Hippo Holdings Inc. quarterly report, Q3 FY2022

Hippo Holdings Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; unaudited consolidated results. Hippo underwrites, administers, and markets personal property and commercial insurance, while also operating as an agency and managing general agent. Unless noted, amounts are in U.S. dollars, millions.

Financial performance and liquidity

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$30.7	$21.3	$83.9	$59.1
Net loss attributable to Hippo	$(129.2)	$(30.9)	$(270.3)	$(310.7)
Adjusted EBITDA loss (non-GAAP)	$(54.8)	$(48.4)	$(159.1)	$(126.4)
Net cash used in operating activities	Not separately provided	Not separately provided	$(131.4)	$(119.2)

• Q3 revenue rose 44% year over year, led by net commission income, up 117% to $14.3 million. Nine-month revenue increased 42%; commission income more than doubled to $38.7 million.
• Q3 net loss widened substantially, primarily reflecting $53.5 million of goodwill impairment and $1.8 million of restructuring charges, alongside higher operating costs. Nine-month net loss narrowed year over year, partly because 2021 included large noncash fair-value and debt-related expenses.
• Gross loss ratio was 110% in Q3 versus 128% a year earlier; net loss ratio was 223% versus 241%. Excluding Hurricane Ian, management reported gross loss ratios of 58% for Q3 and 70% for the nine-month period. These ratios remain high, and the reported Q3 result benefited from reserve releases.
• Total Generated Premium, a company-defined metric, grew 36% to $219.3 million in Q3 and 30% to $577.1 million for nine months. Gross written premium for the nine months was $452.2 million, while net earned premium was $30.9 million after substantial reinsurance cessions.
• At September 30, cash, cash equivalents, and restricted cash totaled $392.9 million; investments totaled $330.8 million. The company reported $991.0 million in liabilities and $639.0 million in stockholders’ equity. The filing reports no outstanding FHLB borrowings and $8.8 million of available secured borrowing capacity. No conventional debt balance is identified in the presented balance sheet.
• Cash and restricted cash fell from $818.7 million at December 31, 2021. Nine-month investing cash outflow was $290.7 million, largely reflecting net purchases of investments. Operating cash use increased by $12.2 million year over year.

Material changes versus the prior comparable period

• Revenue growth was driven mainly by higher ceding commissions and fronting fees. Net earned premium was nearly flat in Q3, as higher gross premium was offset by increased catastrophe reinsurance costs.
• Q3 losses and LAE fell to $23.9 million from $26.3 million, but included $4.7 million of net Hurricane Ian losses and a $3.3 million prior-year reserve release. For nine months, losses and LAE increased to $75.6 million; management cited higher risk retained through loss-participation features and Ian losses, partly offset by a $9.3 million prior-year reserve release.
• Q3 technology and development, insurance-related, and general and administrative expenses increased 78%, 120%, and 42%, respectively. For nine months, stock-based compensation expense rose to $46.3 million from $9.8 million.
• Goodwill fell from $53.5 million at year-end 2021 to zero after an impairment charge, which management attributed mainly to sustained share-price decline and deteriorating macroeconomic conditions. The company also reduced its workforce by about 10%, or approximately 70 employees.
• A one-for-25 reverse stock split became effective September 29, 2022. Share and per-share data in the filing are retroactively adjusted.

Outlook, commentary, risks, and contingencies

• The filing provides no quantified forward guidance. Management says it expects to continue investing in growth, technology, and customer acquisition; it also cautions that profitability may not be achieved and that net losses may increase in the near term.
• Management cited growth across distribution channels, state expansion, agent-network growth, partnerships, premium-rate increases, and retention as drivers of premium growth. Hippo reported selling policies in 40 states as of September 30, 2022.
• Hippo retains approximately 10% of premium under its primary proportional reinsurance arrangements, but loss corridors and other participation provisions may make retained risk exceed that share. Reinsurance availability, cost, and counterparty performance are material risks; the company remains responsible to policyholders if reinsurers fail to pay.
• Hurricane Ian contributed $73.1 million of gross losses across Hippo and fronting programs, but $4.7 million of net losses and LAE. Catastrophe exposure, reserve-estimate uncertainty, inflation, and reinsurance costs could affect results and liquidity.
• Liquidity is being consumed by operating losses and investment in the business. The company states that additional capital may be needed if existing resources are insufficient; future financing may be unavailable or dilutive. Insurance-subsidiary dividends to the holding company are subject to regulatory restrictions.
• Hippo received an NYSE notice in July 2022 for falling below the minimum share-price standard. Following the reverse split, the company reported compliance with NYSE listing criteria as of September 30, 2022.
• A civil action naming Hippo and its executive chairman remains pending. Hippo answered the amended complaint and intends to seek summary judgment; no trial date had been set. The company says it does not believe pending litigation is likely to have a material adverse effect, but litigation can entail costs and uncertainty.
• Management concluded disclosure controls and procedures were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether premium growth translates into improved underwriting economics, especially after reinsurance costs and loss-participation provisions.
• The sustainability of favorable reserve development and the ultimate net cost of Hurricane Ian and other catastrophe claims.
• Cash burn, investment liquidity, insurance-subsidiary capital needs, and the timing or potential terms of any additional financing.
• The assumptions behind the $53.5 million goodwill impairment and whether further impairments or restructuring costs arise.
• Progress toward sustained profitability, including expense trends and the distinction between GAAP losses and non-GAAP Adjusted EBITDA.
• Developments in the pending litigation, reinsurance recoverables and counterparties, and continued compliance with regulatory capital and NYSE listing requirements.