Hello, everyone, and welcome to the Hippo Holdings Fourth Quarter 2023 Earnings Call. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to our host, Mark Olson, Director of Corporate Communications to begin. Mark, please go ahead.

Thank you, Operator. Good morning, and thank you for joining Hippo's 2023 fourth quarter earnings call. Earlier today, Hippo issued a shareholder letter announcing its Q4 and full year results, which is available at investors.hippo.com. Leading today's discussion will be Hippo's President and Chief Executive Officer, 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 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 historical results and/or from our forecast, including those set forth to 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 section 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. 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 of GAAP can be found in the fourth quarter 2023 shareholder letter, which has been furnished to the SEC and available on our website. And with that, I'll turn the call over to Rick McCathron, our President and CEO.

Good morning, everyone. The beginning of a new year always presents an opportunity to reflect on past and internalize its lessons before moving forward with renewed enthusiasm and focus. In two short years, we have nearly doubled our total generated premium from $606 million to $1.1 billion and more than doubled our revenue from $91 million to $210 million, all while lowering fixed expenses and improving the gross loss ratio on our Hippo Home Insurance Program by approximately 40 percentage points. Over the past year, we learned that our customers want the ability to buy not just Hippo Home Insurance policies from us, but other kinds of policies from third-party carriers as well. We have taken this to heart and refocused our consumer agency on finding the best policy for each customer regardless of the carrier. We believe that for our target customer, generation better customers, especially those who are buying a newly built home, a Hippo homeowners’ policy will be the best option. But if a customer is a better fit with another carrier, we will work to find the best option from across our 50 plus carrier partners. We also learned that there is a real need in the market for carrier services focused on servicing MGAs, where much of the innovation in the insurance market is happening. Our Spinnaker Insurance-as-a-Service has an industry leading platform and robust underwriting processes that have allowed us to grow at an accelerating rate in 2023, while avoiding many of the pitfalls experienced by our competitors over the past year. We are especially excited to have achieved this growth while expanding our operating margin in this already profitable portion of our business, truly a win-win for both Spinnaker and its MGA customers. And finally, we also learned that there are some risks…

Thanks, Rick, and good morning, everyone. 2023 was a remarkable year for Hippo. We doubled down on meeting the needs of our customers, streamlined our operations, focused on segments of the market where we have a significant competitive advantage and simplified our reinsurance structure. We exit the year as a business transformed by these efforts increasingly predictable and with far clearer visibility into both how and when we will achieve profitability. During 2023, we grew TGP from $811 million to more than $1.1 billion, an increase of 40%. More important than the growth itself was how we achieved it. The parts of our business that are less exposed to underlying weather and underwriting volatility grew at an accelerating rate while we significantly reduced our exposure to weather in our primary Homeowners Insurance Program. During Q4, the most profitable and predictable components of our business, Insurance-as-a-Service and Services collectively represented 77% of our TGP, up from 59% in the fourth quarter of 2021 and 65% a year ago. We expect these trends to continue in the coming year with TGP growing during 2024 to more than $1.3 billion with the Services and Insurance-as-a-Service segment collectively representing 85% of total TGP by the final quarter of the year. During 2023, we grew revenue significantly faster than TGP from $120 million in 2022 to $210 million in 2023, an increase of 75%. This growth was a result of increases in the scale of our Services and Insurance-as-a-Service segments combined with structural changes we made to our program specific reinsurance structure at HHIP. In 2022, we retained only 12% of the premium associated with our homeowners policies, but approximately 30% of the risk. In 2023, we were able to retain about 40% of the premium, but only 46% of the risk significantly narrowing the…

Thank you. [Operator Instructions] Our first question comes from Tommy McJoynt of KBW. Tommy, your line is open. Please go ahead.

Hey. Good morning, guys. Thanks for taking our questions. Just from a competitive standpoint, we're still seeing a lot of the largest competing homeowners insurers out there pushing through accelerating rate increases. Can you just remind us kind of where you guys stand on the rate increases and the adequacy that you have throughout your geographies? And then just how you feel competitively as the competition is seems to be accelerating their rate increases?

Yeah. Great. Thanks. Thanks for the question, Tommy. A couple different things, as you all know, we've been taking additional rate and underwriting actions for the last couple years. We did that in a far more aggressive stance after Q2 of 2023. Good news is, all of our rate filings are in. Most of them have gone live, but I will point out that going live takes effect for new business and renewal business on their effective date. So we're still relatively early in getting, the actual portfolio to rate adequacy, which is one of the reasons why these numbers I think are very exciting because we still have lots of positive benefit to work ourselves into the P&L. So, I do think others are taking rate. I think there's a lot of rate that was needed in the industry. We feel very good about our current rate level with those things already filed and already in flight, as I mentioned, to get back on offense. So we feel like we're in good shape competitively to write (ph) profitable business.

Okay. Got it. And how much of the improvement would you say that you guys have seen in underwriting has come from actual rate, which you can quantify versus the terms and conditions and the higher deductibles that you guys have pushed through? Is there a reasonable way to think about the mix of those contributions?

Yeah. It's an interesting question. So there are three primary factors that impacts our sort of forward-looking statements. First is terms and condition changes predominantly deductibles in high-cat exposed areas. Second, of course, is the rates, and third is, selective non-renewals on business that we are getting out of where we're overly concentrated. I think all of these things are very, very important for us to reduce that volatility in our portfolio, and that's been a singular focus of the company over the last six months. I don't think any one of them specifically is driving the positive results. I think they are all collectively driving the positive results.

And hey, Tommy. This is Stewart. I'll just add one thing to Rick's point just to clarify. When we think about our expectations for the future and the confidence we have in the numbers, we look at the expected results and then we look at the spread around the expected results. The changes in the terms and conditions and the selective non-renewals and high-cat areas are going to be things that are going to affect both of those, but predominantly the spread of the results. And the change in the rates are the thing is one of the things that's going to be driving the expectation sort of where actuarially, where do we think we're going to come out. So it really is a combination of all three -- all three factors.

Okay. Thanks. And then just last one I'll sneak in here. I guess, we're kind of already into March now, so it would be great to get an update on the first quarter, in terms of some of the potential storm activity and losses from that, we've seen some headlines around losses and flooding around Texas and maybe you guys have a decent exposure there. So anything you can share with an update on the first quarter?

All right. Thanks, Tommy. I think it's a little premature for us to be sharing Q1 results. At this point, I think, we'd be happy to talk about Q4 and 2023, but it's a little early for Q1.

Yeah. The one thing I would add is that, when we give guidance for the year, we take all current information that's available, and we've baked in our expectations on what's been happening with Q1 weather at this point in our current guidance.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Yaron Kinar of Jefferies. Yaron, your line is open. Please go ahead.

Thank you. Good morning, everybody. I want to start maybe with a couple of questions on the revenue guide. And if we could start maybe with HHIP, you're talking about switching to offense, but I guess I'm looking at two different numbers here. One, if I look at TGP, the guide there seems to be to downwards movement there like 20%, 30% down, whereas the revenue number I think is up quite significantly in the midpoint of the guidance range. So can you help us maybe sort things out there? How much of the revenue change is driven by change in reinsurance? How much of deploying offense should we expect to see flow through TGP and revenues?

Yaron, thank you for the question. This is Stewart. I think I'm happy to start and then I'm happy to let Rick add. I think you're right, as we think about TGP, the fastest growing pieces of our business in Q4 anyway, which to the extent that, that influences next year and the trends continue, it's important to understand that our Insurance-as-a-Service segment and our Services segment were the primary drivers of TGP growth in 2024, excuse me, in Q3. Let me start over. Those two pieces of our business were the primary drivers of growth in the fourth quarter of 2023. That trend is going to continue in 2024 on the TGP side. And that's important for us because those two pieces of the business are the most profitable and least volatile in the portfolio. The HHIP business is improving from a revenue standpoint both in Q4 and continuing again in 2024 because of the factors we talked about earlier, the rate improvements and that sort of thing, but also because of the change in the reinsurance structure. And what we're doing there as the loss ratio has come down, as the attritional loss ratio has come down, as the expected volatility around that number has come down, we are increasingly comfortable retaining more of the premium associated with the attritional risk within HHIP. And so we've transitioned almost entirely away from a quota-share reinsurance structure to a more traditional excess of loss reinsurance structure, which means that we're getting paid for the risk that we are retaining. In 2022 and 2023, we ended up retaining more of the risk functionally than we retained on the premium which was a key contributor to some of the losses from the HHIP program. And in 2024, we are correcting that. It won't happen on January 1, because some of the policies from the 2023 treaty year are still under a partial net quota-share structure. But in 2024, we're moving, as I said, we're moving almost entirely away from that and retaining premium that is far more in line with the risk that we're retaining.

Yeah. Yaron, if I could add. This is Rick. If I could add a few things to that, I would look at it almost in two categories. The current portfolio or historical portfolio and growth in the HHIP program in creating our new portfolio and/or expanding the portfolio that we already have that's profitable. So we continue to take the actions necessary to reduce the volatility in the book. That's efforts for our existing portfolio. When I mentioned going back on the offense, that's our comfort writing business in segments, in demographics, in geographies, and products where we believe we have a strong competitive advantage. In these areas, we have a tech competitive advantage, distribution competitive advantage, and a product competitive advantage. So with all of these components, that business we're doubling down on and going to grow in an accelerated fashion and over time will overtake the reduction in that historical portfolio's TGP. So we're really excited that we can continue, the efforts of HIPO to really write business profitably with these areas that we think are ones that we have a distinct advantage.

Got it. And Rick, maybe to your last comment there. So how should we think about kind of the inflection point when the pivot to offense starts overtaking the retrenchment in other parts of the business or other segments and geographies in the HHIP, namely when should we start seeing maybe TGP moving back up again or gross premiums written moving back up again?

Yeah. A couple of things. And just as a point of clarification, and I know your question was specific to HHIP, I think, as Stewart mentioned, we've always we never shut down for business in our agency segment. So they continue to sell homeowners policies from third-parties, and they continue to sell and cross-sell other products. In the HHIP section, we've already begun opening up in those areas that I mentioned where we have these advantages, and we will accelerate that opening as we continue to get comforts around the success of the portfolio, the existing portfolio. So, I think you're going to start seeing that the traditional business slows down in terms of its decrease and then you'll start seeing increases in premium for these new segments.

And can you offer a timeline around that, or is it too early?

Yeah. I would say, late ‘24, early ‘25 is when you start really seeing this inflection point, but there's growth that's happening all along the way.

Got it. And then, if I could, my second question was going to be just around the continued gap between the net loss ratio and gross loss ratio. I think we're going to see, when I look at your guidance even into 2025, I would have thought that with the changes in the reinsurance program and really a diminishing quota-share and much more XoL, we'd see that gap almost eliminated. Can you talk about that? Are there still loss quarters that we should be thinking of and how is that playing out?

Yeah. Thanks, Ron. I think as the 2023 treaty runs off, there will be small effects there, but I don't believe those are meaningful and significant. I think the major driver between the -- the difference between the growth and the net loss ratio as we get into 2024 and certainly beyond, it's just going to be the premium that we're ceding off for XoL reinsurance. And I think that's a pretty standard gap between gross and net. We do have a little bit of ‘23 quota-share that's kind of running down at this point. But again, that shouldn't be a factor for 2025.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Matt Carletti of JMP. Matt, your line is open. Please go ahead.

Hey. Thanks. Good morning. It's come through pretty loud and clear, the kind of the increased confidence you guys have and the path to EBITDA positivity. Can you talk a bit about kind of the exact drivers that got you to that increased confidence. We've talked a lot about pricing in terms of conditions and maybe that's the answer. But, are there other factors that play in? Stewart, you obviously highlighted some of the kind of more structural expense changes that have taken place. Just trying to understand kind of what's changed over the past few quarters that kind of you get better line of sight now?

Yeah. Good morning, Matt. Thanks for the question. I think it breaks down into a few categories of things all of which are moving in the right direction. I think on a written basis we are achieving slightly more rate than we expected in the fourth quarter and we expect that to continue. I think we also made more progress reducing losses in the fourth quarter than we had expected previously. Both of those things along with the structural changes that you mentioned in your question mean a better expected loss ratio in 2024 with lower volatility around that expectation than we had anticipated previously. I think beyond that, we just came through our 2024 reinsurance placement and I think that maybe the market was a little bit better than we expected and I think maybe our story was a little bit more well received by the reinsurance market than we had expected. So I think we have slightly improved reinsurance economics and structure compared to where we were a quarter or two ago. And then finally, we talked a lot about the cost saving initiatives, both people and vendor related in Q3. I think we were able to achieve slightly more benefit from the cost reduction initiatives, in the fourth quarter than we had previously expected. And so you'll see those work their way into our 2024 P&L progressively over the course of the year. So I think really all the drivers are moving in the right direction and we're feeling increasingly confident as we move into ‘24.

Okay. Great. And then one follow-up if I could. Rick, you talked about the competitive environment a little bit and leaning in where you have an advantage, right, whether it's geography, technology, demographic, whatever it might be. I think as we think about the market broadly, we still think of a lot of your competitors as kind of being on their heels, pushing a lot of rate, not looking to grow new business. In those areas that you're looking to grow, is that a similar picture or are these pockets of the market that maybe others view as less cat exposed and other things as well and there is more competition in those markets? Just trying to get a feel for the competitive environment kind of in the spots where Hippo is going to look to grow.

Yeah. No. It's a really good question. And so a couple of things. One, we were actually, I think, ahead of the curve from most of our competitors on changing given the hardening of the market. The main reason we were ahead of the curve is our technology actually allows us to put changes in quicker and get them to market quicker. So I would say, we had a six month to 12 month advantage in terms of timing to our competitors. That's one aspect of it. The second aspect of it, which we've talked about before, and this is one example, we do have comparative and competitive advantages in certain channels. So we've talked about our builder channel, as an example. We have a tech advantage because quoting a property that doesn't even have a street number or a street name requires significant ingestion of data from builder partners. We have a distribution advantage because we are getting those leads directly from the builder partners, and we have a product advantage. We have constructed a specific homeowners policy for new home builds. All of those are areas in although, what some may think is a niche, there's between $1 million and $1.5 million new homes being built every year. So if that's a niche, it's a massive one where we have four years of moat building and competitive advantage that we're doubling down on.

Great. Thanks. That's helpful. Appreciate it.

You're welcome.

Thank you. We have a follow-up question from Yaron Kinar of Jefferies. Yaron, your line is open. Please go ahead.

Thanks. Actually, two follow-up questions, if I could. One, when you say that the actions you've taken would reduce direct losses from hail events like 55% and if the same hail events occurred in ‘24 as they did in 2023, is that on a dollar basis?

Yeah, Yaron. That's on a dollar basis. So basically, if you just apply the exact same storms, the exact same severity, and the exact same geographies, and you roll our -- changes in wind and hail deductibles and selective non-renewals through the portfolio progressively over the course of the year with their renewal dates, we'll achieve a 55% reduction relative to 2023 and 2024, and then it rises to nearly 80% if you allow those changes to work their way all the way through the book. The reason for the difference is because these storms happen. We didn't really start the process of rolling these changes out until the fall of 2024. So not all of our portfolio policies will have had a chance to come up for renewal, by the time we get to hail season this year. So we'll still have some of that exposure, but it will be dramatically reduced in ‘24 and then even further reduced in ‘25.

Yeah, Yaron. This is Rick. Just to add to that and really with one of the previous questions, if you really think about when we started the work on reducing volatility in the portfolio, we actually started that work in 2022, and so we significantly reduced the volatility in 2020 -- from 2022 to 2023. Just 2023 was a horrible first half and a horrible hail season. So we hadn't made all -- we hadn't benefited from all of the actions that we had already been taken. So now as we look forward to 2024, we have all of the 2022 actions already in the portfolio. We have a portion of the 2023 actions that Stewart mentioned that we started in October, as a result of our Q2, partially in and then they'll be fully in to the portfolio by the end of 2024. So we've got a stacking effect of two different years' worth of efforts to get us highly confident in, in our projections.

And the loss ratio impact should be even more pronounced, right, because of the premiums earned components continue to grow?

I think, yes, that's right, because we'll be retaining more of the attritional or that's the premium associated with the attritional losses.

Okay. And then, I guess going back to revenues for a second. So in the Services segment, the guide there is for a bit of a reduction in growth relative to where you were in 2023. And I understand it's a very, very young business that you're still ramping up. So I guess on the one hand, I could say maybe you have a larger base and growing off of that base is more challenging. On the other hand, it's so young and so, in ramp up mode. So why shouldn't we see the same level of growth as we saw in ‘23, if not better, when we look at ‘24?

Yeah. Yaron, that's a great question. I think it gives us an opportunity to clarify maybe one of the drivers that's going on that, that should be clear to everybody, but because we have some eliminations in the numbers between segments may be a bit confusing. So one of the headwinds for our Services segment is the pullback and the pause in underwriting that we've had at HHIP. So our Service business sells policies that are third-party carrier policies and it also sells HIPO Home Insurance policies. And so the third-party business is the primary driver of growth in the fourth quarter of 2023. It will continue to be the primary driver of growth, as we move into 2024 in the beginning of the year. When we start to reopen some of the segments of our HIPO Home Insurance policies that Rick mentioned, then you'll start to get a tailwind effect from that. But the Services business grew 20% TGP year-over-year in the Q4 despite the fact that we had paused most of the Hipo premium. So I actually look at the Services business and the growth that we're seeing there as a bright spot. When you understand that there was a headwind associated with the HIPO Home Insurance Program pause.

Makes sense. Thanks for the clarification.

Absolutely.

Thank you. At this stage, we currently have no further questions. So I'll hand back over to Rick, CEO, for any closing remarks.

Great. Well, thank you very much for your attention. We look forward to chatting with you next quarter. Have a good day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may disconnect your lines.