The First Draft of Hippo’s Obituary

You ever wonder how after someone famous dies the news sites instantly have an obituary written? You probably know it’s because there are writers who compose these ahead of time while the subject is still alive. Maybe not the most polite thing to do but understandably necessary.

In that vein, while Hippo may still be alive, last week’s announcement that they are suspending new business nationally is the corporate equivalent of being in a coma, so I figured it was time to start preparing the postmortem.

Perhaps it will prove premature but the writing appears to be on the wall. How did a company with so much promise end up losing everything? It takes a lot of bad decisions.

Critical But Stable?

Before reviewing the past, it’s probably worth a quick assessment of Hippo’s condition and their prognosis.

Their statement suggested that stopping new business is a routine event like entering a new state. It’s not.

This would be like Tesla deciding not to sell cars anymore but still offer insurance or Apple saying they’re not going to make phones but, don’t worry, the app store is still open.

This is like going into hospice. You’re probably not coming out.

It’s A Breakup, Not A Pause

If you announce you are suspending all new business, you are effectively announcing you’re in runoff. I know they called it a “pause” and suggested some ancillary activities they will continue, but you don’t come back from an announcement like this.

Your agents and affinity partners will not sit still and wait for you to decide to unpause. They will move all renewals to more stable markets as well.

This means the runoff book will run off very quickly. That leaves little value for a buyer to acquire.

Which brings up another point. Hippo wouldn’t have made this announcement if they hadn’t tried (and failed) to find a buyer first. A going concern naturally has more value.

So the idea that maybe the next step is a sale feels unrealistic. The focus will be on preserving cash to buy time for some sort of miracle.

The odds that they can survive a near death experience and convince distribution to put them back on the shelf some day are very remote.

That’s why I’m drafting the obituary. It will be needed soon. My best guess is some time next year they will look to wind down operations and see if they can sell any of the technology.

Bad Choices

While most obituaries focus on the positive, let’s be honest. Hippo’s life was mostly filled with bad choices.

They were a lot like many successful child actors. They burst on the scene with a lot of publicity but grew up to be a troubled teen and fell on hard times as an adult.

The biggest accomplishments were raising lots of capital at inflated values and writing lots of premium at unprofitable prices. While those wins raised their profile, they were not a formula for long term success.

Because early life came so easy to Hippo, they ended up taking a lot of shortcuts that didn’t leave them the skills to deal with adversity later.

Taking Shortcuts

The biggest of those shortcuts was thinking PIF mattered more than profitability. Selling at a loss to build market share might work in an industry with limited options and high barriers to entry like rideshare or certain software products.

In insurance, it only creates losses and engenders little loyalty. If you underprice 30% to win business, you need to raise prices 50% to get back to a reasonable margin.

Problem is if you even raise price 15%, most of the business will go to the next cheapest market. This is super obvious to anyone who has spent time around insurance.

Unfortunately, Hippo didn’t have the experience to understand this and they were never able to recover from it.

To make things worse, they underpriced some of the riskiest customers in the country by focusing on cat prone areas like Texas. The risk of adverse selection is highest in these cat prone markets, especially once they made their next mistake and shifted from direct to agency.

The Agent Addiction

While some savvy customers may have found them online and availed themselves of the lowest prices, the risk of adverse selection is lower in the direct channel.

Once they pivoted to agents, Hippo was begging to be adversely selected. Agents who were having trouble placing catty business in Texas, suddenly had this welcoming new market they could burn. Even better, this new market was paying super high commissions!

Sure, the cost of acquiring direct customers was too high and required more upfront capital, but there was at least a thesis that they offered a more convenient shopping experience that some buyers would prefer – and even pay a price premium for in time. You could build a business around that.

Once they moved to agents to reduce marketing spend, it was game over. They may not have known it yet, but the agent switch was the equivalent of the first hit of heroin.

Sure, they reduced the near term acquisition expense, but they increased underwriting losses and killed long term retention. They were just another market that didn’t matter to agents. There is no future in that.

Not Understanding Cash Burn

Just like Lemonade and their “synthetic agent”, Hippo thought converting from direct marketing to real agents would improve their cash burn.

But in the long run, a model that pays once to acquire a customer is better than one that pays recurring commissions. GEICO and Progressive have conclusively proven this.

Cash burn was never really about the marketing expense. That was a red herring. It was about the loss ratio.

If the loss ratio in direct was good, the high upfront marketing expense could have been tolerated. And lowering the acquisition expense through agents didn’t matter a damn if the loss ratio was going to be terrible.

The bigger misunderstanding about cash burn is that the biggest cause is growth strain. Growing while losing money is the most toxic combination in insurance.

If Hippo had slowed growth earlier and focused on underwriting, they wouldn’t have had to shut down the whole operations today.

Modeling cash burn in insurance is not difficult. But if you ignore it, it quickly becomes a problem. All of the carrier centric startups have learned cash burn should have been metric one, not growth.

The sad thing is Hippo raised plenty of money with the SPAC that if they took a reasoned approach they should have been able to make the cash last. This was an unforced error.

The Alternate Universe

Somewhere in the multiverse, there is a universe where Hippo raised that SPAC money and then turned off the growth to clean up underwriting.

The stock probably would have gone down regardless since investors wouldn’t have liked the lack of growth. But they’d have still had the cash.

In that universe, Hippo has improved their underwriting and is one of the few markets positioned to take advantage of the turmoil in the homeowner’s market and is growing share capturing good customers that the big guys have shed too quickly in their panic to pull back from cat risk.

That could have happened in our universe too. They had the perfect setup! If only they hadn’t blown all their money on their growth addiction.

RIP, Hippo. What could have been…