Good afternoon. Thank you for attending today's Hippo Fourth Quarter ‘22 Earnings Call. My name is Hanna and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end [Operator Instructions]. I would now like to pass the conference over to our host, Cliff Gallant, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everybody. And thank you for joining Hippo's fourth quarter earnings conference call. Earlier Hippo issued a shareholder letter announcing its results, which is available at investors.hippo.com. Leading today's discussions will be Hippo's Chief Executive Officer and President, Rick McCathron; and Chief Financial Officer, Stewart Ellis. Following management's prepared remarks, we will open up the call to questions. 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 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 in 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 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 risks, uncertainties and other factors discussed in Hippo's SEC filings in particular in the sections entitled Risk Factors. 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. And do not place undue reliance on forward-looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating, altering 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 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 third quarter 2022 shareholder letter, which has been furnished to the SEC and available on our Web site. And with that, I'll turn the call over to Rick McCathron, our President and CEO.

Good afternoon, everyone. Hippo was founded in 2015 with a bold vision to fundamentally improve the homeowners insurance experience by partnering with customers, helping them better maintain and protect their homes. It takes a long time to build a profitable insurance company. Building a recognized consumer brand, developing best-in-class underwriting and bringing enough customers together while bringing out the volatility of the policy portfolio, none of this happens overnight. The 10 largest homeowners insurance carriers in the US on average are over 100 years old, and they firmly have the advantages of time on their side. We believe the incumbent players have become complacent. Rapid technological change and the explosion of data and analytics capabilities over the past decade has not only made it possible for a company like Hippo to exist, but also to build a superior customer experience and a national footprint far faster than any legacy carrier could have imagined. Consumers have come to expect high standards of service and Hippo is well positioned to deliver. With Hippo's foundation firmly in place, 2022 was a year of rapid progress, advancing other aspects of our company. Success in this endeavor comes down to two simple fates. First, make the experience of being a Hippo customer the best around, so our customers will partner with us over the long term. When unfortunate things happen, we think modern protection is the best protection, innovations in loss prevention and claims handling can put Hippo at the forefront of customer care. Second make the rest of our company as strong as our foundation. By using our technology to rapidly improve our ability to deliver on the fundamentals of insurance, we are now marching towards profitability ahead of schedule and creating a financial future that is built to last. Here are some of…

Thank you, Rick. In the fourth quarter, Hippo took another step forward along our path to profitability with an adjusted EBITDA loss of $47.3 million, improving upon our Q3 2022 results. Our growth rates remain strong and we're beginning to achieve the positive operating leverage that will drive our long term profitable growth. TGP growth accelerated in Q4, rising to an increase of 44% over the prior year quarter to $234 million, bringing our full year 2022 TGP to $811 million in line with our original 2022 guidance. Demand for our products and services remained strong and customer retention has continued to improve with blended premium retention across both Hippo policies and agency customers coming in at 92% in the quarter, up from 90% in Q3 and 89% in Q2. We saw growth throughout our 40 states as we began to build a presence in the northeast and mid-Atlantic. We've recently been more cautious about growth in our historically largest markets but in the quarter, we saw higher growth in Texas as our footprint in the state becomes more balanced. In our services business lines, where economics are predominantly fees and commission income, TGP was driven by strong fiscal year end home sales in our thriving builders business, which is seasonally typical for Q4. We’ve recently announced the launch of Hippo Builder Insurance Agency designed for smaller regional home builders. We're taking the embedded product of our fastest growing most profitable distribution channel and expanding it to include small builders nationwide. Our technology allows us to begin quoting a new partners lead in as little as two weeks without the builder needing to invest significant resources with builders outside of the top 10 responsible for over half of homes built in the US, we see this as a material long…

[Operator Instructions] The first question is from the line of Matt Carletti with JMP.

I was hoping you could comment on the new reinsurance program that you put announcement out you put in place to start the year. Just one is, is it done or do you look to put some more pieces to it in place across the year? I know it's a dynamic reinsurance environment. And then two just being go through what we should expect in terms of the financial impacts. If I'm understanding it correct, it feels like the net loss ratio should start to come down to approach the gross loss ratio as it earns its way in. Maybe I'm misunderstanding that. But is that accurate?

I'll go ahead and start with the beginning part and then Stewart can jump in with some more specifics. First of all, though, I do want to introduce to the group, Chris Donohue. Chris is our Chief Underwriting Officer. He's been with us now for nearly two years. And Chris and his team have been instrumental in the significant loss ratio improvement and the geographical diversification that we've achieved in such a short time period. Because of these improvements, we did see very strong support from the reinsurance markets. In fact, we had nine participants on the program this treaty. And keep in mind when reinsurers are evaluating the participation, they do a tremendous amount of forward looking calculations, taking all the actions that we've already put into place and bringing everything to current rate level. And I think that's where you saw sort of the bullish nature that they had on our program. I am pleased that we actually achieved improved terms and conditions during a very difficult reinsurance market. And because of all of these things, because of the improvement, we're structurally shifting to an environment where we are going to retain more risk in areas that we can control sort of the day-to-day attritional losses. Yet, we're still very much protecting the balance sheet for items that are outside of our control, such as the weather. So that's kind of the structural components. Stewart, do you want to jump in?

Matt, happy to add a little bit of color here in terms of the financial impact of the treaty in 2023. As Rick said, we're making the structural shift but also the treaty in 2023 is going to bring the premium that we retain more in line with the losses that we retain. Our 2022 treaty has loss participation features that meant for the non-severe weather portion of the rest, we retain about 30% of the exposure but only retain around 12% of the retained premium. In 2023, those numbers are going to come much closer together. So our underlying exposure in the non-severe weather category is up to around 42% but the premium that we're going to retain is up to 39%, so much larger increase in retained premium than underlying exposure. The way that will work itself into our financials is as the policy portfolio transitions from the 2022 treaty on to the 2023 treaty, as each policy renews, you'll start to see the economics play out in the financials. So when we look -- you mentioned the gap between gross and net loss ratio. When -- in Q1, most of the economics will still be on the 2022 treaty. So we'll still continue to see a high underlying net loss ratio there, because of that mismatch between loss retention and premium retention. But by the fourth quarter of 2023, we're expecting it to be much, much closer. So I would say it's probably going to be in the 200% plus range in the first quarter. But by the end of 2023, it'll be down below 100% along with the gross loss ratio.

The next question is from the line of Tommy McJoynt with KBW.

So I do appreciate some of the increased disclosure at the segment level. If you could sum it up, just what is the mix, I guess, of business either on revenue or earnings that is not subject to this loss ratio volatility? And if you could sort of describe that in terms of either 2022 or 2023, and then just thinking about longer term, how you see that mix shifting?

I think I'll start by just giving a little bit of context in terms of how we think about the business. So increasingly, we're viewing the Hippo customer experience, which we view as differentiated in the market, as not limited to people who are covered by Hippo policy, but also will include people who buy a policy from a third-party carrier through Hippo as an agent. And so if you -- and appreciate you mentioning the supplemental package, where we talk about 2023 guidance. This is all laid out in that package, so I'd encourage everybody to take a look at it. But if you classify the components of our business by business model, they fall into three basic categories. There's recurring fee based revenue with no underwriting exposure, we're calling that services and that's about 40% of our expected 2023 total generated premium. The second bucket is business that's primarily fee based revenue that has limited exposure to underwriting results, that's our Spinnaker program business where we support other MGAs by renting our balance sheet to them in exchange for fees, that's about 30% of our expected 2023 total generated premium. And the final bucket, which is the Hippo home insurance program where the economics as we've seen are primarily based on the underwriting results, that'll be about 30% of our 2023 total generated premium.

Tommy, if I could add one more thing. I actually think this helps the procurement of generation better customers. When we actually have options that don't necessarily fit our underwriting appetite or the way we think of customers who truly want a partner to help them protect all aspects of their home. We still have the ability to meet their needs and place them with one of our partner carriers that might very well have a different underwriting appetite and a different business model. Now those customers over time we still can provide Hippo home services to and Hippo home care. So it really does create an environment where the Hippo experience is a combination of Hippo home place policies, third party policies including cross-sell and the ability to generate more customers that would participate in Hippo home care.

And Stewart, if you could just clarify. So those figures on a TGP basis, as you think about just kind of the earnings I guess, contribution mix of those, do those ratios or percentages hold generally true?

As we look at 2023, I think the answer to that question is different in 2023 than it would be over the long-term. Because right now Hippo is not profitable as a business and that is primarily as we've discussed on previous calls, because we're still working on improving the loss ratio. A lot of the activity that needs to be undertaken to improve the loss rate, in particular the rate plans are largely underway and we feel very confident that we're on the right track there. But in 2023, the services business we expect that to lose money but that's a good idea for us from an economic standpoint, because the underlying business there is profitable. And so most of the losses are going to be coming from growth oriented expenses. The insurance as a service program business is actually expected to be profitable in 2023 and the bulk of the losses for the overall Hippo consolidated business is going to come from the Hippo insurance program. But as I said, those we feel very confident are shrinking over time as the loss ratio comes down. So we can talk -- there's more detail in the supplemental package that we released today on the guidance there. But yes, today, is not the same as what I expect the long term contribution to be, because I think long term each of these businesses are going to be profitable.

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

This is Andrew on for Yaron. Can you help us think about how the company views its rate adequacy and pricing needs for '23?

Andrew, I think this is a great question for Chris to take. So Chris, do you want to answer that for Andrew?

The rate plan that we've set forth in 2022 and 2023 is our organization's top priority. We're continuing to improve the overall rate level but also improve our ability to align our rate to risk so we can price risks appropriately in the marketplace. The majority of the efforts that we need to achieve our goal of the 65 loss ratio ultimately have been put in place and are underway. In 2022, we already achieved about 20% written rate increase. We made 64 filings in 28 states. The benefit of those rate increases started to earn in and will continue to impact 2022, 2023 and 2024 going forward. In 2023, we’ll take increases in the high teens. So we'll do pretty much the same thing that we accomplished in 2022 and we'll make 73 filings in 31 states. We've already taken significant ground in executing that strategy with 85% of the filings necessary to achieve that, that having already been submitted to departments of insurance. And these filings will also significantly impact 2023 but we'll continue to see the compounded effect of the last two years of rate earning in through 2024 and see that impact, significantly the loss ratio and the loss results that we see going forward.

I think this explanation is very much aligned with my opening comments related to reinsurance and the bullish nature that the reinsurers have, because the reinsurers forecast out all of these actions already taken, take everything up to current rate level, take both exposure and rate changes into account and identify what both our medium and long term loss ratio is going to be. So we're really pleased at the activity that the underwriting and actuarial team have already done for 2023.

And as we think about ongoing underlying improvement here. Is the correct comp the 66% in '22, relative to the 67% in '21? So just given the rate actions over the last year and perhaps into '23 as well, should we think about the pace of that improvement accelerating?

Not totally following your question.

As we look at the -- as we think about the 66% gross loss ratio, excluding CAT and POID that was about 100 basis points year-over-year improvement from 67% in '21. So just given the pace of rate filings, should we expect a stronger improvement in underlying loss ratio in '23?

Yes, as you continue to -- as these rate actions continue to work themselves into the portfolio, rate actions that we've taken generally do help the underlying loss ratio pretty significantly. This is why we have great confidence that we're going to achieve our goals of cash flow positivity by the end of 2024. We're very much on track and feel very good about what we presented during our Investor Day that we're going to get there.

I'd also love to just add a little bit of color to that question. I think what you're seeing in the results, despite all the rate actions -- and the questions, basically, why has the non-PCS core loss ratio only come down just a little bit. And I think what's not easy to see if you don't live this every day in the business is that we've actually been lowering through geographic diversification the overall exposure to CAT risk in the portfolio. And so if you have a home that's in a state that has very low CAT risk, nearly all of the premium is related to the attritional loss. If you have a home that is in a very high CAT risk part of the country and a substantial portion of that premium is paying for that CAT risk. And so as we bring the overall cat exposure in the portfolio down, you would otherwise expect to see the non-PCS core loss ratio increase, because more of the premium would be going to pay for those attritional losses. The fact that we're bringing it down is a function of the rate plan and underwriting improvements that we've made over the past year.

And the last thing that I would say on this topic is really understanding the way we categorize the category of losses. So we have two categories. We have PCS claims and all other. The all others are combination of attritional and non-PCS weather, so there's still whether in that 62% or 67%, whichever particular number you want to refer to, but it's non-PCS weather, if that's helpful.

You can also look that the core loss ratio, just look at Q4, the core non-PCS loss ratio was 54%. So the 66 thinks is a average over the course of the year, but we are seeing a positive trend progressively throughout the year.

The next question comes from the line of Alex Scott with Goldman Sachs.

First thing I have for you guys is just on the updated reinsurance program. Could you help us think through the loss participation that’s still remaining? I saw in the slides that looks like it's only modestly higher than the premium you're retaining in a base case, so that's good. What kind of variability could we have around that, like how much loss participation do you still have, how does it compare to what you did have? Any way to help frame all that for us.

I'll start and then if Rick wants to add, I'm happy to ask him to supplement this. The loss participation features in the 2023 treaty, they're still there but we're being paid for taking some of that risk ourselves. So that's what we said earlier about the higher retain premium. In general, the corridors we have are narrower than in the 2022 trading. So there's less variability from the corridors and they attach at rates that are more favorable to Hippo than they did in 2022. So at our expected loss ratio, I'm expecting them to be a much smaller percentage of our overall economics in 2023 than they were in 2022.

And then the comment that there’s no changes to required capital, could you help us think through that as well? I mean, there's a part of me that looks at it and says, you're retaining so much more, almost 4 times more than you were before. And like I get that you sort of put more tail risk in place. But could you unpack that a little bit more for us and help us understand how -- I mean, it seems too good to be true that you get this much more premium, and it doesn't require more capital?

So I think there's two things going on there. The actual underlying risk retained is not 4 times what it was because of the loss participation features in the 2022 treaty, so the risk retention is modestly higher but not 4 times higher even though the retain premium is closer to 4 times higher. So this is a an economic shift in the way we're thinking about the treaty, but also I think that reflects candidly the substantial improvement in expected loss ratio in 2023 relative to 2022. The other…

There's one other thing too, Alex, to keep in mind is as we continue to geographically diversify, the exposure from catastrophes has actually come down. And when you calculate all of the PMLs versus the exposure, we actually look like we have less exposure to weather in particular states or other large events like fire. So the diversification on the geographical exposure has also helped the total exposure to the company.

And then the one final point I wanted to make was, in 2022, we were such heavy buyers of reinsurance. And as we looked at the AM Best BCAR score and we're navigating the sort of maintenance of our AM Best A minus rating, the calculation was actually penalizing us with a credit risk penalty on the reinsurance that we were buying. And so as we actually increased our participation and bought less quota share reinsurance, we actually get capital relief from AM Best in the BCAR model. And so we were paying a heavy penalty in that framework, because we were such a heavy utilizer of reinsurance. Now we sort of found the sweet spot where we're matching up the benefit we get from quota share reinsurance and the exposure that we're taking. So we can go into more detail on that if you have further questions. But it's a function of both exposure and the way we're hitting off the risk.

And then maybe one more quick one from me a little bit out of lesson, you know what I mean. How would you think about earthquake exposure, just giving you a little more concentrated in California, seems like earthquake activities often bed just in general globally. So I'm just trying to think through, I get that your policy is part of cover but they may cover like the secondary fires that it causes. Any way for us to think through like how you reinsurance program would help out with that kind of a risk?

I think, I mean, clearly, you're 100% right. Quake is not covered but fire following is. And fire following would be subject to any type of other exposure we have in the portfolio. So we don't think it's a significant exposure for us. Chris, anything you want to add?

No, it is covered within the reinsurance programs but it's definitely not a peak driver peril of risk for us, and we feel it's managed within our portfolio.

Our last question is from the line of Pablo Singzon with JP Morgan.

The first one I had was just on the opportunity in the home builders market. Can you give a sense of the market concentration there below the top 10? I think your reference that's half of the market, but is the top 11 to 20 a good chunk of the 50% or is it more or less evenly distributed? And then as a follow onto that, could you sort of describe your sales organization, how are you thinking about offering your services to 50% of the market there?

I think something to keep in mind and this is a question that has come up in the past, which is if there are slowing housing starts, reduced housing starts, how much does that impact our growth in that particular channel. And whether your top 10, 11 to 20, or what we call long tail builders, the more regional or local builders for the purposes of the builder agency that we established. Hippo is such a small percentage of the total compared to the total that we still believe we're right at early stages of maximizing the sales funnel with those particular builders. Even in down and depressed years, there are still over a million housing starts and we are a small percentage of those. So the vast majority of the homes being built are being built by the long tail builders, not the top 10 builders. So it really gives us an opportunity to maximize growth in that particular channel over time. Now when we think about our sales organization, our sales organization as it relates to home builders is not a B2C effort for the most part, it generally is working with the builders and creating partnerships in which they believe that the technology that we've built at Hippo allows for quick real time quoting on a house that has not even been built yet. And that is a significant advantage to what we've built in the builder channel, because if you go to a traditional agency and you're looking to build -- or to insure a house that hasn't been built yet, what is the address of that house, is it lot seven section six, it’s very difficult. And what we do is we actually get the data files on every model of the builders we partner. And that makes the transaction close quicker. And at the end of the day, that's what everybody wants, the consumer wants to get into their new dream house, the builder wants to close the transaction and we facilitate that in a meaningful way.

And then my second question was about the First Connect business [indiscernible] here, any context you can provide there, when did you set it up? And I guess ultimately, how do you think it compares with the independent [HD] platform against alternatives out there something of clusters and aggregators? And if you can go through sort of the revenue model, how you charge the services provide? But I guess just overall how you think about that as an alternative versus what's out there for independent agents?

So first of all, First Connect was an acquisition that we made a few years ago. So it wasn't something that we started from scratch. Now what we have done since our acquisition of First Connect is we've invested Hippo technology into the infrastructure that First Connect had. So Hippo has built tools for independent agents and our internal sales people to really accelerate the quote to bind process. And we felt it was appropriate to offer these same types of tools, not just for Hippo policies but for non Hippo policies to the network of independent insurance agents that utilize the First Connect platform. So it's not just a traditional aggregator, it's an aggregator with significant technology that helps agents streamline the quote to bind flow and we monetize that through a commission split and other fees that we generate from other services that we're providing. So we think it's an important platform and it utilizes the technology that we already have.

There are no additional questions waiting at this time. So I will turn the call over to Rick McCathron, CEO, for closing remarks.

Thank you. I'm very excited and grateful for all of you of joining today. This was a fabulous quarter for Hippo and a fabulous year. We've made tremendous progress in a very short time frame. And we have strong conviction, more conviction than we've ever had, that the metrics of the company are driving us towards cash flow positivity, while continuing to grow the business. So we're excited to be presenting at next quarter and look forward to sharing the news. Thank you everybody.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.