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Hippo Q3: Throwing spaghetti against the wall and seeing what sticks

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Everyone knows the phrase “A jack of all trades is a master of none.” Relatively few people know the continuation of the phrase: “but often times better than a master of one.”

Hippo is working on being a jack of all trades within homeowners’ insurance, by leveraging partnerships to finance and grow its operations.

The firm understands that to be a growth company above all it needs to show growth. But translating that growth into profitability will be more complicated.

To achieve maximum growth without spending or risking too much of its own capital, Hippo has opted for a strategy of forming partnerships for both risks and its capabilities.

First, risks. The firm, like other InsurTechs, is heavily reinsured with only 10% of premiums retained on its own balance sheet, with the rest of the risk offloaded onto one of the company’s myriad reinsurers. Compare this percentage to fellow InsurTech Lemonade, which has approximately 70% of its policy risk held by reinsurers. By contrast, established personal lines companies nearly retain a majority of their personal lines’ writings!

While Hippo expects the percentage of policies on its balance sheet to increase modestly over time, its capital-light strategy enables the firm to write more business without betting its survival on nat cat activity.

Next, capabilities. The company has opted to utilize partnerships both to minimize direct costs and to experiment with company-wide direction. By contracting out much of the analytical know-how to other companies, Hippo prevents the potential waste of millions of dollars on mediocre in-house software.

The flip side of this arrangement is that the firm owns precious little of its own IP, which it would eventually need to create long-term profitability and earn a commensurate valuation multiple.

Finally, the future. Freeing up capital through heavy reinsurance and partnerships also gives Hippo the ability to try every new thing it can think of to get the growth it has promised investors. It also means that the firm has little to speak of in terms of an overarching strategy because trying everything like you’re a freshman at a fraternity party doesn’t go far in convincing investors you have a real plan.

Below, we look at how being the jack of all trades has worked thus far.

Hippo’s partnerships are a game of trial and error.

Hippo has highlighted its partnerships as avenues for innovation and growth, from both an analytical and a distribution perspective. To some, it may seem like Hippo’s partnerships are shots in the dark. The firm has such diverse relationships that it appears to be reaching for workable models in all directions at once.

The “throwing things at the wall to see what sticks” strategy can be a productive one for the relatively new carrier, which is still developing its brand identity. The InsurTech boasts working relationships with two of the top-10 insurance carriers, the country’s largest homebuilder, a top-five loan originator and two leading smart home technology providers. It also boasts a partnership to bundle auto insurance with Metromile, agreed in May, that looks unlikely to live long given the pay-per-mile insurer's agreed sale to Lemonade.

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Hippo’s fastest-growing segment is its Hippo Builders Program, which partners with developers to offer Hippo products directly to home buyers at the point of sale. To this end, Hippo has enlisted Lennar, the largest homebuilder in the country by gross revenue, Hovnanian Enterprises, and other developer conglomerates that would usually not partner directly with insurance firms.

The home construction sector has grown at an average rate of 3.5% for the last five years, according to IBISWorld, faster than the overall construction sector. The $133bn industry was gifted a high-demand market for homes after the pandemic and given market tailwinds is expected to achieve a 7.7% growth rate this year. Hippo anticipates that this fast-growing segment will be its largest source of premium growth.

The company also recently announced a partnership with another mortgage lender, PennyMac. While Hippo has raved about this opportunity, we’ve yet to hear anything from PennyMac.

Sustaining growth through the direct-to-consumer segment will be an expensive venture if partnerships don’t deliver.

Hippo noted 25% of new premiums stemmed from the direct-to-consumer channel and 17% from partnerships in Q2.

Although Hippo has noted much of its Q3 growth was from CO and NJ, a quick google search for “homeowners insurance Colorado” would take us first to Nationwide, The Hartford, Allstate, Farmers, as well as various quote comparison websites before finding Hippo on page 2.

Theoretically, this is expected. After all, Hippo is expected to spend less than a tenth of the $1bn Allstate spent in advertising last year.

But a similar search for “renters insurance Colorado” brings Lemonade to a top position through google ads. This is despite a very similar spending breakdown to Lemonade.

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While the complexities associated with buying a homeowners’ policy (as opposed to auto/renters) could make it harder to win over the direct-to-consumer homeowner’s business, direct writers account for similar proportions across auto and homeowners (67% of homeowners and 71% of personal auto, according to AM Best).

Translating growth into profit will take some time.

The chart below shows that Hippo’s loss ratio is markedly higher than traditional homeowners’ insurers, such as Allstate, both in the third quarter and YTD. Hippo’s catastrophe losses for 2021 sit at 90% of premium, primarily due to last winter’s Texas storm and the concentration of business in Texas.

Progressive has seen similar challenges in growing its property segment. Although the property segment represents only 5% of Progressive’s book, the company has struggled to mitigate the impact of catastrophe losses as it posts double-digit top-line growth.

Both Progressive and Hippo have put forward similar plans to better insulate themselves from losses in the homeowners/property segment, including diversifying geographically away from concentrations of risk, reaching adequate rate, and better price modeling.

In contrast, Allstate, with homeowners’ representing 20% of premiums, shows the returns an established book of business can yield.

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Customer retention has improved, but is it coming at the price of rates?

Hippo did not take a clear approach to rate increases, noting part of their underwriting improvement plan is to adjust “rates, both upward and downward, to calibrate pricing to risk and market conditions”.

The InsurTech does not have the same retention challenge as peers like Root and Metromile, and YoY retention was up 2 points to 89% - now 2 points ahead of Allstate.

However, with a grow-by-any-means-necessary outlook, Hippo is still likely to find the path to profitability a long one.

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In summary, Hippo’s strategy of partnership-fueled growth without a larger strategic direction may find success in the short-term, but the firm might have trouble transitioning from a growth-first mentality to one focused on profitability.

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