Hippo Holdings Inc. (HIPO) on Q2 2021 Results - Earnings Call Transcript
Operator: Good evening. Thank you for attending the Hippo Holdings Q2 2021 Earnings Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Chris Maloney with Hippo Thank you, he may proceed.
Chris Maloney: Thank you, operator. Good afternoon, everybody. And thank you for joining Hippo's second quarter 2021 earnings conference call. Earlier today, Hippo issued a shareholder letter, announcing it's second quarter results, which is also available@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 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 is 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 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. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in Hippo's SEC filings, not place undue reliance on forward-looking statements, as Hippo is under no obligation and expressly disclaim any responsibility for updating, altering or otherwise, reviving any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Running through some of the technicalities associated with the recent public listing events, the transaction was accounted for as a reversal of the capitalization in Reinvent Technology Partner Z will be treated as the acquired company for financial statement reporting purposes. Hippo Holding Inc. prior to the business combination was seen as the predecessor in Hippo after the business combinations will be the successor SEC registrant, meaning that Hippo's financial statements for periods prior to the consummation of the business combination will be disclosed in Hippo's future periodic reports. No goodwill or other intangible assets were recorded in accordance with GAAP. For more details, please see our filings with the SEC. Additionally, during this conference call; we will also refer to non-GAAP financial measures, such as tele-generated premiums and adjusted EBITDA. Our GAAP and a description of our non-GAAP financial measures, with a full reconciliation to GAAP can be found in the second 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, CEO of Hippo.
Assaf Wand: Thank you, Chris. And thank you all for joining us today. We are incredibly proud to report on Q2 financial results for the first time as a public company. This was a quarter that was not only reflective of what we told you we will do, it was reflective of who we are. Our Q2 performance shows Hippo's growth strategy coming to life. We achieved 101% year-on-year growth in total generated premium during the second quarter reaching $159 million. Our Q2 results demonstrate the power of the Hippo platform and the power for Hippo strategy; and I couldn't be proud of the effort and determination of the Hippo team that drives these results. Looking at we have a growing visibility and confidence that we will not only meet the expectations we previously set for the year but exceed them. Accordingly, we are increasing our full year guidance for token generated streaming from $544 million to $565 million. At Hippo we are transforming the home insurance market with fundamentally different experience that customers are rapidly embracing. The homeowners policy from Hippo a better more modern policy. Before you pick on Hippo it's customized and designed with the consumer in mind. The fine experience with Hippo is technology-enabled to be the easiest policy purchase on the market. And Hippo policies can be both, smart home technology and a proactive partner to help you protect your home. And lastly, when God forbid something bad happened, the Hippo team unveiled our customer's future business by being there for them with care, efficiency and effectiveness in the family . This strategy has allowed us to continue to take share in this vast $110 billion market. Hippo surpassed $0.5 billion of total generated premiums in force at the end of Q2 and 96% increase over the past year. Although we are still at the beginning of our journey, our growth strategy is firing on all cylinders, and we believe we are primed to continue sustain growth for the long-term. And this is not just the vision, it is our mission; and it's not just incremental framing that we deliver in Q2. We also continue to build an increasingly solid foundation for future though. We expanded into new markets, we started new partnerships, and we launched new products in their own vertical continuing our work to build and scale the industry's first vertically integrated on protection platform. We executed on our geographic expansion plan, launching our products in three new states, and we are on-track to achieve our goal of 40 states by the end of 2021. We continue to strengthen our omni-channel distribution strategy by launching new distribution partnerships with two of the Top 10 insurance carriers, the Top 50 homebuilder, the Top 5 loan originator and two leading Smart Home provider. Further, we've doubled our MGA underwriting capacity by signing partnerships with Ally Financial and Inclined P&C to serve as additional carrier; thus reducing the capital that would otherwise be needed to support our future growth. Finally, we launched three products; inspection protection for homebuyers to protect against issues missed during their home session, and second, our first ever commercial product offering insurance to homeowners association in the 350,000 community across the U.S. In all insurance, unlike in other lines, weather is one of the biggest drivers of short-term loss ratio; therefore, a diversified portfolio of policies enables a more stabilized result. Expansion and diversification proceeds one state at a time is regulators approve new programs like Hippo. Just like when you build a diversified portfolio of stocks to reduce volatility, as we expand into more estate and diversify geographically, our loss ratio should become more and more consistent over time. In a very real way, the success of our dynamic growth strategy paved the way to using our long-term loss ratios and improving bottom-line profitability. Let me conclude by saying that the team at Hippo is very pleased and proud to now be trading as a public company. One; the form of ownership has changed; the conviction and determination of our team have not. We are growth driven company that is determined to transform the home insurance business. We will offer Hippo policies across the United States; we will drive growth and focus on bottom-line metrics as we grow. We will carefully deploying the more than $900 million that we now have on our balance sheet to enhance our product offering and growth in order to become a leader in this industry. As I noted earlier, home insurance is a vast $110 billion industry, and we at Hippo, have now crossed the $500 million mark. While this is a great milestone for the company, you know, just beginning. Thank you. And let me now turn it over to our CFO, Stewart.
Stewart Ellis: Thanks, Assaf. So Assaf mentioned, Q2 results show our strategy coming to life, with balanced growth across channels and across geographies. Let me start with total generated premium, which represents the total amount of new and renewal business in a given period across all our platforms, including Hippo policies, agency policies we sell on behalf of third-party carriers and other programs that we support through Spinnaker, the carrier required in September of last year. Total generated premium in Q2 grew 101% year over year to $158.7 million. The in force version of this metric total generated premium in force grew 96% year over year to $500.6 million. Total generated premium is a great indicator of the long-term value we are building at Hippo because it is recurring, predictable, and fun, affected by things like severe weather, which in home insurance can create short-term and seasonal fluctuations that impact loss ratio and profitability. I mentioned that the growth was balanced across channel. For the homeowners portion of our business, independent agents and other insurance companies represented 68% of our new generated premium, 25% of new generated premium came from our direct-to-consumer channel, and 17% came through partners like homebuilders, mortgage servicers, and other players in the real estate and home protection ecosystem. We also continue to grow and diversify our business across geographies, to reduce our concentration in any one area. For example, Texas represented only 19% of new generated homeowners premium in Q2, down from 33% in Q2 of last year, and from 65% in Q2 of 2019. Expanding distribution channel relationships and increasing geographic coverage are two areas where our technology platform provides an advantage. Because our platform allows us to bind a policy via a custom Hippo ATI, customers can purchase the policy from us, in many cases, without ever leaving the website of one of our partners, a capability that presents Hippo with unique distribution opportunities. Because we own and control our own technology stack, we can also launch in new geographies much more quickly than we otherwise would if we were dependent on a third-party policy management system. One of the key drivers of our long term-unit economics customer retention remained strong and continues to improve this quarter. We measure retention of dollars of premium from a cohort of customers that renewed in the current period divided by dollars of premium generated by that same cohort of customers a year ago. Our year one homeowners retention grew to 88% during Q2. And cohorts in their second and third years continue to improve beyond this level as they aged. Our revenue, which grew 76% year over year to $29 million for the quarter, is a mixture of net burned premium for risk we retain on our balance sheet, commission income from premium, where we are not the primary bearer of the risk, as well as service fee and investment income. The growth in revenue was driven primarily by the continued growth in our total generated premium. Our gross loss ratio this quarter was 161%, compared to 106% in Q2 of 2020, driven by three main factors. First, we experienced severe hailstorm in parts of Texas where we have concentration in our book. We have a normalized catastrophic weather load built into our actuarially predicted loss ratio, but the hailstones in Q2 were well beyond normal level. According to industry data, Q2 residential cap losses in Texas were the third highest reported in the past 24 years, which is in property claims services began breaking out losses by line of business. Second in Q2, we had a small amount of negative developments in the anomalous Texas Winter Storm Uri. Well, this contributed an incremental 14 percentage points to our gross loss ratio, it did not negatively affect our P&L on a net basis, underscoring the benefits of our reinsurance strategy. Finally, like other homeowners carriers, we experienced a significant increase in loss severity year over year to the steep but temporary industry-wide disruptions in supply chain, increases in building material costs and tightening of labor market as a result of the COVID-19 pandemic. Q2 operating expenses, excluding loss and loss adjustment expenses, as well as other non-cash interest and other expenses, increased 54% from prior year to $47 million. Of this, $22.2 million relates to sales and marketing, an increase of $4.9 million or 28%, compared to prior year. The other major reason for the increase is growth in headcount, as we continue to add new Hippo employees across all core functions. As of Q2, our headcount was 603, up to 117% from 278 last year. Our adjusted EBITDA loss for Q2 was $42.3 million, an increase of $23.5 million compared to Q2 last year, driven by the increase in loss ratio, and continued investments with our platform and team to support our long-term strategy. Finally, as Assaf soft mentioned above, we ended the quarter well capitalized and in a strong position to continue executing on our plan and investing in future opportunities. Including the net proceeds from taking the company public, we had total cash and cash equivalents and investments at the end of Q2 of over $900 million. Looking forward, we remain confident in the execution of our growth strategy and believe we will exceed the forecast we shared previously. As Assaf mentioned earlier, we are increasing our full year guidance for total generated premium from $544 million to between $560 million and $570 million with a midpoint of $565 million. I'd now like to turn it over to Rick McCathron, our President, to put Q2's loss ratio in context, and to say a bit more about the progress we made in the quarter to bring our actuarially indicated loss ratio down to our long-term target level.
Rick McCathron: Thanks, Stuart. Loss ratio is one of the most important drivers of our long-term profitability. This metric will vary year-to-year, and quarter-to-quarter due to seasonal impacts from weather. In particular, given the current geographic distribution of our customers, Q2 typically represents the seasonal high for severe weather. This is why a primary focus of ours is on geographic diversification to drive down the volatility of this metric overtime. Beyond geographic diversification, we have been tightening our underwriting model, expanding our product portfolio, and optimizing our rates to ensure the right price for the right risk. It is important to recognize that we are trying to build in 10 years what incumbents have built over decades. The difference between the average age of Hippo's customer cohorts and those of legacy players makes it challenging to compare their performance with ours. I am pleased to report that during Q2, despite the unfortunate weather, we have made great progress on initiatives that should significantly improve our long-term loss ratio. And we are encouraged by leading indicators to suggest these actions are already having a positive impact on future loss numbers. I want to highlight three examples of the many concrete steps that we are taking in this area; first, geographical diversification out of Texas. As recently as 2019, approximately two-thirds of our new homeowners premium was written in Texas. We have deliberately focused on growth outside Texas in order to achieve a more geographically balanced portfolio. Overtime, this should dramatically reduce our exposure to the kinds of weather events that we experienced in Q2 and lower the volatility of our loss ratio. Second, because of the flexibility of our technology platform, we have the ability to incorporate new data sources, both pricing and underwriting quickly, and we have done just that in Q2. While it will take some time for these actions to positively impact our overall loss ratio, early indicators are encouraging. During the first six months of the year, our early term frequency in both Texas and California, have shown significant improvements. In these two states, where we have been focusing most of our underwriting actions, early term loss frequency has improved by 40% and 37% respectively versus 2020. Third, we have also been diversifying our product portfolio within the homeowners vertical, our H05 product for newly built homes where we have strategic partnerships with some of the largest homebuilders in the country have been performing exceptionally well with loss ratios at approximately 40% over the past 12 months. It is a key competitive advantage for us and we've been doubled down our efforts to expand it's share of our overall book which has helped this product grow five to six times faster than our more mature homeowners products. Our proprietary API's enable our technology to integrate with homebuilder sell cell systems, so our partners can provide their customers a simple, personalized insurance offer precisely when their customers are in the market for our policy. This is an example of how we leverage technology and form innovative distribution channels to access better risks. And fourth, we are taking strategic actions to ensure our rates are adequate and aligned with the increased severity and inflationary trends we have been seen recently across the industry. Lastly, we have significantly deepened our bench of top industry talent, adding five leaders in the area of risk, underwriting, actuarial and insurance product management from respected industry players such as USAA, CHUB, AIG, SwissRe and RenRe . We are confident and have early indications that our strategy to reduce loss ratio will get us to our long-term targets. With growth and diversification, we expect our loss ratio to improve significantly; it will take time but given the traction and performance of our growth strategy, I am confident that we will get there. And now, let me turn it back over to Assaf for some final words.
Assaf Wand: Thanks, Rick. And thanks to everyone for joining Hippo's first earnings call today. In summary, this is just the beginning for Hippo as our Q2 results proudly demonstrate we have the right strategy, team and the resources to execute our growth strategy. We are on a path to gain significant share and transform this massive market. We believe Hippo is the future of home insurance. With that, we'd be happy to take your questions.
Operator: We will now begin the QA session. The first question is from Christopher Martin with KBW. Please proceed.
Christopher Martin: Hey guys, congrats on the IPO and posting your first earnings call. Now, I'm sure there seems to be a bit of relief to go through the last few months and get to here today but it's probably just going to get harder because everything is maturing and growing at the same time. But I have two questions here; and the first one I'd like to begin with, as soon as the media has picked up on and what some investors have been interested in; can you comment on -- I guess you'd say that seemingly high level of redemptions after the IPO? And does this have any impact on potential growth of the company or strategy that you guys might be implementing?
Stewart Ellis: Hi Chris, this is Stewart here. Happy to speak to this one. I think first, it's important to understand that we structured the transaction to take us public with a large pipe relative to the size of the cash and trust, and so pro forma for the transaction at the end of the second quarter, as we said, we have more than $900 million on the balance sheet. And the short answer to your question is that the redemptions don't change any of our plans with respect to investing in our business over the next few years to pursue our long-term goals. I would also like to highlight one thing that we mentioned in the earlier portion of the call is that we have also just signed partnerships with both, Ally Financial and Incline as carrier partners for our MGA, and that in and of itself will also reduce the capital that we otherwise would have needed to support our growth. So while the redemptions weren't obviously what we hoped, we don't expect that they will have any impact on our ability to invest in the future or to pursue our plan.
Christopher Martin: Okay, yes, great. That makes a lot of sense, especially those announcements last week which I imagined didn't come online 13 days ago, whatever it is now; it's great. And the other one is just looking at the growth of premiums that have -- actually have outpaced revenue here; and some of the significant increase in headcount. We've seen some commentary in the personal lines players like some by your peers and some other Top 10 names. And even in the -- like advertising platforms themselves have talked about customer acquisition costs are on the rise, and kind of either a near-term hindrance to growth or even scaling back in attempting growth because of what the market is right now and the big marketing advertising sales. And then, you had mentioned there the increase in sales and marketing expenses were not aligned necessarily with how much growth you've had. And did you -- what have you sort of seen in your target markets and what does that kind of mean for broader expansion plan if are seeing this type of expense growth on the customer acquisition side? And are there anything that's been outside of your expectations?
Stewart Ellis: Thanks, again. Chris, this is Stewart again, I'll take this one as well. I think first thing to understand about Hippo as distinct from some other players in the industry is that we've always pursued an omni-channel distribution strategy. It's been our core belief to design our entire experience from the very beginning around what is best for our customers. And on the distribution side, that means that we want customers to be able to buy a policy from Hippo where they want to buy a policy from Hippo; that might be through our website, it might be by calling us on the phone, it might be through an existing agent relationship that they already have. It might be from a home builder that they are just buying a new home from, like Winlock . There are a lot of different ways that people might want to buy a policy and we want to be present in all of them. One of the benefits to us of the omni-channel distribution strategy is that it is resilient to fluctuations in advertising costs or other things that might be going on in any one component of our channels. And it's also cash-efficient in a way that helps us to expand to new geographies, since the partner and the agent channel in particular are things that we pay for based on collected premium over time. So the question about advertising expenses and acquisition costs is I think important to keep that in mind. We're always very disciplined as we think about spending money in direct-to-consumer advertising channels. That said, we have not seen increases in our own sector for our business in lead costs or other things in the funnel. So we feel very, very strongly about our distribution strategy. We're not scaling back our investment in sales and marketing. In fact, because of our strong unit economics and high customer retention, we feel like now is the time to get aggressive. We want to continue to invest going forward. I think you'll start to see us spend more building and improving and expanding the nationally-recognized brands that we hope to build so that everyone can start to hear the Hippo story directly from us. So, we feel good about our distribution strategy and we feel like we're on track.
Christopher Martin: Awesome, that's great. Thanks a lot, and I'm sure there will be something -- a lot more in the future.
Stewart Ellis: Yes. Thank you, Chris.
Christopher Martin: Okay.
Operator: Thank you, Mr. Martin. The next question comes from Arvind Ramnani with Piper Sandler. Please, proceed.
Arvind Ramnani: Hi, guys. Thanks for taking my question. I just wanted to really get your thoughts on bundling. You announced the partnership with Metromile. But I wanted to get your thinking on why are you taking a more focused approach to really launching your own order product versus kind of bundling with Metromile?
Assaf Wand: Thanks, Arvind. This is Assaf. I'll take this one. I actually want to break it down into two components. There's a micro and a macro component. So, on the micro-level, we just believe in focus and our focus is to be the best home protection platform in the world. Now, what you realize is that there's actually low correlation between some of the different lines. For instance, auto is the high frequency and low severity, and home is low frequency and high severity product. There's also some misalignment and it's not exactly the same claim organization, it's not the same people that need to do it. It's not the same underwriting experience. It's just a different line where there's not enough synergy. However, we always want to offer our customers the best policies in the market for what they need. We do not create products if we don't have enough conviction inside, that we can offer our customers something which is utilizing technology better, using data in a better way, or just giving them a better customer experience. In this case, for auto, we just couldn't get that conviction. Hence, we partner with some of the best of providers in the market, Progressive, Facebook , Metromile is some of our customers in data approach for how to do everything. So, our customers are still going to get abundant. They're just not going to get too further that are being produced by Hippo. So, that's under micro-level. Now, I want to raise another point, which is our thinking about it in the macro-level. What you're seeing in trends in the world, especially in the world of fintech, is the world is actually unbundling component. And you also see their insurance because for every Geico product that is being sold by SMCU , I'm bundling someone else's home and auto bundle. But back to the point of this unbundling trend; just think about your life before, I don't know five to 10 years ago, Arvind. You used to go to your bank and in the bank used to have your savings and your checking account. You used to take your credit card, you used to take your student loans there, your mortgage, you're used to the old trading in the bank. Everything used to be bank-centric. But right now, moving forward five to 10 years further, your credit card is with the airline that you're using, you take your student loan from one provider, you take your mortgage from another provider, and you're trading with another company, the world is moving to an area of best of breed products that are very customer centric and are easier for customers to actually engage with. And that's what we believe would happen in insurance and we have a lot of belief that people is going to be one of the biggest benefactors of this trend.
Arvind Ramnani: That's perfect. Thank you.
Stewart Ellis: Thanks, Avi .
Operator: Thank you, Mr. Ramnani. The next question comes from Matt Carletti with JMP securities. Please, proceed.
Matthew Carletti: Hey, thanks. Good afternoon. Thanks for taking my questions. First off, I just want to follow-up on some of Chris' questioning on customer acquisition costs and just ask kind of a follow-on in the sense of can you talk a little bit about how you view LTV to CAC by distribution channel? Are they relatively similar or are there wide variances and kind of which channel a customer comes through to Hippo?
Stewart Ellis: Hi, Matt. This is Stewart, I'll take this one. There are some variances and I think they spring from the different structural ways that these channels work. So, in the direct-to-consumer channel, it works like a traditional customer acquisition funnel, where we will spend the advertising dollars upfront to bring people to the website, or to bring people to the phone, and some percentage of those leads will turn into customers. And so when you have a situation like that, you have acquisition costs up front and then you earn that acquisition cost back over the life of the customer. Typically, customer lifetimes and homeowners insurance are pretty lengthy relative to a lot of other consumer products. It's a service that when people sign up, they tend to stay with their home insurance provider. And so the average industry customer lifetime is in excess of eight years. And when we look at our data, we see very high customer satisfaction with the very high net promoter scores and we see very high premium retention. And I mentioned our first year retenti0on in this quarter was 88% on a premium basis. And for cohorts that have entered their second and third years, the numbers just go up from there. And so, we have upfront acquisition costs in the direct channel followed by being able to benefit from the full economics of that customer down the road. In the other two channels, the economics work slightly differently. We don't pay anything upfront to external parties to acquire a customer through an independent agent, or another insurance company, or through a partner. We share premium that is collected from those customers over time. So, in the purest sense, there is no LTV to CAC, because there's not really any CAC. The way we think about this internally, is we take the first year of premium that we would share with that partner and we treat that as customer acquisition cost, even though it's not marketing capital at risk. And when you do that math, it starts to approximate what you see in a traditional technology LTV to CAC ratio, the producer and the partner channels, when crafted on this basis, have a slightly higher LTV to CAC than the direct consumer. And so the way I tend to think about this is we pay more for a direct to consumer customer and then we get to keep more because the lifetime value is higher. And in the other two channels, because we pay a little bit less, the lifetime value is less. On a blended basis, we think it's five to six times at our long term loss ratio targets. The direct will be slightly lower than that on a ratio basis and the other channels are going to be slightly higher than that on a ratio basis. But all of this, the higher and attractive unit economics for us stemmed from the fact that we have very high customer retention relative to some other lines of insurance.
Matthew Carletti: Good. It's really helpful. Thank you. The next question I want to ask was you commented a little bit about the ALLY and Incline partnerships. I was hoping that beyond capital leverage, can you peel back the onion a little bit on your strategic thinking there? And then from just a numbers perspective, should we expect any real loss ratio impact as those come on or any impacts related to some of the other underwriting actions I think Rick spoke about.
Rick McCathron: Hey, Matt, this is Rick. I'll go ahead and answer that question. As you mentioned, Stewart already addressed sort of that support of our capital life structure, which reduces the amount of capital we need and the use of our own capital to support our growth. But what the ALLY and the Incline partnership does is it essentially doubles our underwriting capacity, which certainly makes our capital light structure work well. The question that you were, I think driving towards is what does it do from a loss ratio or underwriting perspective? In the use of multiple carriers, allows us to further segment our underwriting customers, both existing and new customers across multiple underwriting companies. So, over time as you have segmented business further, you generally see a more positive underwriting result because you are placing them with the right carrier, the right risk, the right underwriting guidelines, et cetera. So, we believe that having multi-carrier does support improvements in our underwriting model.
Matthew Carletti: Okay, thanks. And then last one, if I can, just want to touch on a loss ratio. Can you break it apart for us and help me with -- you mentioned a few items, obviously, the hail in the quarter in Texas, some adverse development from Uri last quarter, which I think there's a number put on that 14 points. And then kind of this general severity from supply chain and labor shortages, things like that, can you help us quantify kind of how much impact the hail had in the quarter and then your best assessment of kind of how much that severity is impacting things currently?
Stewart Ellis: Thanks, Matt. We generally have not broken out the specifics of individual storm events or series of storm events. We did break out Uri on a gross basis this quarter. The development there simply because we wanted to help people understand a little bit because that was such an anomalous storm. But on a net basis, Uri really didn't have any negative development to us. And so the impact, I think in in Texas, it's important to understand for us because our book of business is more concentrated in Texas, than, than in other areas of the country because historically, we started in California and Texas. And so, in 2019, something like 55% of our new premium was coming from Texas. But we've been diversifying away from Texas over the past couple years to 33% in Q2 of 2020, 19% in this quarter. We will have some legacy exposure to severe convective storm risk, the hailstorms that happened in Q2. What I can say, as I mentioned before is this was truly an unusual year in the second quarter. It was the third worst on record since PPS started breaking out the loss ratio. The growth that we are experiencing in areas outside of Texas, though, should bring this down as a source of volatility in our overall portfolio going forward and the other things that we're doing on the loss-side operationally to add new data sources, to bring on new smart home initiatives to bring on products within homeowners like the HO5 and the HOA products that are not going to be subject to this kind of loss risk, I think will help us over time. But this is obviously something historically Q2 has been a bit of a seasonal peak for us. And this was just a bit higher peak than we've experienced in the past.
Matthew Carletti: Okay. And then from a broad severity standpoint, is there any way you can help us think about kind of your view there of what that's driving higher? And then obviously, I would assume that it's a lot of just pricing to try to combat that going forward?
Rick McCathron: Yes, Matt, this is Rick. I'll go ahead and take that one. Yes. It's clear, I think every insurance company in the sector is talking about increasing in severity predominantly because of supply chain issues, because of labor shortages. COVID had a massive impact on that. We are seeing that go down. So, we think that that was a temporary blip. But we of course monitor that significantly. No, we're constantly monitoring both frequency and severity in numbers. We're constantly looking at how we can reduce those beyond just pricing actions. When Stewart mentioned our product expansion and as I mentioned in the opening comments are doubling down on our HO5 new construction, our strategic partnership with Lennar, we're putting in IoT devices, water shut off valves , all of these sorts of things in new construction houses that dramatically improved the loss ratio for those.
Matthew Carletti: Thank you very for the color. Very helpful. And the best of luck.
Assaf Wand: Thanks, Matt.
Stewart Ellis: Thanks, Matt.
Operator: Thank you, Mr. Carletti. The next question comes from the line of Christopher Martin with KBW. Please, proceed.
Christopher Martin: Hey, guys, thanks for taking my call. My question is here again, circling back. If you can comment on with all the things that are in your numbers you've given, the growth you've shown and then with your discussion around the flattening of the loss ratio, the breakdown of geographic diversification, the tightening of the model for rate optimization, looking at balance sheet approach. Are you able to comment at all on a path to profitability? As in EBITDA level or not necessarily, obviously, explicit guidance, but just a discussion on getting towards that breakeven and then where it goes from there in the future?
Stewart Ellis: Yes. Chris, this is Stewart. We did put a forecast out publicly earlier this year. So, I direct folks to that for historical reference. But I want to talk for a moment about the way we think about the path to profitability. We know that at scale, a well-diversified book of business that is properly-priced, where we defined risk, the right the right price to the right risk, there is an opportunity to be profitable in home insurance. We also know that by partnering with our customers and using the technology that we have that Rick mentioned and that we've talked about previously, it is possible to help our customers avoid losses from happening in the first place. And our belief is that when you combine that true customer-centric model, the technology that we use that gives us access not only to the ability to help our customers avoid loss, but to preferred pools of customers through partners like Lennar and other homebuilders, remortgage servicers, where people aren't actively shopping for home insurance, that there is an opportunity to bring loss ratio to an advantageous level. What we believe internally is that we are at the very beginning of taking share in this incredibly large market. And as long as our return on investment in sales and marketing and in customer acquisition is high, we should continue to invest aggressively because we're nowhere close to bumping up against market share constraints. And one of the biggest drivers, as we've mentioned, the high return on investment is the fact that our customers are having a good experience with Hippo and they're staying with us. And so when we have strong unit economics and we have a business that we know can be profitable on a long-term basis, it makes sense to invest in scale. And so, we will continue to be opportunistic. As I said, we're at the beginning of the journey here. So, we think that as long as there's opportunity, it makes sense to continue to invest. Obviously, we're very disciplined as we think about spending money on growth. But in a real way, as we've talked, growth is the path to profitability. The more geographic diversification we have in our business, the less volatile our loss ratio will become and the greater confidence we will have in continuing to make those investments. So, we see a very virtuous cycle here that we'll be able to keep going for many years. Rick, do you want to say anything in addition to this question?
Rick McCathron: Yes. Thanks, Stewart. And, Chris, thanks for the question. A couple other things, as I mentioned earlier, the leading indicator of what we're doing is early term losses, the frequency of early term losses. And the actions that we have taken clearly show an improvement. When you're looking at the reduction of 40% and 37% respectively, you're really seeing a reduction in early term losses. And one thing to remember is that our cohorts are very young compared to other cohorts. As those cohorts age over time, and we have a larger book, a larger portion of our business that's renewal business, that in itself in addition to the geographical diversification and the growth in other places will absolutely get us where we need to be.
Christopher Martin: Awesome, that's really great and thanks a lot, and good luck.
Stewart Ellis: Thank you, Chris.
Operator: Thank you, Mr. Martin. Thanks, everyone for joining. This concludes today's conference. You may now disconnect.
