Hippo Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Hippo provides insurance services and underwriting through three segments: Services, Insurance-as-a-Service, and Hippo Home Insurance Program. Unless noted otherwise, financial amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $57.7 | $30.7 | $145.2 | $83.9 |
| Net loss attributable to Hippo | $(53.1) | $(129.2) | $(230.8) | $(270.3) |
| Adjusted EBITDA loss (non-GAAP) | $(38.4) | $(54.8) | $(178.3) | $(159.1) |
| Net earned premium | $32.9 | $10.7 | $69.0 | $30.9 |
| Net loss ratio | 111% | 223% | 219% | 245% |
Q3 revenue grew 88% year over year, led by higher earned premium and investment income. Q3 net loss narrowed, helped by revenue growth, lower advertising costs, improved loss ratios, and the absence of the prior-year goodwill impairment and restructuring charges. Nine-month adjusted EBITDA loss increased despite a narrower GAAP net loss, primarily reflecting catastrophe and other weather losses.
Total Generated Premium, a company-defined non-GAAP operating measure, rose 38% to $303.7 in Q3 and 50% to $866.3 for the nine months. Growth was driven mainly by non-Hippo business in Insurance-as-a-Service, along with channel growth, rate increases, and premium retention. It is not equivalent to GAAP revenue.
Q3 gross loss ratio was 59% versus 110%; nine-month gross loss ratio was 81% versus 89%. The company reported Q3 favorable development of earlier-period catastrophe reserves. Nine-month Hippo Home Insurance Program gross loss ratio was 118% versus 91%, reflecting first-half catastrophe activity, including wind and hail events.
Operating cash flow was $(43.9) for the nine months, versus $(131.4) in 2022. Investing activities provided $79.6, and financing activities used $10.8. At September 30, cash and restricted cash totaled $269.4; investments totaled $330.0. These amounts sum to $599.4 in cash, restricted cash, and investments, although restricted cash is not fully available for general use. Total assets were $1,647.0, liabilities $1,235.7, and stockholders’ equity $411.3. The balance sheet presents no conventional borrowings line; Hippo disclosed unused FHLB borrowing capacity of $13.9.
Gross loss and LAE reserves were $359.9, including $249.5 of reinsurance recoverables on unpaid losses. Reinsurance recoverables on paid and unpaid losses totaled $297.3. The company reported no allowance for expected reinsurer nonpayment.
Material changes and management commentary
- Q3 net earned premium increased to $32.9 from $10.7, partly because the 2023 reinsurance treaty allowed higher premium retention. Greater retention also increases Hippo’s exposure to losses.
- For the 2023 primary homeowners treaty, Hippo retains approximately 40% of premium before catastrophe protection; builder-channel retention is approximately 58%. Loss-participation features can increase retained losses beyond the stated pro-rata share.
- Following substantial Q2 catastrophe losses, Hippo raised rates on some renewals, increased wind and hail deductibles, selectively non-renewed policies in higher-risk regions, and paused nationwide new HO3 underwriting while reviewing risk appetite. Management expects these steps to cause Total Generated Premium to decline in 2024.
- Insurance-as-a-Service reported Q3 adjusted operating income of $3.6, while Services had a $9.7 loss and the Hippo Home Insurance Program had a $31.7 loss. For the nine months, the respective results were $11.5, $(30.3), and $(157.9).
- On October 26, 2023, after quarter-end, Hippo announced a workforce reduction affecting up to approximately 120 employees, or about 20% of worldwide staff. It expects $2.2–$2.7 of Q4 severance and related charges, substantially all cash costs.
Outlook, risks, and contingencies
Management expects near-term technology and development and sales and marketing expenses to decrease as it pursues expense reductions; it expects general and administrative expenses to remain relatively flat in the near term. The filing provides no specific full-year revenue, earnings, or cash-flow guidance. Management expects underwriting and pricing actions to improve non-catastrophe loss experience over time, but results remain exposed to severe weather, seasonality, and the timing and severity of claims.
Key risks include catastrophe exposure, the cost and availability of reinsurance, loss-participation terms, and reinsurer credit risk. Insurance subsidiaries remain primarily liable to policyholders if reinsurers fail to pay. Management also cites competitive, regulatory, customer-retention, underwriting, technology, privacy, and capital-raising risks. The company said risk factors had not materially changed from its 2022 Form 10-K.
Hippo and its co-founder are defending a civil lawsuit alleging, among other matters, fraud, insider trading, and share-transfer claims; they deny the allegations. The court designated the matter complex, and trial was expected in late 2024. The company stated it did not believe pending proceedings were likely to have a material adverse effect, while noting litigation can still create costs and management distraction.
Most important facts for investors to verify
- Whether the post-quarter underwriting restrictions and pricing actions reduce catastrophe exposure and deliver the expected 2024 premium decline without undermining retention or revenue.
- How catastrophe claims, reserve development, and loss-participation provisions affect reported loss ratios and cash needs; reserve estimates are inherently uncertain.
- Reinsurance recoverability, renewal terms, costs, and actual retained risk, including the difference between stated treaty participation and losses retained under participation features.
- Liquidity available for operations after excluding restricted cash, ongoing operating cash use, and the company’s path to profitability or need for additional capital.
- The implementation costs and expected savings from the workforce reduction, plus developments in the pending litigation.