Hippo Holdings Inc. (HIPO) Q4 2021 Earnings Report, Transcript and Summary

Good afternoon. Thank you for attending today's Hippo Fourth Quarter 2021 Earnings Call. My name is Heena and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host [technical difficulty]. Please go ahead.

Thank you, operator. Good afternoon everybody and thank you for joining Hippo's fourth quarter 2021 earnings conference call. Earlier today, Hippo issued a shareholder letter announcing fourth quarter results, which is also available at investors.hippo.com. Leading today's discussion will be Hippo's Chief Executive Officer, Assaf Wand; President, Rick McCathron; and Chief Financial Officer, Stewart Ellis. Following management's prepared remarks, we will open up the call to question. Before we begin, I'd like to remind you that our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on current expectations as of the date of this presentation. Forward-looking statements include, but are not limited to, our expectations or predictions of financial and business performance and conditions in competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties, and other factors that will cause our actual results to differ materially from historical results and/or from our forecasts, including those set forth in Hippo's Form 8-K filed today. For more information, please refer to the uncertainty in our factors discussed in the SEC failing. All cautionary statements that we make during this call are applicable to any forward-looking we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed and disclosed in the SEC filing. Do not place undue reliance on forward-looking statements as Hippo is under no obligation to disclaim any responsibility for updating offering or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During today's call we will also refer to non-GAAP financial measures such as total generated premium 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 fourth quarter 2021 shareholder letter, which has been furnished to the SEC and available on our website. And with that, I'll turn the call over to Assaf Wand, Co-founder and CEO.

Thank you, Cliff. Good afternoon, everybody. 2021 was a year of mark for Hippo, including the public listing which Hippo shared and annual total generated premium crosses $600 million. Some of these successes were tempered by headwinds such as silo point in the equity markets for many tech growth oriented companies, catastrophe losses in our major geographic markets, and heightened loss cost pressure for home retails. However, Hippo ended the year operationally and financially strong in a position to patiently weather the volatility of financial market and the laser-focused on executing against our long-term vision of protecting the majority of home ownership. We believe we are conforming the home insurance industry with our proactive to be the best home protection. Our 2021 growth in total Generated Premium of 80% supported by 88% people want premium retention rate has validated that. So, we are broadening our reach in 2022. In the coming months, we plan to extend our geographic presence from 37 states by adding major states in the northeast as well as extend within our existing footprint with new products. We would like to continue to grow through our key partnerships through major US home builders such as Lennar and Toll Brothers. We are sourcing some of our best customers newly built tech-enabled homes with owners who to use technology to improve their homeownership scheme. Through our partnership with major financial service companies, we're able to reach potential homeowners at the critical moment when home protection is at the forefront undermine. I am pleased by the strong progress we are making to improve our loss ratio. Our Q4 gross loss ratio of 89% was the best quarter of the year, in part, benefiting from seasonality and also sales of point of reserve releases from five-year period. We are improving our loss ratio as we mature by using our technology to better calibrate pricing, increasing our geographic diversity, and entering new markets. We view our progress in this area as particularly encouraging given the many pressures on loss part. We also have successful reinsurance renewal in general. Despite the hardening reinsurance market in which prices, terms and conditions were under pressure, Hippo was able to renew its mainstream with a panel of 11 A-minus higher rated reinsurers. This is up from a panel of 9 in 2021. Our insurance partners are able to closely examine our underwriting practices and we are grateful to have to continued support and confidence in our future results. Technology remains a key differentiator for Hippo. First, we leverage technology to help customers rent easing their homes through preventative maintenance and home health through our inspection forces either in person or through live video we can inspect the customer's home often leading us to facilitate preventative home repair measures. We also offer discounts to customers who partner with us to use technology like Click Center or Home Security to help prevent losses. What customers might not be, is that we are also leveraging our technology to build a modern insurance company actually underwriting and claim adjusting insurance and customer support agents. All leverage our modern tech stack to turbocharge their productivity and scale their daily operations with consistency and reliability. Recognizing the following company role of technology at Hippo, we are celebrating one of our long-serving Hippo, Mr. Ran Harpaz, to the newly created position of COO. Ran would maintain his current responsibilities as Chief Technology Officer and will also oversee our end-to-end customer experience from product inception all the way through customer support. Another major accomplishment for the year was that despite a very difficult hiring in pharmacy environment, we extended the e-bookings to 621 people. Attracting top talent across the range of expertise. Starting a first day in 2022, we're particularly excited to welcome Ms. Grace Hanson, formerly with Hiscox to our Hippo Board to become our first Chief Claims Officer while we prepare to help our customers prevent claims. When unfortunate events do happen, we prioritize supporting our customer and Grace will be working to enhance our capabilities in claims service. While we're unsatisfied with the share price performance since our August 2021 lifting, we have more confidence than ever in Hippo's long-term prospect and ability to modernize home insurance and protect the joy of homeownership. Now, to talk a little bit more about our insurance operation, I hand the call over to our President, Rick McCathron.

Thanks, Assaf. We believe 2021 was a preview of the long-term environment for the homeowners insurance industry. Increased volatility, unpredictable climate activity, inflationary home repair costs, and supply disruption will require providers to have a level of responsiveness not previously seen in the industry. We have been developing the technology platform to well position for such challenges. In December, we rolled out our latest iteration of our underwriting engine by introducing additional coverage option and increased data. We have added granularity in our models and our better matching price with risk. While some existing customers will see price increases, others will see reductions. In Texas, for example, we have done significant re-underwriting in which approximately 25% of our Texas customers will see a rate decrease. We've also begun rolling out our multi-carrier strategy utilizing Ally and Incline, giving us additional avenues to file set rates for targeted markets, increasing the number of pricing sectors, adding additional rating period. Part of this strategy is opening of Ally for Hippo's preferred risks, enabling even more competitive pricing for preferred segments. Our fastest-growing distribution partnerships with home builders is also our most profitable channel. These partnerships are having a positive impact on countrywide profitability. This channel and related portfolio continues to indicate that it is aligned with profitable growth. We have not filed any rate activity or rate actions in this area. One last point worth noting is how our tech stack allows us to accelerate pricing and underwriting changes. Our flexible tech stack enables us to do more and be more quickly. In our Texas rate filings, we've introduced new data source, three new underwriting variables, and new coverage restriction. Under traditional carrier legacy systems, the specs for such changes are frequently required to be provided to the IT organization months in advance. With our tech stack, we were able to program these immediately after the rate change has been submitted, meaning we can launch changes as soon as they receive regulatory approval. The results in our timeline being shorten allows us to real-time finalize proposals and submissions to the state. The extra time enabled us to use the most recent data to pick our loss and trend factors. As an example, we see inflation as a major area to lock in 2022. And we're able to include our view of our rig selections. We also constantly update and re-underwrite each individual risk in our portfolio. When a policy comes up for renewal, we don't simply mechanically add an inflation adjustment. We re-underwrite the policy, updating it for all new data we've accumulated since the last renewal to enable our customers to properly protect their homes. All in all, we think our segmented multi-pronged approach to pricing puts us in a great place to drive profitable growth in 2022. Now, I'd like to pass it over to Stewart, who will update you on our financial progress.

Thanks, Rich, and hello everyone. Total Generated Premium grew 53% year-over-year to reach $153 million in Q4 and grew 50% year-over-year to $606 million for the full year. Our premium retention remained high at 88%, an indicator that our customers continue to be pleased with our service and product. Our growth was spread across our many distribution channels as we said before we're happy for our customers to purchase Hippo policy throughout their life, whether directly from Hippo or through independent agent or by way of one of our partnerships with homebuilders or financial institutions. We grew in each of our 37 states including Texas and California where we have re-positioned our regional mix within these large states to diversify our total exposure. We expect to launch additional major states in 2022. And for the full-year 2022, we are targeting total Generated Premium in the range of $800 million to $820 million. Revenue of $32 million in Q4 was up 96% year-over-year. Our revenue include premiums earned on business we retain, growing stream of exceeding MGA, and agency commission paid to us by reinsurers or other carrier and exchange for sourcing customers and/or risk that they retain on their balance sheet as well as service and fee income from our customers. Finally, through Spinnaker and its affiliate, our wholly-owned A and Beth, A-minus rating business insurance company, we continue to expand our business with third-party program administrators, earning funding fee income through our insurance as a service model. Over time, we expect an increased share of our earnings will be derived from a stable and recurring stream of fee and commission-based income. In 2022, we expect our revenue growth rate will feed our GDP growth rate and that we will generate revenue in the range of $142 million to $143 million. Moving down the P&L, I'm pleased to report that we continue to make progress and improving our gross loss ratio. Q4's gross loss ratio of 89% is our best quarter of 2021. Given historical patterns of seasonality and catastrophic weather events, we don't expect sequential improvement in each quarter of 2022, but we do expect meaningful year-over-year improvement. We're making great strides on each of our initiatives to reach our intermediate goal of industry level loss ratios while continuing to grow quickly. During the fourth quarter, PCS catastrophic losses accounted for 25% of our gross loss ratio. The largest of these events was the Marshall fire in Colorado on December 30th. Non-PCS large loss events accounted for an additional 11%. Our gross loss ratio also benefited from our leases of reserves held proprietary in 2021 due to favorable development across all apparels. These re-leases had a positive impact on our Q4 gross loss ratio of 13%. As our go to business matures and achieves more balanced and geographic diversification, we expect volatility to help profit and large loss events to decline. Turning now to reinsurance. Despite a hardening reinsurance market, we successfully renewed and placed our primary homeowners insurance program for 2022. We expanded our total share counts from 9 to 11 re-insurers, all of them are either rated A-minus, excellent, or better by AM Best are appropriately collateralized. As a reminder, we also have multi-year reinsurance for approximately one-third of our capacity from a separate reinsurance treaty we signed at the end of 2020. 2022 will be the second of the three-year term. We expect to retain approximately 10% the homeowners' premium that our MGA underwrites on the balance sheets of our insurance company subsidiaries or our captive reinsurance company. And 2022 Proportional Reinsurance Treaty does include loss participation feature, which may increasing on risk retained by the company in excess of our pro rata participation of 10%. We reduced our retention through purchases of non-proportional reinsurance like excessive loss coverage. This program provides protection from catastrophes that could impact a large number of our customers in the single event. We buy after-loss coverage to [indiscernible] year return period. To say it another way, the probability that losses from the single occurrence exceeds the purchase protection is 0.4% or less, protecting us from all but the most severe catastrophic events. Sales and marketing expense increased $25.7 million in Q4 versus $16.5 million in the prior-year quarter. As we continue to see progress in our key KPIs, we have increased confidence in raising the profile of our brand with potential customers nationwide. Technology and development expenses were $13.5 million in Q4 versus $4.8 million in the prior-year quarter. Technology is the backbone of Hippo and we continue to relentlessly invest to improve our customer offering, our API oriented ecosystem, and the efficiency of our platform. Nearly a quarter of our employees are on the technology team with the talent that any Silicon Valley company would be proud to have. General and administrative expenses were $18.6 million versus $9.5 million in the prior-year quarter, reflecting the increased cost of operating a public company and increases in stock-based compensation. Our cash, cash equivalent, and investments at the end of the quarter stood at $839.6 million listening as well for an extended period of growth and investment. Net loss attributable to Hippo was $60.7 million or $0.11 per share compared to a net loss of $54.1 million or $0.16 per share in the prior year quarter. Adjusted EBITDA was a loss of $46 million versus a loss of $26.1 million in the year ago quarter. We remain confident in our outlook for strong profitable growth as we diversify and develop our business. To summarize our guidance for the year, we expect overall PGP in the range $800 million to $820 million, revenue to reach $140 million to $142 million, and barring major catastrophes a full-year 2022 gross loss ratio under 100%, down from 138% in 2021 and on track for further material improvement. I'd now like to turn it back to Assaf, for closing remarks.

Thank you, Stewart. At the time the world faces multiple challenges, we at Hippo understand that our home [indiscernible] an even deeper meaning. Our vision of protecting the journey of homeownership has never been more important and we are energized by the progress we're making. We have assembled the world-class team and we are building a momentum across all of our strategic priorities. I am proud of what we accomplished in 2021, but even more excited by the promise of 2022 and behind. With that, we are happy to take your questions.

[Operator Instructions] The first question is from the line of Michael Phillips with Morgan Stanley. You may proceed.

Thanks, everybody, and good evening or good afternoon. First off with a quick numbers question and then we'll go into a couple of them. The first number question is on your gross loss ratio, the 89%, you break it down for us in the cat in a large loss and be attritional. But, I assume the attritional of the 53 that includes the 13, right, so maybe if we net that out the attritional through 66, is that correct?

Mike, this is Stewart. The large losses and the PCS cat event and the other attritional, those mutually are exclusive. The numbers in the shareholder -

They do so, but where is the 13, I guess, is the question - 13, 40, 89. Is that correct?

Can you repeat the question? I'm not sure I heard it right.

Yes, sure. So 25, 11, and 53 that's your 89, but somewhere buried in those numbers, I assume the 25 or the 11, but probably the 53 is a negative 13.

Yeah, it's across all categories.

Okay. Okay. All right. Thanks. That's all the numbers question was. Can we talk, I guess, on your channels? Lots of positive talk and the profitability of the builder channel. I wanted to see if you could compare how you think about your different partnership channel, builder versus the financial services company in terms of profitability, in terms of growth potential, in terms of overall market TAM? Correct me if I'm wrong. I think of the financial services like the PennyMac examples is more of a potential bigger size market, but maybe not growth whereas the builder one maybe a smaller TAM but possibly a bigger growth and profitability. So, I just kind of want to mesh through all that in your partnership channels.

This is Assaf, Michael. Thanks for the question. Let me start and kind of explain our view on the partnership channel. So, the partnership channel is coming from this view that for many people they actually never buy home insurance in their life. What they do buy is they buy a home. And if you get a home, if you need to mortgage, you need to pull home insurance. So that's how the flow basically in people mind goes. And our view is that we want to have an omnichannel kind of strategy and support people whenever they basically want to purchase a policy. So, the partnership track is about supporting people in the cycle of purchasing a home. So we work with the realtors, we work with mortgage originators, mortgage service sales, title company and buildup one of these things. As you stated, some of them that you view as more financial than they might be bigger in scale in some ways, but the fact is different and the reach that we get is slightly different and we have a customized solution for each and every one of them, specifically for the builder, for instance. So builders have their own challenges, which is different than other people challenges, usually a data deficiency for instance. So what I mean is if you're buying a property in a certain community, you don't even have an address; you don't know exactly the - there's a lot of information that is missing in that front and then you have very limited information about the potential tenants, and there're a lot of these components that create some issues for other standard insurance companies when they try to attach the policy. On the other stuff, this is a brand new home, so there is a large list of potential back losses that are hidden in some place. Builders give the warranty under construction. So anything that's going to happen in the first years is actually going to be covered by the builder. It's a brand new community. So for instance, there is no overarching tree or a 20-foot tree that is overarching your home that might fall. Everything is brand new, the piping works, the sewage works, and it's lower the entire risk of entire community. And builders have a full knowledge of the rebuilding cost of it, each and every one of their homes. So what we have done in Hippo, for instance for the builders, we've built a dedicated product that takes all of these points into consideration. It has broader coverage. It's an HO5 product, so it's an old peril. It has more correct price for the specific risk that the builder has, so it's better for the customers and it has higher attach rates that has been efficient for the builder. There is a unique data integration with the builders, the specific data. There is specific integration with the sales team on the ground, so the sales associates can actually offer something which is a lot more comprehensive and beneficial for the customer. And what we're seeing is that, I would say, it's one of our fastest growing products and channels. Just as an example, when we started working with Lennar, the attach rate of these products was around - offering around 40%. Now what we're seeing with Lennar and some of our other business that we have is an opt-in rate of around 90% in some of the regions and an attach rate, which is getting close to the 70% and we're very confident it's actually going to grow. So in short, this entire unique strategy is relatively unique. You need to have very, very strong data and technology underneath to support it. You need to have API that's attached to the different systems in place. By the way, those regulatory and compliance components, some of them you need to break those compliance, some of them you don't have. So, a lot of unique solutions have come into play. One of our fastest growing channel and a profitable one for us. So, we're going to continue announcing more and more of the partnerships in the future and we're going to double down on it.

I wanted to clarify something on your first question to Stewart, which Stewart answered correctly, but I want to make sure it resonates with you in a little more detail. So the positive development on the reserve release, the 13 points you were talking about, that was not just attritional. I think you inferred what the attritional loss ratio would be as a result. As Stewart said, that's across all perils. Let me give you a specific example. Winter storm Uri was a unique event and it had a different reporting pattern than other events. So as the year went on, we were seeing positive development across all perils and not just attritional peril.

Okay, thank you, Rich. That's helpful. I appreciate it. I guess the last one to follow on to that last answer from Assaf, you touched on it a bit and you touched on it before. I guess one of the things we get a lot is - if you guys are going to great partnership saying and it's really cool, but what can else they do? What can [indiscernible] do that and if you want to do it more successfully and faster, so what would you say to that question that comes up quite a bit?

Yeah, a couple of things. First one is, what we're seeing now is that insurance companies in general, is probably one of the most severe channel conflict that we've ever seen. So usually what happen is if we stick on one to offer, the entire deal is that they are going to direct the traffic to [indiscernible] who live in Mainstreet in the southern corner and to do something which is holistic that takes care of - you're attaching [indiscernible] and you don't attach the specific agent is something which is conflicting. So, we are doing something which is holistic. You are always going to get the Hippo experience. It's not just specific agent that has to do with it, so we not directing to a specific agent. We are directing to Hippo and we're taking care of that. The second thing as I said different companies have different infrastructure, different data sources, unique compliance regulation and it's not a trigger thing to actually pivot. What PennyMac has and what Homepoint has is different than what Chase has and what Blend has. InCompass has a different touch point into different customers. Different customers, different systems, different products, different companies have a very unique company. You need to remember that its essence, and that's what we do at Hippo it is an insurance company. So there has been insurance, but there is a full technology piece underneath it. Where we were sitting now in Palo Alto, it's in the heart of Silicon Valley and we need to have a certain level of engineers, a certain level of data scientists, and we need to match and cater to all of these needs of the different systems and it's not a trivial thing. It's not using a third-party system. It's using our own system, our own policy management system and it's never a copy paste. It is never once done API. There are lot of integrations and this is something that we take a lot of pride in and we feel we are very good at. So, it's not a trivial thing to just to attach it.

Mike, this is Stewart. I'll add one thing. We know from our experience with builders like Lennar that the performance that we've been able to generate for them in terms of attach rates are meaningfully higher than they were before we started. So, it is not that other companies are not attempting to do that through other agencies and other things. It's just that the thing that Assaf talked about, the technology that we have and our ability to work in an iterative way with the partners, just result in better performance.

The next question is from the line of Yaron Kinar with Jefferies. You may proceed.

Thank you and good afternoon everybody. First question goes back to the TGP growth and Assaf I think you mentioned you were seeing more significant growth coming from the partnership channel. Could you maybe help us think through where - maybe if we think of each of the channels that you have prioritization of growth or where do you see the most growth coming from over the next year from highest of these?

Sure. Let me take the first half and then I'm sure that Stewart will kick in that some component. We have an omni-channel approach open. And while we're seeing - at different periods of time, we're going to see different growth in different channels. So when there is an increasing cost on the direct to consumers, then we might lower that and we're going to double down on some other. And when we are seeing a change in more, I would say appetite, by some of the financial partners to actually double down more on these things then we're going to work closely with them. So, it might change over time. What we're seeing now is in the hands growth on the partnership and slightly less growth on the producer side, but it keep on evolving almost on a daily or a weekly basis. I would say that the end state of what we're probably going to get is we call it sale, sale and sale. So if sale of our business is going to come from direct to consumer, sale of our business is going to come from producers and the sale of our business is going to come from partnership. But it doesn't mean that at any given point it's always going to be at the breakdown. But, we are very bullish on all of these things and what we're seeing right now is that the partnership is what's going really very fast. Don't forget that at the end of the day it started from the smallest base for us, so this was the largest and the second largest was direct to consumer and the third largest was the partnership. And what we're seeing is that channel is picking up significantly.

And then if I think about commissions or fees, more in the independent agency channel versus mix of the partnership channel, are those roughly similar? And if not, your account for that in your price of products?

It is difference predominantly because of structure and how we actually set up the partnerships. So, a traditional independent agency will have a higher commission rate than our partnerships because we generally do these through joint ventures with the partnership. So, it is not the same and there is more value add that we get when we are doing the joint venture partnerships. As an example, when a customer buys a Lennar home and they're happy with the Hippo products within the Lennar home, the next question they ask is "great, can you help me with car insurance." And our answer is absolutely, we can. We are happy to cross sell somebody else's manufactured product in the agency that we partner with Lennar on. So, it creates the opportunity to earn revenue, non-risk-based fee revenue alongside the risk based homeowners' revenue for selling the Hippo product.

This is Stewart, Yaron. One thing to add there. On the independent agent fees, we do have a lower renewal commission than we do on new business commission. So as the book of business matures, the overall percentage of fees as a percentage of premium will decline gradually.

Okay, got it. One quick numbers question, if I can. Can you maybe talk about the prior period development and the cat losses on a net base as well?

I am sorry. The last part of your question dropped off.

The numbers you provided for both catastrophe and for the prior period development were both on a gross basis. Could you offer those on a net base?

Yeah, I think we may need to get back to you on that, Yaron.

The next question comes from the line of Matt Carletti with JMP. You may proceed.

Thanks, good afternoon. The first question I wanted to talk about the loss ratio guidance for 2022. Could you put some color around it in terms of maybe what we should expect from an attritional basis, so actually peeling off the large losses in the cat, 53 Q4 or 54 for the full year? Pretty similar. As we go throughout, I understand your comments about not expecting quarter-by-quarter improvement, but as we sit at the end of '22, should we expect improvement in that number and any more color you could provide there would be helpful. Thank you.

Matt, this is Stewart. I think there're a couple of things that are going on. One of the reasons that - as you rightly pointed out, we do have volatility in the weather over the course of the middle of the year. So when we think about sequential improvement in loss ratios, while our book is still concentrated in certain areas that have shown volatility in the second and the third quarters, it is a little bit hard to imagine that it's just going to be a smooth steady March downward. That said relative to 2020, we do expect a significant improvement year-over-year. We'll have more visibility into what the ultimate loss ratio is going to be in 2022 as we make our way through the year. That volatility will decline. And as we grow and add the geographic diversity to the book into the portfolio that weather-related volatility will become a lower and lower source of variance on that. With respect to the mix of attritional and cat related losses, that's also something that will have some variability over the course of the year. We are - as we mentioned in the earlier part of the call, even within states like Texas, we have shifted our regional concentration. Texas is a very big state, away from the northern part of the state where we've had historically higher hail losses to other parts of the states and then across states. As we've built that geographic diversity in the portfolio, the specific contribution of weather and cat related events to the premium, that's going to change over the course of the year as the mix of our states changes.

Matt, just a couple of additions to that. First of all, as you know, we've increased the speed and number of rate filings that will take effect throughout the year and rate filings dramatically help attritional loss ratio. So as those filings get approved by the various regulators, that will show some inconsistent improvement - nonetheless, but inconsistent improvement depending on when those rate filings go live and as the premiums for those increased rate filings start to earn out. Secondly, as Stewart mentioned, understanding that our loss ratio currently is based on some geographical concentrations that we have shown meaningful improvement on over the last few years. As we continue to grow geographically, the number of states we have that have higher weather-related losses will shrink and those that have higher attritional losses will increase because if you take a state with very little weather, of course, the attritional loss ratio is higher and we are not fully diversified yet in states that provide a balance that will shift in change as time goes on.

That's very helpful. And one other one if I could just a high-level question. I heard you guys right. I think the very high level message is, you expect to still grow very strongly, obviously while at the same time what we're just talking about improving your loss ratio. That's a difficult balance at times. So can you talk a bit about how you expect to balance those two goals and meet those goals?

I think first thing that's important for all of us to understand about the way we think about this is, that we are focused on delivering thoughtful profitable growth. And at this point, we know that the entire industry is taking rate due to inflationary pressures and we've got a lot of filings that are in process across the country. As we get comfortable that we have rate adequacy and it's properly calibrated from a pricing standpoint, not too high enough and not too low in various parts of the country, it is going to get easier and easier for us, I mean growth over the course of the year. But I would say that Hippo may have some unique advantages going into 2022 from a growth standpoint and those fall into few buckets. We are entering large new states that we're not currently in. We are able to roll out new products in our existing states. We talked already on the call about the strong partnerships we have with home builders and national institutions that give us access to what we believe is positively selected risk, and we know that bringing the new geographic to our portfolio we expect that that will bring the weather-related volatility down. So, we see ourselves as a - because of the platform we've built, we have a very, very wide top of funnel and so we can bring growth to the business while optimizing loss ratio. And so, we see the benefits of that growth in reduction of volatility from weather in loss ratio as well.

As we mentioned, our guidance for 2022 is a sub-100 loss ratio. I just want to make it clear point that our intermediate term goal is to get the loss ratio to industry norms, which is within the '60s while continuing to grow. So, our targets as an entity and goal is within the '60s while still demonstrating healthy growth.

The next question is from the line of Alex Scott with Goldman Sachs. You may proceed.

First one I had is just on the reinsurance renewals. Could you give us a feel for how the two-third that was repriced could impact just the reinsurance costs and if there's any sort of noticeable impact to loss ratios we should consider?

Yeah Alex, I'll take the first part of that and Rich feel free to add anything. Our ceding commission on the annual reinsurance treaties is very similar to what it was in 2021. And while we're not disclosing the specifics of the individual contracts we have with reinsurers, we do feel like it was a successful renewal. As we mentioned in the prepared remarks that we do have some loss participation features and we buy XOL protection to protect us from large losses. So, we do feel like despite the fact that it is the hardening reinsurance market, we have the confidence of our reinsurance partners and that we are executing on the plans that we've discussed with them. And we feel confident that we have strong protection to the balance sheet.

Yeah, just to emphasize what Stewart was saying is that this 2022 treaty was oversubscribed. Keep in mind that every one of our reinsurance partners closely examined our underwriting practices, our use of technology, our ability to incorporate and function guards and inflation accelerators at a rapid pace, and we recognize, as they do, we are long-term partners. Without a level of trust with our reinsurers, we will not be successful and we have built that trust with them and their view of what we are doing is one that created additional reinsurers joining our panel in an oversubscription scenario.

That's surely helpful. Thank you. Next question I had is just on retention. It looked really strong this quarter. Is it fair to say that's a good indication of how things are going in terms of repricing action? I think some investors have nervousness around just the size of the rate hike there was being taken in California, but can we take this to mean that early indications are not affecting retention and any comment on how you expect repricing to affect retention in 2022 more broadly?

I think that's accurate. The reality is, the industry is taking a lot of rate than we are, the inflationary cycle states like California. We're not the only one. Lots of folks are taking rate. One thing that's relevant I think it is that we've launched a more robust pricing model than we had before and we are better matching premium to risk, and it's not a situation where everybody is going to get rate increases. We mentioned in our prepared remarks, some of what was happening in Texas, we do have customers because we have more granulated pricing in segmentation; our use of our multi-carrier strategy using the different underwriting companies, which only affects new customers, not existing customers. We do see situations where the Hippo risks that we're targeting will see rate decreases. So, we're very pleased with the retention numbers and very optimistic that it will continue.

Thanks. Maybe if I could sneak one last one in. Just circling back on the reinsurance. Were there any material changes to the amount of risk retention that you have in excess to sort of the 10% per share that you take? Anything we should think about there in terms of volatility that we could see associated with higher risk retention or was it fairly similar to 2021?

From a quarter share proportional perspective, we're actually taking a little bit less than we did in 2021, but we have instituted or initiated certain performance mechanisms on loss ratios above certain thresholds. So, we are better aligning our economic models from a loss perspective with our reinsurance partners. I don't think it's a meaningful change, but it is different. We do have a very sophisticated reinsurance treaty and that sophistication allows us to protect ourselves against larger losses while maintaining a capital-light structure, yet demonstrating to our reinsurance partners that we are just that, we are partners and together we have strong belief that the loss ratio is not only going in the right direction, but we'll continue to do so on a year-over-year basis.

The next question is a follow-up question from the line of Yaron Kinar with Jefferies. You may proceed.

Thanks. I wanted to go back to the comment around the expected increase in share of earnings coming from stable and recurring commissions and fee-based income. So does that simply mean that - with the example that you gave earlier of maybe getting additional fees through launching or partnering with other third-party insurers and maybe some of the ceding commissions, you expect those to go up? Does it mean that you may not be looking to reduce the use of reinsurance over time because you're not necessarily expecting the portion of underwriting and earnings to go up? How should we think about that?

Yaron, I'll take that. I think it's - I think it reflects an increased confidence that we have in the agencies portion of our business and it's not - I don't think I would take that as a commentary on the way where the amount of reinsurance that we're going to be using. We do - as I think we said before, we have the NGA. We have the insurance as-a-service and carrier business in the form of Spinnaker. We have our own agency, which allows us to sell other carriers policies, whether they be home insurance policies or auto insurance policies. We are getting better operationally at delivering a solid experience whether someone's buying a policy for Hippo or through us from another carrier. I do have the answer to your previous question about the favorable reserve development on a net basis. For Q4, it was 34 percentage points favorable on a net basis and on a gross basis, as a reminder, 13 points favorable.

And on the cat side, do you have those on a net basis?

I don't think we've broken down. The reserve releases that we said were across all perils, so it's a broad release of reserves as we've gotten comfortable that we're properly reporting the reserves on the balance sheet.

Okay. Then, could you maybe explain or walk us through the increase in the insurance-related expenses, a bit more meaningful this quarter both on year-over-year and quarter-over-quarter base?

Yeah, I think that's - it's a bit of a technical answer, but I think it will make sense when I go through it. You'll recall that we closed the Spinnaker acquisition towards the end of Q3, 2020. And before the acquisition, all of the commissions that we paid to producers and partners were recognized in our P&L at a point in time. And following the acquisition, like with other items in the P&L when we switched to 944 accounting, the commission is recognized over the life of the policy. And so, in Q4 2022 the P&L only reflected one quarter of the commission amortization for that group of policies whereas in Q4 2021 we have functionally a full year of commissions. This also shows up in the same way in the commission income if you look at Q4 2021 versus Q4 2020. So, I will be happy to talk in more detail about the technical pieces of the accounting offline, but it's basically a comparability issue.

Got it. Just going forward, we probably look at this quarter's insurance expenses - insurance related expenses, a reasonable run rate?

I think that's right. I think there will be a few more quarters where it's not perfectly comparable because each of the prior quarters will need to have a full year before it becomes fully apples to apples. But yes, as we think about the relationship between non-variable and the drivers, it's more stable now than it was.

Got it. One last one from me. How much rate did you take in 4Q 2021 and maybe also in full-year 2021?

I don't think we have disclosed the individual rate actions that we have taken, although of course our public information that can be bolt-on the department of insurance websites But, we have not broken down or disclosed rate actions also because there - we've begun taking rate actions and we have over the last year or so, but we are not at the end of it. There is still plenty of rate actions to be taken, but again those are all filed with each regulator.

And as Rich said earlier, it's not all increases. A lot of the rate that we are filing is a calibration where certain categories of homes and kinds of risks are getting price decreases and others are getting price increase.

There are no additional questions waiting at this time, so I will pass the conference over to the management team for any additional remarks.

Thank you. Just want to close and say thanks everybody for your time. Appreciate it. And as I concluded the other remarks, we're entering 2022 with a very confident mindset. It's not an easy time in the world. It's not an easy time to be an insurance company, but with the team, with the technology, with all of the things and the growth that we're seeing, we are optimistic and we think 2022 is going to be a stronger year for Hippo. Thank you all for your time.

That concludes today's Hippo fourth quarter 2021 earnings call. Thank you for your participation. You may now disconnect your lines.