Welcome back to our finance-meets-cinema series, where today’s feature Insurtech presentation stars Hippo Insurance in its Q4 2023 financial thriller. Hippo’s stock at the market close was up about 35% for the day.
The overall publicly traded insurtech results reminded me of a classic TV show from the 60s and 70s that I watched as a kid: Mutual of Omaha’s Wild Kingdom.
In the sprawling savannahs of the insurance market, a wild kingdom unfolds where innovative creatures like Hippo, Root, and Lemonade vie for dominance. Reminiscent of the classic TV series, where Marlin Perkins introduced us to the nuanced behaviors of animals in their natural habitats, today’s insurtech landscape is equally rich and complex.
In Hippo’s latest shareholder letter, we get a glimpse into the life of this unique creature. Marlin Perkins might have marveled at Hippo’s adaptability and resilience. Much like the formidable mammals Perkins described navigating the tricky currents of African rivers, Hippo has been on a journey of transformation, much like the metamorphosis of a butterfly, but with less grace and more growing pains.
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The Insurtech Hippo Roars
The company has shown remarkable resilience, doubling its total generated premium (TGP) from $606 million to $1.1 billion in just two years. As Marlin Perkins once said about hippos, “They may look lazy and docile, but they are one of the most dangerous animals in Africa.” Hippo’s growth certainly shouldn’t be underestimated. This growth, though, came in like the blistering Serengeti summer, with a $263M net loss. There are a lot of rivers and streams that have dried out.
While Hippo has been wading through the murky waters of the insurance swamp, its companions Lemonade and Root have had their own challenges. Lemonade, known for its refreshingly simple approach to insurance, has seen its loss ratio improve but still struggles with profitability and their attachment to “synthetic agents” is more an accounting gimmick than actually showing improvement in operating costs. Root, on the other hand, has been navigating the treacherous terrain of the auto insurance market, with improving success.
The African Dry Season
During the dry season, when water sources become scarce, hippos are forced to travel long distances in search of suitable pools and grazing areas. They retreat to rivers and lakes, where they can stay cool and protect their sensitive skin from the sun. However, this behavior can lead to overcrowding and increased competition for resources. Similarly, Hippo’s Hippo Home Insurance Program (HHIP) has faced challenges in a crowded and competitive insurance market. One of the most striking features of Hippo’s results is the performance of its Hippo Home Insurance Program (HHIP). While the program has shown improvement, with the accident period loss ratio improving 24 percentage points year-over-year to 64%, it still has a long way to go. The estimated combined ratio for HHIP remains above 100, indicating that the program is not yet profitable. As Marlin Perkins might say, “The hippo may be a herbivore, but it still needs to consume a lot of resources to maintain its massive size.“
Looking ahead to 2024, Hippo projects a gross loss ratio of 72-78% for HHIP, with 20% related to PCS cat losses and 52-58% related to non-PCS losses. The company also expects the net loss ratio to be 85-90%, with Q4 2024 net loss ratio expected to be under 75%. Assuming an expense ratio of 31%, we can estimate the projected combined ratio for HHIP in 2024 to be between 115% – 120%, still a losing business.
This estimated combined ratio suggests that the HHIP segment may still face challenges in achieving profitability in 2024, although Hippo expects further improvements in 2025, with a net loss ratio below 75% for the full year.
Hippo’s Secret Weapon
Did you know that a Hippo has the largest mouth of all land mammals? An adult male’s mouth can open almost 180 degrees wide, measuring about 4 feet across. Hippo has a secret weapon that sets it apart from its insurtech peers: its fronting carrier strategy with Spinnaker and its focus on services. Their Insurance as a Service segment was their only profitable segment in 2023, generating $18.3M in profit. Services lost $37.6M and the HHIP lost $180.3M.
This multi-pronged approach has allowed Hippo to be more flexible and adaptable, much like how hippos can live in both water and on land. By diversifying its revenue streams and not relying solely on underwriting profits, Hippo has a better chance of achieving overall profitability compared to Lemonade and Root.
Takeaways for Regional Insurance Carriers:
As we’ve seen, Hippo has navigated the treacherous waters of the insurance industry with the grace and determination of a ballerina hippo in a tutu. While the journey hasn’t always been easy, Hippo has learned valuable lessons along the way that can serve as a guide for regional insurance carriers looking to avoid the pitfalls and find their own path to success. Just as a wise old hippo might pass on essential survival skills to its young, let’s dive into the key takeaways from Hippo’s experience that regional carriers can apply to their own businesses.
- Diversification is key: Hippo’s strategy of focusing on services and partnering with a fronting carrier has allowed them to navigate the challenges of the insurance market better than their peers who rely solely on underwriting profits. How can you diversify your portfolio? Is it with Products? Services? Geography? These are some of the questions you should be asking yourself.
- Invest in analytics and technology: Hippo’s effective use of technology and data analytics for risk assessment and operations is a lesson in the importance of investing in digital capabilities to improve operational efficiency, and to enhance underwriting, and broker and customer engagement. Regional carriers should consider investing in digital platforms and data analytics to stay competitive.
- Explore Innovative Distribution Channels: Hippo’s use of a fronting carrier model for flexibility in distribution and setting up an agency distribution model that will sell anyone’s products exemplifies the value of alternative channels and partnerships in expanding market reach and enhancing profitability.
- Focus on customer-centricity: LMND’s success in building a strong brand and customer loyalty demonstrates the value of putting customers first. Regional carriers should prioritize customer experience and engage with their policyholders to build long-term relationships.
Cautions and Considerations
- Monitor loss ratios closely: Hippo’s experience with HHIP highlights the importance of closely monitoring loss ratios and taking proactive measures to address any issues. Regional carriers should have robust risk management practices in place and the technology to simplify rate filings to ensure the profitability of their programs.
- Avoid overexposure to volatile markets: ROOT’s challenges in the auto insurance market underscore the risks of being overexposed to volatile segments. Regional carriers should carefully assess their market exposure and consider diversifying their portfolio to mitigate risks.
In the end, the question remains: Do you root for a Hippo that drinks Lemonade?
In the narrative of the insurtech wild kingdom, adaptability, strategic insight, and operational finesse emerge as pivotal for survival. Drawing from Hippo’s journey, regional carriers are presented with a blueprint for navigating the competitive landscape, offering lessons in innovation while cautioning against the perils of complacency and inefficiency. In this dynamic ecosystem, success belongs to those who adapt, innovate, and above all, remain resilient in the face of adversity.
Only time will tell if Hippo will emerge as the king of the insurtech jungle, but regional carriers can certainly learn from its journey and adapt their strategies accordingly.
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.