Hippo Holdings Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are against fiscal 2020. This is an annual filing, not a standalone fourth-quarter report. Hippo completed its SPAC business combination on August 2, 2021 and received approximately $450.3 million of net proceeds from the combination and PIPE investment.
Financial and operating performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total Generated Premium (non-GAAP operating metric) | $606.1 million | $333.6 million | +82% |
| Total revenue | $91.2 million | $51.6 million | +77% |
| Net earned premium | $38.9 million | $17.1 million | +127% |
| Net loss attributable to Hippo | $(371.4) million | $(141.5) million | Loss widened |
| Adjusted EBITDA loss (non-GAAP) | $(172.4) million | $(90.4) million | Loss widened |
| Gross loss ratio | 138% | 109% | +29 percentage points |
| Net loss ratio | 217% | 148% | +69 percentage points |
| Net cash used in operating activities | $(124.5) million | $(65.4) million | Use increased |
Revenue growth reflected higher net earned premiums, commission income and service and fee income. Losses and loss adjustment expenses rose to $84.4 million from $25.3 million, while sales and marketing expense increased to $95.0 million from $69.4 million. The reported net loss was substantially affected by $198.9 million of interest and other expense, including fair-value movements on preferred-stock warrants and convertible-note derivatives. A $47.0 million gain on extinguishment of debt partly offset expenses.
The 2021 gross loss ratio was pressured by catastrophe claims, notably Texas winter storm Uri, which management said contributed 26 percentage points, and other weather-related events. In Q4, Hippo released $15.0 million of reserves following favorable development; management reported a 13-point favorable impact to the quarter’s gross loss ratio and a 34-point favorable impact to its net loss ratio. The company said prior-period reserve changes did not affect the full-year net loss ratio because the relevant exposure was ceded to reinsurers.
Balance sheet, liquidity and capital
- At year-end, cash and cash equivalents were $775.6 million, restricted cash was $43.1 million, and investments were $64.0 million. Combined cash and restricted cash totaled $818.7 million.
- Total assets were $1.643 billion; total liabilities were $781.0 million; stockholders’ equity was $861.7 million.
- Convertible promissory notes and related derivative liabilities were converted in connection with the business combination; no convertible promissory notes remained on the year-end balance sheet. The company reported no outstanding borrowings under its $22.9 million Federal Home Loan Bank borrowing capacity.
- Financing cash flow was $480.8 million, principally reflecting $450.3 million of net business-combination proceeds and $29.0 million from preferred-stock warrant exercises. Investing cash flow used $30.0 million.
- Gross unpaid loss and LAE reserves were $260.8 million, versus $105.1 million a year earlier; net reserves after reinsurance were $44.0 million. Reinsurance recoverables were $266.9 million.
- Insurance subsidiaries’ statutory capital and surplus totaled $139.5 million, compared with $92.2 million in 2020. The filing states Spinnaker’s risk-based capital ratio exceeded minimum statutory requirements.
Material changes and management outlook
- Hippo acquired Spinnaker in 2020; 2021 therefore included a full year of its operations versus a partial year in 2020. The acquisition shifted some business from MGA commissions and gross placed premium into carrier-written premium, ceding commissions and retained-risk results, affecting year-over-year comparability.
- The company operated in 37 states at year-end, up from 32 in 2020, and reported that its products covered more than 80% of the U.S. population. Management planned further state expansion in 2022, broader partner distribution, cross-selling and growth in home-protection services.
- Hippo retained approximately 12% of the risk on its 2021 homeowners policies. For 2022, it expected to retain approximately 10% under its primary proportional treaty, while noting increased use of loss-participation features could increase retained risk beyond its pro-rata share.
- Management expects continued investment in marketing, technology, hiring and public-company costs, and disclosed that it expects net losses to increase in the near term. The filing provides no specific revenue, earnings or profitability guidance.
- Management cited inflation in labor and building-material costs, COVID-related effects on inspections and premium collection, and catastrophe exposure as factors affecting claims and operations. It expects seasonal revenue strength in the third quarter and seasonal weather-related claims volatility.
Risks, contingencies and unusual items
- Hippo has incurred annual net losses since incorporation in 2015; accumulated deficit was $628.0 million at year-end. Profitability is not assured.
- Results depend on effective underwriting, adequate pricing and reserves, catastrophe modeling, and the availability, cost and performance of reinsurance. Hippo remains primarily liable to policyholders if reinsurers fail to pay.
- Texas and California represented approximately 47% of 2021 gross written premium combined, creating geographic concentration in catastrophe and regulatory exposure.
- Other material risks include intense competition, customer retention and acquisition costs, state insurance regulation and rate approvals, data privacy and cybersecurity, reliance on third-party data and cloud providers, and access to capital.
- The company disclosed a civil action involving its CEO and a former employee concerning a loan, call option and alleged promises. The court sustained Hippo’s motion to dismiss claims against the company without prejudice; Hippo said the matter remained early-stage and its potential loss could not be estimated.
- Public and private warrants are liabilities measured at fair value, so valuation changes may create material non-cash earnings volatility. Management reported disclosure controls and procedures were effective; it did not include a management assessment or auditor attestation of internal control over financial reporting because of the transition rules for newly public companies.
Important facts for investors to verify
- Reconcile reported net loss attributable to Hippo of $371.4 million with the consolidated net loss of $367.9 million, including the noncontrolling-interest allocation.
- Assess underlying claims performance apart from catastrophe losses, reinsurance recoveries, reserve releases and warrant or derivative fair-value changes.
- Review whether growth in generated premium and revenue translates into improved loss ratios, customer retention, acquisition efficiency and a path toward profitability.
- Check the adequacy and renewal terms of reinsurance, reinsurer credit exposure, and the effect of loss-participation terms on retained risk and statutory capital.
- Monitor cash burn, commitments, insurance-subsidiary capital and dividend restrictions, and the potential dilution from equity awards and outstanding warrants.