Happy Friday the 13th!
Hippo today released its first-quarter results, entitled “Promises of Spring.” Many of the results are promising, which we will discuss shortly.
When I think of spring, I think of butterflies, and butterflies make me think about my dissertation. No, I’m not an entomologist, I was a political scientist. The butterflies I’m talking about come from Edward Lorenz’s groundbreaking paper “Deterministic Nonperiodic Flow,” which proved that a tornado striking the US can be caused by a butterfly flapping its wings in China. In other words, weather patterns are not predictable in the long run because of the sensitivity to small changes. (If you want to know how I applied this principle to the analysis of American electoral behavior, please feel free to contact me.)
Hippo’s results this quarter underscore the “butterfly effect.” The weather was more favorable, with applicable premiums up 5% from 4Q2021 to $634 million and gross loss ratio down 17% to 76% over the same period.
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As I mentioned during my discussion of the first quarter results of Lemonade, the stock markets have soured to the Insurtech scene. Even companies like specialist insurer Hagerty have fallen 50% or more this year. Hippo is not doing well either. Although they are up 30% today, they have fallen 84% since the IPO.
As you can see in the chart below, 12-month trailing (TMT) revenue has increased 70% over the past 12 months from $58M to $99M. At the same time, we are seeing the diminishing impact of the cost of the IPO. TMT’s net income has fallen from a high of -$371M to -$239M this quarter. Finally, an Insurtech with net losses starting to shrink!
Not all trees that bloom in spring bear fruit. The total premium earned for the quarter was reported at $153.7 million, a 5% decrease from the fourth quarter of 2021 of $162.6 million. While their gross loss ratio has fallen by 13 percentage points since the end of 2021, 6 points of this are favorable results from fewer natural disasters. So is 46% of the improvement in loss ratios due to declining butterfly populations?? That leaves 54% of the improvement due to ex-cat losses – i.e. normal expected losses in underwriting. That’s great! They say, “The quarter also included a benefit of 19% from the favorable development of loss reserves from previous periods.” Depending on what one applies the 19% to, this could mean that their base loss ratios have increased by 6 points, not the net decline of 7 points.
Spring is typically the time of year when we jettison the old and introduce the new. Hippo is no different. They now write about two-thirds of new business outside of California and Texas. What do they have against Tequila?
One question I have is: “Will the new geographies be as technologically sophisticated as California’s?” Hippo has found that its best customers are “homeowners who embrace proactive home protection and are willing to use technology to make their homes safer and easier to manage.” Will customers elsewhere in the country embrace these technologies and advances as much as those in Silicon Valley? Moreover, can they activate prospects who reflect their best customers during their operations at a reasonable cost per acquisition?
Spring is also a perfect time to diversify your wardrobe. In this case portfolio. Hippo announced that they acquired SwingDev, a Polish digital product development company. Hippo is beginning to look like a diversified financial holding company, although still very insurance-focused.
April showers bring May flowers
Hippo announced in their shareholder letter that they are sitting on $772M in cash, which they believe will position them well for expanded growth and investment. In fact, at their current TMT net loss of -$239M, they have well over 3 years of runway compared to the other public Insurtechs, and that assumes they do not improve their financial performance. This is about 8 – 12 months longer than I project Lemonade or Root have.
The beauty of the monarch
Monarch butterflies can be found anywhere in North America where suitable habitats are available for feeding, breeding, and wintering. This is true even more so for regional insurance carriers. They cover the entire country, some of which can only be found in very small towns such as Ashland PA, where Ashland Mutual Fire Insurance Co reported gross premiums of $12k with ZERO losses and a surplus of $376k in 2020 to well over $1B premium for Farm Bureau of Tennessee, all in one state alone.
Regional carriers are the lifeblood of their communities. Similar to monarchs, their habitat is eroding. Insurtechs influence them on the one hand, and larger multinationals on the other. However, regional carriers are also nimbler and understand their risks and communities on a more nuanced level. As such, they can learn from competition and adapt faster. There is much to learn about the way Hippo has integrated home monitoring, maintenance, and an improved product that better reflects today’s new homes and needs. Please reach out to discuss if you have questions or alternative views.
Insurtech Advisors helps regional carriers and agencies to collaborate with the best Insurtechs that will enable you to succeed and continue to meet the needs of your members, employees and independent agents. We know your company and the Insurtech landscape. We save you countless hours of wasted time and false starts. We also work closely with your team to identify opportunities and then introduce you personally to the best Insurtechs to pilot.
Kaenan is a professional in the areas of block chain, telematics, wearables, analytics, artificial intelligence (AI) and Insurtech. He has played a key role in innovating many start-ups and established carriers. His advice has been widely appreciated in the financial community, which resulted in multiple quotes and publications in various media.
Most recently he was Practice Lead for Innovation, Fintech, and Strategic Insights at EY. Throughout his career he has held leading roles within Marketing Strategy and Decision Management with top Insurance, Banking and Finance companies, including USAA, Citibank and Sallie Mae.