Hippo Chief Executive Officer Assaf Wand and CFO Stewart Ellis stand ready to make a ceremonial sound during Hippo’s debut in the market in the New York Stock Exchange on August 3, 2021.
By the end of 2020, home insurance Hippo had earned its place in the ranks of the most successful fintech startups. Its Palo Alto, California, company was just about to receive fresh funding from prominent investors such as Ribbit Capital and Dragoneer with a $1.5 billion price. In the following months, Hippo’s founder and CEO Assaf Wand expressed optimism about moving into the public market via a SPAC that was then the hottest investment vehicle that involved the creation of a “blank check” shell entity that goes public to buy the assets of a private business later to take it to the general market. However, in this year’s trading, Hippo’s optimistic outlook began to fade. Its shares recently traded at $4.50 and were down by more than 50% since its initial trading day when it became an official public company.
The main issue was the timing of Hippo’s SPAC deal. Due to many reasons, such as the lucrative payouts to SPAC funders, many people with large pockets decided to establish SPACs. The need for companies that could easily be bought through a SPAC increased dramatically. “Every company that’s a unicorn is getting pitched by multiple SPAC providers,” venture capitalist and former Visa president Hans Morris told Forbes in October 2020. SPACs generated $83 billion in 2018, compared to only $14 billion in 2019. The fierce competition with SPAC supporters has helped Hippo get a reasonable price for its stock. The company landed the market with a valuation of $5 billion, which was more than three times the amount it could get just eight months ago in a private round of funding. It was a price that was difficult to surpass afterward.
Hippo announced its plan to seek a SPAC that LinkedIn co-founder Reid Hoffman backed on March 4, 2021. At the time, it was trusted that the worth of SPAC shell companies was at its highest, According to the Calgary-based asset management firm Accelerate Financial Technology. In the following months, the market cooled as regulators increased their scrutiny. Many SPAC-backed firms such as gambling website DraftKings and electric automobile producer Lordstown Motors ran into legal issues. The events brought down the costs of several SPACs.
As time went on, investors began to be skeptical of the industry of insurance. Renters insurance company Lemonade and auto insurance companies Root and Metromile had their shares drop by around 50% from February through late July, as winter’s storm Uri affected insurers severely, and investors became skeptical regarding their capacity to make profits.
The financial aspects of SPACs have also caused an issue for Hippo. Before blank-check SPAC companies choose which company they’ll buy, they usually launch their public offerings at $10 per share. Investors have the option of purchasing that stock before the acquisition being completed. However, after the target for investment is announced and just a few days after it’s complete, shareholders who have the initial SPAC stock may decide that they don’t want to be part of the deal. They can “redeem” their shares and receive a refund of $10 per share. (This feature has made SPACs a lucrative investment option for arbitrage traders. Find that a SPAC stock is selling for $9.95 before the time a merger ends. A trader could buy it and repurchase the shares at $10, netting 5-cents profit, which is risk-free, according to Julian Klymochko, CEO of Accelerate Financial Technologies.)
Hippo was hoping to get $230 million in cash from investors via its SPAC. However, 84% of stockholders had their shares redeemed before the merger, which means it only brought in $37 million. They had decided that Hippo was not worth $5 billion, and they sold their shares for just $10 per share.
Due to a large number of redemptions, investors who held the shares were probably traders in the short-term, not the kind of long-term investors the CEO Assaf Wand wanted to bring into the business. The redemptions caused the stocks of Hippo to drop dramatically, which made the stock more volatile so that any pressure to sell would cause it to fall further. The current price of Hippo is trading at around $4.50 per share, which is the implied value is $2.5 billion, which is half of the value it was estimated to have during its SPAC deal.
Hippo’s CFO Stewart Ellis argues the redemptions were primarily due to the market’s dynamics. “The entire SPAC category experienced a significant increase in redemptions over the past few months,” Ellis declares. “I think IPO investors, people who invested in SPACs before they had found a merger partner, got a lot more risk-averse.”
In addition to the modest SPAC raise of $37 million, Hippo also secured $550 million in private investments into the public equity (or PIPE) from backers such as Ribbit Capital and Dragoneer. The investors still hold the shares, Ellis says. Hippo currently has around $900 million cash in its balance account, Ellis adds.
The biggest question affecting Hippo currently and one that’s making its stock low is whether it will earn profits. In August, in its earnings conference, Hippo made it clear that its loss ratio — the insurance measure that divides a company’s expenses for managing and paying claim-paying insurance by the amount it receives from customers via premiums — was 161 percent. A loss ratio should be at or below 100% for a company to achieve profitability. Within the six weeks following the mid-August earnings call, Hippo’s stock dropped by $5.49 up to $3.99.
“We have high belief that we’ll be able to bring the loss ratio into line with the industry,” Ellis claims. He says that severe weather events in Texas, such as Winter Storm Uri and hailstorms, caused considerable losses because Hippo is home to a significant portion of its clients in Texas. Allstate is the second-largest home insurance company in America that has had many years of refining its underwriting process, suffered a losses ratio of 71 percent during the 2nd quarter.
“Insurance is a much harder business than it seems from the outside,” says Paul Newsome, a senior research analyst at Piper Sandler. He has been providing insurance coverage for over 25 years. “Companies are looking to enter the industry are entering at a difficult time. The business is trying to comprehend these huge forecasts for the weather.”
Another primary concern to ask Hippo is whether the costs of acquiring customers will begin to increase as the company proliferates and develop. In the most recently held earnings calls, Ellis said that’s not happening at this point. Investors are advised to be on the lookout for this metric, not only for Hippo but also for all fintech as their areas become more competitive.