Home insurer Hippo defends start-up sector despite mounting losses

The head of Hippo has taken aim at sceptics of the home insurer and the sector’s fellow start-ups, saying they have “buried their heads in the sand” after a market sell-off fed doubts over the future of the companies.

Insurtechs, as the start-ups are commonly known, have been some of the biggest losers in the broader stock market downturn as their underwriting losses have mounted.

The companies, which listed during the final leg of the bull market, have responded with job cuts and a greater emphasis on minimising claims and achieving profitability.

Last week, Palo Alto-based Hippo said it was making about 70 employees redundant, a tenth of its workforce. That knocked its shares further, leaving them down more than 90 per cent since the group listed in New York early last year.

Chief executive Richard McCathron told the Financial Times that the job cuts were the “prudent and responsible” move as Hippo enters a more mature phase of growth and adjusts to “not taking as many bets” on certain product lines.

Hippo, he said, had the insurance expertise, underwriting discipline and strategy to be one of the winners from the shake-out among insurtechs.

“I fear that some of my colleagues in the insurance industry are hopeful that insurtechs will not ultimately be successful, and some of them, I fear, have buried their heads in the sand,” McCathron added.

“Every company in every industry has modernised over time. Those that modernise are successful, those that don’t find themselves obsolete.”

Analysts have pushed Hippo for an update on its progress towards turning a profit. At an investor day on Tuesday, the insurtech revealed new targets, including a plan to generate positive earnings before interest, tax, depreciation and amortisation by the final quarter of 2024.

That is two quarters earlier than it projected when it went public, although revenue expectations have been trimmed since then. Hippo is expecting adjusted ebitda of $20mn to $30mn in 2025.

At the end of 2024, Hippo expects to have cash and short-term investments of $400mn on its balance sheet, having started to generate positive cash flow.

The reduction in its workforce has helped accelerate the shift towards profitability, said McCathron. Actuarial and risk teams were spared in what was a broad-based programme of redundancies, he added, given the “considerable strides” they had made to improve its underwriting performance.

The investor day was “not to try to make people feel good about Hippo as an investment vehicle”, he said, but to showcase its “next challenge” — doubling down on its proactive approach to home insurance.

In addition to its smart devices such as leak sensors, which seek to prevent claims and offer customers lower insurance costs, Hippo is expanding its repair and maintenance services — including home check-ups — as it seeks to offer a full suite of home protection options.

The idea is to generate more ancillary revenues from homeowners but also to create a more insurable customer, which Root could underwrite or, increasingly, pass on to another insurance company.

The shift will see it underwrite a smaller proportion of the insurance that customers buy. Gross written premiums are forecast to fall from about three-quarters of its insurance business this year to just over a half in 2025, with placed premiums — passed on to another insurer — making up the balance.