State Farm and ADT, a smart home technology provider, announced yesterday that State Farm will make a $1.2 billion equity investment in ADT, a move that will give the nation’s largest insurer a 15 percent ownership stake in ADT. (See related article, “Tech Bytes: New Partnerships at ADT, Sapiens, Beazley,” for details)
The investment also heralds a change in mindset, Paul Smith, State Farm’s chief operating officer, said in the media statements. “This partnership gives State Farm the opportunity to provide smart home technology that takes us from our ‘repair and replace’ model to a ‘predict and prevent’ mindset,” Smith said, describing a mindset that is central to the business model of another insurance industry player—InsurTech Hippo.
At an investor conference yesterday, Hippo executives were asked to comment on State Farm’s investment, which an analyst said was roughly the same size as Hippo’s overall market capitalization.
“It’s a new announcement, but it’s not a new development” in the market, said Hippo Founder and Executive Chair Assaf Wand, referring to the fact that almost all of Hippo’s smart home technology provider partners over the years, such as ADT, Ring, SimpliSafe and Notion, have had the ability to team up with other insurance companies.
“There’s no exclusivity,” he said, going on to discuss the time and effort it takes to design and “meticulously iterate” to get to the right product offering, get it to the right target customers, and to make decisions about discounts, etc.
At various points during the meeting, other Hippo executives classified the InsurTech’s target customers as “Generation Better” homeowners who embrace the idea of proactive home protection, making them likely to produce better loss ratios.
“It took us four, five years to get to the state of where we are,” said Wand, explaining the effort that goes into delivering on smart home technology partnerships. “I think when we started, it was 10, 12, 15 percent attachment. And then we got to the 70, 80 percent…We had had times where we used to offer it or even send it to everybody, but then [for] a lot of people, it was just sitting on the mantle. That was a waste of money and attention,” he said, referring to fine-tuning needed after announcing a partnership.
Hippo Chief Revenue Officer Yuval Harry said the State Farm announcement is a good development in Hippo’s view. “It aligns with what we are trying to do with other partners.”
“When others are educating the market about the benefits, that’s positive for us,” he said, referring to carriers like State Farm.
Stewart Ellis, Hippo’s chief financial officer, agreed, and added that while Hippo is very excited about smart home technology, for the InsurTech, it is just part of a “holistic home protection platform.” The holistic program includes home care services like “Book a Pro,” for example. “Book a Pro” links Hippo customers with professionals for maintenance and repair work.
During the nearly three-hour meeting with analysts, which was webcast as well, Hippo executives took turns explaining Hippo’s value proposition and its future path to profitability, which includes typical insurance carrier actions like rate increases, and also anticipated revenue growth from commissions and fees related to placing business as an agent and an MGA, growth through monetization of home protection services, and efforts directed toward growing an embedded insurance channel to place homeowners insurance through partnerships with builders.
Hippo Chief Executive Officer Richard McCathron summed up the business strategy during the final minutes of the session when an analyst suggested that partnering with a better-capitalized incumbent carrier might make sense in Hippo’s future.
“If an offer was made, our board would have to entertain the offer. But the reality is [that] to just optimize around the edges isn’t why any of us are here. This isn’t why we joined this company,” he said, referring to opening comments he had made nearly three hours early, describing Hippo’s first value proposition as one of “redefining an old, fragmented industry.”
McCathron concluded: “We think we can make a meaningful change to the home protection industry, and we are heads down achieving that goal. We have the capital to do it. We have the time to do it.”
“We need to do a better job, frankly, of educating our investors on what does differentiate us. I think this today is a start of that—to really help folks understand we are not a traditional insurance company. We are not an MGA. We are not an agency. We are not a home protection services company. We are not a fronting carrier.”
“We are all of those,” he said.
During the conference, McCathron also addressed questions about last week’s action to reduce Hippo’s workforce.
“We just needed to right-size the organization and we had never done this. We’ve been around now for six years …. It was time to do it. And because of the macroeconomic terms, it’s only prudent.”
“We do not want to find ourselves in a position where we need to go raise outside capital, unless it’s our choice because of some strategic opportunity that we have,” he said, noting that while he believes workforce cuts are done, there are other cost-cutting measures that Hippos is looking into—”with real estate, with contract renegotiation, all of the things that I think any public company, frankly, any company should be doing when there’s uncertain macroeconomic times. And we have the fortitude will to do it,” McCathron said.