Is Hippo Stock A Buy?

Hippo Holdings Inc. (HIPO) is an emerging, newly floated InsurTech company looking to disrupt the lucrative homeowners insurance market.

Its share price took a tumble recently, falling from highs of $15 to its present value of just less than $5. The big question for investors is whether Hippo’s current price represents a quality discount for potential shareholders, or if the business is in terminal decline. 

Hippo Has A Strong Competitive Advantage

The insurance industry is particularly resistant to change. The field is dominated by some big, well-established brand names, and there are high barriers to entry for newer players.

This is an obvious problem for the likes of HIPO, but the company believes it has several competitive advantages that make it stand out from the crowd. The fact that there’s a perception too among customers that the insurance sector has failed to move with the times also means that policy-seekers are willing to give fresher alternatives a try.

In Hippo’s most recent Shareholder Letter, the firm outlined the 5 competitive moats that it’s banking on to give it the edge over its rivals.

Hippo Moats

The first is its Technology + Insurance Approach.

It’s here that Hippo claims its unique technology offerings will set it apart from legacy companies and other InsurTech peers.

Hippo’s ability to draw on full-stack technology systems – including Smart Home activation status and machine learning algorithms – enable it to deliver a fast and accurate online purchase experience that fulfills modern customers’ expectations, and create sophisticated feedback mechanisms that ensure the company gains underwriting improvements based on the evidence of how previous claims have been settled.

The second moat surrounding Hippo’s business is its Vertically Integrated Insurance Capabilities. This is where Hippo offsets its risk profile by using the services of an insurance carrier partner, in this case Spinnaker Insurance Company, which Hippo actually bought out in 2020.

By doing this, Hippo only exposes itself to 10% of the risk inherent in its policies at any one time. It also means it can run a capital- and asset-light business, letting it scale quickly if needs be, and injecting an element of agility into its day-to-day running.

Hippo’s third approach is its Diversified Distribution Strategy, which is a way to give customers a variety of ways in which to access its policies.

This omni-channel distribution philosophy works by selling either direct-to-consumer, through insurance partners – such as insurance agents and other traditional insurance companies – or through non-insurance partners, which can be any enterprise adjacent to the insurance industry, including mortgage originators, home builders, realtors and Smart Home technology providers.

The company’s Smart Home Program functions as a fourth competitive moat because it makes its customers’ homes more resilient to the kind of damage typically seen in the homeowners insurance market, such as that from fire, theft and flooding.

It also gives Hippo a funnel in which to gather important data from its policyholders’ IoT devices, further informing and refining its underwriting capabilities.

Finally, Hippo’s Dedication to Hippo Customers is a major element in the way that the business relates to its customers.

Hippo understands that, despite all its technological sophistication, the “human touch” is a vitality important aspect in building trust with its client base.

The company runs a Claims Concierge team that will make contact with customers when a major incident is predicted, helping homeowners shore up their defenses, preventing and mitigating as much as possible any resultant damage.

HIPO Q2 Results

Hippo reported its first ever earnings card as a public company in August, and the numbers reflected something of a mixed-bag. The headline news was a fairly dire $84.5 million net loss over the quarter, but there were plenty of positive undertones to brighten up the mood. 

For instance, Total Generated Premium was up 101% year-on-year at $158.7 million, and the firm’s In-force Premium of $500.6 million also grew by 96%.

TGP was helped along by tailwinds from growth in existing states, as well as the firm’s expansion into a further 14 new ones too. Hippo expects to have penetration in a total of 40 states by the close of 2021. The company also saw retention rates improve to 88%, and the firm signed off on a number of strategic distribution partnerships as well.

Conversely, revenue for the quarter was up just 76% at $20.9 million, although this seemingly low figure makes sense when you factor in the fact that HIPO only covers around 10% of the business’s total risk. Operating Expenses were running at a much lower fraction than its typical growth metrics elsewhere, at only 54%.

One less-than-positive story emerging from the Second Quarter was Hippo’s poor loss ratio of 161%. The loss ratio is an important measurement in the insurance industry, giving investors and insurers a number that connects the ratio of total losses with the amount of premiums earned.

If the loss ratio is below 100%, the business is profitable. If it’s above 100%, then the company is taking a loss on the settlements it is having to make.

Hippo’s loss ratio this year was up from a loss ratio of 106% for Q2 2021, suggesting the company is going in the wrong direction on this crucial metric. However, much of the blame for this underperformance lies with the Texas storms that afflicted that state in 2020/21, and which caused significant losses for all insurers operating there.

Valuation: Is Hippo Still A Buy?

Hippo isn’t resting on its laurels. The company is determined to roll out an ambitious product diversification plan, and has already begun by launching two new offerings in 2021. However, for the business to be viable it has to become profitable at some point.

Hippo is currently burning cash at a rate of $156 million annually, and its adjusted EBITDA for the quarter was a loss of $42.3 million – down significantly from a loss of $18.8 million the year before.

On the other hand, Hippo’s management is obviously confident of its future fortunes, since it raised its guidance for Total Generated Premium to $565 million from $544 million. Its cash position, despite its high cash costs, is pretty good, with $900 million of cash remaining at the close of the quarter.

Price wise, Hippo is certainly trading at an attractive discount. The company stock lost around 50% of its value over little more than two months, and appears to have found a local equilibrium.

But if the business can move towards profitability, there’s no telling where this company could go. Hippo isn’t the only insurer of its kind on the market – Lemonade (LMND) is doing similar things – but there’s a compelling case to be made that its unique 5-pronged moat is enough to see its stock rise over the coming years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.