Hippo (HIPO) - 2021 Q4 - Annual Report

Part I Item 1. Business Hippo Holdings Inc. modernizes the $110 billion U.S. home insurance industry with technology and data, providing proactive home protection Our Vision, Mission, and Company Overview Hippo's vision is to protect the joy of homeownership by delivering intuitive and proactive protection, combining technology with a human touch - Hippo's vision is to protect the joy of homeownership by delivering intuitive and proactive protection, combining technology with a human touch[19] - The company aims to transform the $110 billion U.S. home insurance industry, which it views as dominated by incumbents with outdated models, by creating an integrated home protection platform using real-time data and smart home technology[21][23] - Hippo's approach is designed to create a virtuous cycle: making homes safer leads to better risk outcomes and customer loyalty, which improves economics, allowing for further investment in product offerings and marketing to attract more customers[31] The Hippo Business Approach Hippo's business approach focuses on delivering a superior customer experience through easy purchasing, modern policies, proactive claims, and smart home programs - Hippo's business approach focuses on a superior customer experience through several key pillars[41][42] - Easy Purchasing: Provides a quote in under 60 seconds and a policy in about 5 minutes by pre-filling applications with data from trusted sources[44] - Modern Policies: Coverage is designed for modern homeowners, including items like home office equipment and service lines, while limiting obsolete coverage[44] - Proactive Claims Experience: Utilizes a 'Claims Concierge' for a human touch, remote inspection technology to expedite claims, and a network of vetted repair partners[44][45] - Smart Home Program: Offers smart home kits to mitigate damage from water, fire, and theft, with premium discounts for customers who use them[48] Distribution and Technology Hippo employs an omni-channel distribution strategy and a full-stack technology platform to enable rapid growth and a frictionless customer experience - Hippo employs an omni-channel distribution strategy to meet customers where they prefer to shop[49] - Direct to Consumer: Offers digital purchasing and online account management[51] - Insurance Partners: Provides a dedicated portal for traditional insurance agents, integrating with industry tools to streamline workflows[51] - Non-insurance Partners: The fastest-growing channel, involving integrations with home builders, mortgage originators, and smart home providers to offer insurance at relevant points in the customer journey[51] - The company's full-stack technology platform enables rapid growth, risk prevention through ongoing underwriting, and a frictionless customer experience from purchase to claims[68][69][71] Economic Model and Growth Strategy Hippo's economic model relies on MGA commissions, agency commissions, insurance-as-a-service fees, and retained premium margins, supported by an asset-light capital strategy - Hippo's economic model has four key components: 1) MGA commissions and fees, 2) agency commission from selling non-Hippo policies, 3) insurance-as-a-service fees from its carrier platform, and 4) margin on retained premiums[76][77][78][79] - The company pursues an asset-light capital strategy, ceding the majority of insurance risk to a panel of reinsurance partners, retaining approximately 12% of the risk for policies written in 2021[81] - Growth strategy includes: increasing penetration in the 37 states where it operates, expanding into new states, offering adjacent insurance products, and providing non-insurance home protection services like home warranties and maintenance[83][85][87] Regulation and Intellectual Property The company is subject to extensive state-level insurance and data privacy regulations, while protecting its intellectual property through patents and trademarks - The company is subject to extensive state-level insurance regulations governing areas like solvency, licensing, policy forms, rates, and claims practices, and also federal and state data privacy laws such as the Gramm-Leach-Bliley Act and the CCPA[95][98][99] - As an insurance holding company, Hippo is subject to additional reporting requirements regarding enterprise risk, and its insurance subsidiaries' ability to pay dividends is restricted by state law[101][105] - As of December 31, 2021, Hippo's intellectual property portfolio included two utility patents, 10 pending patent applications, and 42 trademarks, including the Hippo name in the United States and numerous other countries[108] Item 1A. Risk Factors The company faces significant risks across its business, industry, and stock ownership, including net losses, intense competition, reinsurance dependency, and exposure to catastrophic events Risks Related to Our Business Business risks include a history of net losses, dependence on customer growth, intense competition, reliance on reinsurance, and risks related to technology and data - The company has a history of net losses, with a net loss of $367.9 million in 2021, and may not achieve or maintain profitability in the future due to significant investments[113] - Hippo faces intense competition from large, established insurance companies with greater name recognition and resources, as well as from other insurtech companies[125][128] - The business is heavily dependent on reinsurance to manage exposure, which may become unavailable or available only at unfavorable terms, and the company is subject to counterparty credit risk from its reinsurers[129] - The company's ability to accurately underwrite risks and charge profitable rates is critical, as inaccurate pricing could lead to inadequate premiums to cover losses and expenses[136][137] - Reliance on proprietary technology and third-party data presents risks, as system failures, bugs, or security incidents could impair operations and harm the company's reputation[141][166] Risks Related to Our Industry Industry risks stem from the cyclical nature of insurance, potential for actual losses to exceed reserves, extensive regulation, and exposure to unpredictable catastrophic events - The homeowners' insurance business is historically cyclical, subject to periods of intense price competition and unfavorable premium rates[231] - Actual incurred losses may be greater than established loss and loss adjustment expense reserves, as reserving is an inherently uncertain process, potentially harming financial condition[233][234] - The company is subject to extensive and complex insurance industry regulations at the state level, which can impact rates, product forms, and underwriting practices[238][241][246] - Exposure to severe weather events and other catastrophes, such as hurricanes, wildfires, and winter storms, is inherently unpredictable and may materially affect financial results[256][257] Risks Related to Ownership of Our Common Stock Risks related to stock ownership include potential price volatility, lack of an active trading market, anti-takeover provisions, and no expected cash dividends - The market price of the company's common stock (HIPO) and warrants (HIPO.WS) may be highly volatile, and an active trading market may not be sustained[281][282] - Provisions in the Certificate of Incorporation and Bylaws, as well as Delaware law and applicable insurance laws, may have anti-takeover effects that could discourage an acquisition[285][289] - The company is an "emerging growth company" and has elected to take advantage of reduced disclosure requirements, which may make its common stock less attractive to some investors[296] - The company does not currently expect to pay any cash dividends, so a return on investment will depend on stock price appreciation[303] - Outstanding warrants are exercisable for common stock, which could result in dilution to existing stockholders[311] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[317] Item 2. Properties Hippo Holdings Inc. leases all its facilities, including its corporate headquarters in Palo Alto, California, and other office spaces, owning no real property - The company's corporate headquarters are located in Palo Alto, California, and it also leases office space in Austin, TX; Dallas, TX; Bedminster, NJ; Israel; and Poland[318] - As of December 31, 2021, the company does not own any real property[318] Item 3. Legal Proceedings The company is involved in routine policyholder litigation and a specific civil action, but management does not believe any current litigation will materially affect the business - Hippo and its CEO were named in a civil action by Eyal Navon on November 19, 2021, related to a loan, a call option, and alleged promises made by the CEO[320] - On March 8, 2022, the court sustained Hippo's demurrer, dismissing all claims against the company without prejudice[321] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[322] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock and warrants trade on the NYSE, with no cash dividends expected as earnings are retained for business expansion - The company's common stock and warrants trade on the NYSE under the symbols 'HIPO' and 'HIPO WS'[324] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[326] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Hippo's Total Generated Premium grew 82% to $606.1 million and total revenue increased 77% to $91.2 million, but net loss widened to $371.4 million due to non-cash expenses and higher loss adjustment expenses Overview and Business Model Hippo's business model comprises MGA commissions, agency commissions, insurance-as-a-service fees, and earned premium from retained risk, following an asset-light capital approach - Hippo's business model has four key revenue components: MGA commissions, agency commissions, insurance-as-a-service (fronting fees), and earned premium from retained risk[337][338][339][340] - The company follows an asset-light capital model, retaining approximately 12% of the premium on its balance sheet for policies written in 2021[342] Key Operating and Financial Metrics Key metrics for 2021 show significant growth in Total Generated Premium and Total Revenue, alongside an increased Gross Loss Ratio primarily due to catastrophic events Key Metrics Comparison (2021 vs. 2020, in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Generated Premium | $606.1 | $333.6 | | Total Revenue | $91.2 | $51.6 | | Net Loss attributable to Hippo | ($371.4) | ($141.5) | | Adjusted EBITDA | ($172.4) | ($90.4) | | Gross Loss Ratio | 138% | 109% | | Net Loss Ratio | 217% | 148% | - Total Generated Premium (TGP) grew 82% year-over-year, driven by growth in existing states, expansion into five new states, and growth of non-Hippo premium supported by Spinnaker[414] - The Gross Loss Ratio increased to 138% in 2021 from 109% in 2020, primarily due to abnormal catastrophic events, including Texas winter storm Uri, which accounted for 26 percentage points of the 2021 Gross Loss Ratio[424][425] Results of Operations Total revenue increased by $39.6 million (77%) in 2021, but net loss widened significantly due to higher loss adjustment expenses and non-cash interest and other expenses Consolidated Results of Operations (in millions) | | Year Ended December 31, | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | | 2021 | 2020 | | | | Total revenue | $91.2 | $51.6 | $39.6 | 77% | | Losses and loss adjustment expenses | $84.4 | $25.3 | $59.1 | 234% | | Sales and marketing | $95.0 | $69.4 | $25.6 | 37% | | Interest and other (income) expense | $198.9 | $26.0 | $172.9 | 665% | | Net loss attributable to Hippo | ($371.4) | ($141.5) | ($229.9) | 162% | - Net earned premium increased by $21.8 million (127%) year-over-year, driven by the growth of the total book of business and the full-year impact of the Spinnaker acquisition[431] - Losses and loss adjustment expenses increased by $59.1 million (234%), primarily due to business growth where risk is retained, higher catastrophic losses, and loss participation clauses in reinsurance treaties[437] - Interest and other expense increased by $172.9 million, mainly due to fair value losses on preferred stock warrants ($105.4 million) and the derivative liability on convertible notes ($54.8 million) prior to their conversion in the Business Combination[446] Liquidity and Capital Resources The company's liquidity is primarily from cash and marketable securities, significantly bolstered by approximately $450 million in net proceeds from the August 2021 Business Combination and PIPE investment - The company's primary sources of liquidity are its cash and marketable securities, with $818.7 million of cash and restricted cash and $64.0 million of available-for-sale securities as of December 31, 2021[450] - In August 2021, the company received net proceeds of approximately $450 million from the Business Combination and PIPE Investment[449] Cash Flow Summary (in millions) | | Year Ended December 31, | | :--- | :--- | :--- | | | 2021 | 2020 | | Net cash used in operating activities | ($124.5) | ($65.4) | | Net cash used in investing activities | ($30.0) | ($2.3) | | Net cash provided by financing activities | $480.8 | $518.1 | Critical Accounting Policies and Estimates Key critical accounting policies and estimates include loss and loss adjustment expense reserves, business combinations, and the fair value of common stock prior to the IPO - Key critical accounting policies and estimates include[457] - Loss and Loss Adjustment Expense Reserve: Management's best estimate of amounts to be paid for all claims that occurred, including IBNR, which is an inherently uncertain process based on actuarial analysis and various assumptions[460][463] - Business Combinations: Accounting for acquisitions requires significant judgment in determining the fair value of assets acquired and liabilities assumed, with the excess purchase price recorded as goodwill[478] - Fair Value of Common Stock (pre-IPO): Prior to the Business Combination, the fair value of common stock was determined using various valuation methodologies, including the OPM and PWERM, which involved complex and subjective estimates[488][490][491] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate changes affecting its fixed maturities investments, with an investment strategy prioritizing principal preservation and liquidity - The company is primarily exposed to market risk through its fixed maturities investments[503] - The investment strategy is to preserve principal, provide liquidity, and then maximize yield without putting principal at risk, as the company does not invest for trading or speculative purposes[503] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021 and 2020, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with accompanying notes and the independent auditor's report Consolidated Financial Statements This section provides key consolidated financial data, including balance sheet and statement of operations figures for 2021 and 2020 Consolidated Balance Sheet Data (in millions) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Investments | $64.0 | $56.0 | | Cash and cash equivalents | $775.6 | $452.3 | | Total Assets | $1,642.7 | $979.4 | | Loss and loss adjustment expense reserve | $260.8 | $105.1 | | Total Liabilities | $781.0 | $834.1 | | Total Stockholders' Equity (Deficit) | $861.7 | ($199.5) | Consolidated Statement of Operations Data (in millions) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Total Revenue | $91.2 | $51.6 | | Total Expenses | $458.4 | $194.8 | | Net Loss | ($367.9) | ($141.4) | | Net Loss per Share | ($1.36) | ($1.63) | Notes to Consolidated Financial Statements These notes detail significant accounting events, including the August 2021 Business Combination, geographic premium concentration, net operating loss carryforwards, and 2020 acquisitions - The August 2, 2021 Business Combination with RTPZ was accounted for as a reverse recapitalization, with Old Hippo as the accounting acquirer[527][538] - The company's gross written premium is concentrated, with Texas (29.2%) and California (17.9%) being the largest states by premium in 2021[671] - As of December 31, 2021, the company had U.S. federal and state net operating loss (NOL) carryforwards of $372.9 million and $136.3 million, respectively, the use of which may be subject to limitations[746][747] - In 2020, the company acquired Spinnaker Insurance Company for total consideration of $90.5 million, resulting in $32.5 million of goodwill, and an insurance agency aggregator for $24.4 million, resulting in $13.9 million of goodwill[752][755][759][760] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles, financial disclosure, or auditing scope - None[779] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal controls during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[781] - The company is excluding management's report on internal control over financial reporting for the year ended December 31, 2021, due to the timing of the Business Combination[784] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[786] Item 9B. Other Information This section details recent executive promotions and salary adjustments, including Ran Harpaz's promotion to COO and new annual salaries for key officers - On March 8, 2022, Ran Harpaz was promoted to Chief Operating Officer and will continue as Chief Technology Officer with an annual salary of $500,000[787] - Effective March 16, 2022, new annual salaries were approved for CEO Assaf Wand ($600,000), President Rick McCathron ($600,000), and CFO Stewart Ellis ($550,000)[788] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference to the company's Proxy Statement[791] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference to the company's Proxy Statement[792] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference to the company's Proxy Statement[793] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference to the company's Proxy Statement[794] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference to the company's Proxy Statement[795] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications from the CEO and CFO - This item contains a list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[797] Item 16. Form 10-K Summary The company has not provided a summary of the Form 10-K - None[803]