Hippo Holdings Inc.

Welcome and thank you for attending the HIPAA third quarter 2021 earnings conference call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, the HIPAA management team. Thank you. You may proceed.

Thank you, operator. Good afternoon, everybody, and thank you for joining HIPAA's third quarter 2021 earnings conference call. Earlier today, HIPPO issued a shareholder letter announcing its third quarter results, which is also available at investors.hippo.com. Leading to today's discussion will be HIPPO's Chief Executive Officer, Asaf Nwand, President Rick McArthur, and Chief Financial Officer, Stuart Ellis. Following management's prepared remarks, we will open up the call to questions. Before we begin, I'd like to remind you that our discussion will contain predictions, expectations, forward-looking statements, and other information about our business, that is based on management's current expectations as of the day of the presentation. Forward-looking statements include, but are not limited to, expectations or predictions of financial and business performance and conditions and competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from historical results and or from our forecast, including those set forth in HIPAA's Form 8-K filed today. For more information, please refer to the risks, uncertainties, and other factors discussed in HIPAA's SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in HIPAA's SEC filings. Do not place undue reliance on forward-looking statements as HIPAA is under no obligation to expressly disclaim any responsibility for updating, altering, or otherwise revising any forward-looking statements. whether as a result of new information, future events, or otherwise, except as required by law. Additionally, during this conference call, we will also refer to non-GAAP financial measures, such as total generated premium and adjusted EBITDA. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the third quarter 2021 shareholder letter, which has been furnished to the SEC and available on our website. With that, I'll turn the call over to Asaf Wan, co-founder and CEO of Vippo.

Thank you, Cliff. Q3 was an incredibly strong quarter for Vippo. Our results demonstrate exciting progress in the areas of our business that matters most. We delivered robust growth, improved our loss ratio, and made a number of investments which will strengthen our foundation for the future. Total generated premium grew 94% year-on-year, premium retention increased to 89%, and customer satisfaction remained amongst the best in the industry. We are now more convinced than ever that partnering with our customers to actively protect their homes and prevent losses is setting a new standard for the industry and is positioning HIPAA for long-term success. Our omnichannel distribution strategy continues to deliver. In addition to strong results in our direct independent agent and builder channels, I'm excited to report that we launched a major new partnership with national home lender Panimac, giving us the opportunity to offer quotes to millions of additional homeowners. Reflecting our strong performance in Q3 and our expectations of continued momentum in Q4, we are raising our full year guidance of total generated premium from $560 to $570 million we shared last quarter to $600 to $605 million now. We also delivered an improved loss ratio during the quarter, coming in at 128% versus 155% a year ago. While we are pleased with the progress, we still have a lot of work to do to reach our long-term targets. In a moment, Rick will talk about how we are using our proprietary technology to learn and implement change at an accelerated pace to continue our momentum in this area. Another advantage that we now have is a world-class insurance leadership team. In recent months, we have welcomed new leaders of our actuarial, underwriting, and risk function, and announced the future addition of a new leader of our claims organization. This team brings many decades of experience at leading insurance companies and sees the power in technology platform that we've built to deliver better insurance results for people. I am personally excited by this rapid operational progress we are making under these new leaders. It will take time for the changes we are making to work their way into our reported results. But early signs are positive and I am more confident than ever that we will deliver. In an unpredictable environment impacted by pandemics, climate change, and inflation, we believe that our tech-driven operating agility allows us to act more quickly and decisively than our competitors and puts us in a better position to win in the long term. Thank you, and I will pass it over to Stuart, our CFO, to discuss our Q3 results in more detail.

Thank you, Asaf. As Asaf said, our third quarter results highlight the ongoing strong demand from customers for our products and services, our improving loss ratio, and early indications that we are seeing the benefits of operating leverage as we grow. Total generated premium, or TGP, was up 94% year-over-year, $162 million in Q3. Pro forma for the acquisition of Spinnaker, TGP was up 51% year-over-year. Additions to our book of business, or new total generated premium, were up 66% year-over-year to $75 million, which is an acceleration from 53% last quarter. We also continue to geographically diversify. Led by growth in Colorado and New Jersey, 63% of new HIPPO homeowners premium in the quarter came from states outside of Texas and California, up from 55% last quarter. As our business grows nationally, we are continuing to develop a much more balanced portfolio of geographic exposure, which should help reduce the volatility of our loss ratio over time. Premium retention remains strong and continues to edge upward, reaching 89% in the quarter. Our high retention rates are a driver of top-line growth, and because loss frequency declines with customer age, a benefit to improving loss ratio over time. Our revenue was up 64% year-over-year to $21 million, driven by the growth in total generated premium. As we highlighted last quarter, geographic concentration in homeowners insurance can result in higher loss ratio volatility. While our concentration in North Texas was against us in the first half of 2021 due to historically bad weather, it benefited us in Q3. The industry was hit hard by the devastation of Hurricane Ida this quarter, but we managed to improve our gross loss ratio to 128%, down from 155% last year. Prior period reserves remained stable with minor favorable development. Digging deeper into the components of loss ratio, catastrophic weather losses contributed 50 percentage points of loss ratio in Q3 versus 75 percentage points a year ago. Our underlying attritional loss ratio was 63%, a 5 percentage point improvement from a year ago. Rick will talk more in a moment about the specific actions we have taken and will continue to take to bring the loss ratio down to our long-term targets. As I mentioned earlier, we are starting to see the benefits of operating leverage as we scale, with the major components of our operating expenses growing more slowly than our total generated premiums. Sales and marketing increased 27% year-over-year to $22.4 million, and we continue to generate more dollars of new TGP for each dollar of sales and marketing we spend. This trend is giving us increased confidence that our message is resonating with potential customers, and as a result, we expect to invest more aggressively in 2022 to build a differentiated and nationally recognized brand in home protection. Technology and development increased 46% year-over-year to $8.3 million as we continue to invest in our platform by integrating new data sources, improving our underwriting model, onboarding new partnerships, expanding into new states, and launching new products. General administrative expenses decreased 17% to $13.4 million, with the increased costs of operating as a public company being more than offset by reductions year-over-year in stock-based compensation. Our net loss attributable to HIPPO for the quarter was $30.9 million, or $0.08 per share, compared to a net loss of $38.6 million, or $0.44 per share, in the prior year quarter. We've ended the quarter well capitalized, with cash, the cash equivalents, and investments of $850 million. Looking forward, we remain confident in our ability to execute our growth strategy and believe we will exceed the forecast we shared with you previously. As Asaf mentioned earlier, we are increasing our full-year guidance for total generated premium from a range of $560 to $570 million to $600 to $605 million. I'd now like to turn it over to Rick McCatherin, our president, to talk more about the rapid operational progress we are making on the insurance side of our business.

Thank you, Stuart. We continue to leverage our technology to improve and rapidly iterate in all aspects of our operations, from generating new business to underwriting, to servicing customers, and handling claims. Specific to loss ratio, we've made several enhancements to promote better results. We are beginning to leverage our new carrier relationships as we implement our multi-carrier strategy. Ally filings have been made in 14 states, and incline have been made in Massachusetts and North Carolina. These will allow us more flexibility in matching the right price to the right customer risk. We incorporated five new data sources during the quarter and added 50 new variables to our data sets, which we expect to introduce in Q4. We have adjusted rates up and down, including a recently approved 24% increase in California. We have also enhanced our home inspection process. In addition, HIPAA continues to diversify its portfolio geographically. This will address some of the volatility seen in results over the past two years. Actions to restrict new business in portions of California and Texas, our two largest states, have been combined with growth in other strategic states. These states generating this diversifying growth were chosen based on the health of the marketplace and our perception of our ability to adequately price and select business in the state. We expect this change in geographic footprint will also help to improve our attritional loss results. There are a lot of actions being taken here, and I want to be clear, our operating model was designed for this kind of continuous improvement and quick execution. As Asaf said, we are living in an unpredictable world, and we have an operating model built to adapt. And now, let me turn it back over to Asaf for some final words.

Thanks, Rick, and thanks to everyone for joining HIPAA's earning call today. Our Q3 results are just beginning to prove that we have the right strategy, the right team, and resources to execute our growth strategy. We are on the path to transform this massive market We believe HIPAA is the future of home insurance. With that, we'd be happy to take your questions.

We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1. If for any reason you would like to remove your question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Matt Carletti with J&P Securities. You may proceed.

Matt Carletti, J&P Securities Okay, thanks. Good afternoon.

Good afternoon. I thought I'd start with a premiums question. You commented in the opening commentary as well as I saw in the letter that new premium growth has really accelerated from prior quarters. And I was hoping you could peel back the onion there a little bit and maybe give us some color on what you view as the real drivers of that new business growth. Yeah, thanks Matt for the question. Stuart, I'll take it and then others can join in. I'll start by saying that we're excited about what we're seeing in each of our distribution channels and that growth in the quarter was balanced across the range of ways we go to market. In Q3, we saw particular strength in the builder and partner channels, which represented over 20% of our new HIPAA homeowners premium for the first time. And given the launch of our partnership with PennyMac, we expect to see continued strength in this area of our business going forward. Geographically, we also did make progress diversifying our geographic exposure in the quarter. 63% of new HIPPOs homeowners premium came from outside of California and Texas. So we have states that we've been live in for a while that are starting to accelerate in growth. And that 63% was the highest ever level for us, up from 55% last quarter. I also think that it doesn't relate directly to new premium, but the overall growth, we benefit from increased premium retention. That remains strong and went up in the quarter to 89%, which of course is a benefit for us because the higher our premium retention, the smaller the headwind we have to overcome from departing customers.

I want to add a couple of more things. There's also some aspect that I would put it under the title maturization. The longer we are in the market, and the market matures, usually conversion improves, word of mouth improves. We're starting to see the value of being in a market for longer, and it's very effective for us. Longer partnerships, partnerships that have been with a while also perform better. New products that we have started to mature as well. I think last quarter we announced our hormonal association and community association. We're now live in eight states. So we're starting to see the benefit of that. Additionally, we are a technology company. And because of that, what we do is do basically constant iterations and fine-tuning of funnels, of data components, of all kinds of other components. And what we're seeing is the longer we are in the market, the more we are fine-tuning and iterating, our conversions improving, and that also improves our growth. So I think it's a combination of all of these things and customers better leaning into our strategy and products.

Great. Thank you. And then one more, if I could. You know, the theme, I think, across not just InsurTech, but more broadly, last quarter and definitely this quarter has been, you know, elevated marketing costs, and particularly in certain performance channels and kind of lower marketing efficiency. Can you comment a little on what you've seen and specifically I'm wondering if given that you produce a good amount of your business through some of the partnerships you just talked about as well as more traditional agent means, if that is shielding you from some of what some others might be seeing that are relying more on direct mechanisms. Yeah, Matt, this is Stuart again. I think we talked a bit about this phenomenon last quarter, and I'm happy to report that we are still not seeing this effect in our business. In fact, we're seeing improved marketing efficiency over time as we are generating more dollars of TGP for every dollar we spend on sales and marketing. I think some of the reasons that we've been less affected maybe than others have to do with our business. Home insurance is often an event-driven purchase that centers around the actual purchase of a home. So that's one potential reason why. And then also, I think the way we have historically gone to market hasn't been as reliant on social media as a channel. It really has not been a significant part of our go-to-market strategy. I also think it's actually quite difficult to find a homeowner's policy online in a direct way. There are not very many people out there who do that. And so I think that that also may influence the amount of money that's being spent in this channel. And so we have an advantage there. I think that at least for now has been persistent. I think finally, I'll also say that now that we're reaching true nationwide scale, we are planning to launch a national brand campaign next year that we think will further reinforce our differentiated consumer experience and our approach to partnering with our customers who want to better protect their homes, which, as you mentioned, along with our omni-channel strategy, which we think has been the right choice for us and for our customers from the beginning, should help insulate us from things like this in the future. Great. That makes a lot of sense. Thank you very much for taking my questions, and best of luck. Absolutely. Thanks, Matt.

Thank you, Mr. Parletti. Once again, if you would like to ask a question, please press star 1. Our next question will come to the line of Alex Scott with Goldman Sachs. You may proceed.

Good afternoon. Thanks for taking the question. I just wanted to maybe dig into the operational changes that were referenced in the letter. Could you provide some more detail on some of those actions you're taking? and maybe how the ally and incline partnerships kind of are intertwined with some of those actions and any way for us to think about how quickly that will push your loss ratio towards some of your targeted levels.

This is Rick. I'll happily answer that question. From an operational perspective, we've taken quite a bit of action. As Stuart mentioned earlier, our diversification outside of Texas and California have certainly taken hold. And we're doing a better job of managing our non-CAT via underwriting, leveraging data and technology. As I mentioned, we've got five new data sources that we've integrated this quarter. We have 50 new data variables that we're using. Also, the multi-carrier strategy that you mentioned is certainly allowing us to accelerate by having multiple underwriting companies, multiple price points, multiple underwriting guidelines. That will allow us to accelerate our rate improvement and loss ratio improvement. Certainly, our tech stack also helps that. The fact that we have a – a open architecture tech stack that enables us to integrate with multiple carriers in a quick way will help us accelerate the rate at which we're doing that as well. As you know, we have a capital light structure, And using Ally and Incline not only makes us more capital efficient, but also allows us to accelerate those actions. So we anticipate writing our first business on Ally and Incline in Q1. We've already filed a combination of 16 states on Ally and Incline, and we're excited to launch those and write our first policies I mentioned in Q1.

Thanks. Sorry, Alex, this is Stuart. I'd also say just more generally, you know, we're seeing, we talked a little bit about this last quarter, but, you know, the supply chain issues with COVID and other kind of inflationary aspects of COVID remediation and costs in the industry, I think our proprietary platform that we own and control gives us an ability to react more quickly generally to changing market conditions. So whether it's rate filings, whether it's underwriting guidelines, I think we feel confident that we are in a strong position to react to whatever the market conditions are in the future. And we view that as really one of the differentiators of the technology platform.

Got it. Thank you. Maybe just a quick follow-up to that. I mean, when you think through some of the actions you're taking, and you mentioned the California rate increase in the initial comments, Do you expect to have any impact on retention? Is there any way for me to think about the way that that will trend or any sort of early insights that maybe you have on that?

Alex, good question. I think we're in an inflationary cycle. I think the entire industry is taking rate. It's a combination of increased frequency and severity. I think weather changes. So I don't think this is something that's isolated to HIPPO. And I think if you look at SNL data, you're going to find that most incoming carriers are taking rate and we're no different.

Got it. Just in terms of the catastrophe losses, I appreciate that this year has been very active. Every quarter, there's been different things that have impacted. How should we think about that level going forward? And just thinking through, you are concentrated in some areas that are more cat-exposed right now, and maybe that's sort of a more elevated, normalized level, kind of eventually giving way to a more normal cap budget that you'd see in other companies with a nationwide distribution. Any way for us to think through how that will progress and where it will be over the near term?

Yeah, I think you know clearly this is not been a great year for the industry generally because of the cats that you had mentioned and the PCS events. I think from our perspective, sort of a normalized cat load is a very state specific situation as we continue to diversify. um outside of places like california and texas you'll see a very different shift in a cat load versus an attritional load over time i think what's important for us is that we really price each customer based on each state where we believe we will have an underwriting profit so to us it's staying ahead of that curve obviously we have some catch-up work to do we've been doing it with all the rate filings But we're certainly improving that. And I do think you're noticing that the diversification that Stuart mentioned earlier, 63% are out of those high concentrated areas, and that's up from 55% last quarter. So you're certainly seeing that. And over time, we want to get to loss ratios in the 60s.

And this is historic. Even within, say, for example, the state of Texas, we would also consider what we've been doing over the past couple of quarters to be diversification within the state. So our concentration within Texas has historically been in the North Texas area, near the Dallas-Fort Worth area, which is more hail-exposed. Texas is a very, very large state. And so even though we're continuing to write business in Texas, that new business that we're bringing into the portfolio is diversifying our cat exposure away from things like hail.

Got it. Thanks for the responses. Thanks, Alex.

Thank you, Mr. Scott. Once more, if you would like to ask a question today, please press star 1. The next question comes from the line of Christopher Martin with KBW. You may proceed.

Hey, guys. Congrats on the quarter. Very positive look on the bubble premium generated. Just a quick question on some of the constraints we've seen on the supply chain in the home builder space in those partnerships you have. Have you seen any kind of slowdown in those channels? in the recent quarters, and how should we think about, kind of, as you're splitting up your diversification of distribution, that that pieces it with Lennar, et cetera, could be a little bit constrained versus what you may have thought about six months ago? Hi, Chris. This is Asaf. As I mentioned before, the build-ins is one of our fastest-growing categories. What we've seen is, yes, that overall there are several constraints for this industry, but for our partners, what they've seen is growth, and our attach rate is growing. Our partnership with them is deepening. We launched in more states. I think we're live now in 15 states and selling our unique product, which is our HO5 product. Many people don't know it's actually a dedicated insurance product that was developed very closely with our partners. It has all kinds of features and nuances that caters to their needs. And we're starting to see more and more adoption. We're currently working with three out of the top 15 builders and keep on deepening this partnership with the builders that we have. And we're very open to add more and more builders. We're very excited about this product. There's no stopping it. We've seen just tailwinds go down. Great. That makes a lot of sense. The deepening of the relationships versus what the constraints may be. That's all I have for now. You guys answered everything else previously. Thank you. Thank you.

Thank you, Mr. Martin. There are no additional questions waiting at this time, so I'll pass it back to the HIPAA management team to provide closing remarks.

Thanks, everybody. Just wanted to say thank you for coming in today, and we're looking forward to talking to you in the next quarter.

That concludes the HIPAA Third Quarter 2021 Earnings Call. Thank you for your participation and enjoy the rest of your day.