It’s too early for Hippo Holdings to disrupt the insurance market

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A very popular term in business is disruption or causing radical change through innovation. Hippopotamus (NYSE:HIPO) is a digital home insurance provider that went public in August. Potential investors in HIPO shares are wondering if this insurance provider is going to disrupt the insurance market.

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It seems to me that HIPO action lacks key catalysts to move it. In fact, the stock went into liquidation a few days after its IPO.

HIPO started trading on August 3, 2021 at $ 10.6500 and on August 23 the shares hit a low price of $ 3.78. The stock rallied to $ 4.99 on September 23 and was recently trading around $ 4.40 per share.

This volatility shows two things. SPACs can be volatile and may not be suitable for all investors. Also, some people acknowledged something about HIPO that most other investors ignored: information.

HIPO action has a difficult start

The company made headlines on August 8 when it was reported that “Hippo loses $ 192 million in funding just before PSPC merger, retains $ 5 billion valuation.”

The report states that many “investors in the SPAC company with which the Israeli insurance company Hippo is expected to merge have requested their reimbursement.”

About 83% of the capital raised by SPAC (Special Purpose Acquisition Company) Reinvent Technology Partners has been “withdrawn” and $ 192 million has been returned to investors, according to the report.

The question to be answered is of course why investors are withdrawing this capital. What are the possible explanations for Hippo Holdings to receive much less money than expected?

There might have been a disagreement in the implementation of trade policy. Or maybe investors have found more interesting opportunities. There’s also the company’s second quarter results, which were about to be released at the time.

However, I am not surprised with the financial performance, and that could be a reason why these investors preferred to withdraw their capital.

In any case, this event shows a lack of confidence in the business prospects of Hippo Holdings. This is not the ideal start for a company that has just gone public. It raises red flags.

The good and the bad

The highlights of the second quarter showed both positive and negative results.

On the positive side:

  • “High increase
  • 101% increase in total premiums generated
  • Annual guidance on the rise
  • 88% customer loyalty in year 1

Negative side:

  • Operating expenses “increased by 54% over the previous year to reach $ 47.0 million”
  • Hippo’s net loss was $ 84.5 million, or ($ 5.98) per share, compared to a net loss of $ 24.8 million, or ($ 2.01) per share in the second quarter of 2020. “

It is not surprising that Hippo Holdings is recording increasing net losses. The company is trying to find an inflection point. It invests in innovation to succeed in its long-term growth. But does that mean it can disrupt the insurtech industry?

Industry is growing at a rapid pace

Hippo Holdings operates in the global insurtech market. A report of Allied market research Says: “The global Insurtech market size was valued at $ 9,415.28 million in 2020 and is expected to reach $ 158,994.52 million by 2030, growing at a CAGR of 32.7% from 2021 to 2030.

This suggests that there is a lot of growth for the business to tap into. But for that to happen, economic moats Hippo Holdings claim they must deliver results.

In its letter to shareholders, Hippo Holdings mentions on page 12 that the company’s main economic gaps include “the technology and insurance approach”, “vertically integrated insurance capabilities” and a “diversified distribution strategy”. “.

The letter also cites the company’s dedication to customers. If I had to pick just one to criticize, I would choose that one. Why? It should be a core value for any business. It is not an economic divide, but rather a fundamental business principle.

Need more information on HIPO actions

How does that sum up for the HIPO action? Selling home insurance online operates in a very competitive market. Innovation must be very strong to make a difference. I think operating expenses such as marketing and advertising can increase to gain more customers, but it would hurt the chances of profitability.

As we do not yet have a lot of financial data to analyze, it is prudent to wait and assess the financial performance of HIPO stock over the next few quarters. If you invest too early in an IPO or SPAC, it’s like getting your driver’s license and trying to push the limits of a performance car. It’s too risky, and a lot can go wrong.

Playing it safe is never a bad idea, especially when investing in stocks.

I would like to see the Hippo Holdings economic moat bring measurable financial results soon. Until then, it is safer to be on the sidelines.

As of the publication date, Stavros Georgiadis, CFA does not have (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.

Stavros Georgiadis is a CFA Chartered Equity Research Analyst and Economist. He focuses on US stocks and has his own stock blog at thestockmarketontheinternet.com/. He has written various articles for other publications in the past and can be contacted on Twitter and on LinkedIn.

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