HIPO (2025 - Q2)

Hello, everyone, and a warm welcome to the Hippo Q2 2025 Earnings Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I would now like to turn the call over to Mark Olson, Director of Corporate Communications, to begin. Please go ahead. Mark Ols

Thank you, operator. Good morning, and thank you for joining Hippo's 2025 Second Quarter Earnings Call. Earlier today, Hippo issued a shareholder letter announcing its Q2 2025 results, which is available at investors.hippo.com. Leading today's discussion will be Hippo President and Chief Executive Officer, Rick McCathron; and Chief Financial Officer, Guy Zeltser. Following management's prepared remarks, we will open up the call to questions. Before we begin, we'd like to remind you that our discussion will contain predictions, expectations, forward-looking statements and other information about our business that are based on management's current expectations as of the date of this presentation. Forward- looking statements include, but are not limited to, Hippo's expectations or predictions of financial and business performance and conditions and competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results and/or from our forecast, including those set forth in Hippo's Form 10-Q filed today. For more information, please refer to the risks, uncertainties and other factors discussed in Hippo's SEC filings, in particular, in the section entitled Risk Factors in our Form 10-Q. All cautionary statements are applicable to any forward-looking statements we make whenever they appear. You should carefully consider the risks and uncertainties and other factors discussed in Hippo's SEC filings. Do not place undue reliance on forward- looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating, offering or otherwise revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During this conference call, we will also refer to non-GAAP financial measures, such as adjusted net income and adjusted EBITDA. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the second quarter 2025 shareholder letter, which has been furnished to the SEC and is available on our website. And with that, I will turn the call over to Rick McCathron, our President and CEO.

Thank you, Mark. Good morning, everyone. Thank you for joining us. The second quarter marked a pivotal milestone for Hippo, a proud moment that reflects the dedication, hard work and steady progress we've made over the past several quarters. We unveiled our exciting long-term strategic plan at our Investor Day in New York City and announced a new transformative partnership that will accelerate our strategy. This quarter underscores our ability to deliver significant incremental improvements across the core drivers of value in our business. The strategic plan we presented to investors and analysts is designed to deliver superior returns on capital and is anchored in 3 powerful pillars: strategic diversification. We are actively diversifying our premium base across both personal and commercial lines, while also broadening our reach across the insurance value chain by leveraging Hippo's hybrid fronting carrier, unlocking market growth. We are poised to capitalize on the robust long-term growth trajectory within the home insurance market through our own managing general agency, Hippo Home Insurance. This program offers a differentiated technology-driven customer experience that sets us apart. Optimize risk management. We're leveraging our diverse portfolio and risk management capabilities to intelligently optimize our business across market cycles. This involves iteratively adjusting pricing coverages and the degree and nature of risk participation across different lines of business to maximize returns. The strategic partnership announced at our Investor Day with the Baldwin Group is set to supercharge the momentum across all 3 of our strategic pillars. Program premium growth and diversification. Hippo's hybrid fronting carrier will build upon its decade-long support of Baldwin's MSI renters and MSI homeowners programs, extending capacity to a broader spectrum of Baldwin's MGA programs. This move is set to accelerate premium growth and enable faster diversification across lines of business. Tripling market access. We'll now distribute our newly built homeowners product through Baldwin's industry-leading Westwood Insurance Agency, which partners with 20 of the top 25 homebuilders in the U.S. This collaboration significantly expands our reach, tripling access to new home closings and fueling both premium growth and geographic diversification, strengthening financial position. We closed the deal to transfer our homebuilder assets to the Baldwin Group for $100 million in Q3. The additional capital will directly fuel our long-term strategy of building a well-balanced portfolio of insurance risks that delivers a superior return on capital. Beyond these significant corporate developments, our internal teams remain laser-focused on operational efficiency, execution and excellence throughout the quarter. We welcomed 2 key MGA partners to our platform, further diversifying our premium within commercial and casualty lines, while also expanding additional lines of business with current partners. As we mentioned during Investor Day, our risk participation when launching new programs is low. As we gain more experience with each program, we'll consider increasing our risk participation if doing so enhances our return on equity. Crucially, while expanding our top line remains core to our strategy, we did not compromise on underwriting profitability. Thanks to earlier underwriting and rate actions, along with improved claims operations, we achieved a consolidated net loss ratio of 47% in Q2, supported by favorable reserve developments across multiple lines of business. This quarter also powerfully demonstrated the scalability of our platform. While we grew revenue by more than 30% year-over-year, fixed expenses decreased by 16% over that same period. Our improved operating leverage is a key driver of value, enabling us to deliver robust revenue growth while maintaining underwriting discipline and controlling expenses. Our diligent execution of our strategic go-forward plan in the second quarter led to a substantial improvement in profitability year- over-year, culminating in a critical milestone. Hippo posted positive net income from operating activities for the very first time. This truly outstanding quarter for Hippo would not have been possible without the extraordinary hard work, focus and collaborative spirit of the entire team and the unwavering support of our valued partners. I'm immensely proud of all we achieved in Q2 and eagerly look forward to building on this powerful momentum throughout the rest of 2025 and well into the future. Now I'd like to turn the call over to our Chief Financial Officer, Guy Zeltser, to walk through the highlights of our second quarter financial results as well as our expectations for the remainder of 2025.

Thanks, Rick, and good morning, everyone. In Q2, we continue to implement our long-term strategy, demonstrating strong performance across key financial and operational metrics. Our underwriting discipline remains consistent, supporting solid top line premium growth and healthy loss ratios. We also made further progress in expense management, positioning us well to capitalize on the operating leverage inherent in our model as we scale. At our Investor Day in New York City, we outlined our 2028 financial targets, reinforcing our confidence in the long-term trajectory of the business. These targets include gross written premium over $2 billion, adjusted net income over $125 million, adjusted return on equity over 18%. These targets reflect the continued maturation of our business model and our ability to drive profitable growth over time. The primary drivers of future adjusted net income growth are already visible in our Q2 results. We are growing top line premium while maintaining underwriting profitability at expected levels, and we're gaining meaningful operating leverage as premium growth continues to outpace the growth of fixed expense. As we outlined during our Investor Day, there are 4 key drivers of future gross written premium growth: organic growth from existing hybrid fronting programs, addition of new hybrid fronting programs, scaling our new homes channel within HHIP and expanding HHIP beyond the new homes channel. In Q2, we made strong progress on most of these growth drivers. Gross written premium grew 16% year-over-year to $299 million, up from $258 million in Q2 of last year. This growth was driven by our hybrid fronting programs with existing programs contributing $24 million in organic growth and new programs adding $23 million. In HHIP, we observed a mixed trend where the growth in our new homes channel was more than offset by the reduction in cat exposure from existing homes, resulting in a 9% year-over-year reduction in gross written premium for HHIP. Looking ahead, there are 2 trends that we expect to bring HHIP back to gross written premium growth. The Baldwin partnership provides us access to approximately 3x more new homes closings, supporting our continued expansion within the new homes channel. And second, we prefer to expand growth beyond new homes, selling policies to customers with existing homes through select partners and in new states, providing geographical diversification. In Q2, revenue grew 31% to $117 million, up from $90 million in Q2 of last year. The increase was driven by gross earned premium growth of 12% to $238 million, up from $212 million in Q2 of last year as well as an increase in premium retention, which grew 9 percentage points to 39%, up from 30% in Q2 of last year. The increase in premium retention was driven by 2 main factors: one, higher risk retention at hybrid fronting programs where the risk profile and underwriting profits were attractive; and two, a shift away from quota share reinsurance at [ SJP. ] Our premium retention in Q2 is approaching the long-term target range of between 40% and 45% that we recently shared during our Investor Day. As a core part of our strategy, we plan to be opportunistic and respond quickly to market conditions by dialing up or down premium retention guided by return on equity. In Q2, our consolidated net loss ratio improved 46 percentage points year-over- year to 47%. This improvement was driven by previous underwriting and rate actions earning through our financials, enhanced claim operations and favorable reserve development across multiple lines of business. Even when we exclude the benefit of the reserve release from prior accident year, our net loss ratio would have been 55%, well below the long-term target of between 60% and 65% we shared at our Investor Day. The net loss ratio for our hybrid fronting programs increased 4 percentage points to 37%. As we nearly doubled net earned premium from our high fronting programs compared with Q2 of last year, we continue to demonstrate our ability to not compromise on underwriting discipline while driving significant growth. The HHIP net loss ratio improved 58 percentage points year-over-year to 55%, driven by improvements in gross loss ratio and our prior quota share reinsurance treaties running off, resulting in a better match between net premium and losses. Gross loss ratio of HHIP improved 41 percentage points year-over-year to 44%. Non-PCS loss ratio improved 26 percentage points to 34%, while PCS loss ratio improved 14 percentage points to 11%. Even when excluding the benefit from reserve release from prior accident year, HHIP gross loss ratio improved 44 percentage points to 56%. The improvement in gross loss ratio was driven by improved rate, changes in terms and conditions, better underwriting processes and enhanced claims operations. In Q2, we continue to deliver top line growth while simultaneously reducing our operating expenses, both as a percentage of revenue and on an absolute dollar basis. In Q2, our combined sales and marketing, technology and development and general and administrative expenses declined by $6 million compared with the same period last year, representing a 16% decrease. When combined with the increase in our revenue over the same period, these costs fell from 46% of revenue in Q2 of last year to 30% of revenue this quarter. This reduction reflects ongoing efficiency gains across our operations and signals our ability to scale the business more effectively in future quarters. Q2 net income came in at $1 million, a $41 million improvement compared to Q2 of last year. The drivers of this improvement included top line growth while diversifying the premium base, improving consolidated net loss ratio, better operating leverage and lower stock-based compensation expense. Q2 adjusted net income came in at $17 million, a $37 million improvement compared to Q2 of last year. The same factors that drove the net income improvement also contributed to the increase in adjusted net income with the exception of stock-based compensation expense, which does not impact adjusted net income. Q2 ending cash and investments increased quarter-over-quarter by $76 million to $604 million. This increase was primarily driven by the $50 million surplus note issuance and seasonal working capital changes, including payments received from reinsurers. On July 1, 2025, we closed on the sale of our homebuilder distribution network to Westwood Insurance Agency, LLC. The sale consisted of $75 million in upfront cash and $25 million in cash to be paid in the first quarter of 2026. During the third quarter of fiscal year 2025, we expect to record a gain of approximately $90 million in our consolidated financial statements. On July 1, 2025, we repurchased approximately 514,000 shares of our common stock beneficially owned by Lennar in a private transaction at a price per share of $28.17 for an aggregate purchase price of $14.5 million. The repurchase of the shares was made under our existing share repurchase program. As of July 1, 2025, after giving effect to the repurchase of the shares, approximately $18 million will remain authorized and available under our share repurchase program. As we look ahead to the rest of the year, we are raising full year guidance for all the key metrics we highlighted during our Investor Day. While additional details, including quarterly guidance could be found in our Q2 shareholder letter, the summary of the guidance and expected drivers are as follows: we are raising the lower end of our guidance for gross written premium for full year 2025 from between $1.05 billion and $1.1 billion to between $1.07 billion and $1.1 billion, driven by stronger performance of newly launched programs. Similar to the trend experienced in 2024, we expect Q3 and Q4 to record lower gross written premium versus Q2 on an absolute basis, but represent an acceleration in year-over-year growth versus Q2. We expect revenue for full year 2025 to come in between $460 million and $465 million. We expect the selling of the homebuilder distribution assets to lower revenue in Q3 and Q4 by approximately $5.5 million and $6.5 million, respectively, compared with the guidance provided prior to announcing this transaction. We are updating guidance for consolidated net loss ratio for full year 2025, improving from between 72% and 74% to between 67% and 69%, driven by positive loss trends reflected in our Q2 results. When neutralizing the impact of prior and current accident year reserve changes in Q2, we expect consolidated net loss ratio to increase slightly in Q3 due to seasonally higher non-PCS losses, followed by an improvement in Q4. We are raising guidance for net income for full year 2025 from between $65 million and $69 million loss to net income positive of between $35 million and $39 million, driven by the improved net loss ratio trends discussed already as well as the onetime gain on sale from selling the homebuilder distribution assets. We're also raising guidance for adjusted net income for full year 2025 from between $10 million and $14 million loss to between $4 million loss and breakeven, driven by improved net loss ratio trends discussed on this call. And with that, operator, I would now like to open the floor to questions.

[Operator Instructions] Our first question today comes from Andrew Andersen with Jefferies.

If we look at the guide for '25 and you touched on it a bit, but could we talk about some of the upside optionality or limitations here? Are you waiting on any more rate approvals for the HHIP product before starting to write more on either the new home programs or the existing? And should we think of the second quarter as perhaps the final quarter of retrenchment in HHIP?

I'll go ahead and take that one, Andrew. A couple of different things. Taking a half a step back, I don't think any effectively managed insurance organization in this environment is ever done taking rate actions. Costs continue to go up. And I think if you stay ahead of the curve, you're consistently taking much smaller rate increases than we've done in the past, but going forward. I think the substantial rate increases to really remediate our portfolio are done. Not all of those premiums have worked themselves into the P&L yet. So I would say the majority of the work is done. Still, there's some tailwind upside benefit, but we will continue to take rate as our expected loss ratios start to deteriorate. So our goal, of course, is to stay in a sweet spot range of profitability. So those will continue, but not nearly to the degree that they've done -- that we've done so in the past.

And then just on the net loss ratio guide for the second half was kind of unchanged. But could you remind us or just help us think about the cat loss ratio component in the second half of the year and remind us of the Southeast wind exposures you all have on the fronting side as well as the HHIP side?

Yes. Guy, why don't you take the first part, and I'll take the second part.

Sure. So Andrew, as you mentioned, the guide for the second half remain unchanged. So from an HHIP perspective, it is similar to what we shared before. So it is roughly 15 points of cats in Q3 and then another 11 or so in Q4. And then we have some -- there's also some cat load on the fronting programs that the [ green ] season is approaching. So yes, we remain unchanged from that perspective.

Yes. Related -- Andrew, related to the question about our exposure to Southeast hurricane. Just as a reminder, on the HHIP program, the only thing we write in Florida, as an example, are newly constructed homes. That portfolio has gone through 3 hurricanes and has performed very well. On the fronting side of the business, we do take some exposure with MSI and a few other small commercial providers, but we think that we have amply baked our participation in that -- in our cat load predictability. And so we feel good about our exposure in that particular area even going into hurricane season.

Our next question comes from Randy Binner with B. Riley.

Just continuing with that line of questioning, do you disclose the -- your per event limit if you had a large cat in the third quarter of any nature across your book? Is there -- do you have a per event limit that you disclose? And just could you just walk us through like how your reinsurance is structured for that?

Yes. We don't disclose that specifically, Randy, but let me just give you a little bit of information the way that we think about reinsurance. So for all intents and purposes on the HHIP program, for any regular or attritional losses, we have very little quota share. We take almost all of that net. We do then buy layers of XOL above that to protect from sort of earnings type events. And then we also buy corporate cat not only over the HHIP portfolio, but also all of the portfolios in which we take property exposure within Spinnaker. So we believe we have ample reinsurance protection to see us through any of these individual events. Also as a reminder, each of the programs we support, they have their own reinsurance treaties and towers, typically quota share with some XOL if it's property exposed and then, of course, that overarching corporate cat that we have. And we only take a fraction of the underlying exposure on most programs. So we don't have a lot of exposure related to that, and we think we've got good solid reinsurance support in the event of any large loss.

Okay. Understood. And you said you're baking in 15% of cat for 3Q and 11% for 4Q. Did I hear that correctly?

On HHIP, yes, 15% in 3Q and about 11% in 4Q. Correct.

Okay. Great. And then just a higher-level question. Obviously, the gross written was pretty good in the quarter. Is there -- can you just give us kind of an update on how homeowners insurance is increasingly expensive in the U.S. You're more focused on homebuilders. There's a lock in effect in the homeowners market. Can you just give us like a quick overview of kind of where your buyers are, how you're resonating with distribution and just kind of how you're fitting into the kind of the overall kind of fragmented and higher-priced homeowners market?

Yes. It's a challenging market for consumers for sure. I think insurance organizations are finally reaching layers of -- or levels of rate adequacy. Frankly, I think that over time, the industry, consumers and providers of home repairs are going to have to come up with a better solution. I don't anticipate weather-related events to decrease. If anything, they're likely to increase. And simply raising deductibles or putting roof schedules on homes are not in the best interest of customers. So it's my belief that over time, we're going to find these types of weather-related exposures to be -- for the risk for those to be taken outside of a traditional homeowners policy similar to what happened with earthquake. I also think we're starting to see more parametric providers pop up to do things like deductible buydown or deductible buyback as it relates to some of these types of things. I think that's going to take time. What we've really focused on at Hippo is 2 things. One, where we were exposed in HHIP to weather-related events, we have significantly decreased our exposure in those particular areas. And then we've also, as we've said in our strategic 3-year forecast, our objective is to build a well-balanced portfolio in which homeowners is only a portion, which creates a couple of things. It creates more revenue predictability and reduced volatility. So that's the way we look at it. From a consumer perspective, Randy, answering that question, we generally resonate with customers of either, a, new homes or, b, people that want to keep their homes acting, looking, feeling, sounding like a new home. So proactive preventative services provided to our customers to help them protect that joy of homeownership. And that's the types of customers we've gone for traditionally and certainly do now. And I think the entry into new homeowners with new homes transitions nicely as those homes age, as the homebuilder warranty starts to expire for them to partner with a provider like Hippo that tries to create ongoing value by protecting their home and mitigating exposures through the use of IoT devices through the use of proactive preventative maintenance and other aspects that we assist customers on.

Our next question comes from Tommy McJoynt with KBW.

It's [ Tina ] on for Tony. My first question is on operating leverage. You mentioned that fixed income -- fixed expenses declined 16% this quarter. Just curious, as you scale towards the $2 billion gross written premium, at what revenue level do you anticipate needing significant fixed cost investments? And how will you maintain this operating leverage momentum going forward?

I'm sorry, you cut out a little bit there. Could you repeat the question?

My question is on operating leverage. So you mentioned that your fixed expenses declined 16%. So I just wonder like as you scale towards the $2 billion gross written premium, at what level -- what revenue level do you anticipate needing more fixed cost investments? And how will you maintain this operating leverage going forward?

Yes, happy to take this question. This is Guy. So as we're approaching our Investor Day, our 3-year plan that will take us to more than $2 billion of premium and more than $125 million of adjusted net income. What we guided there is that in order for that to happen, we need to grow the written premium over the horizon by a bit more than 20%. And what we also said is that we expect the operating leverage to grow slower than that at around 8%. So as you mentioned, we don't expect the fixed expense to continue to go down. It will start to go up, but the entirety of the operating leverage is what's going to allow us to grow them significantly slower and to boost more profit into the bottom line.

Yes. Just to add to what Guy said, over the last 2.5 years, we've made tremendous progress on operational efficiency within the organization across all aspects of our business. Although we've made tremendous progress, I don't think we've made all the progress. I think we have an inherently scalable platform that will allow us to continue to add premium disproportionately to the amount of expense that go along with it. We don't talk a lot about what we're doing in the AI front, but there are operational efficiency measures that we have deployed that we believe will continue to help that trend of increasing premiums and revenues without commensurate increases in fixed expenses. So we think we've made good progress, but we don't think we've made all of the progress as a percentage of premiums and revenues.

The last thing I would add is when we think about the broader portfolio that we have and the scalability of the fronting carrier that we have, this is what is allowing us to continue adding programs. And we just mentioned this quarter that $23 million of gross written premium came from new launch programs. And usually, when we launch these programs, we don't need to add significant fixed expense. And this -- and we expect that to continue. It's part of what makes the platform very scalable.

Got it. My second question is on the MGA partnership. In your letter, you mentioned you guys added 2 MGA partners with commercial and casualty lines. Just curious on what specific criteria drives your MGA partner selection? And how do you evaluate the risk return profile of new program versus existing?

Yes. Thank you for the question. I appreciate the question. I think it's important as we talk about what differentiates our Spinnaker platform from other avenues in which an entity might be able to take inherent underwriting risk. So typically, when we engage with a new MGA, it's a fully fronted deal. We typically do not take much, if any, underwriting risk. And as that program matures and as we have the data to support our conviction that this is a well-managed, well-run program, we then start participating in risk as that program starts to mature. So we never really feel compelled to participate in risk unless we have strong conviction in a particular program's operating and underwriting capabilities. We also want to make sure that we have a portfolio in which the various product lines work together to reduce volatility in any particular product line or particular event. So adding more casualty to our portfolio creates ballast against the high property that we currently have in the portfolio. And that's the efforts of our fronting team to make sure that we are going out and we are plugging holes in that desired portfolio with operators and MGAs that we believe will produce positive underwriting results. Then they prove that over time and then we start participating in risk. So we're well positioned to pick and choose our level of risk participation based on our view of quality. The last thing I'll say in this area is we have also sent programs into runoff, ones that do not meet our threshold, whether we take risk or don't take risk, we send ones into runoff that we believe will not produce a favorable gross loss ratio, not just a net loss ratio for our participation. So we're highly disciplined in this area. We have more than 10 years of history doing this as Spinnaker, and we're going to continue to leverage that on a go-forward basis.

At this time, we have no further questions registered. And so I'll hand back to President and CEO, Rick McCathron, for closing remarks.

Well, first of all, I'd like to thank all of you for joining us this morning. We are immensely pleased with the performance of this quarter. I think this is showing the hard work that the team has done over the last several quarters, really getting our business well positioned for the future. We think we now have that well-positioned stance, and it is our objective to consistently demonstrate positive returns, both on equity and underwriting performance. So we look forward to sharing our continued progress next quarter. And we, again, thank you for joining us this morning. Have a wonderful day.

Thank you all for joining us today. This concludes our call, and you may now disconnect your lines.