Hippo Holdings Inc.

Good afternoon. Thank you for attending today's HIPPO fourth quarter 2021 earnings call. My name is Hannah, and I will be your moderator for today's call.

All lines will be muted during the presentation portion of the call. With an opportunity for questions, if you have a question, please press star F1 on your telephone keypad. I would now like to pass the conference over to our host, HIPPO. Please go ahead.

Thank you, Andrea. Good afternoon, everybody, and thank you for joining HIPPO's Fourth Quarter 2021 Earnings Conference Call. Earlier today, HIPPO issued a shareholder letter announcing its fourth quarter results, which is also available at investors.hippo.com. Meeting today's discussion will be HIPPO's Chief Executive Officer, Scott Vaughan, President, Richard Kaepernick, 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 NASA's current expectations as of the date of this presentation. Forward-looking statements include, but are not limited to, both expectations or predictions of financial and business performance and conditions, competitive and industry outlook. Forward-looking statements are subject to risk, uncertainties, and other factors that will cause our actual results to differ materially from historical results and or from our core tests, including those set forth in HIPAA's Form 8-K file today. For more information, please refer to the risk, uncertainty, and other factors discussed in HIPAA's entity filing. All cautionary statements that we make during this call are applicable to any forward-looking statements we make whenever they appear. You should carefully consider the risks and uncertainties and other factors discussed in TIPO's SEC filing. Do not place undue reliance on forward-looking statements, as TIPO is under no obligation and expressly disclaims 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 revised by law. During the conference call, you will also refer to non-GAAP financial measures, such as total generated premiums 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 fourth quarter 2021 shareholder letter, which has been furnished to the FTC and available on our website. And with that, I'll turn the call over to Asaf Huan, co-founder and CEO of FIBRA. Asaf Huan Thank you, Philippe. Good afternoon, everybody. 2021 was a year of milestones for Vipo, including the public listing of Vipo shares and annual total generated premiums costing $600 million. Some of these successes were tempered by headwinds, such as a sell-off in the equity markets for many tech growth-oriented companies, catastrophe losses in our major geographic markets, and heightened loss cost pressures for home retailers. However, people ended the year operationally and financially strong in a position to patiently weather the volatility of financial markets and a laser focus on executing against our long-term vision of protecting the joy of homeownership. We believe we are transforming the home insurance industry with our proactive and holistic approach to home protection. Our 2021 growth in total generated premium of 80%, supported by an 88% EPO-01 of premium retention rate, has validated that belief, so we are broadening our reach in 2022. In the coming months, we plan to extend our geographic presence from 37 states by adding major states in the Northeast, as well as extend within our existing footprint with new borders. We will also continue to grow through our key partnerships, Through major U.S. home builders such as Lenard and Soul Brothers, we are sourcing some of our best customers, newly built tech-enabled homes with owners who want to use technology to improve their homeownership experience. Through our partnership with major financial service companies, we're able to reach potential homeowners at the critical moment when home protection is at a forefront on their minds. I am pleased by the strong progress we are making to improve our loss ratio. Our Q4 gross loss ratio of 89% was the best quarter of the year, in part benefiting from seasonality and also starting points of reserve releases from prior periods. We are improving our loss ratio as we mature by using our technology to better calibrate pricing to risk, increasing our geographic diversity, and entering new markets. We view our progress in this area as particularly encouraging given the many pressures on loss costs. We also have successful reinsurance renewals in January. Despite the ardent reinsurance market in which prices, trends, and conditions were under pressure, People was able to renew its main treaty with a panel of 11 A- or higher rated reinsurers. This is up from a panel of nine in 2021. Our reinsurance partners are able to closely examine our underlying practices, and we are grateful to have their continued support and confidence in our future resource. Technology remains a key differentiator for e-commerce. First, we leverage technology to help customers rest easy in their homes through preventative maintenance and home sales. Through our own inspection process, either in person or through live video, we can inspect a customer's home, often leading us to facilitating preventative home repair measures. We also offer discounts to customers who partner with us to use technology like leak sensors or home security to help prevent losses. What customers might not see is that we're also leveraging our technology to build a modern insurance company. Actuaries, underwriters, claim adjusters, insurance and customer support agents all leverage our modern tech stack to turbocharge their productivity and scale their daily operations with consistency and reliability. Recognizing the all-encompassing role of technology at EPO, we are elevating one of our long-serving EPOs, Mr. Ran Arpad, to the newly created position of COO. Ran will maintain his current responsibilities as Chief Technology Officer and will also oversee our end-to-end customer experience from product inception all the way through customer support. Another major accomplishment for the year was that despite a very difficult hiring environment, we expanded the EPO team to 621 people, attracting top talent across a range of expertise. Starting our first day in 2022, we're particularly excited to welcome Ms. Grace Hanson, formerly with ISFOS, to our EPO course to become our first Chief Plains Officer. While we prefer to help our customers prevent claims, when unfortunate events do happen, we prioritize supporting our customers and gracefully be working to enhance our capabilities in chain service. While we are unsatisfied with the share price performance since our August 2021 listing, we have more confidence than ever in HEPA's long-term prospects and ability to modernize home insurance and protect the joy of homeownership. Now, to talk a little bit more about our insurance operation, I hand the call over to our President, Rick McCafflin.

Thanks, Asaf. We believe 2021 was a preview of the long-term environment for the homeowners insurance industry. Increased volatility, unpredictable climate activity, inflationary home repair costs, and supply disruptions will require providers to have a level of response We have been developing a technology platform well positioned for such challenges. In December, we rolled out our latest iteration of our underwriting engine by introducing additional coverage options and using increased data. We have added granularity in our models and are better matching price with risk. While some existing customers will see price increases, others will see reductions. In Texas, for example, we have done significant re-underwriting in which approximately 25% of our Texas customers will see a rate decrease. We've also begun rolling out our multi-carrier strategy, utilizing Ally and Incline, giving us additional avenues to file and set rates for targeted markets, increasing the number of pricing segments, adding additional rating variables, part of this strategy is opening up ally for hippo's preferred risks enabling even more competitive pricing for preferred segments our fastest growing distribution partnerships with home builders is also our most profitable channel these partnerships are having a positive impact on country-wide profitability this channel and related portfolio continues to indicate that it is aligned with profitable growth. We have not filed any rate activity or rate actions in this area. One last point worth noting is how our tech stack allows us to accelerate pricing and underwriting changes. Our flexible tech stack enables us to do more and do more quickly. In our Texas rate filing, we introduced new data source, three new underwriting variables, and new coverage restrictions. Under traditional carrier legacy systems, the specs for such changes are frequently required to be provided to the IT organization months in advance. With our tech stack, we are able to program these immediately after the rate change has been submitted, meaning we can launch changes as soon as they receive regulatory approval. The result in our timeline being shortened allows us to real-time finalize proposals and submissions to the state. The extra time enables us to use the most recent data to pick our loss and trend factors. As an example, we see inflation as a major area to watch in 2022, and we're able to include our view of our rate selections. We also constantly update and re-underwrite each individual risk in our portfolio. When a policy comes up for renewal, we don't simply mechanically add an inflation adjustment. We re-underwrite the policy, updating it for all new data we've accumulated since the last renewal to enable our customers to properly protect their homes. All in all, we think our segmented, multi-pronged approach to pricing puts us in a great place to drive profitable growth in 2022. Now I'd like to pass it over to Stuart, who will update you on our financial progress. Thanks, Rick, and hello, everyone. Total generated premium grew 53% year-over-year to reach $163 million in Q4 and grew 50% year-over-year to $606 million for the full year. Our premium retention remained high at 88%, an indicator that our customers continue to be pleased with our service and products. our growth was spread across our many distribution channels as we said before we're happy for our customers to purchase hippo policies however they like whether directly from hippo through independent agents or by way of one of our partnerships with home builders or financial institutions we grew in each of our 37 states including texas and california where we have repositioned our regional mix within these large states to diversify our cat exposure we expect to launch additional major states in 2022 And for the full year 2022, we are targeting total generated premium in the range of $800 to $820 million. Revenue of $32 million in Q4 was up 96% year over year. Our revenue includes premiums earned on business we retain, Growing streams of seeding, MGA, and agency commissions paid to us by reinsurers or other carriers in exchange for sourcing customers and or risks that they retain on their balance sheets, as well as service and fee income from our customers. Finally, through Spinnaker and its affiliates, our wholly owned A&Best A-rated group of insurance companies, we continue to expand our business with third-party program administrators, earning fronting fee income through our insurance as a service model. Over time, we expect an increased share of our earnings will be derived from a stable and recurring stream of fee and commission-based income. In 2022, we expect our revenue growth rate will exceed our TGP growth rate and that we will generate revenue in the range of $140 to $142 million. Moving down the P&L, I'm pleased to report that we continue to make progress on improving our gross loss ratio. Q4's gross loss ratio of 89% is our best quarter of 2021, Given historical patterns of seasonality and catastrophic weather events, we don't expect sequential improvement in each quarter of 2022, but we do expect meaningful year-over-year improvement. We're making great strides on each of our initiatives to reach our intermediate goal of industry-level loss ratios while continuing to grow quickly. During the fourth quarter, PCF's catastrophic losses accounted for 25 percentage points of our gross loss ratio. The largest of these events was the Marshall Fire in Colorado on December 30th, Non-PCS large loss events accounted for an additional 11 percentage points. Our growth loss ratio also benefited from releases of reserves held for prior periods in 2021 due to favorable development across all perils. These releases had a positive impact on our Q4 growth loss ratio of 13 percentage points. As our book of business matures and achieves more balance and geographic diversification, we expect volatility in catastrophic and large loss events to decline. Turning now to reinsurance. Despite a hardening reinsurance market, we successfully renewed and placed our primary homeowner's reinsurance program for 2022. We expanded our quota share panel from 9 to 11 reinsurers, all of whom are either rated A-minus, excellent, or better by AMBAP, or are appropriately collateralized. As a reminder, we also have multi-year reinsurance for approximately one-third of our capacity from a separate reinsurance treaty we signed at the end of 2020. 2022 will be the second of its three-year term. We expect to retain approximately 10% of the homeowner's premium that our MGA underwrites on the balance sheets of our insurance company subsidiaries or our captive reinsurance company. Our 2022 Proportional Reinsurance Treaty does include loss participation features, which may increase the amount of risk retained by the company in excess of our pro rata participation of 10%. We reduce our risk retention through purchases of non-proportional reinsurance, like excess of loss coverage, This program provides protection from catastrophes that could impact a large number of our customers in a single event. We buy FLL coverage to a 1 in 250-year return period. Or said another way, the probability that losses from a single occurrence exceeds the purchase protection is 0.4% or less, protecting us from all but the most severe catastrophic events. Sales and marketing expense increased to $25.7 million in Q4 versus $16.5 million in the prior year quarter. As we continue to see progress in our key KPIs, we have increased confidence in raising the profile of our brand with potential customers nationwide. Technology and development expenses were $13.5 million in Q4 versus $4.8 million in the prior year quarter. Technology is the backbone of HIPAA, and we continue to relentlessly invest to improve our customer offering, our API-oriented ecosystem, and the efficiency of our platform. Nearly a quarter of our employees are on the technology team, with a talent depth that any Silicon Valley company would be proud to have. General and administrative expenses were $18.6 million versus $9.5 million in the prior year quarter, reflecting the increased cost of operating as a public company and increases in stock-based compensation. Our cash, cash equivalents, and investments at the end of the quarter stood at $839.6 million, positioning us well for an extended period of growth and investments. Net loss attributable to Hippo was $60.7 million, or $0.11 per share, compared to a net loss of $54.1 million, or $0.60 per share, in the prior year quarter. Adjusted EBITDA was a loss of $46 million versus a loss of $26.1 million in the year-ago quarter. We remain confident in our outlook for strong, profitable growth as we diversify and develop our business. To summarize our guidance for the year, we expect overall PGP in the range of $800 to $820 million, revenue to reach $140 to $142 million, and barring major catastrophes, a full-year 2022 growth-loss ratio under 100%, down from 138% for 2021, and on track for further material improvements. And now let's pass it back to Asaf for closing remarks. Thank you, Stuart.

At the time where the world faces multiple challenges, we as people understand that our homes take on an even deeper meaning. Our vision of protecting the joy of homeownership has never been more important, and we are energized by the progress we are making. We've assembled a world-class team, and we are building momentum across all of our strategic priorities. I am proud of what we accomplished in 2021, but even more excited by the promise of 2022 and behind. With that, we are happy to take your questions.

Certainly, if you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, question star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Michael Phillips with Morgan Stanley. You may proceed.

Great. Thanks, everybody, and good evening or good afternoon. First off with a quick numbers question, and then we'll go into a couple other ones. The first numbers question is on your gross loss ratio, the 89%. You broke it down for us in the caps and the large loss and the attritional, but I assume the attritional of the 53, that includes the 13, right? So maybe if we net that out, the attritional, true attritional is 66. Is that correct? Hey, Mike, good to see you. The large losses and the DCS cat events and the other attritional, those are mutually exclusive. So the numbers in the Charlotte. Yes, so where's the 13? I guess, where do we put the 13? Yeah, they do, but where's the 13? I guess is the question. 13 is part of the 89, is that correct? I'm not sure.

Can you repeat the question?

I'm not sure I heard it right. Yeah, sure. So 25, 11, and 53, that's your 89. But somewhere buried in those numbers, it's only not the 25 or the 11, but probably the 53 is a negative 13.

Oh, yeah.

Yeah, it's across all categories. okay okay okay cool right thanks um that's all the numbers question was so can we talk i guess on on your channels um a lot lots of uh positive talk on the profitability of the builder channel um i guess so i want to see if you can compare how you think about your different partnership channel builder versus the financial services companies in terms of profitability in terms of growth potential in terms of overall market cam that we both have i guess Correct me if I'm wrong, I think of the financial service like the Teddy Mac examples as more of a potential bigger size market, but maybe not growth. Whereas the builder one, maybe a smaller TAM, but possibly bigger growth and profitability. So I just kind of want to mesh through all that in your partnership channels.

Yeah, hi, this is Asaf Michael. Thanks for the question. Let me start eye level and kind of explain our view on the partnership channels. So the partnership challenge is coming from this view that for many people, they actually never buy home insurance in their mind. What they do buy is they buy a home. And if you get a home, then you usually need a mortgage, you need a mortgage, you need a form of insurance. So that's how the flow basically in people's mind goes. and our view is that we want to have an omni-channel kind of strategy and support people whenever they they basically want to purchase the policy so the partnership track is about supporting people in the uh cycle of purchasing a home so we work with realtors we work with mortgage originators mortgage services title companies and builders is one of these things. Right, as you stated, some of them that you view as more financial, then they might be bigger in scale in some ways, but the attachment is different and the risk that we get is slightly different. And we have a customized solution for each and every one of them, specifically for the builders, for instance. So builders have their own challenges, which is different than other people's challenges. There's usually a data deficiency, for instance. So what I mean is if you're buying a property in a certain community, you don't even have an address. You don't know exactly the square foot. There's a lot of information that is missing in that form. And then you have very limited information about the potential tenant. And there's a lot of these components that create some issues for other standard insurance companies when they try to attach the policy. On the other side, this is a brand new home. So there's a lot less potential back losses that are hidden someplace. Builders give warranty on the construction. So anything that's going to happen in the first several years is actually going to be covered by the builder. it's a brand new community so for instance there's no overarching tree or uh you know or a 20-foot tree that is overarching your home that might fall everything is brand new the the piping works the the sewage works and it's and it lowers the entire risk of the entire community and builders have a full knowledge of the rebuilding cost of each and every one of the homes so what we've done in april for instance for the builders We built a dedicated product to take all of these points into consideration. It has broader coverage. It's an HO5 product, so it's an all-parallel. It has more correct price for the specific risk that the builder has, so it's better for the customer, and it has higher attach rate that is beneficial for the builder. There is unique data integration with the builder's specific data. There is specific integration with the sales team on the ground. So the sales associates can actually offer something which is a lot more comprehensive and beneficial for the customer. And what we're seeing is that I would say that it's one of our fastest growing products in channel. And so just as an example, when we started working with Lenar, the attach rate of these products were over and around 40%. Now what we're seeing with Lennar and some of our other vendors that we have is an opt-in rate of around 90% in some of the regions and an attach rate which is getting close to the 70% and we're very confident it's actually going to grow. So in short, This entire unique strategy is relatively unique. You need to have very, very strong data and technology underneath to support it. You need to have API that's attached to the different systems in place. By the way, those regulatory and compliance components, some of them you need compliance. Some of them you don't have. So it's a lot of unique solutions that come into play. It's one of our fastest-growing channels and a profitable one for us. So we're going to continue announcing more and more of the partnership in the future, and we're going to double down on it.

I wanted to clarify something on your first question to Stuart, which Stuart answered correctly, but I want to make sure it resonates with you in a little more detail. So the positive development on the reserve release, the 13 points you were talking about, that was not just attritional. I think you inferred what the attritional loss ratio would be as a result. That's, as Stuart said, that's across all perils. Let me give you a specific example. Winter Storm Uri was a unique event, and it had a different reporting pattern than other events. So as the year went on, we were seeing positive development across all perils, not just attritional perils. Okay. No, thank you, Rick. That's helpful. Appreciate that. I guess the last one, a follow-on to that last answer from the top. You touched on it a bit. You touched on it before. I guess one of the things we get a lot is, gosh, these guys are doing this great partnership thing, and it's really cool, but, I mean, why can't Allstate do that? Why can't Traverse do that? And won't they do it more successfully and faster? So what would you say to that? Because it's a question that comes up quite a bit.

Yeah, a couple of things. First one is what we're seeing now is that insurance companies in general, it's probably one of the most severe channel conflicts that you've ever seen. So usually what happens is if State Farm wants to offer, their entire deal is that they're going to direct the traffic to Joe Schmoe, who lives in Main Street in a certain corner, and to do something which is holistic, that takes care of, you know, that you're attaching State Farm and you don't attach this specific agent is something which is conflicting. So we're doing something which is holistic. You're always going to get the HIPAA experience. It's not the specific agent that has to do with it. So we're not directing to specific agents, we're directing to HIPAA and we're taking care of that. The second thing, as I said, different companies have different infrastructure, different data sources, unique compliance regulation and needs, and it's not a treated thing to actually fit it. What PennyMac has and what HomePoint has is different than what Chase has and what Blend has. And Compass has a different touch point and a different customer, different customers, different systems, different, products, different companies have a very unique company. You need to remember that at Essent, and that's what we do at EPO, it's an insurance company. So there is the insurance piece, but there's a full technology piece underneath it. we're sitting now in palo alto and you know it's in the heart of silicon valley and we need to have a certain level of engineers a certain level of data scientists and we need to match and cater to all of these needs of the different systems and it's not a trivial thing it's not using a third party system using our own system our own policy management system and it's never a copy paste it's never one standard api there's a lot of integrations and this is something that we we take a lot of pride in, and he's going to be really good at it. So it's not a trivial thing to just attach it.

Mike, this is Stuart. I'll add one thing. We know from our experience with builders like Lenar that the performance that we've been able to generate for them in terms of attach rates, opt-in rates, are meaningfully higher than they were before we started. So it isn't that other companies aren't attempting to do this through other agencies and other things. It's just that The things that Saf talked about, the technology that we have and our ability to work in an iterative way with these partners just results in better performance. Okay. Thank you, guys. I appreciate that. Go ahead. Thank you, Martin.

Thank you, Mr. Phillips. The next question is from the line of Yaron Kinnar with Jefferies. You may proceed.

Thank you, and good afternoon, everybody. First question goes back to the TGP growth, and Asaf, I think you mentioned that you were seeing more significant growth coming from the partnership channel. Can you maybe help us think through where, maybe if we think of each of the channels that you have, prioritization of growth or where you see the most growth coming from over the next year, from highest to least?

Sure, let me take a first stab and then I'm sure this still can add some components. We have an omni-channel approach for things. And while we're seeing in some different periods of time, we're going to see different growth in different channels. So when there is an increasing cost on the direct-to-consumer, then we might lower that and we're going to double down on some other areas. And when we are seeing a change in more I would say, appetite by some of the financial partners to actually double down more on these things, then we're going to work closer with them. So it might change over time. What we're seeing now is enhanced growth on the partnership and slightly less growth on the producer side. But it keeps on evolving almost on a daily or a weekly basis. I would say that the end state of what we're probably going to get is, we call it a third, a third, and a third. So a third of our business is going to come from direct-to-consumer, a third of our business is going to come from producers, and a third of our business is going to come from partnership. But it doesn't mean that at any given point, it's always going to be the same breakdown. uh but we're very bullish on all of these things and what we're seeing right now is that the partnership is what's going really really fast don't forget that at the end of the day also was it started from the smallest base for us so producers was the fat was the largest and the second largest was direct to consumer and the third largest was produced with the partnership and what we're seeing is that uh channel is picking up significantly

Got it. That's helpful. And then if I think about commissions or fees more in the independent agency channel versus maybe the partnership channel, are those roughly similar? And if not, do you account for that in your pricing as you price the product? You know, it is different. predominantly because of structure and how we actually set up the partnerships. So a traditional independent agency would have a higher commission rate than our partnerships because we generally do these through joint ventures with the partnership. So it is not the same, and there's more value add that we get when we are doing the joint venture partnerships. As an example, when a customer buys a Lennar home and they're happy with the HIPAA product within the Lennar home, the next question they ask is, well, great, can you help me with car insurance? And our answer is absolutely we can. We are happy to cross-sell somebody else's manufactured product in the agency that we partner with Lennar on. So it creates an opportunity to earn revenue, non-risk-based fee revenue, alongside the risk-based HOMEOWNERS REVENUE FOR SELLING THE HIPPO PRODUCT. ONE THING TO ADD THERE, ON THE INDEPENDENT AGENT FEEDS, WE DO HAVE A LOWER RENEWAL COMMISSION THAN WE DO ON NEW BUSINESS COMMISSIONS, SO AS THE BOOK OF BUSINESS MATURES, THE OVERALL PERCENTAGE OF FEEDS AS A PERCENTAGE OF PREMIUM WILL DECLINE GRADUATELY.

Got it.

One quick numbers question, if I can. Can you maybe talk about the prior period development and the cap losses on a net base as well? Sorry, we can hear you in the last part. The last part of your question dropped off. So the numbers you provided for both catastrophes and for the prior period of development were both on a gross basis. Could you offer those on a net? Yeah, I think we may need to get back to you on that.

Okay. Okay. I'll read you. Thank you. Thank you.

Thank you, Mr. Kinnar. The next question comes from the line of Matt Carletti with JMP. You may proceed.

Thanks. Good afternoon. First question, I wanted to talk about the loss ratio guidance for 2022. And could you put some color around it in terms of maybe what we should expect from a nutritional basis? So obviously peeling off the large losses in the cats, you know, 53 Q4, 54 for the full year, so pretty similar. As we go throughout, I understand your comments about not expecting quarter-by-quarter improvements, but as we fit at the end of 22, should we expect improvement in that number? And any more color you can provide there would be helpful. Thank you. Yeah, no problem, Matt. This is Stuart. I think there's a couple things that are going on. One of the reasons that, as you rightly pointed out, we do have volatility in the weather over the course of the middle of the year. So when we think about sequential improvement in loss ratios, while our book is still concentrated in certain areas that have shown volatility in the second and the third quarters, it's a little bit hard to imagine that It's just going to be a smooth, steady march downward. That said, relative to 2020, we do expect significant improvement year over year. We'll have more visibility into what the ultimate loss ratio is going to be in 2022 as we make our way through the year, that volatility will decline. And as we grow and add the geographic diversity to the book and to the portfolio, that weather-related volatility will become a lower and lower source of variance on that. With respect to the mix of attritional and cat-oriented losses, that's also something that will have some variability over the course of the year. We are, as we mentioned in the earlier part of the call, even within states like shifted our regional concentrations, Texas is a very big state, away from the northern part of the state where we've had historically higher hail losses to other parts of the state, and then across states. As we build that geographic diversity in the portfolio, the specific contribution of weather and cap-related events to the premium, that's going to change over the course of the year as the mix of our states changes? Yeah, just Matt, just a couple of additions to that. First of all, as you know, we've increased the speed and number of rate filings that will take effect throughout the year. And rate filings dramatically help attritional loss ratio. So as those filings get approved by the various regulators, that will show some inconsistent improvement nonetheless, but inconsistent those rate filings go live and as they, the premiums for those increased rate filings start to earn out. Secondly, as Stuart mentioned, understanding that our loss ratio currently is based on some geographical concentrations that we have shown meaningful improvement on over the last few years. As we continue to grow geographically, the number of states we have that have higher weather-related losses will shrink, and those that have higher attritional losses will increase, because if you take a state with very little weather, of course, the attritional loss ratio is higher, and we are not fully diversified yet in states that provide a balance that will shift and change as time goes on. Very helpful. And one other one, if I could, just a high-level question. I mean, hearing you guys write, I mean, I think the very high-level message is you expect to still grow very strongly, obviously, while at the same time what we're just talking about, you know, improving your loss ratio. Yeah, that's a difficult balance at times. So can you talk a bit about how you expect to balance those two goals and, you know, meet those goals? yeah yeah sure um so i think first thing it's important for all of us to under understand about the way we think about this is that we're focused on delivering thoughtful profitable growth and at this point we know that the entire industry is taking rate due to inflationary pressures uh and you know we're we're we've got a lot of filings that are in uh in process across the country As we get comfortable that we have rate adequacy and we're properly calibrated from a pricing standpoint, you know, not too high, not too low in various parts of the country, it's going to get easier and easier for us to lean harder into growth over the course of the year. But I would say that HIPPO may have some unique advantages going into 2022 from a growth standpoint. And those fall into a few buckets, right? We're entering large new stakes that we're not currently in. We're able to roll out new products in our existing stakes. We've talked already on the call about the strong partnerships we have with home builders and financial institutions that give us access to what we believe is positively selected risk. And we know that bringing the new geographic diversity to the portfolio We expect that that will bring the weather-related volatility down. So we see ourselves as a – because of the platform we've built, we have a very, very wide top-up funnel. And so we can bring growth to the business while optimizing loss ratio. And so we see the benefits of that growth in the reduction of volatility from weather and loss ratio as well. Yeah, as we mentioned, our guidance for 2022 is a sub-100 loss ratio. I just want to make a clear point that our intermediate term goal is to get the loss ratio to industry norms, which is within the 60s, while continuing to grow. So our target as an intermediate goal is within the 60s while still demonstrating healthy growth. Great. Thanks for the answers. Very helpful.

Thank you, Mr. Carletti. The next question is from the line of Alex Scott with Goldman Sachs. You may proceed.

Hi. Good afternoon. First one I had is just on the reinsurance renewals. Could you give us a feel for how the two-thirds that was repriced could impact just the reinsurance costs and if there's any sort of noticeable impact to loss ratios we should consider?

Yeah, Stuart, I'll take the first part of that, and then Rick, feel free to add anything. Our seating commission on the annual reinsurance treaty is very similar to what it was in 2021. And while we're not disclosing the specifics of the individual contracts we have with reinsurers, we do feel like it was a successful renewal. We mentioned in the prepared remarks that We do have some loss participation features and we buy XOL protection to protect us from large losses. So we do feel like we, despite the fact that it is a hardening reinsurance market, we have the confidence of our reinsurance partners and that we're executing on the plans that we've discussed with them. And we feel confident that we have strong protection for the balance sheet. Yeah, just to emphasize what Stuart was saying is that this 2022 treaty was oversubscribed. And keep in mind that every one of our reinsurance partners closely examines our underwriting practices, our use of technology, our ability to incorporate inflation guards and inflation accelerators at a rapid pace. And we recognize, as they do, we are long-term partners. Without a level of trust with our reinsurers, we will not be successful. And we have built that trust with them and their view of what we are doing is one that created additional reinsurers joining our panel and an oversubscription scenario.

That's really helpful. Thank you. Next question is just on retention. It looked really strong this quarter. Is it fair to say that's a good indication of how things are going in terms of repricing action? I know there was, you know, I think some investor nervousness around just the size of the rate hike that was being taken in California. But, you know, can we take this to mean that early indications are that's not affecting retention? And, you know, any comment on how you'd expect repricing to affect retention in 2022 more broadly?

Yeah, I think that's accurate. And the reality is the industry is taking a lot of rate. We are an inflationary cycle. States like California, we're not the only one. Lots of folks are taking rate. One thing that's relevant, I think, is that we've launched a more robust pricing model than we had before, and we are better matching premium to risk. And it's not a situation where everybody's going to get rate increases. We mentioned in our prepared remarks some of what was happening in Texas. We do have customers, because we have more granulated pricing and segmentation, our use of our multi-carrier strategy using the different underwriting companies, which only affects new customers, not existing customers. We do see situations where the HIPPO risks that we're targeting, we'll see rate decreases. So we're very pleased with the retention numbers and very optimistic that it will continue.

Thanks. Maybe if I could sneak one last one in, just circling back on the reinsurance. Were there any material changes to the amount of risk retention that you have in excess of sort of the 10% share that you'd take? Anything we should think about there in terms of volatility that we could see associated with higher risk retention, or is it fairly similar to 2021?

And from a quota share proportional perspective, we're actually taking a little bit less than we did in 2021, but we have instituted or initiated certain performance mechanisms on loss ratios above certain thresholds. And so we are better aligning our economic models from a loss perspective with our reinsurance partners. I don't think it's a meaningful change, but it is different. We do have a very sophisticated reinsurance treaty And that sophistication allows us to protect ourselves against large losses while maintaining a capital-wide structure, yet demonstrating to our reinsurance partners that we are just that, we are partners. And together, we have strong beliefs that the loss ratio is not only going in the right direction, but will continue to do so on a year-over-year basis. Thanks.

Thank you, Mr. Scott. Thank you, Mr. Scott. The next question is a follow-up question from the line of Yaron Kinar with Jefferies. You may proceed.

Thanks. So I want to go back to the comment around the expected increase in share of earnings coming from stable and recurring commissions and fee-based income. Does that simply mean that the example that you gave earlier of maybe getting additional fees through launching or partnering with other third-party insurers and maybe some of these seating commissions, that you expect those to go up? Does it mean that you may not be looking to reduce the use of reinsurance over time because you're not necessarily expecting the portion of underwriting earnings to go up? How should we think about that? Yeah, I think, Iran, I'll take that, Stuart. I think it's I think it reflects an increased confidence that we have in the agency portion of our business. And I don't think I would take that as a commentary on the way or the amount of reinsurance that we're going to be using. We do, as I think we said before, we have the MGA, we have the insurance as a service kind of carrier business in the form of Spinnaker. We have our own agency, which allows us to sell other carriers, policies, whether they be home insurance policies or auto insurance policies, we are getting better operationally at delivering a solid experience, whether someone's buying a policy from HIPAA or through us from another carrier. And I do have the answer to your previous question about the favorable reserve development on a net basis. For Q4, it was 34 percentage points favorable reserve. on a net basis. And on a gross basis, as a reminder, 13 points favorable. Okay. And on the CAT side, do you have those on a net basis? I don't think we've broken down. The reserve releases, as we said, were across all perils. So it's a broad release of reserves as we've gotten comfortable that we're properly reporting the reserves on the balance sheet.

Okay.

Then could you maybe explain or walk us through the increase in the insurance-related expenses, which seem a bit more meaningful this quarter, both on year-over-year and quarter-over-quarter base? Yeah, I think that's – It's a bit of a technical answer, but I think it'll make sense when I go through it. You'll recall that we closed the Spinnaker acquisition toward the end of Q3 2020. And before the acquisition, all of the commissions that we paid to producers and partners were recognized in our P&L at a point in time. And following the acquisition, like with other items in the P&L, when we switched to 944 accounting, is recognized over the life of the policy. And so in Q4 2020, the P&L only reflected one quarter of the commission amortization for that group of policies, whereas in Q4 2021, we have functionally a full year of commissions. This also shows up in the same way in the commission income if you look at Q4 2021 versus Q4 2020. So happy to talk in more detail about the technical pieces of the accounting offline, but it's basically a comparability issue. Got it. So going forward, we should probably look at this quarter's insurance-related expenses at a reasonable run rate? I think that's right. I think, you know, we still, there will be a few more quarters where it's not perfectly comparable because each of the prior quarters will need to have had a full year before it becomes fully apples to apples. But yes, I think as we think about the relationship between that variable and the drivers, it's more stable now than it was. Got it. One last one from me. How much rate did you take in 4Q21 and maybe also in full year 21? I don't think we have disclosed the individual rate actions that we have taken, although those, of course, are public information that can be pulled from the Department of websites, but we have not broken down or disclosed rate actions. Also, because we've begun taking rate actions, and we have over the last year or so, but we're not at the end of it. There's still plenty of rate action to be taken. But again, those are all filed with each regulator. And as Rick said earlier, it's not all increases. A lot of the rate that we're filing is a calibration where certain categories of homes and kinds of risks are getting price decreases and others are getting price increases. Thank you very much.

Thank you, Mr. Kinnar. There are no additional questions waiting at this time, so I will pass the conference over to the management team for any additional remarks.

Thank you. Just wanted to close it and say thanks, everybody, for your time. Appreciate it. And as I concluded the other remarks, We're entering 2022 with a very confident mindset. It's not an easy time out there in the world. It's not an easy time to be an insurance company. But with the team, with the technology, with all of the things and the growth that we're seeing, we're optimistic. And we think 2022 is going to be a stronger year for people.

Thank you all for your time.

That concludes today's HIPPO fourth quarter 2021 earnings call. Thank you for your participation. You may now disconnect your line.