Hippo (HIPO) - 2021 Q3 - Quarterly Report

Part I. Financial Information Item 1. Consolidated Financial Statements This section presents Hippo Holdings Inc.'s unaudited consolidated financial statements as of September 30, 2021, detailing balance sheets, operations, equity changes, cash flows, and notes, including the Business Combination's impact Consolidated Balance Sheets Total assets significantly increased to $1,658.2 million by September 30, 2021, driven by cash from the Business Combination, while total liabilities decreased, resulting in stockholders' equity turning positive to $903.7 million | Financial Metric | September 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,658.2 million | $979.4 million | | Cash and cash equivalents | $778.7 million | $452.3 million | | Total Liabilities | $754.5 million | $834.1 million | | Convertible promissory notes | $0 | $273.0 million | | Total Stockholders' Equity (Deficit) | $903.7 million | ($199.5 million) | Consolidated Statements of Operations and Comprehensive Loss The company reported a net loss of $310.7 million for the nine months ended September 30, 2021, significantly higher than the prior year, driven by increased expenses including fair value adjustments, despite total revenue growing to $59.1 million | Metric (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $21.3 | $13.0 | $59.1 | $35.2 | | Total Expenses | $51.1 | $53.5 | $367.3 | $124.5 | | Net Loss Attributable to Hippo | $(30.9) | $(38.6) | $(310.7) | $(87.4) | | Net Loss Per Share | $(0.08) | $(0.44) | $(1.77) | $(1.02) | Consolidated Statements of Changes in Stockholders' Equity (Deficit) Stockholders' equity transitioned from a $199.5 million deficit at January 1, 2021, to a $903.7 million positive equity by September 30, 2021, primarily due to the Business Combination's impact on preferred stock, debt conversion, and paid-in capital - Stockholders' equity increased from a deficit of ($199.5) million at January 1, 2021 to a positive $903.7 million at September 30, 2021[15] - The significant increase in equity was mainly due to the Business Combination, which included the conversion of convertible preferred stock ($518.2 million), conversion of convertible debt ($434.5 million), and issuance of common stock in connection with the transaction ($452.9 million)[15] Consolidated Statements of Cash Flows Net cash used in operating activities was $127.1 million for the nine months ended September 30, 2021, offset by a $480.4 million inflow from financing activities, resulting in a net increase in cash to $822.8 million | Cash Flow Activity (in millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(127.1) | $(36.3) | | Net cash (used in) provided by investing activities | $(22.9) | $24.8 | | Net cash provided by financing activities | $480.4 | $152.4 | | Net increase in cash, cash equivalents, and restricted cash | $330.4 | $140.9 | Notes to Consolidated Financial Statements These notes detail accounting policies and financial figures, covering the Business Combination's reverse recapitalization, investments, fair value measurements, reinsurance, and stock-based compensation - The Business Combination with Reinvent Technology Partners Z (RTPZ) on August 2, 2021 was accounted for as a reverse recapitalization, with Old Hippo treated as the accounting acquirer[25][50] - The company received aggregate gross cash consideration of $587.7 million from the Business Combination and PIPE investment, resulting in net cash of approximately $449.3 million after redemptions, share repurchases, and transaction costs[53][54] - For its primary 2021 reinsurance treaty, the company retains approximately 11% of the proportional risk, with the remainder ceded to a panel of nine third-party reinsurers[88] - As of September 30, 2021, Texas (29.3%) and California (18.0%) represented the largest concentrations of Gross Written Premium for the nine-month period[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the business model, including MGA, agency, insurance-as-a-service, and risk retention, detailing the impact of acquisitions and the Business Combination, analyzing key performance indicators, operational results, liquidity, and capital resources Overview and Business Model Hippo operates as an integrated home protection platform with a business model encompassing MGA services, agency commissions, insurance-as-a-service, and risk retention, pursuing an asset-light strategy by retaining approximately 11% of risk for 2021 policies - Hippo's business model is based on four pillars: MGA, Agency, Insurance-as-a-Service, and Risk Retention[148][150][151] - The company follows an asset-light capital model, retaining approximately 11% of the risk for policies written in 2021, with the majority ceded to reinsurers[152] Key Factors and Trends Affecting Operating Results Growth is driven by customer acquisition, national expansion into 37 states, and cross-selling, with operations influenced by seasonality and the August 2020 Spinnaker acquisition, which increased net earned premium and reclassified certain costs - Key growth factors include customer acquisition/retention, national expansion, and cross-selling of additional services[176][181][184] - The acquisition of Spinnaker in August 2020 shifted the business model, leading to higher net earned premium and a reclassification of certain acquisition costs[192][196][198] Key Operating and Financial Metrics Total Generated Premium grew 94% YoY to $161.7 million in Q3 2021, with the Gross Loss Ratio improving to 128%, but the Net Loss Ratio increased to 241% due to higher risk retention, and Adjusted EBITDA loss widened to $48.4 million | Metric (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Generated Premium | $161.7 | $83.2 | $443.5 | $227.6 | | Total Revenue | $21.3 | $13.0 | $59.1 | $35.2 | | Net Loss attributable to Hippo | $(30.9) | $(38.6) | $(310.7) | $(87.4) | | Adjusted EBITDA | $(48.4) | $(23.9) | $(126.4) | $(64.3) | | Gross Loss Ratio | 128% | 155% | 158% | 147% | | Net Loss Ratio | 241% | 185% | 217% | 160% | - Total Generated Premium (TGP) grew 94% YoY to $161.7 million for Q3 2021, driven by growth in existing states, expansion into new states, and growth of non-Hippo premium supported by Spinnaker[231] - The Gross Loss Ratio for Q3 2021 improved to 128% from 155% in Q3 2020, but the Net Loss Ratio increased to 241% from 185% due to higher risk retention and loss participation clauses in reinsurance treaties[247][250] Results of Operations Total revenue increased 64% YoY to $21.3 million in Q3 2021, driven by a 132% rise in net earned premium, while total expenses slightly decreased due to a gain on debt extinguishment, and net loss narrowed to $30.9 million | Metric (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Net earned premium | $10.9 | $4.7 | +132% | | Losses and loss adjustment expenses | $26.3 | $8.7 | +202% | | Sales and marketing | $22.4 | $17.6 | +27% | | Interest and other (income) expense | $(26.4) | $0.1 | N/A | | Net loss attributable to Hippo | $(30.9) | $(38.6) | -20% | Liquidity and Capital Resources The company held $822.8 million in cash and restricted cash as of September 30, 2021, bolstered by approximately $450 million net proceeds from the Business Combination and PIPE investment, deemed sufficient for future needs despite historical operating losses - The company had $822.8 million in cash and restricted cash and $72.0 million in investments as of September 30, 2021[282] - The Business Combination and PIPE Investment provided net proceeds of approximately $450 million in August 2021[280] - For the nine months ended Sep 30, 2021, net cash used in operating activities was $127.1 million, while cash provided by financing activities was $480.4 million[284] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from interest rate sensitivity in its fixed-maturity investments, but its short-term, principal-preserving strategy is not expected to materially impact operations or cash flows from sudden rate changes - The company's primary market risk is interest rate risk associated with its portfolio of fixed maturities investments[296] - The investment strategy prioritizes preserving principal and providing liquidity. Management does not expect interest rate changes to have a material effect due to the portfolio's short-term nature[296] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with a prior material weakness in warrant accounting remediated post-Business Combination, and no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[298] - A material weakness related to warrant accounting in the predecessor SPAC (RTPZ) is considered remediated post-Business Combination, and the matters that led to it no longer exist[299] Part II. Other Information Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, aside from routine policyholder claims that are reserved for - The company is not currently party to any legal proceedings expected to have a material adverse effect on the business[303] Item 1A. Risk Factors This section outlines extensive risks across business operations, including historical losses, customer dependence, competition, and reinsurance reliance; industry factors like cyclicality, catastrophe losses, and regulation; and stock ownership risks such as price volatility and anti-takeover provisions Risks Related to Our Business Business risks include a history of net losses with an accumulated deficit of $567.3 million, dependence on customer acquisition and retention, intense competition, challenges in managing growth, and risks related to proprietary technology, third-party data, security incidents, and capital needs - The company has a history of net losses, with an accumulated deficit of $567.3 million as of September 30, 2021, and expects losses to increase in the near term due to investments in growth[305] - The business faces intense competition from traditional, larger insurers with greater name recognition and resources, as well as from other "insurtech" companies[317][318][321] - The business model is highly dependent on the availability and pricing of reinsurance, which is subject to market forces and counterparty credit risk[322] - The company's technology platform and reliance on third-party data present risks, including operational failures, security incidents, and regulatory scrutiny over data usage[335][341][361] Risks Related to Our Industry The company operates in a cyclical, competitive homeowners' insurance industry exposed to unpredictable catastrophe losses and extensive state-level regulations governing rates, capital, and conduct, with potential harm from inadequate loss reserves - The homeowners' insurance business is cyclical and highly competitive, which can lead to periods of unfavorable premium rates[422] - The company is exposed to unpredictable severe weather events and other catastrophes, which may be exacerbated by climate change and could lead to losses exceeding reserves and reinsurance limits[445] - The business is subject to extensive and complex state-level insurance regulations that govern nearly all aspects of operations, including rates, forms, and capital, which could impede growth and profitability[429][432] Risks Related to Ownership of Our Common Stock Stock ownership risks include potential price volatility, lack of an active trading market, and dilution from warrants, while anti-takeover provisions and the company's status as an "emerging growth company" also impact investors, with no expected cash dividends - The market price of the company's common stock (HIPO) may be highly volatile[471] - Outstanding warrants to purchase an aggregate of 9.0 million shares of common stock will become exercisable, potentially causing dilution to existing stockholders[497] - Anti-takeover provisions in the company's charter and applicable insurance laws may make a change of control difficult[474][476] - As an "emerging growth company," Hippo has elected to use extended transition periods for new accounting standards, which may make its financials less comparable to other public companies[483][485] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds were reported for the period[503] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported for the period[504] Item 4. Mine Safety Disclosures No mine safety disclosures were required - No mine safety disclosures were required[505] Item 5. Other Information No other information was reported under this item - No other information was reported under this item[506][507] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and CEO/CFO certifications required by the Sarbanes-Oxley Act - This section lists exhibits filed with the report, including corporate governance documents and officer certifications required under the Sarbanes-Oxley Act[509]