Hippo Holdings Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise.
Business context and performance
Hippo underwrites, administers and markets personal property and commercial insurance, and also earns commissions and fees through its agency and managing general agent businesses. It describes its model as digital-first and generally relies on reinsurance to limit retained insurance risk.
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total generated premium (non-GAAP operating metric) | $153.7 | $123.1 | Up 25%; gross written premium was $117.1, up 18%, and gross placed premium was $36.6, up 53%. |
| Total revenue | $24.5 | $17.0 | Up 44%, led by commission income. |
| Net earned premium | $9.0 | $8.8 | Up 2%; higher catastrophe reinsurance costs offset premium growth. |
| Commission income, net | $11.5 | $5.2 | Up 121%. |
| Net loss attributable to Hippo | $(67.6) | $(195.2) | Loss narrowed substantially, mainly because Q1 2021 included large non-cash fair-value and convertible-note expenses. |
| Adjusted EBITDA loss (non-GAAP) | $(48.5) | $(35.6) | Loss increased $12.9, primarily from employee-related and public-company costs. |
| Gross loss ratio | 76% | 198% | Improved primarily because Q1 2021 included Winter Storm Uri losses. |
| Net loss ratio | 250% | 216% | Worsened as net earned premium remained nearly flat while retained losses rose. |
Hippo reported total expenses of $90.8, including $22.5 of losses and loss adjustment expenses, $13.2 of insurance-related expenses, $14.7 of technology and development, $24.9 of sales and marketing, and $16.5 of general and administrative expenses. Stock-based compensation was $13.4, compared with $2.5 a year earlier. No operating margin was separately stated.
Cash flow, balance sheet and liquidity
- Cash flows: Operating cash outflow was $58.6, versus $15.5 in Q1 2021. Investing cash outflow was $378.2, mainly from investment purchases; financing cash outflow was $0.3. Cash, cash equivalents and restricted cash declined by $437.1 during the quarter.
- Liquidity and investments: At March 31, cash and cash equivalents were $336.8, restricted cash was $44.8, and investments were $435.4. The company described $381.6 of cash and restricted cash plus $435.4 of investments as available liquidity. Cash and restricted cash totaled $818.7 at December 31, 2021; the decline largely reflects purchases of investments.
- Assets and equity: Total assets were $1,674.5; total liabilities were $865.8; total stockholders’ equity was $808.7. Accumulated deficit was $695.6.
- Debt and borrowing: The balance sheet does not report a borrowing balance. Hippo disclosed $19.2 of Federal Home Loan Bank borrowing capacity and no outstanding borrowings under that arrangement.
- Insurance reserves: Loss and LAE reserves were $282.4 gross of reinsurance recoverables; reinsurance recoverables on unpaid losses were $235.3. Net prior-year reserve development was favorable by $2.8.
Material changes versus the prior comparable period
- Total generated premium grew 25%, but net earned premium increased only 2% as ceded premium and catastrophe XOL costs rose. Q1 2022 XOL offset against earned premium was $7.4, versus $3.3 in Q1 2021.
- The gross loss ratio fell from 198% to 76%, principally because Q1 2021 included Winter Storm Uri. The net loss ratio nevertheless rose to 250%, reflecting higher retained risk from loss-participation provisions and higher catastrophe reinsurance costs.
- Technology and development expense rose 113% to $14.7, insurance-related expense rose 128% to $13.2, and general and administrative expense rose 99% to $16.5, reflecting growth, staffing and public-company costs.
- The net loss comparison is substantially affected by Q1 2021 fair-value losses on preferred stock warrants and convertible-note derivatives and related interest expense; those instruments were settled in Q3 2021. Q1 2022 included a $1.2 gain on warrant fair value and a $3.2 contingent-consideration charge.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects continued investment in technology, sales and marketing, and staffing; it states net losses may increase in the near term and does not assure future profitability.
- Management cites seasonality: customer acquisition and home moves tend to be stronger in summer, while weather-related claims vary by season. It also says technology and development, sales and marketing, and general and administrative costs are expected to rise in the foreseeable future.
- Hippo retained approximately 10% of premium under its primary 2022 proportional reinsurance arrangements, but loss participation features may cause the percentage of risk retained to exceed the percentage of premium retained. Reinsurer availability, pricing, collectability and catastrophe protection remain material risks.
- At March 31, investments had $3.3 of gross unrealized losses, which management attributed to interest rates rather than issuer credit deterioration; it recorded no credit-loss allowance.
- The company disclosed a planned Austin office property purchase for approximately $30.0 in cash, with $2.0 deposited in escrow and termination without cause available through April 21, 2022. A separate future lease for space at the property carries $11.7 of minimum rental payments; additional office leases not yet commenced had $7.2 of future obligations.
- A civil lawsuit naming Hippo and its CEO was in its early stages; Hippo said it could not estimate the likelihood or amount of any potential loss. The filing says the company did not believe other pending litigation was likely to have a material adverse effect.
- Management identified key risks including catastrophic weather, reserve-estimate uncertainty, reinsurance exposure, regulatory limits on rates and underwriting, competition, customer acquisition and retention, cybersecurity and data privacy, and the possibility that Hippo will need additional capital. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether premium growth can translate into higher net earned premium and improving net loss ratio after reinsurance costs and loss-participation provisions.
- How much risk Hippo ultimately retains under 2022 reinsurance treaties, and whether catastrophe coverage and reinsurer recoverables remain adequate and collectible.
- Cash burn and runway: reconcile operating cash outflow with the sizable shift from cash into investments and monitor future operating and investment cash flows.
- Progress toward improving adjusted EBITDA and controlling expense growth, including the effect of stock-based compensation and public-company costs.
- Status and final economics of the Austin property purchase, related lease commitments, and any resulting capital requirements.
- Developments in the Navon litigation and any change in the company’s ability to estimate a potential loss.