Reinsurance

3 Months Ended

Mar. 31, 2023

10. Reinsurance

The Company purchases reinsurance to help manage exposure to property and casualty insurance risks, including attritional and catastrophic risks. The Company’s insurance company subsidiaries have entered into proportional and non-proportional reinsurance treaties, under which a significant portion of the liabilities have been ceded to third-party reinsurers. The Company also assumes risk from non-affiliated insurance carriers.

Proportional Reinsurance Treaties — Hippo

For the Company’s primary homeowners reinsurance treaty commencing in 2023, the Company secured proportional reinsurance from a diverse panel of six third-party reinsurers. All reinsurers are either rated “A-” Excellent or better by AM Best, or the reinsurance is appropriately collateralized. In 2023 the Company expects to retain approximately 40% of the premium through its insurance company subsidiaries or its captive reinsurance company, RHS, before purchasing catastrophe protection. Additionally, the reinsurance contracts are subject to contingent commission adjustments and loss participation features, which align the Company’s interests with those of its reinsurers. Loss participation features may increase the amount of losses retained by the Company’s insurance company subsidiaries in excess of its pro rata participation.

For business produced through the Company’s builder channel, we purchased proportional reinsurance from three third-party reinsurers. All reinsurers are rated “A-” Excellent or better by AM Best, or the reinsurance is appropriately collateralized. In 2023, the Company expects to retain approximately 58% of the premium produced through the Company’s insurance company subsidiaries or RHS, before purchasing catastrophe protection. The reinsurance contracts are subject to contingent commission adjustments and limited loss participation features, which align the Company’s interests with those of the reinsurers.

For the Company’s primary homeowners reinsurance treaty commencing in 2022, the Company secured quota share reinsurance from a diverse panel of eleven third-party reinsurers. All reinsurers are either rated “A-” Excellent or better by AM Best, or the reinsurance is collateralized. In 2022 the Company retained approximately 10% of the premium through the Company’s insurance company subsidiaries, including the Company’s captive reinsurance company, RHS. Additionally, the reinsurance contracts are subject to variable commission adjustments and loss participation features, including loss ratio caps and loss corridors, which align the Company’s interests with those of its reinsurers. Similar to the prior year, the Company saw increased use of loss participation features in the 2022 reinsurance agreements, which may increase the amount of losses retained by its insurance company subsidiaries in excess of the Company’s pro rata participation. The Company also seeks to further reduce its risk retention through purchases of non-proportional reinsurance described below in the section titled “Non-Proportional Reinsurance.”

For the Company’s primary homeowners reinsurance treaty that commenced in 2021, the Company secured proportional reinsurance from a diverse panel of nine third-party reinsurers with AM Best ratings of “A-” or better. A total of approximately 12% of the premium was retained either by Spinnaker or RHS, which aligns interests with third-party reinsurers. Two of the reinsurers, representing approximately one-third of the programs, provided three-year agreements.

Non-Proportional Reinsurance — Hippo

The Company also purchases non-proportional excess of loss catastrophe coverage (“XOL”) reinsurance. Through the Company’s insurance company subsidiaries, the Company is exposed to the risk of natural catastrophe events that could occur on the risks arising from policies underwritten by the Company or other managing general agents (“MGAs”). The Company is also exposed to this risk through its captive reinsurer, which takes on a share of the risk underwritten by the Company’s MGA business.

The Company’s XOL program provides protection to the Company from catastrophes that could impact a large number of insurance policies. The Company buys XOL so that the probability of losses from a single

occurrence exceeding the protection purchased is no more than 0.4%, or equivalent to a 1 in 250 year return period. This reinsurance protects the Company from all but the most severe catastrophic events.

Other Reinsurance

Spinnaker purchases reinsurance for programs written by MGAs other than Hippo. The reinsurance treaties are a mix of proportional and XOL in which approximately 75% to 100% of the risk is ceded. The reinsurance contracts are subject to variable commission adjustments and loss participation features, including loss caps, and may increase the amount of losses retained by the Company in excess of the Company’s pro-rata participation. Such provisions are recognized in the period based on the experience to date under the agreement.

Spinnaker also purchases a corporate catastrophe XOL program that attaches above the reinsurance programs protecting the business written by Hippo as well as the other MGAs. This treaty has a floating retention and attaches at the exhaustion point of the underlying programs’ specific reinsurance. This program provides protection to the Company from catastrophes that could impact a large number of insurance policies underwritten by the Company or other MGAs. The Company buys XOL so that the probability of losses from a single occurrence exceeding the protection purchased is no more than 0.4%, or equivalent to a 1 in 250 year return period. This reinsurance protects the Company from all but the most severe catastrophic events.

With all reinsurance programs, the Company’s wholly owned insurance carriers are not relieved of their primary obligations to policyholders in the event of a default or the insolvency of its reinsurers. As a result, a credit exposure exists to the extent that any reinsurer fails to meet its obligations assumed in the reinsurance agreements. To mitigate this exposure to reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and, in certain circumstances, holds substantial collateral (in the form of funds withheld, qualified trusts, and letters of credit) as security under the reinsurance agreements. No allowance has been recorded in the three months ended March 31, 2023, and 2022 for amounts anticipated to be uncollectible or for the anticipated failure of a reinsurer to meet its obligations under the contracts.

The following tables reflect amounts affecting the consolidated statements of operations and comprehensive loss for reinsurance as of and for the three months ended March 31, 2023, and 2022 (in millions).


	For the Three Months Ended March 31,
	2023						2022
	Written premiums		Earned premiums		Loss and LAE incurred		Written premiums		Earned premiums		Loss and LAE incurred
Direct	$	185.7	$	164.1	$	124.6	$	117.0	$	120.1	$	90.9
Assumed	3.8		0.9		1.6		0.1		—		0.3
Gross	189.5		165.0		126.2		117.1		120.1		91.2
Ceded	(168.2)		(151.2)		(88.5)		(116.5)		(111.1)		(68.7)
Net	$	21.3	$	13.8	$	37.7	$	0.6	$	9.0	$	22.5

As of March 31, 2023 and December 31, 2022, a provision for sliding scale commissions of $6.2 million and $3.5 million, respectively, is included in provision for commission on the consolidated balance sheets. As of March 31, 2023 and December 31, 2022, a receivable for sliding scale commissions of $4.0 million and $4.5 million, respectively, is included in ceding commissions receivable on the consolidated balance sheets.

As of March 31, 2023 and December 31, 2022, a provision for loss participation features of $70.5 million and $51.3 million, respectively, was recorded as a contra-asset in reinsurance recoverable on the consolidated balance sheets.