $13.9 million |
| Gross / net loss ratio | 128% / 241% | 155% / 185% | 158% / 217% | 147% / 160% |
- Q3 revenue increased 64%; nine-month revenue increased 68%. Total Generated Premium, a company-defined metric, rose 94% in Q3 to $161.7 million and 95% for the nine months to $443.5 million.
- Nine-month net loss widened substantially, mainly from noncash fair-value losses on preferred-stock warrants and convertible-note derivatives, note interest, higher retained-risk losses, and Texas winter storm Uri. For Q3, the reported net loss narrowed, helped by a $47.0 million gain on extinguishment of convertible notes and a $5.6 million warrant fair-value gain.
- Nine-month operating cash use was $127.1 million, versus $36.3 million in 2020. Investing activities used $22.9 million; financing provided $480.4 million, chiefly from the business combination and PIPE.
- At September 30, cash and cash equivalents were $778.7 million, restricted cash $44.1 million, and investments $72.0 million. Total assets were $1.658 billion; total liabilities were $754.5 million; stockholders’ equity was $903.7 million.
- Convertible notes converted into common shares at the business-combination closing; no convertible-note balance remained at September 30. The company reported $26.1 million of available Federal Home Loan Bank borrowing capacity and no amount outstanding.
Material changes and unusual items
- Growth in premiums and net earned premium reflects business expansion and the full-period effect of the 2020 Spinnaker acquisition. Spinnaker’s carrier role also changed revenue and expense presentation, including lower MGA commission and more net earned premium.
- Gross written premium for the nine months was $356.7 million, compared with $43.5 million; ceded written premium was $331.5 million. Hippo says it retained approximately 11% of proportional risk under its 2021 primary treaty.
- The nine-month gross loss ratio rose to 158%, including severe catastrophe activity. Management stated it would have been 122% excluding winter storm Uri. Q3 gross loss ratio improved year over year, while the net loss ratio rose to 241%.
- The August business combination and PIPE generated approximately $449.3 million of net cash after redemptions, share repurchase, and transaction costs. Preferred stock and notes converted to common equity; Hippo began NYSE trading as HIPO.
- An August acquisition of a software development and engineering consulting firm had $7.5 million of consideration, including cash and equity; $0.4 million of acquisition costs was expensed.
Outlook, commentary, and risks
- Management expects continued operating losses as it invests in growth, technology, marketing, staffing, and public-company compliance. It believes current cash, cash equivalents, and business-combination proceeds will meet working-capital and capital-expenditure needs for the foreseeable future; no quantified earnings or revenue guidance is provided.
- Management plans continued geographic expansion, customer acquisition, cross-selling, and development of home-protection services. Hippo was authorized to sell its homeowners policies in 37 states as of September 30.
- Key exposures include catastrophe severity and geographic concentration, pricing and reserve-estimation uncertainty, reinsurance availability and counterparty performance, regulatory capital and rate approvals, competition, customer retention, technology and cybersecurity, privacy regulation, and the effects of COVID-19. Management identified elevated construction and labor costs as factors affecting claims.
- Gross loss reserves were $239.7 million and reinsurance recoverables on paid and unpaid losses and LAE were $279.4 million at quarter-end. Hippo remains primarily liable to policyholders if reinsurers fail to pay. Prior-period reserve development was favorable by $0.6 million for the nine months.
- Operating leases run through 2029; a Texas lease extension and additional space entail approximately $8.0 million of future payments through 2026. Management reported no material off-balance-sheet arrangements and no pending legal or regulatory matters expected to materially harm financial condition, results, or cash flows.
- Disclosure controls were assessed as effective. Management said a prior RTPZ warrant-accounting material weakness no longer existed after the business combination and staffing changes.
Most important facts for investors to verify
- Whether loss ratios, catastrophe losses, and reserve development improve, and how much additional exposure remains from severe weather and inflation in claims costs.
- The collectability and credit quality of reinsurance recoverables, treaty terms and renewals, and the adequacy of catastrophe protection relative to retained risk.
- Underlying cash burn and the sustainability of liquidity as losses continue; distinguish operating performance from one-time and noncash fair-value effects.
- How growth in Total Generated Premium translates into earned revenue, renewal retention, customer-acquisition economics, and eventual profitability.
- Potential dilution and earnings volatility from equity awards, warrants, and the company’s public-company transition.