HIPPO HOLDINGS INC. – 10-Q – HIPPO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, references in this "Hippo Management's
Discussion and Analysis of Financial Condition and Results of Operations" to
"we," "our," "Hippo" and "the Company" refer to the business and operations of
Hippo Enterprises Inc. and its consolidated subsidiaries prior to the Business
Combination and to Hippo Holdings Inc. and its consolidated subsidiaries
following the consummation of the Business Combination.
Overview
Hippo is a different kind of home protection company, built from the ground up
to provide a new standard of care and protection for homeowners. Our goal is to
make homes safer and better protected so that customers spend less time worrying
about the burdens of homeownership and more time enjoying their homes and the
life within. Harnessing real-time data, smart home technology, and a growing
suite of home services, we have created an integrated home protection platform.
The home insurance industry has long been defined by incumbents that we believe
deliver a passive, high- friction experience to policyholders. We view these
incumbents as constrained by outdated captive-agent distribution models, legacy
technology, and strong incentives not to disrupt their businesses. Accordingly,
the industry has not seen meaningful innovation in decades. We believe this
results in a flawed customer experience that creates a transactional,
adversarial relationship-one that pits insurance companies and their
"policyholders" against each other in a zero-sum game. The outcome of this
misalignment is an experience that is out of touch with the needs of modern
homeowners.
As a digital-first, customer-centric company, we offer an improved customer
value proposition and are well-positioned to succeed in this growing, $110
billion market. By making our policies fast and easy to buy, designing coverages
around the needs of modern homeowners, and offering a proactive, white-glove
claims experience, we have created an active partnership with our customers to
better protect their homes, which saves our customers money and is expected to
deliver a better economic outcome for Hippo.
Beyond a core insurance experience that is simple, intuitive, and human, we
focus our resources on Hippo's true promise: better outcomes for homeowners.
Through our unique Smart Home program, customers may detect and address water,
fire, and other issues before they become major losses. And we help our
customers maintain their homes with on-demand maintenance advice and access to
home check-ups designed to reduce the probability of future losses. In short, we
have created an integrated home protection platform, which offers a growing
suite of proactive features designed to prevent loss and provide greater peace
of mind.
Our partnership with our customers is designed to create a virtuous cycle. By
making homes safer, we help deliver better risk outcomes and increase customer
loyalty, which improves our unit economics and customer lifetime value ("LTV").
This enables us to invest in expanding our product offering, customer value
proposition, and marketing programs, which help attract more customers to the
Hippo family. This growth generates more data and insights to fuel further
innovation in our product experience and improved underwriting precision. The
result is even safer homes and more loyal customers. We believe this virtuous
cycle, combined with our significant existing scale, deep partnerships, and
compelling unit economics, will propel Hippo to become a trusted household name
synonymous with home protection.
Our Business Model
There are four key components in our economic model. First, as a managing
general agent ("MGA"), we manage the customer-facing experience of insurance,
including sales and marketing, underwriting, policy issuance and administration,
and claims administration. In exchange for these services, we earn recurring
commission and fees associated with the policies we sell. While we have
underwriting authority and responsibility for administering policies and claims,
we do not take the bulk of the risk associated with these policies on our own
balance sheet. Rather, we work with a diversified panel of highly-rated
insurance companies who pay us commission in exchange for the opportunity to
take the insurance risk on their own balance sheets.
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We also earn commission income as a licensed insurance agency selling non-Hippo
policies to our customers. Today, we earn agency commission income when we cross
sell automobile, flood, earthquake, umbrella, and other policies to our
homeowners customers. When a customer seeking homeowners insurance is located in
an area where Hippo policies are unavailable, we work to place them with another
carrier. When a particular home does not meet our underwriting criteria, we also
work to place these customers with another carrier when possible. As we broaden
our agency offerings, we expect to distribute additional types of insurance
products offered by other carriers, which we expect will contribute to growth of
this business. Commission income on these policies recurs as the policies renew,
allowing us to earn margin relative to our customer acquisition cost.
The third way we generate revenue is through our insurance company platform
offering insurance-as-a-service to other MGAs who are willing to share economics
with a carrier that can provide the capital and regulatory licenses needed for
their business, commonly referred to as "fronting fees." The economic benefits
to us of providing this service extend beyond profit margins on these premiums
and include capital efficiency benefits as the diversity of insurance offered
allows us to secure more cost-effective reinsurance coverage. Given our diverse
portfolio of homeowners insurance, the regulatory capital we are required to set
aside for premium generated by these third parties is lower than these parties
would need to set aside if they were to provide their own capital.
Finally, we earn revenue in the form of earned premium when we retain risk on
our own balance sheet rather than ceding it to third-party reinsurers.
In the future, we anticipate generating additional revenue through our offering
of value-added services such as home monitoring and maintenance.
Our Asset-Light Capital Model and Reinsurance
We have historically pursued an asset-light capital strategy to support the
growth of our business. Even though we acquired a licensed carrier in 2020, we
generally retain only as much risk on our balance sheet as is necessary to
secure attractive terms from the reinsurers who bear the risk of the policies we
sell. Those reinsurers usually insist that insurance companies like ours retain
some risk to ensure alignment of interests. For policies written in 2021, we
expect to retain approximately 11% of the risk associated with Hippo homeowners
policies on our own balance sheet and expect to see this increase modestly over
time.
This strategy also helps support our growth: third party reinsurance helps
decrease the statutory capital required to support new business growth. As a
result, we expect to be able to grow at an accelerated pace with lower capital
investments upfront than we would otherwise require. We have a successful track
record of securing strong reinsurance treaties, providing a solid foundation for
a long-term, sustainable model.
Reinsurance
We utilize reinsurance primarily to support the growth of our new and renewal
insurance business, to reduce the volatility of our earnings, and to optimize
our capital management.
As a MGA, we underwrite homeowners insurance policies on behalf of our insurance
company subsidiaries (Spinnaker and Spinnaker Specialty) and other
non-affiliated third-party insurance carriers. These carriers purchase
reinsurance from a variety of sources and in a variety of structures. In the
basic form of this arrangement, fronting insurance carriers will typically cede
a large majority of the total insurance premium they earn from customers, in
return for a proportional amount of reinsurance protection. This is known as
"ceding" premium and losses through a "quota share" reinsurance treaty.
The fronting carrier and the MGA are paid a percentage of the ceded premium as
compensation for sales and marketing, underwriting, insurance, support, claims
administration, and other related services (in totality, known as a ceding
commission). As additional protection against natural catastrophes or other
large loss events, the fronting carrier frequently purchases additional,
non-proportional reinsurance.
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Without reinsurance protection, the insurer would shoulder all of the insurance
risk itself and would need incremental capital to satisfy regulators and rating
agencies. Reinsurance allows a carrier to write more business while reducing its
balance sheet exposure and volatility of earnings.
As a result, we believe our acquisition of Spinnaker gives us increased control
over reinsurance strategy and purchasing.
Proportional Reinsurance Treaties - Hippo MGA
For our primary reinsurance treaty commencing in 2021, we secured proportional,
quota share reinsurance from a diverse panel of nine third-party reinsurers with
AM Best ratings of "A-" or better. We retain approximately 11% of the
proportional risk through our insurance company subsidiaries or our captive
reinsurance company, RHS, which aligns our interests with those of our
reinsurers. We also seek to further reduce our risk retention through purchases
of non-proportional reinsurance described below in the section titled
"Non-Proportional Reinsurance."
Non-Proportional Reinsurance - Hippo MGA
We also purchase two forms of non-proportional reinsurance: excess of loss
("XOL") and per-risk. Through our ownership of our insurance company
subsidiaries, we are exposed to the risk of larger losses and natural
catastrophe events that could occur on the risks we are assuming from policies
underwritten by us or other MGAs. We are also exposed to this risk through our
captive reinsurer, which takes on a share of the risk underwritten by our MGA
business.
Our XOL program provides protection to us from catastrophes that could impact a
large number of insurance policies. We buy XOL so that the probability of losses
exceeding the protection purchased is no more than 0.4%, or equivalent to a
1:250 year return period. This reinsurance also caps losses at a level which
protects us from all but the most severe catastrophic events.
Our per-risk program protects us from large, individual claims that are less
likely to be associated with catastrophes, such as house fires. We have
historically purchased and expect to continue to purchase this coverage for the
benefit of our retained shares for losses on single policies in excess of
$500,000.
Other Spinnaker MGA Programs - Reinsurance
As the fronting carrier for other MGAs, Spinnaker has reinsurance in place for
several other MGA programs. Those programs are supported by a diversified panel
of high-quality reinsurers similar to those on Hippo's panel. The treaties are a
mix of quota share and excess of loss in which 80% to 100% of the risk is ceded.
Spinnaker's catastrophic risk retention for each program is managed to a 1:250
year loss event across all programs.
With all our reinsurance programs, we are not relieved of our primary
obligations to policyholders in the event of a default or the insolvency of our
reinsurers. As a result, a credit exposure exists to the extent that any
reinsurer fails to meet its obligations assumed in the reinsurance agreements.
To mitigate this exposure to reinsurance insolvencies, we evaluate the financial
condition of our reinsurers and, in certain circumstances, hold substantial
collateral (in the form of funds withheld and letters of credit) as security
under the reinsurance agreements.
Business Combination and Public Company Costs
On August 2, 2021, we completed the Business Combination and the PIPE
Investment. For more information, see Notes 1 and 2 in the Notes to Consolidated
Financial Statements set forth in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
The Business Combination is accounted for as a reverse recapitalization. Under
this method of accounting Hippo Enterprises Inc. has been deemed the accounting
"acquirer" or predecessor and Hippo Holdings Inc. is the successor SEC
registrant, which means that Hippo Enterprises Inc.'s financial statements for
previous periods will be disclosed in Hippo Holdings Inc.'s future periodic
reports filed with the SEC. The most significant change in
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Hippo Holdings Inc.'s future reported financial position and results was an
increase in net cash of approximately $450 million.
As a consequence of the Business Combination, we need to continue to hire
additional personnel and implement procedures and processes to satisfy
regulatory requirements and customary practices applicable to an SEC-registered
and NYSE-listed company. We expect to incur additional annual expenses as a
public company for, among other things, directors' and officers' liability
insurance, director fees and additional internal and external accounting and
legal and administrative resources, including increased audit and legal fees.
COVID-19 Impact
The COVID-19 pandemic and the measures imposed to contain it severely impacted
businesses worldwide, including many in the insurance sector. Insurers of
travel, events, or business interruption have been directly and adversely
affected by claims from COVID-19 or the lock-down it engendered. Other insurance
businesses, including property and casualty lines, have also been indirectly
impacted in varying ways, including the dependency on in-person inspections
during a time when such in-person interactions have been discouraged. In
addition, insurance businesses dependent on office-based brokers and teams that
are poorly equipped to work from home have been negatively impacted. The broader
economic volatility may hurt insurers in other ways. For instance, with interest
rates at all-time lows, many insurers have and may continue to see their return
on capital drop, while those selling premium or discretionary products may see
an increase in churn and a decrease in demand.
The magnitude and duration of the global pandemic and the impact of actions
taken by governmental
authorities, businesses and consumers, including the availability and acceptance
of vaccines, to mitigate health risks continue to create significant
uncertainty, particularly as new strains of the virus emerge and create
potential challenges to vaccination efforts. We are closely monitoring the
impact of the COVID-19 pandemic and related economic effects on all aspects of
our business, including how it will impact our production, loss ratios,
recoverability of premium, our operations, and the fair value of our investment
portfolio.
Production, Loss Ratios, and Recoverability of Premium
COVID-19 has reduced our ability to perform interior home inspections on risks
we underwrite and may impact loss ratios as time at home has increased and has
impacted collection of premium where moratoriums have been imposed restricting
cancellation of policies for non-payment. During 2020 and 2021, we also
witnessed increased cost of labor, and costs associated with materials like
timber. These higher costs have a direct impact to the cost of handling claims
and result in more than normal loss expenses.
Due to the speed with which the COVID-19 situation has developed, the global
breadth of its spread and the range of governmental and community reactions
thereto, uncertainty around its duration and ultimate impact persists, and the
related financial impact on our business could change and cannot be accurately
predicted at this time.
Operations
The COVID-19 pandemic has also had and continues to have a significant impact on
our business operations, including with respect to employee availability and
productivity, temporary increases in regulatory restrictions on operating
activities (e.g., moratoria, rate actions or claim practices) that may impact
our profitability, the availability and performance of third party vendors,
including technology development, home inspections and repairs, and marketing
programs. We may also be impacted by cybersecurity risks related to our new
dependency on a remote workforce.
Our Investment Portfolio
We seek to hold a high-quality, diversified portfolio of investments. During
economic downturns, certain investments may default or become impaired due to
deterioration in the financial condition or due to deterioration in the
financial condition of an insurer that guarantees an issuer's payments on such
investments. Given the conservative nature of our investment portfolio, we do
not expect a material adverse impact on the value of our
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investment portfolio or a long-term negative impact on our financial condition,
results of operations or cash flows as it relates to COVID-19. Despite the
COVID-19 pandemic, our business has continued to grow.
•We write and place home insurance and other insurance products from our
agencies that have so far been largely unaffected by COVID-19.
•Our systems are entirely cloud-based and accessible to our teams from any
browser anywhere in the world. Customers' phone calls are routed to our team's
laptops and answered and logged from wherever they happen to be. Internal
communication has been via email, Slack, and Zoom since our founding. Our teams
are able to access systems, support customers and collaborate with each other
from anywhere, much as they did before the pandemic.
•Our customers' experience has also been largely unaffected by COVID-19 related
disruptions
•We have initiated virtual inspections for our underwriting requirements and
claims processing to keep our employees, agents, policy holders and potential
policy holders safe.
Key Factors and Trends Affecting our Operating Results
Our financial condition and results of operations have been, and will continue
to be, affected by a number of factors, including the following:

Our Ability to Attract New Customers

Our long-term growth will depend, in large part, on our continued ability to
attract new customers to our platform. We intend to continue to drive new
customer growth by highlighting our consumer-focused approach to homeowners
insurance across multiple distribution channels. In particular:

•Our growth strategy is centered around accelerating our existing position in
markets that we already serve by increasing our direct-to-consumer advertising,
increasing the number of agents selling Hippo policies, and growing our network
of partners within existing partner channels.

•In addition to efforts in states where we are currently selling insurance, we
also expect to drive growth by expanding into new markets across the United
States and by continuing to develop new strategic partnerships with key players
involved in the real estate transaction ecosystem.

•Finally, we plan to deepen our relationships with our customers by offering
value-added services, both directly and through partners, that are not
specifically insurance products like home maintenance, home monitoring, and home
appliance warranties.

Our ability to attract new customers depends on the pricing of our products, the
offerings of our competitors, our ability to expand into new markets, and the
effectiveness of our marketing efforts. Our ability to attract customers also
depends on maintaining and strengthening our brand by providing superior
customer experiences through our proactive, tech-enabled strategy.

We face competition from traditional insurers who have more diverse product
offerings and longer established operating histories, as well as from new,
technology-driven entrants who may pursue more horizontal growth strategies.
These competitors may mimic certain aspects of our digital platform and
offerings and as they have more types of insurance products and can offer
customers the ability to "bundle" multiple coverage types together, which may be
attractive to many customers.

Our Ability to Retain Customers

Our ability to derive significant lifetime value from our customer relationships
depends, in part, on our ability to retain our customers over time. Strong
retention allows us to build a recurring revenue base, generating additional
premium term over term without material incremental marketing costs. Our
customers typically become
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more valuable to us over time because retention rates have historically
increased with the age of customer cohorts and because non-catastrophic loss
frequency declines as cohorts mature.

As we expect to broadly retain our customers, we expect our book of business to
evolve to be weighted more towards renewals versus new business over time, as is
the case with our more mature competitors. We expect that this would enable us
to benefit from the higher premium retention rates and inherently lower
frequency of losses that characterize renewed premiums.

Our ability to retain customers will depend on a number of factors, including
our customers' satisfaction with our products, offerings of our competitors, and
our ability to continue delivering exceptional customer service and support.

Our Ability to Expand Nationally Across the United States

We believe that national expansion will be a key driver of the long-term success
of our business. As of September 30, 2021, we were authorized to sell Hippo
Homeowners policies in 37 states. We expect to apply our highly scalable model
nationally, with a tailored approach to each state that is driven by the
regulatory environment and local market dynamics. We hope to expand rapidly and
efficiently across different geographies while maintaining a high level of
control over the specific strategy within each state.

We expect to benefit from our ability to provide insurance across an increasing
number of states in the United States. State expansion should create a broader
base from which to grow while increasing the geographic diversity in our base of
customers and premium. We expect that this greater diversity will reduce the
impact of catastrophic weather events in any one geographic region on our
overall loss ratio, improving the predictability of our financial results over
time as we scale. We believe that increased geographic diversity will also
improve our ability to secure attractive terms from reinsurers, which would
improve our overall cost structure and profitability.

Our Ability to Expand Fee Income and Premium Through Cross-Sales to Existing
Customers

Our strategy to increase the value we are providing to our customers is to offer
incremental services to assist our customers in better maintaining and
protecting their homes. As we roll out these services, we expect to be able to
generate incremental, non-risk-based service and fee income from our existing
customers. We expect these home protection services not only to generate
incremental revenue, but also to reduce losses for our customers, and-by
implication-our loss ratios. Our success in expanding revenue and reducing
losses by offering these services depends on our ability to market these
services, our operational ability to deliver value to our customers, and the
ability of these services to reduce the probability of loss for an average
homeowner.

We are also in the early stages of cross-selling non-homeowner insurance
products across our customer base. Cross-sales allow us to generate additional
premium per customer, and ultimately higher revenue and fee income, without
material incremental marketing spend. Our success in expanding revenue through
cross-sales depends on our marketing efforts with new products, offerings of our
competitors, additional expansion into new states, and the pricing of our
bundled products.

Our Ability to Manage Risk

We leverage data, technology, and geographic diversity to help manage risk. For
instance, we obtain dynamic data from various sources and use advanced
statistical methods to model that data into our pricing algorithm. Incorporating
these external data sources and utilizing the experience gained with our own
customer base will lead to better underwriting, reduced loss frequency,
and-adjusting for weather related events-lower loss ratios over time. While our
current reinsurance framework helps us manage the volatility of earnings,
reducing our overall gross loss ratio is critical to our success. Our ability to
incorporate new data sources as they become available and to use them to improve
our ability to accurately and competitively price risk is central to our growth
strategy.

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Seasonality of Customer Acquisition

Seasonal patterns can impact both our rate of customer acquisition and the
incurrence of claims losses. Based on historical experience, existing and
potential customers move more frequently during the summer months of the year,
compared to the rest of the calendar year. As a result, we may see greater
demand for new or expanded insurance coverage, and increased engagement
resulting in proportionately more growth during the third quarter. We expect
that as we grow, expand geographically, and launch new products, the impact of
seasonal variability on our rate of growth may decrease.

Additionally, seasonal weather patterns impact the level and amount of claims we
receive. These patterns include hurricanes, wildfires, and coastal storms in the
fall, cold weather patterns and changing home heating needs in the winter, and
tornados and hailstorms in the spring and summer. The mix of geographic exposure
and products within our customer base impacts our exposure to these weather
patterns, and as we diversify our base of premium such that our exposure more
closely resembles the industry exposure, we should see the impact of these
events on our business more closely resemble the impact on the broader industry.

A More Diverse and Resilient Business Model

There are four components in our economic model:

1. MGA
2. Agency
3. Insurance as a Service
4. Risk Retention

Prior to our acquisition of Spinnaker on August 31, 2020, our economics were
driven by our MGA and Agency business. We now have a more diverse and resilient
model, as well as the infrastructure to support our growth.

This structural evolution of our business model has several implications:

1. Substantive: We are retaining more risk on our balance sheet and accordingly
both our net earned premium and our Loss and Loss Adjustment Expenses are
expected to be higher.

2. Financial presentation: The direct acquisition costs associated with the
premium written on our carrier will shift from sales and marketing to insurance
related expense and will be offset by the corresponding ceding commission and
amortized over the lifetime of the policy. Only the excess of ceding commission
over our direct acquisition costs will be recognized as revenue. All else being
equal, for the exact same amount of premium we expect:
a. our ceding commission will be lower
b. our sales and marketing expense will be lower
c. our bottom line results will be unchanged

When comparing our year-over-year financial results and analyzing trends, we
need to take into consideration these structural changes and their implications.
We utilize a non-GAAP measure Adjusted EBITDA to measure our operating
profitability. See the section entitled "Hippo Management's Discussion and
Analysis of Financial Condition and Results of Operations - Key Operating and
Financial Metrics and Non-GAAP Measures - Adjusted EBITDA."

Acquisition of Spinnaker Insurance Company

In August 2020, we completed the acquisition of Spinnaker, giving us direct
control over the insurance and reinsurance placement aspect of our business. We
believe the Spinnaker acquisition will enable us to maintain a

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capital-light model while retaining risk in a way that aligns our interests with
those of the reinsurance market. We also believe it will benefit our economics;
while we expect to continue writing business on third party carriers, we will no
longer need to pay a fee to third parties for carrier services on the portion of
business we write on Spinnaker. Our financial results in 2021 will reflect the
full year of Spinnaker's operations compared to a partial year in 2020. For more
information, see the section titled "Results of Operations" below.

Prior to the Spinnaker acquisition, Hippo received MGA commission income for the
policies placed by Hippo on Spinnaker paper, and we recognized this commission
income at the policy effective dates, net of risk retained by Hippo. The expense
incurred for third-party sales commissions (i.e., acquisition costs) was
presented on a gross basis in the statement of operations for the period January
1, 2020 to August 31, 2020, and was included in sales and marketing line item
and was not offset against the commission revenue.

After the acquisition, we have consolidated the results of Spinnaker which
impact our results of operations as follows:
•Premium for the risk retained by us is recognized on a pro-rata basis over the
policy period.
•Ceding commission on premium ceded to third party reinsurers is deferred as a
liability and recognized on a pro-rata basis over the term of the policy, net of
acquisition costs. To the extent ceding commission received exceeds direct
acquisition costs, the excess is presented as revenue in the commission income,
net line on our statements of operations and comprehensive loss. The
consolidated company (Hippo and Spinnaker) began to earn ceding commission on
premium ceded to third party reinsurers in September 2020 and the ceding
commission is recognized net of acquisition costs, on a pro-rata basis over the
term of the policy.

Acquisition costs incurred to acquire the Spinnaker policies are deferred and
amortized over the term of the policies. Those costs include sales commissions,
premium taxes, and board and bureau fees. The amortization of deferred
acquisition costs is included in insurance related expenses on the consolidated
statements of operations and comprehensive loss.

Loss and LAE incurred, net of losses ceded to reinsurers, will be reflected in
the statement of operations for the risk we retain on the Spinnaker policies.

Investment income, net representing interest earned from fixed maturity
securities, short-term securities and other investments, and the gains or losses
from the sale of investments is presented as part of revenue.

Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with GAAP as determined by the Financial Accounting Standards Board
("FASB"), Accounting Standards Codification ("ASC"), and pursuant to the
regulations of the SEC.
Key GAAP Financial Terms
Gross Written Premium
Gross written premium is the amount received or to be received for insurance
policies written or assumed by us and our affiliates as a carrier, without
reduction for policy acquisition costs, reinsurance costs, or other deductions.
In addition, gross written premium includes amounts received from our
participation in our own reinsurance treaty. The volume of our gross written
premium in any given period is generally influenced by:
•New business submissions;
•Binding of new business submissions into policies;
•Bound policies going effective;
•Renewals of existing policies; and
•Average size and premium rate of bound policies.
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Ceded Written Premium
Ceded written premium is the amount of gross written premium written or assumed
by us and our affiliates as a carrier that we cede to reinsurers. We enter into
reinsurance contracts to limit our exposure to losses, as well as to provide
additional capacity for growth. Ceded written premium is treated as a reduction
from gross written premium written during a specific period of time over the
reinsurance contract period in proportion to the period of risk covered. The
volume of our ceded written premium is impacted by the level of our gross
written premium and decisions we make to increase or decrease retention levels.
Components of Results of Operations
Revenue
Net Earned Premium
Net earned premium represents the earned portion of our gross written premium
for insurance policies written or assumed by us and less ceded written premium
(any portion of our gross written premium that is ceded to third-party
reinsurers under our reinsurance agreements). We earn written premiums on a
pro-rata basis over the term of the policies.
Commission Income, Net Includes:
a.MGA Commission: We operate as an MGA for multiple insurers. We design and
underwrite insurance products on behalf of the insurers culminating in the sale
of insurance policies. We earn recurring commission and policy fees associated
with the policies we sell. While we have underwriting authority and
responsibility for administering claims, we do not take the risk associated with
policies on our own balance sheet. Rather, we work with carrier platforms and a
diversified panel of highly rated reinsurance companies who pay us commission in
exchange for the opportunity to take that risk on their balance sheets. Our
performance obligation associated with these contracts is the placement of the
policy, which is met on the effective date. Upon issuance of a new policy, we
charge policy fees and inspection fees (see Service and Fee Income below),
retain our share of ceding commission, and remit the balance premium to the
respective insurers. Subsequent ceding commission adjustments arising from
policy changes such as endorsements are recognized when the adjustments can be
reasonably estimated.
b.Agency Commission: We also operate licensed insurance agencies that are
engaged solely in the sale of policies, including non-Hippo policies. For these
policies, we earn a recurring agency commission from the carriers whose policies
we sell, which is recorded in the commission income, net line on our statements
of operations and comprehensive loss. Similar to the MGA businesses, the
performance obligation from the agency contracts is placement of the insurance
policies.
For both MGA and insurance agency activities, we recognize commission received
from insurers for the sale of insurance contracts as revenue at a point in time
on the policy effective dates. Cash received in advance of policy effective
dates is recorded on the consolidated balance sheets, representing our portion
of commission and premium due to insurers and reinsurers, and hold this cash in
trust for the benefit of the insurers and reinsurers as fiduciary liabilities.
The MGA commission is subject to adjustments, higher or lower (commonly referred
to as "commission slide"), depending on the underwriting performance of the
policies placed by us. We are required to return a portion of our MGA commission
due to commission slide received on the policies placed by MGA if the
underwriting performance varies due to higher Hippo programs' loss ratio from
contractual performance of the Hippo programs' loss ratio or if the policies are
cancelled before the term of the policy; accordingly, we reserve for commission
slide using estimated Hippo programs' loss ratio performance, and a cancellation
reserve is estimated as a reduction of revenue for each period presented in our
statement of operations and comprehensive loss.
c.Ceding Commission: We receive commission based on the premium we cede to
third-party reinsurers for the reimbursement for our acquisition and
underwriting services. Excess of ceding commission over the cost of acquisition
is included in the commission income, net line on our statements of operations
and comprehensive loss. For the policies that we write on our own carrier as
MGA, we recognize this
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commission as ceding commission on the statement of operations and comprehensive
loss. We earn commission on reinsurance premium ceded in a manner consistent
with the recognition of the earned premium on the underlying insurance policies,
on a pro-rata basis over the terms of the policies reinsured. We record the
portion of ceding commission income, which represents reimbursement of
successful direct acquisition costs related to the underlying policies as an
offset to the applicable direct acquisition costs.
d.Carrier Fronting Fees: Through our insurance-as-a-service business we earn
recurring fees from the MGA programs we support. We earn fronting fees in a
manner consistent with the recognition of the earned premium on the underlying
insurance policies, on a pro-rata basis over the terms of the policies. This
revenue is included in the commission income, net line on our statements of
operations and comprehensive loss.
e.Claim Processing Fees: As an MGA, we receive a fee that is calculated as a
percent of the premium from the insurers in exchange for providing claims
adjudication services. The claims adjudication services are provided over the
term of the policy, and recognized ratably over the same period. This revenue is
included in the commission income, net line on our statements of operations and
comprehensive loss.
Service and Fee Income
Service and fee income mainly represents policy fees and other revenue. We
directly bill policyholders for policy fees and collect and retain fees per the
terms of the contracts between us and our insurers. Similar to the commission
revenue, we estimate a cancellation reserve for policy fees using historical
information. The performance obligation associated with these fees is satisfied
at a point in time upon completion of the underwriting process, which is the
policy effective date. Accordingly, we recognize all fees as revenue on the
policy effective date.
Net Investment Income
Net investment income represents interest earned from fixed maturity securities,
short-term securities and other investments, and the gains or losses from the
sale of investments. Our cash and invested assets primarily consist of
fixed-maturity securities, and may also include cash and cash equivalents,
equity securities, and short-term investments. The principal factors that
influence net investment income are the size of our investment portfolio and the
yield on that portfolio. As measured by amortized cost (which excludes changes
in fair value, such as changes in interest rates), the size of our investment
portfolio is mainly a function of our invested equity capital along with premium
we receive from our customers less payments on customer claims.
Net investment income also includes an insignificant amount of net realized
gains (losses) on investments, which are a function of the difference between
the amount received by us on the sale of a security and the security's amortized
cost, as well as any allowances for credit losses recognized in earnings, if
any.
Expenses
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses represent the costs incurred for losses net of
amounts ceded to reinsurers. We enter into reinsurance contracts to limit our
exposure to potential losses as well as to provide additional capacity for
growth. These expenses are a function of the size and term of the insurance
policies and the loss experience associated with the underlying risks. LAE are
based on actuarial assumptions and management judgements, including losses
incurred during the period and changes in estimates from prior periods. Loss and
LAE also include employee compensation (including stock-based compensation and
benefits) of our claims processing teams, as well as allocated occupancy costs
and related overhead based on headcount.
Insurance Related Expenses
Insurance related expenses primarily consist of amortization of direct
acquisition commission costs and premium taxes incurred on the successful
acquisition of business written on a direct basis and credit card processing
fees not charged to our customers. Insurance related expenses also include
employee compensation (including stock-based compensation and benefits) of our
underwriting teams, as well as allocated occupancy costs and related
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overhead based on headcount. Insurance related expenses are offset by the
portion of ceding commission income, which represents reimbursement of
successful acquisition costs related to the underlying policies. Additionally,
insurance related expenses include the costs of providing bound policies and
delivering claims services to our customers. These costs include underwriting
technology service costs including software, data services used for performing
underwriting, and third-party call center costs in addition to personnel-related
costs.
In 2019, insurance related expenses were primarily comprised of the costs of
providing bound policies and delivering claims services to the Company's
customers. These costs include technology service costs, including software,
data services, and third-party call center costs in addition to
personnel-related costs. We believe these technology service costs represent
insurance related costs and might be misleading to a reader on a comparative
basis if not recorded in insurance related costs.
Technology and Development
Technology and development expenses primarily consist of employee compensation
(including stock-based compensation and benefits) for our technology staff,
which includes information technology development, infrastructure support,
actuarial, and third-party services. Technology and development also include
allocated facility costs and related overhead based on headcount.
We expense development costs as incurred, except for costs related to
internal-use software development projects, which are capitalized and
subsequently depreciated over the expected useful life of the developed
software. We expect our technology and development costs to increase for the
foreseeable future as we continue to invest in research and develop activities
to achieve our technology development roadmap.
Sales and Marketing
Sales and marketing expenses primarily consist of sales commission, advertising
costs, and marketing expenditures, as well as employee compensation (including
stock-based compensation and benefits) for employees engaged in sales,
marketing, data analytics, and customer acquisition. We expense advertising
costs as incurred. Sales and marketing also include allocated facility costs and
related overhead based on headcount.
We plan to continue to invest in sales and marketing to attract and acquire new
customers and to increase our brand awareness. We expect that our sales and
marketing expenses will increase over time as we continue to hire additional
personnel to scale our business, increase commission payments to our produces
and partners as a result of our premium growth, and invest in developing a
nationally-recognized brand. We expect that sales and marketing costs will
increase in absolute dollars in future periods and vary from period-to-period as
a percentage of revenue in the near-term. We expect that-in the long-term-our
sales and marketing costs will decrease as a percentage of revenue as we
continue to drive customer acquisition efficiencies and as the proportion of
renewals to our total business increases.
General and Administrative
General and administrative expenses primarily consist of employee compensation
(including stock-based compensation and benefits) for our finance, human
resources, legal, and general management functions, as well as facilities and
professional services. We expect our general and administrative expenses to
increase for the foreseeable future as we scale headcount with the growth of our
business, and as a result of operating as a public company, including compliance
with the rules and regulations of the SEC and other regulatory bodies, legal,
audit, additional insurance expenses, investor relations activities, and other
administrative and professional services.
Interest and Other (Income) Expense
Interest and other (income) expense primarily consist of interest expense
incurred for the convertible promissory notes, and fair value adjustments on
preferred stock warrant liabilities, gains or losses on debt extinguishment, and
embedded derivative on convertible promissory notes. The convertible promissory
notes converted into equity immediately prior to the closing of the merger with
RTPZ, eliminating the associated interest expense for the future periods after
the consummation of the merger.
Income Taxes
We record income taxes using the asset and liability method. Under this method,
we record deferred income tax assets and liabilities based on the estimated
future tax effects of differences between the financial
                                       39
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statement and income tax basis of existing assets and liabilities. We measure
these differences using the enacted statutory tax rates that are expected to
apply to taxable income for the years in which differences are expected to
reverse. We recognize the effect on deferred income taxes of a change in tax
rates in income in the period that includes the enactment date.
We record a valuation allowance to reduce deferred tax assets and liabilities to
the net amount that we believe is more likely than not to be realized. We
consider all available evidence, both positive and negative, including
historical levels of income, expectations, and risks associated with estimates
of future taxable income and ongoing tax planning strategies in assessing the
need for a valuation allowance.
Key Operating and Financial Metrics and Non-GAAP Measures
We regularly review the following key operating and financial metrics in order
to evaluate our business, measure our performance, identify trends in our
business, prepare financial projections, and make strategic decisions.
The non-GAAP financial measure below has not been calculated in accordance with
GAAP and should be considered in addition to results prepared in accordance with
GAAP and should not be considered as a substitute for, or superior to, GAAP
results. In addition, Adjusted EBITDA should not be construed as an indicator of
our operating performance, liquidity, or cash flows generated by operating,
investing, and financing activities, as there may be significant factors or
trends that they fail to address. We caution investors that non-GAAP financial
information-by its nature-departs from traditional accounting conventions.
Therefore, its use can make it difficult to compare our current results with our
results from other reporting periods and with the results of other companies.
Our management uses the non-GAAP financial measures, in conjunction with GAAP
financial measures, as an integral part of managing our business and to, among
other things: (i) monitor and evaluate the performance of our business
operations and financial performance; (ii) facilitate internal comparisons of
the historical operating performance of our business operations; (iii) review
and assess the operating performance of our management team; (iv) analyze and
evaluate financial and strategic planning decisions regarding future operating
investments; and (v) plan for and prepare future annual operating budgets and
determine appropriate levels of operating investments.
The results of Spinnaker Insurance Company since the date of acquisition (August
31, 2020) have been
consolidated with ours and are reflected in the following table.
                                            Three Months Ended            Nine Months Ended
                                              September 30,                 September 30,
                                            2021           2020          2021           2020
                                                            ($ in millions)
       Total Generated Premium          $    161.7       $ 83.2       $  443.5       $ 227.6
       Total Revenue                          21.3         13.0           59.1          35.2
       Net Loss attributable to Hippo        (30.9)       (38.6)        (310.7)        (87.4)
       Adjusted EBITDA                       (48.4)       (23.9)        (126.4)        (64.3)
       Gross Loss Ratio                        128  %       155  %         158  %        147  %
       Net Loss Ratio                          241  %       185  %         217  %        160  %


Total Generated Premium
We define Total Generated Premium ("TGP") as the aggregate written premium
placed across all of our business platforms for the period presented. We measure
TGP as it reflects the volume of our business irrespective of choices related to
how we structure our reinsurance treaties, the amount of risk we retain on our
own balance sheet, or the amount of business written in our capacity as an MGA,
agency, or as an insurance carrier/reinsurer. We calculate TGP as the sum of:

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i)Gross written premium ("GWP") - a GAAP measure defined below; and
ii)Gross placed premium - premium of policies placed with third-party insurance
companies, for which we do not retain insurance risk and for which we earn a
commission payment, and policy fees charged by us to the policyholders on the
effective date of the policy.
Our Total Generated Premium for the three months ended September 30, 2021 grew
94% year-over-year to $161.7 million from $83.2 million for the three months
ended September 30, 2020. The growth was driven primarily by growth across
channels in existing states, expansion into 6 new states compared to the three
months ended September 30, 2020, expansion of our independent agent network,
launch of new strategic partnerships, maintaining solid premium retention
levels, and growth of non-Hippo written premium supported by our insurance
company Spinnaker.
Our Total Generated Premium for the nine months ended September 30, 2021 grew
95% year-over-year to $443.5 million from $227.6 million for the nine months
ended September 30, 2020. The growth was driven primarily by growth across
channels in existing states, expansion into 6 new states compared to the nine
months ended September 30, 2021, expansion of our independent agent network,
launch of new strategic partnerships, maintaining solid premium retention
levels, and growth of non-Hippo written premium supported by our insurance
company Spinnaker.
Our Total Generated Premium for the three and nine months ended September 30,
2020 does not include $24.0 million and $71.8 million, respectively, of written
premium from non-Hippo programs written by Spinnaker prior to the acquisition
which closed on August 31, 2020.
The following table presents Total Generated Premium for the periods presented
(in millions):

                                         Three Months Ended September 30,                          Nine Months Ended September 30,
                                     2021                2020             Change               2021               2020             Change
Gross Written Premium           $      129.0          $   28.9          $  100.1          $     356.7          $   43.5          $  313.2
Gross Placed Premium                    32.7              54.3             (21.6)                86.8             184.1             (97.3)
Total Generated Premium         $      161.7          $   83.2          $   78.5          $     443.5          $  227.6          $  215.9

The decrease in Gross Placed Premium is a direct result of the Spinnaker
acquisition. After the acquisition, premium that would have been placed on
Spinnaker and included in Gross Placed Premium is now recognized as Gross
Written Premium.

Total Revenue
For the three months ended September 30, 2021, total revenue was $21.3 million,
an increase of $8.3 million compared to $13.0 million for the three months ended
September 30, 2020. This increase was driven by increases in net earned premium
and service and fee income of $6.2 million and $1.9 million, respectively.
For the nine months ended September 30, 2021, total revenue was $59.1 million,
an increase of $23.9 million compared to $35.2 million for the nine months ended
September 30, 2020. This increase was driven by increases in net earned premium
and service and fee income of $21.2 million and $6.9 million, respectively.
These amounts were partially offset by a decrease in net commission income of
$3.6 million as a result of the Spinnaker acquisition.
Net Loss Attributable to Hippo
Net loss attributable to Hippo is calculated in accordance with GAAP as total
revenue less total expenses and taxes and net of net income attributable to
non-controlling interest, net of tax.
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For the three months ended September 30, 2021, net loss attributable to Hippo
was $30.9 million, a decrease of $7.7 million compared to $38.6 million for the
three months ended September 30, 2020. This was primarily driven by an decrease
in other (income) expense of $26.5 million due to a gain on the extinguishment
of the convertible notes. This amount was partially offset by an increase in
losses and loss adjustment expense of $17.6 million as a result of the growth in
our business in which we retain risk and loss participation clauses in several
of our proportional reinsurance treaties.
For the nine months ended September 30, 2021, net loss attributable to Hippo was
$310.7 million, an increase of $223.3 million compared to $87.4 million for the
nine months ended September 30, 2020. This was primarily driven by an increase
in interest and other (income) expense of $152.3 million, due to an increase in
fair value losses recorded on preferred stock warrants and the derivative
liability on our convertible promissory notes, and interest expense. In
addition, there was an increase in losses and loss adjustment expense of $51.1
million due the growth in our business in which we retain risk, abnormally high
weather-related losses, including the Texas winter storm in February 2021
("Uri"), and a higher concentration in areas impacted by the weather-related
losses. There was also an increase in sales and marketing expense of $16.4
million.
Adjusted EBITDA
We define Adjusted Earnings Before Interest, Taxes, Depreciation, and
Amortization ("Adjusted EBITDA"), a Non-GAAP financial measure, as net loss
attributable to Hippo excluding interest expense, income tax expense,
depreciation, amortization, stock-based compensation, net investment income,
other non-cash fair market value adjustments for outstanding preferred stock
warrants and derivative liabilities on the convertible promissory notes, and
contingent consideration for one of our acquisitions and other transactions that
we consider to be unique in nature.
For the three months ended September 30, 2021, adjusted EBITDA loss was $48.4
million, an increase of $24.5 million compared to $23.9 million for the three
months ended September 30, 2020, due primarily to an increase in our loss and
loss adjustment expense due to the growth in our business in which we retain
risk.
For the nine months ended September 30, 2021, adjusted EBITDA loss was $126.4
million, an increase of $62.1 million compared to $64.3 million for the nine
months ended September 30, 2020, due primarily to an increase in our loss and
loss adjustment expense due to the growth in our business in which we retain
risk,
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abnormally high weather-related losses, including Uri, and a higher
concentration in areas impacted by the weather-related losses.
The following table provides a reconciliation from net loss attributable to
Hippo to Adjusted EBITDA for the periods presented (in millions):

                                               Three Months Ended                           Nine Months Ended
                                                  September 30,                               September 30,
                                            2021                   2020                 2021                  2020

Net loss attributable to Hippo       $      (30.9)            $     (38.6)         $     (310.7)         $     (87.4)
Adjustments:
Net investment income                        (0.1)                   (0.2)                 (0.2)                (0.8)
Depreciation and amortization                 2.7                     1.7                   7.7                  4.7
Interest expense                              4.2                       -                  26.1                    -
Stock-based compensation                      4.5                    13.2                   9.8                 15.0
Fair value adjustments                       16.2                       -                 177.3                  4.2
Gain on extinguishment of
convertible promissory notes                (47.0)                      -                 (47.0)                   -
Contingent consideration charge               0.8                     1.9                   2.1                  1.9
Other one-off transactions                    1.1                       -                   8.1                    -
Income taxes (benefit) expense                0.1                    (1.9)                  0.4                 (1.9)
Adjusted EBITDA(1)                   $      (48.4)            $     (23.9)         $     (126.4)         $     (64.3)


(1) In previous disclosures, our Adjusted EBITDA calculation included an
adjustment for capitalization of internal use software costs. We no longer
include this adjustment, as we believe the current presentation is more relevant
and in-line with our peers and relevant comparable companies. We have adjusted
the historical periods accordingly.
Gross Loss Ratio
Gross Loss Ratio, expressed as a percentage, is the ratio of the Gross Losses
and LAE to the Gross Earned Premium (in millions).
                                        Three Months Ended            Nine Months Ended
                                          September 30,                 September 30,
                                        2021           2020           2021          2020
            Gross Losses and LAE    $    130.0       $ 37.4       $   416.2       $ 42.6
            Gross Earned Premium         101.2         24.2           262.7         29.0
            Gross Loss Ratio               128  %       155  %          158  %       147  %


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The following table provides a reconciliation of Gross Loss Ratio by named event
Property Claims Services "PCS" and non-PCS events.

                                              Three Months Ended                                 Nine Months Ended
                                                 September 30,                                     September 30,
                                         2021                     2020                     2021                     2020
PCS component of gross loss ratio               50  %                   75  %                     90  %                   73  %
Large loss component of the gross
loss ratio (1)                                  15  %                   12  %                     13  %                   13  %
Non-PCS, non-large loss component
of gross loss ratio                             63  %                   68  %                     55  %                   61  %
Gross loss ratio                               128  %                  155  %                    158  %                  147  %


(1) Defined as the excess portion of non-weather losses in excess of $0.1
million loss and allocated loss adjustment expense per claim
For the three months ended September 30, 2021, our Gross Loss Ratio was 128%
compared with 155% for the three months ended September 30, 2020. This was
primarily driven by a decrease in the impact of PCS catastrophic events,
supported by our ongoing effort to diversify our book geographically, as well as
a decrease of 5 percentage points in other attritional losses driven by our
continuously improved underwriting process.
For the nine months ended September 30, 2021, our Gross Loss Ratio was 158%
compared with 147% for the nine months ended September 30, 2020. The increase
was due to the impact of abnormal PCS catastrophic events primarily in the first
six months of 2021, including the Texas winter storm Uri in February 2021.
Excluding the impact of Texas winter storm Uri, our Gross Loss Ratio for the
nine months ended September 30, 2021 would have been 122%.
Net Loss Ratio
Net loss ratio expressed as a percentage, is the ratio of the net losses and
LAE, to the net earned premium (in millions).

                                      Three Months Ended              Nine Months Ended
                                        September 30,                   September 30,
                                    2021                2020          2021          2020
           Net Losses and LAE   $    26.3             $ 8.7       $    65.0       $ 13.9
           Net Earned Premium        10.9               4.7            29.9          8.7
           Net Loss Ratio             241   %           185  %          217  %       160  %



For the three months ended September 30, 2021, our Net Loss Ratio was 241%
compared with 185% for the three months ended September 30, 2020. The increase
was due primarily to an increase in our loss and loss adjustment expense as a
result of the growth in our business in which we retain risk and loss
participation clauses in several of our proportional reinsurance treaties.

For the nine months ended September 30, 2021, our Net Loss Ratio was 217%
compared with 160% for the nine months ended September 30, 2020. The increase
was due primarily to the impact of abnormally high PCS catastrophic events,
including the Texas winter storm Uri in February 2021.

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Results of Operations

The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes included in the Company's
Registration Statement on Form S-1(File No. 333-259040) filed with the SEC on
August 24, 2021. The following table sets forth our consolidated results of
operations data for the periods presented (dollars in millions):

                                               Three Months Ended                                                      Nine Months Ended
                                                  September 30,                                                          September 30,
                                              2021                2020             Change      % Change              2021               2020             Change      % Change
Revenue:
Net earned premium                      $     10.9             $   4.7          $    6.2            132  %       $     29.9          $   8.7          $

  21.2            244  %
Commission income, net .                       6.6                 6.3               0.3              5  %             18.2             21.8              (3.6)           (17) %
Service and fee income                         3.7                 1.8               1.9            106  %             10.8              3.9               6.9            177  %
Net investment income                          0.1                 0.2              (0.1)           (50) %              0.2              0.8              (0.6)           (75) %
Total revenue .                               21.3                13.0               8.3             64  %             59.1             35.2              23.9             68  %
Expenses:
Losses and loss adjustment expenses           26.3                 8.7              17.6            202  %             65.0             13.9              51.1            368  %
Insurance related expenses                     7.1                 5.2               1.9             37  %             23.2             13.0              10.2             78  %
Technology and development                     8.3                 5.7               2.6             46  %             22.7             13.2               9.5             72  %
Sales and marketing                           22.4                17.6               4.8             27  %             69.3             52.9              16.4             31  %
General and administrative                    13.4                16.2              (2.8)           (17) %             30.6             27.3               3.3             12  %
Interest and other (income) expense          (26.4)                0.1             (26.5)        (26500) %            156.5              4.2             152.3           3626  %
Total expenses                                51.1                53.5              (2.4)            (4) %            367.3            124.5             242.8            195  %
Loss before income taxes                     (29.8)              (40.5)             10.7            (26) %           (308.2)           (89.3)           (218.9)           245  %
Income taxes (benefit) expense                 0.1                (1.9)              2.0           (105) %              0.4             (1.9)              2.3           (121) %
Net loss                                     (29.9)              (38.6)              8.7            (23) %           (308.6)           (87.4)           (221.2)           253  %

Net income attributable to
noncontrolling interests, net of tax           1.0                   -               1.0               N/A              2.1                -               2.1               N/A
Net loss attributable to Hippo          $    (30.9)            $ (38.6)         $    7.7            (20) %       $   (310.7)         $ (87.4)         $ (223.3)           255  %
Other comprehensive income:
Change in net unrealized gain on
available-for-sale securities, net of
tax                                           (0.1)               (0.2)              0.1            (50) %             (0.4)            (0.2)             (0.2)           100  %
Comprehensive loss attributable to
Hippo                                   $    (31.0)            $ (38.8)         $    7.8            (20) %       $   (311.1)         $ (87.6)         $ (223.5)           255  %



                                       45

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Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
Net Earned Premium
For the three months ended September 30, 2021, net earned premium was $10.9
million, an increase of $6.2 million compared to $4.7 million for the three
months ended September 30, 2020. For the nine months ended September 30, 2021,
net earned premium was $29.9 million, an increase of $21.2 million compared to
$8.7 million for the nine months ended September 30, 2020. The three and nine
month increases are due to year-over-year growth of our total book of business
and our acquisition of Spinnaker, which closed on August 31, 2020.
The following table presents gross written premium, ceded written premium, net
written premium, change in unearned premium, and net earned premium for the
three and nine months ended September 30, 2021 and 2020 (in millions).
                                      Three Months Ended                                         Nine Months Ended
                                         September 30,                                             September 30,
                                     2021                 2020            Change               2021                2020            Change
Gross written premium         $     129.0              $  28.9          $ 100.1          $    356.7             $  43.5          $ 313.2
Ceded written premium               123.1                 19.0            104.1               331.5                21.0            310.5
Net written premium                   5.9                  9.9             (4.0)               25.2                22.5              2.7
Change in unearned premium            5.0                 (5.2)            10.2                 4.7               (13.8)            18.5
Net earned premium            $      10.9              $   4.7          $   6.2          $     29.9             $   8.7          $  21.2


Commission Income, Net
For the three months ended September 30, 2021, commission income was $6.6
million, an increase of $0.3 million, or 5%, compared to $6.3 million for the
three months ended September 30, 2020. The increase was due primarily to
increased ceding commission and agency commission of $3.1 million and $1.3
million, respectively. These amounts were partially offset by a decrease in our
MGA commission of $4.1 million, as direct result of the structural change in our
business due to the acquisition of Spinnaker.
For the nine months ended September 30, 2021, commission income was $18.2
million, a decrease of $3.6 million, or 17%, compared to $21.8 million for the
nine months ended September 30, 2020. This is a direct result of the structural
change in our business due to the acquisition of Spinnaker, which led to a
decrease in our MGA commission of $14.7 million. This amount was partially
offset by an increase in ceding commission and agency commissions of $8.7
million and $2.4 million, respectively.
Service and Fee Income
For the three months ended September 30, 2021, service and fee income was $3.7
million, an increase of $1.9 million, or 106%, compared to $1.8 million for the
three months ended September 30, 2020. The increase was due primarily to
increased policy fees and other revenue due to an increase in the volume of
policies placed by our MGA services.
For the nine months ended September 30, 2021, service and fee income was $10.8
million, an increase of $6.9 million, or 177%, compared to $3.9 million for the
nine months ended September 30, 2020. The increase was due primarily to
increased policy fees and other revenue due to an increase in the volume of
policies placed by our MGA services.
Net Investment Income
For the three months ended September 30, 2021, net investment income was $0.1
million, a decrease of $0.1 million, compared to $0.2 million for the three
months ended September 30, 2020. The decrease was due primarily to a decrease in
interest rates compared to the same period in the prior year. We mainly invested
in
                                       46
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corporate securities, residential mortgage-backed securities, and other fixed
maturities securities issued by the U.S. government and agencies.
For the nine months ended September 30, 2021, net investment income was $0.2
million, a decrease of $0.6 million, compared to $0.8 million for the nine
months ended September 30, 2020. The decrease was due primarily to a decrease in
interest rates compared to the same period in the prior year. We mainly invested
in corporate securities, residential mortgage-backed securities, and other fixed
maturities securities issued by the U.S government and agencies.
Losses and Loss Adjustment Expenses
For the three months ended September 30, 2021, loss and loss adjustment expenses
were $26.3 million, an increase of $17.6 million, compared to $8.7 million for
the three months ended September 30, 2020. The increase was due primarily to an
increase in our loss and loss adjustment expense as a result of the growth in
our business in which we retain risk and loss participation clauses in several
of our proportional reinsurance treaties.
For the nine months ended September 30, 2021, loss and loss adjustment expenses
were $65.0 million, an increase of $51.1 million, compared to $13.9 million for
the nine months ended September 30, 2020. The increase was due primarily to an
increase in our loss and loss adjustment expense as a result of the growth in
our business in which we retain risk as well as loss participation clauses in
several of our proportional reinsurance treaties, abnormally high
weather-related losses, including the Texas winter storm in February 2021, and a
higher concentration in areas impacted by PCS catastrophic related losses.
Insurance Related Expenses
For the three months ended September 30, 2021, insurance related expenses were
$7.1 million, an increase of $1.9 million, or 37%, compared to $5.2 million for
the three months ended September 30, 2020. The increase was due primarily to a
$1.3 million increase in amortization of deferred direct acquisition costs, $0.9
million increase in underwriting costs, $0.6 million increase in amortization
expense attributable to capitalized internal use software, and $0.4 million
increase in employee-related costs. These amounts were partially offset by a
decrease of $1.9 million in profit sharing expenses.
For the nine months ended September 30, 2021, insurance related expenses were
$23.2 million, an increase of $10.2 million or 78%, compared to $13.0 million,
for the nine months ended September 30, 2020. The increase was due primarily to
a $3.2 million increase in amortization of deferred direct acquisition costs,
$2.4 million increase in underwriting costs, $1.7 million increase in
employee-related costs, and $1.6 million increase in amortization expense
attributable to capitalized internal use software. These amounts were partially
offset by a decrease of $2.1 million in profit sharing expenses.
The primary components of insurance related expenses are listed below (in
millions):
                                                     Three Months Ended                                Nine Months Ended
                                                        September 30,                                    September 30,
                                                   2021               2020                          2021                 2020
Underwriting costs                             $      2.0          $    1.1                   $      5.6              $    3.2
Amortization of capitalized internal use
software                                              1.3               0.7                          3.4                   1.8
Employee-related costs                                1.4               1.0                          4.4                   2.7
Amortization of deferred direct acquisition
costs, net                                            1.9               0.6                          4.9                   1.6
Other                                                 0.5               1.8                          4.9                   3.7
Total                                          $      7.1          $    5.2                   $     23.2              $   13.0


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Deferred direct acquisition costs were $12.1 million and $22.8 million for the
three and nine months ended September 30, 2021, of which $10.2 million and $17.9
million were offset by ceding commission income.

Deferred direct acquisition costs were $0.6 million and $1.6 million for the
three and nine months ended September 30, 2020, of which $0 million was offset
by ceding commission income.
Technology and Development Expenses
For the three months ended September 30, 2021, technology and development
expenses were $8.3 million, an increase of $2.6 million, or 46%, compared to
$5.7 million for the three months ended September 30, 2020. The increase was due
primarily to an increase in employee-related costs of $3.6 million, driven by an
increase in headcount to support our long-term product roadmap and business
growth, partially offset by a decrease in stock-based compensation of $0.8
million. The increase was also driven by a $0.8 million increase in consulting
and professional services in support of our growth initiatives. These amounts
were partially offset by an increase in capitalized costs for the development of
internal-use software of $1.8 million.
For the nine months ended September 30, 2021, technology and development
expenses were $22.7 million, an increase of $9.5 million, or 72%, compared to
$13.2 million for the nine months ended September 30, 2020. The increase was due
primarily to an increase in employee-related costs of $9.8 million, including an
increase in stock-based compensation of $0.2 million, driven by an increase in
headcount to support our long-term product roadmap and business growth. The
increase was also driven by a $1.5 million increase in consulting and
professional services in support of our growth initiatives. These amounts were
partially offset by an increase in capitalized costs for the development of
internal-use software of $3.5 million.
Sales and Marketing Expenses
For the three months ended September 30, 2021, sales and marketing expenses were
$22.4 million, an increase of $4.8 million, or 27%, compared to $17.6 million
for the three months ended September 30, 2020. The increase was due primarily to
an increase in employee-related expenses of $3.4 million, including an increase
in stock-based compensation of $0.5 million, driven by an increase in headcount
to support our growth, and a $4.6 million increase in advertising costs. These
amounts were partially offset by a decrease in direct acquisition costs of $5.2
million, which have now been deferred and the related amortization included in
insurance related expenses after the acquisition of Spinnaker in the third
quarter of 2020.
For the nine months ended September 30, 2021, sales and marketing expenses were
$69.3 million, an increase of $16.4 million, or 31%, compared to $52.9 million
for the nine months ended September 30, 2020. The increase was due primarily to
an increase in employee-related expenses of $9.4 million, including an increase
in stock-based compensation of $2.3 million, driven by an increase in headcount
to support our growth, an increase of $12.4 million in advertising costs, an
increase of $7.0 million in service fees related to the issuance of a
convertible promissory note, and an increase of $1.5 million in licensing fees.
These amounts were partially offset by a decrease in direct acquisition costs of
$20.1 million, which have now been deferred and the related amortization
included in insurance related expenses after the acquisition of Spinnaker in the
third quarter of 2020.
General and Administrative Expenses
For the three months ended September 30, 2021, general and administrative
expenses were $13.4 million, a decrease of $2.8 million, or 17%, compared to
$16.2 million for the three months ended September 30, 2020. The decrease was
due primarily to a decrease in stock-based compensation of $8.1 million due to a
charge for the secondary sale of equity holdings by certain of our employees in
the prior year. This amount was partially offset by an increase in other
employee-related expenses of $3.1 million, driven by an increase in headcount to
support our growth, an increase in professional services expense of $1.3
million, and an increase in corporate and directors and officers insurance
expense of $1.2 million, related to the increased cost of public company
requirements.
                                       48
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For the nine months ended September 30, 2021, general and administrative
expenses were $30.6 million, an increase of $3.3 million, or 12%, compared to
$27.3 million for the nine months ended September 30, 2020. The increase was due
primarily to an increase in professional services expense of $2.8 million and an
increase in corporate and directors and officers insurance expense of $1.2
million, related to the increased cost of public company requirements. These
amounts were partially offset by a decrease in employee-related expenses of $0.1
million comprised of a decrease in stock-based compensation of $7.1 million due
to a charge for the secondary sale of equity holdings by certain of our
employees in the prior year and an increase of $7.0 million in other
employee-related expenses, driven by an increase in headcount to support our
growth.
Interest and Other (Income) Expense
For the three months ended September 30, 2021, interest and other (income)
expenses were income of $26.4 million, an increase of $26.5 million compared to
an expense of $0.1 million for the three months ended September 30, 2020. The
increase was due primarily to a gain on the extinguishment of the convertible
notes and related derivative liability of $47.0 million and a fair value gain on
the outstanding Public and Private Placement Warrants of $5.6 million. These
amounts were partially offset by an increase in fair value losses recorded on
preferred stock warrants of $7.0 million due to the increase in the fair market
value of our preferred stock and an increase in fair value losses recorded on
the derivative liability on our convertible promissory notes of $14.9 million,
from June 30, 2021 to the Business Combination closing date of August 2, 2021,
the date of exercise and/or settlement of those instruments. We also recorded
interest expense on the convertible promissory notes of $4.2 million.
For the nine months ended September 30, 2021, interest and other (income)
expense was $156.5 million, an increase of $152.3 million compared to $4.2
million for the nine months ended September 30, 2020. The increase was due
primarily to an increase in fair value losses recorded on preferred stock
warrants of $117.4 million due to the increase in the fair market value of our
preferred stock and an increase in fair value losses recorded on the derivative
liability on our convertible promissory notes of $61.4 million from December 31,
2021 to the Business Combination closing date of August 2, 2021, the date of
exercise and/or settlement of those instruments. We also recorded interest
expense on the convertible promissory notes of $26.1 million. These amounts were
partially offset by a gain on the extinguishment of the convertible notes and
related derivative liability of $47.0 million and a fair value gain on the
Public and Private Placement Warrants of $5.6 million.
Income Taxes
For the three months ended September 30, 2021, income tax expense was $0.1
million, an increase of $2.0 million, compared to a benefit of $1.9 million for
the three months ended September 30, 2020.
For the nine months ended September 30, 2021, income tax expense was $0.4
million, an increase of $2.3 million, compared to a benefit of $1.9 million for
the nine months ended September 30, 2020.
Liquidity and Capital Resources
Sources of Liquidity
Our capital requirements depend on many factors, including the volume of
issuance of insurance policies, the timing and extent of spending to support
research and development efforts, investments in information technology systems,
and the expansion of sales and marketing activities. Until we can generate
sufficient revenue and other income to cover operating expenses, working
capital, and capital expenditures, we expect the funds raised in our preferred
stock financings, convertible notes financings, the PIPE Investment, and the
Business Combination to fund our cash needs. In the future, we may raise
additional funds through the issuance of debt or equity securities or through
borrowing. We cannot assure that such funds will be available on favorable
terms, or at all.
On July 8, 2020, we issued shares of our Series E Convertible Preferred Stock
for aggregate proceeds of $150 million.
                                       49
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In November and December 2020, we raised an additional $365.0 million of cash by
issuing convertible promissory notes.
In August 2021, we completed the Business Combination. In connection with this
transaction, we received net proceeds of approximately $450 million. We also
received proceeds of $29.0 million from the exercise of preferred stock warrants
immediately prior to the Business Combination.
We are a member of the Federal Home Loan Bank (FHLB) of New York, which provides
secured borrowing capacity. Our borrowing capacity as of September 30, 2021, is
$26.1 million, and there were no outstanding amounts under this agreement.
As of September 30, 2021, we had $822.8 million of cash and restricted cash and
$72.0 million of available- for-sale fixed income securities and short term
investments. To date, we have funded operations primarily with issuances of
convertible preferred stock, convertible promissory notes, and from net proceeds
from the PIPE Investment, the Business Combination, and revenue. Our existing
sources of liquidity include cash and cash equivalents and marketable
securities.
Since our inception, we have incurred operating losses, including net losses
attributable to Hippo of $141.5 million for the year ended December 31, 2020 and
$310.7 million for the nine months ended September 30, 2021. We had an
accumulated deficit of $256.6 million as of December 31, 2020 and $567.3 million
as of September 30, 2021. We expect to continue to incur operating losses for
the foreseeable future due to continued investments that we intend to make in
our business and, as a result, we may require additional capital resources to
grow our business. We believe that current cash, cash equivalents, and net
proceeds from the PIPE Investment and the Business Combination will be
sufficient to meet our working capital and capital expenditure needs for the
foreseeable future.
Cash Flow Summary
The following table summarizes our cash flows for the periods presented (in
millions):
                                                   Nine Months Ended
                                                     September 30,
                                                   2021          2020        Change
           Net cash provided by (used in):
           Operating activities                $   (127.1)     $ (36.3)     

$ (90.8)

           Investing activities                $    (22.9)     $  24.8      

$ (47.7)

           Financing activities                $    480.4      $ 152.4      

$ 328.0

Operating Activities
Cash used in operating activities was $127.1 million for the nine months ended
September 30, 2021, an increase of $90.8 million, from $36.3 million for the
nine months ended September 30, 2020. This increase was due primarily to a
$221.2 million increase in our net loss for the nine months ended September 30,
2021 and $27.0 million in changes in our operating assets and liabilities. These
amounts were partially offset by an increase in non-cash charges of $157.4
million. Non-cash charges increased due primarily to the change in fair value of
our preferred stock warrants liabilities of $117.4 million, an increase in the
change in fair value on the derivative on our convertible promissory notes of
$61.4 million, and an increase in the amortization of debt discount of $20.4
million, partially offset by a gain on the extinguishment of debt of $47.0
million.
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Investing Activities
Cash used in investing activities was $22.9 million for the nine months ended
September 30, 2021, due primarily to purchases of investments.
Cash provided by in investing activities was $24.8 million for the nine months
ended September 30, 2020, due primarily to maturities and sales of investments
partially offset by cash paid for acquisition, net of cash acquired.
Financing Activities
Cash provided by financing activities was $480.4 million for the nine months
ended September 30, 2021, primarily driven by the Business Combination and PIPE
Investment, which resulted in a cash inflow of $449.3 million and proceeds from
the exercise of preferred stock warrants of $29.0 million.
Cash provided by financing activities was $152.4 million for the nine months
ended September 30, 2020, due primarily to the proceeds from the issuance of
preferred stock, net of issuance costs.
Commitments and Contractual Obligations
There have been no material changes to our contractual obligations from those
described in the Audited Consolidated Financial Statements for the year ended
December 31, 2020 included in the Company's Registration Statement on Form S-1
(File No. 333-259040) filed with the SEC on August 24, 2021, other than an
increase in Unpaid Loss and Loss Adjustment Expense and lease obligation. We
have extended a current lease and leased additional square footage in Texas for
future payments of approximately $8.0 million extending through 2026. Unpaid
Loss and Loss Adjustment Expense is $239.7 million as of September 30, 2021.
Off-Balance Sheet Arrangements
As of September 30, 2021, the Company does not have any material off-balance
sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of our financial statements
requires us to make estimates and judgments that affect the reported amounts in
our condensed consolidated financial statements. We evaluate our estimates on an
on-going basis, including those related to our revenue, loss and loss adjustment
expense reserve, recoverability of our net deferred tax asset, goodwill and
intangible assets, business combinations, fair value of common stock, valuation
of embedded derivatives, and redeemable convertible preferred stock warrant
liability. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Although actual results have historically been
reasonably consistent with management's expectations, the actual results may
differ from these estimates or our estimates may be affected by different
assumptions or conditions.

Management believes there have been no significant changes for the three and
nine months ended September 30, 2021 to the items that we disclosed as our
critical accounting estimates in the section titled Management's Discussion and
Analysis of Financial Condition and Results of Operations in our Registration
Statement on Form S-1 (File No. 333-259040), filed with the SEC on August 24,
2021.
Recent Accounting Pronouncements
See Note 1 to our interim consolidated financial statements for recently adopted
accounting pronouncements and recently issued accounting pronouncements not yet
adopted as of September 30, 2021.
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Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates. We are primarily exposed to market risk
through our fixed maturities investments. We invest our excess cash primarily in
money market accounts, corporate and foreign securities, residential and
commercial mortgage-backed securities, and other governmental related
securities. Our current investment strategy seeks first to preserve principal,
second to provide liquidity for our operating and capital needs, and third to
maximize yield without putting principal at risk. We do not enter into
investments for trading or speculative purposes. Our investments are exposed to
market risk due to the fluctuation of prevailing interest rates that may reduce
the yield on our investments or their fair value. We assess market risk
utilizing a sensitivity analysis that measures the potential change in fair
values, interest income, and cash flows. As our investment portfolio is
primarily short-term in nature, management does not expect our results of
operations or cash flows to be materially affected to any degree by a sudden
change in market interest rates. In the unlikely event that we would need to
sell our investments prior to their maturity, any unrealized gains and losses
arising from the difference between the amortized cost and the fair value of the
investments at that time would be recognized in the condensed consolidated
statements of operations.
Emerging Growth Company Status
We currently qualify as an "emerging growth company" under the JOBS Act.
Accordingly, we are provided the option to adopt new or revised accounting
guidance either (1) within the same periods as those otherwise applicable to
non-emerging growth companies or (2) within the same time periods as private
companies.
We have elected to adopt new or revised accounting guidance within the same time
period as private companies, unless management determines that it is preferable
to take advantage of early adoption provisions offered within the applicable
guidance. Our utilization of these transition periods may make it difficult to
compare our financial statements to those of non-emerging growth companies and
other emerging growth companies that have opted out of the transition periods
afforded under the JOBS Act.