Insuretech Disrupters: Hippo Yes...Lemonade Not Too Much
Insuretech Hippo went public out of a SPAC on and has had a rough period since the IPO dropping to below $5 from the SPAC par price of $10. Nevertheless it has a unique insuretech model and if it can execute on its plan it will produce excellent long term results.
Hippo was founded by Israelis Founded in 2015 by Israelis Assaf Wand and Eyal Navon Although it is headquartered in the US in late August it announced establishment of a major global innovation center in Tel Aviv
Insuretech: Where's the opportunity
Finntech/Insuretech are hot areas in the Israeli startup ecosystem including some publicly traded companies. The buzzwords of massive total addressable market and industry dominated by stodgy companies ripe for disruption seem to paint an easy bath for insuretech companies. But it actually not easy to make major inroads into the insurance industry there are many issues of capital, and regulatory relationships, building a diverse pool of insureds and managing the risk, dealing with claims and marketing.
A close look at two companies that are always mentioned as Israeli insuretech : Hippo and Lemonade shows that they are different in virtually every aspect of their businesses. Lemonade has been the subject of much gushing approval among you tube "influencers" for instance here and here. But there is much to question about their business model and whether they have distinctive "disruptive technology that will be hard to replicated. I will highlight Hippo's approach to the business and note the major differences between the two companies.
Hippo is laser focused on the homeowners andmarket adding related products in insurance and elsewhere. Without mentioning Lemonade by name this diagram from Hippo illustrates the difference:
Lemonade says it is moving into an entirely new product: auto insurance because then it can offer a bundled discount. Hippo is already doing this with metro mile.
Home insurance is a far better market than rental insurance: it carries higher
premiums, has high customer retention (average policy is held for 8 years) and it is a must buy for anyone with a mortgage. Lemonade says its growth will come from its renters insurance customers "moving up" to home insurance. With a $249 average premium vs $1200 for Hippo they have a long way to go. it's also not clear to me that new homeowners looking at insurance on their most important asset will use the company they used for renters insurance without insuring all aspects of policies from multiple companies.
Hippo: a truly unique approach to homeowners insurance:
Disruptive use of data: Hippo makes use of public records as well as information from aerial photos which allows it to offer quotes within 60 seconds
Innovative coverage Hippo has expanded its coverage more suited to contemporary lifestyles including:
House cleaners and sitters
Higher coverage for home office and home office equipment
Enhanced coverage on anything electric in the home.
Enhanced rebuilding coverage.
Coverage for damage caused by gas water or sewage lines reaching the home.
New products: Making use of their data Hippo has been able to expand to:
Non owner occupied properties
Homeowners Associations
Inspection insurance
Multiple streams of income and extremely capital light: Hippo offers insurance through its own company Spinnaker retains 10% of the risk and reinsures the risk. It has a reliable source of reinsurance. Mitsui Insurance was a venture investor in Hippo for $350 million and the agreement included provision for reinsurance.
Hippo also acts as a broker and agent for other insurers meaning commission income without any impact on the balance sheet. In August Hippo announced an alliance with ALLY Financial ( a vc stage investor)in which Hippo will act as the MGA (managing general agent for ALLY insurance. This will expand Hippo into all 50 states (currently 37) and doubles Hippo's underwriting capacity. Ally Financial was also a venture investor in Hippo. This means that in addition to premium and the associated risk,.
Its' builders program initially established with Lennar Homes (a vc investor) has been expanded to Hovanian both among the largest homeowners in the US.Hippo acts as an agent comparing quotes from multiple carriers and tailoring the proposal to the client integrating its smart home discounts. The insurance application is pre filled with most of the data needed and the insurance binding becomes part of the closing process for the home which can be done digitally. 50% of eligible Lennar homebuyers have opted to use the service. Hovanian homes, another of the largest builders in the US announced in September that it is joining the program. The program is unique to Hippo. Hippo also has a marketing arrangement with major mortgage originators. This puts Hippo in a unique marketing position since every home buyer with a mortgage must have homeowners' insurance.
it is important that homeowners insurance is a must buy for anyone with a mortgage. The average customer remains with their insurer 8 years. Of course neither of those is the case with renters' insurance.
Non insurance streams of income Hippo already has a home care program to help owners with any problems they have and currently has an approved contractor referral program. There are many similar services can supply generating non risk income.
Multiple marketing channels
In addition to its direct marketing channel,Hippo offers policies through agents, through partners such xfininity and adt (monitioring services) and builders and mortgage originators.
High Tech High Touch with Policyholders using the Internet of things. Hippo clearly has a lot of unique insuretech, but it is also distinctive in its contact with policyholders. Most insurers sell the policy and don’t have any contact with the insured unless there is a claim. Hippo’s philosophy is that the best claim is the one that is presented. Therefore it maintains contact with policyholders.
Hippo continues to monitor the insureds’ property and can detect major changes such as building an extension, turning a garage or a swipping pool. Thus they can contact policyholders and notify them that some of the changes they made would not be covered in their current insurance . Of course this creates an opportunity for increased premium earned but is also a win win for the client.
High touch for claims. Hippo does not depend on an anonymous “bot” to handle claims...unlike Lemonade. Instead it assigns a “concierge to the claimholder” who works with the client throughout the claims process. It is likely that if Lemonade moves into higher premium homeowners insurance where claims can be extensive and complex they will find a bot and an 800 number will not suffice.
SPACed and IPO fail.
Hippo went public as a SPAC in the midst of the market souring on that structure making its' August 6 IPO as a standalone company disappointing. was one of another SPAC fails and it was a significant one when it went public on August 6
. As the Israeli business website Ctech explains.
The first sign that the $5 billion valuation awarded to Hippo as part of the SPAC was exaggerated became very clear when some 83% of the capital raised by Reinvent Technology Partners was withdrawn, and $192 million was returned to investors. In fact, only 19.2 million shares out of the 23 million shares issued, were sold. Under the original SPAC merger plan, the insurtech company was expected to receive $230 million from the SPAC’s funds and another $550 million raised from institutional investors in the PIPE phase. Although Hippo still started trading at a value of $5 billion, as agreed with the SPAC entrepreneurs, it had to make do with “only” $550 million.
Underwriting fail
On August 16 Hippo reported 2 Q results. Despite strong metrics in growth there was a massive fail in underwriting as losses in Texas created a loss ratio of 160% and a loss for the quarter of $83.5 mln vs only.$ 24.9 mln in 2 Q 2020 Hippo had terrible geographic diversification which they have balanced out:
By every other metric Hippo's results were outstanding (all comparisons are 2Q 2021 vs 2Q 2020
Total generated
101% increase in premium written to $159 mln
Total generated in force premium of $501 mln +96%
Total Revenue $21 mln up 76%
88% retention rate
Efficient use of marketing dollars Marketing expense was up 29% yoy with revenue up 76%
But loss ratio worsened to 160% vs an extremely poor ratio of 102% the previous year (industry average in around 70%)
The impact of the spac fail and poor underwriting results resulted in a 50% decline vs. the SPAC price of $10.
One positive indicator is that CEO Wand purchased shares at $4
Obviously reducing that ratio is crucial and Hippo has made adjustments in geographic diversification, pricing and product diversification. With the extreme weather events of recent months and more likely in the future Hippo's loss ratio will be a focus of attention.
Higher proportion of non risk income: This is probably an overlooked positive for Hippo. It makes significant amounts of its money as a broker and agent and offering ancillary products and this is likely to increase. A closer look at Hippo's income statement shows commission income of $6.5 million and service and fee income of $4.1 million and net earned premium of $10.2 million. That shows a near even split between net earned premium and these other sources of income. Lemonade for comparison has next to no income outside of premiums and commission rebates from reinsurers.
Looking forward:
At the lower price Hippo's valuation looks attractive. A vote of confidence is the additional stock purchased by CEO Wand at $4. The company is constantly building its range of homeowner related insurance products and non insurance products. The makes its' income less subject to the vagaries of extreme weather and underwriting losses.
Hippo is extremely well positioned with large capacity in reinsurance from Mitsui for insurance it takes on its own books and increased capacity through its alliance with Ally as a managing general agent and as a broker through their builders program.
The marketing channels through major builders and mortgage lenders means very efficient marketing.
The fact that the business relationships are with venture stage investors Ally, Lennar and Mitsui indicates those relationships will be long term.
Hippo continues to build on technology both in partnership with outside vendors and a new innovation center in Tel Aviv.
But ....significantly improving underwriting and reducing loan loss ratio is critical.
Investors should however have a long term view. Hippo has close to $900 mln in cash and plans to continue to invest in growth rather than shoot for near term profitability.
From Silicon Valley Business News
Hippo is posting sales growth — and losses
Hippo projects its revenue will grow from $87 million this year to $151 million next year. Despite that, it expects to continue to post operating losses until 2025, by which time it projects its revenue will be around $789 million.
For now, the company's focus is on growing its business and solidifying itself as the one to beat in home-related services, rather than posting profits, Wand said.
"We're at a point where we are starting to build a moat on our competitors," he said. "We have an opportunity to extend that moat and deepen it and just build it bigger and bigger. I prefer to invest now, so that eventually it's so big that it's going to be a lot harder for people to basically chase us."
At present Hippo has been beaten down to half it's IPO value and has very strong growth rate by all metrics with significant diversification from insurance it takes on its own books. It has virtually no analyst coverage at this point...which might be an opportunity for investors.
Here are long term goals for Hippo from their pre IPO presentation. The goals on most financial metrics seem reasonable. But included in these numbers is a loan loss ratio of 60% far below actual numbers so far. Investors will likely be looking very carefully in future quarterly reports to see both significant improvement in their loss ratio and a continued trend of income not tied to Hippo taking the insurance on their books.
Investors looking to purchase Hippo need to have a long term perspective. They have the benefit that the stock has minimal analyst coverage. This is likely partially because many institutional investors are prohibited from buying stocks priced under $10. A possible edge to individual investors ..?