A new note from Keefe, Bruyette, & Woods (KBW) says that a recent meeting between its representatives and those of Hippo Holdings has led it to say that the firm is able to retain more risk than it currently does should reinsurance cost prove too high.
The note states that KBW met with Richard McCathron, president and CEO of Hippo Holdings for an investor lunch also attended by Stewart Ellis and Cliff Gallant, respectively the CFO and IR of the firm.
At the meeting, said KBW, the management of Hippo Holdings said that it reaffirmed the company’s path to full-year AEBITDA profitability by 2025 that it presented in September.
KBW reported that narrowing bottom-line losses are expected by Hippo Holdings to come from both operating leverage and improving loss ratios. It said that management is planning to give more detailed segment disclosures to better lay out the unit economics and distinguish risk retention, agency activities, and other fee-based services.
Elsewhere, KBW wrote: “Hippo can certainly be considered a heavy user of reinsurance, ceding about 90% of gross premiums. So, naturally, we recognize there are investor concerns about the company’s ability to navigate the upcoming 1/1 renewals given the well-publicized hard reinsurance market backdrop. Although it is too early to share any formal details on the status of its 1/1 renewals, management is generally constructive, noting the benefits of: 1) 30% of the quota share on multiyear through 2023, 2) its improving loss ratios (unlike those of most primary insurers which have deteriorated from inflation), 3) diverse programs and panel partners, 4) only covering new construction in Florida, 5) expanded geographic diversification.”
It added: “Importantly, the company has sufficient capital flexibility to retain more risk on balance sheet if the reinsurance costs end up too punitive (above their own cost of capital), and increased retention is already part of Hippo’s long-term plan to reduce ceding to 75% (from 90%).”
This remarks come about four weeks after Hippo reported that its Q3 revenue was up 36%, with total generated premiums hitting $219m.
Alongside the rise in TGP and revenue for the quarter, Hippo reported a net loss of $129.2m compared with a net loss of $30.9m in the prior year quarter.
At the same time, Hippo’s Q3 adjusted EBITDA loss was $54.8m compared to a loss of $48.4m in the prior year quarter. The $54.8 million loss also included $4.7m of losses directly related to Hurricane Ian.
The firm noted that it expects improving adjusted EBITDA results going forward, continuing in the fourth quarter and into 2023 with profitability achieved by late 2024.
Meanwhile, general and administrative expenses were $19m for the quarter, compared to $13.4m from the prior year quarter.
Additionally, Hippo’s gross loss ratio excluding impacts from Hurricane Ian was 58%. In a statement released by the firm, Hippo noted that this result is highly encouraging and is an early indication of the success of their re-underwriting efforts taken in the first half 2022.
