Porch Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Afternoon, everyone, and thank you for participating in Port Group's Q2 2023 Conference Call. Today, we issued our Q2 earnings release and related Form 8 ks to the SEC. The press release can be found on our Investor Relations website at ir.portgroup.com. Joining me here today are Matt Ehrlichman, Portage Group's CEO, Chairman and Founder Sean Tabak, Portage Group's CFO Matthew Nagle, Portage Group's COO and Malcolm Connor, VP and GM of Home Services and Warranty. Before we go further, I would like to take a moment to read the Company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important precautions regarding forward looking statements.

Operator

Today's discussion, including responses to your questions, reflects management's views as of today, August 8, 2023. We do not undertake any obligations to update or revise this information. Additionally, we will make forward looking statements about our expected future financial or business performance or conditions, business strategy and plans, including the pending application for the Reciprant Exchange, based on current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward looking statements. We encourage you to consider the risk factors described in our SEC filings as well as the risk factor information in these slides for additional information.

Operator

We will reference both GAAP and non GAAP financial measures on today's call. Please refer to today's press release for reconciliations of non GAAP measures and most comparable GAAP measures discussed during this earnings call. As a reminder, this webcast will be available for replay along with a presentation shortly after this on the company's website at ir.portgroup.com. And with that, I'll turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Port Group. Over to you, Matt.

Speaker 1

Thank you, Lois. Good afternoon, everybody. I want to start by giving a shout out and sincere appreciation to the Porch team who are doing exceptional work across our business units. We remain on track for adjusted EBITDA profitability in the second half of this year and beyond. And if we can achieve this in what continues to be a historically challenging macro market for both of our 2 industries, Insurance and housing.

Speaker 1

It will be a tremendous milestone, a proud accomplishment, and it would set us up for strong growth and margins as the markets improve. While property and casualty insurance carriers across the U. S. Report massive losses in Q2 due to historically severe hailstorms and other weather, And while our portion of this can risk overshadowing the work of the team, the fact remains, the longer term view, we are poised for great things. Insurance companies will make money as more weather events allow for rates to continue to increase markedly.

Speaker 1

Our perspective is that the homeowners insurance industry TAM is poised to approximately double over the midterm, and we will be beneficiaries of this. Today, the team and I will talk about Q2 results, some new initiatives we're working on and how we're leaning into our unique and sustainable advantages to create value as markets improve. Sean will provide an update on financial results and a revised outlook for 2023. Matthew will cover KPIs and trends in the business. And then Malcolm Connor, the GM of our warranty business, will dive deeper into some of the exciting progress we're making there.

Speaker 1

Moving to Slide 6 to review the high level financials. Overall, we delivered solid execution in the quarter while continuing to face same industry weather and housing related headwinds as previous quarters. Revenue in the 2nd quarter grew 39% to $99,000,000 driven by our Insurance segment. Adjusted EBITDA loss in the 2nd quarter was $43,000,000 Based on historic loss ratios In Texas weather seasonality, we had expected Q2 to be our largest loss making quarter of the year as it's typically the most expensive time for weather related claims comps. The Q2 was on track with our expectations until, as we recently disclosed, our insurance division was impacted by catastrophic weather losses exceeding our long term average.

Speaker 1

To give this some context, Q2 2023 was the 3rd most costly second quarter for weather losses in the U. S. Since 1950. Property claims services estimates Losses were $20,600,000,000 nationwide, which is well above the 5 year average of $15,000,000,000 For us, these events drove an approximate $18,000,000 incremental loss. Looking ahead, Q3 and Q4 are typically when we Related to our vertical software division, industry wide home sales declined 21% in the Q2 year over year with those headwinds impacting more transactional businesses like our moving group.

Speaker 1

So turning on to key updates in the quarter. First, the reciprocal exchange application continues to progress with the Texas Department of Insurance. Pending approval, we expect to launch Porch Insurance, a new brand and product that the reciprocal exchange will offer, which includes unique benefits for consumers, such as a 90 day warranty and special offers to customers within the Porch ecosystem. The HOA product will continue to be available for customers as well. And certainly, we're excited about what's to come here.

Speaker 1

2nd, we've continued to take aggressive underwriting actions to counter severe weather in our insurance business. We're focused on improving overall performance by increasing premiums and policy deductibles where appropriate, by lowering distribution and support costs in regions that are unprofitable given current costs of reinsurance and shifting premiums toward the most attractive homes to underwrite. For 2023 and likely through 2024, given constraints in the reinsurance market as capital and risk mitigation partners, We will continue to carefully control gross written premium growth and balance the amount and type of premium with capital requirements, all with an eye for profitability. We are highly confident in our ability to grow premiums when surplus builds with favorable weather results and or third party capital and reinsurance returns. In addition to the capital constrained and hardened reinsurance markets that we've discussed.

Speaker 1

There has just recently been a development of 1 of Porch's larger reinsurance platforms called VESTU. There are claims that the collateral that backed Vistu is not valid. And while it's early in our investigation and while the reinsurance was sourced and administered by 2 of our reputable reinsurance brokers. We are taking this issue seriously. We've terminated this agreement, have already met with the Texas regulator and have secured certain supplemental reinsurance.

Speaker 1

3rd update. You may recall last quarter, we discussed how our unique property data meaningfully impacts insurance pricing accuracy. In Q2, we received approval to use the data in 2 further states, bringing us now to 11 states total. Again, this data allows us to improve our risk accuracy in key insurance risk categories and we're seeing an approximate 15% to 20% improvement with much room ahead. This means that we can charge a lower price for policies which are low risk and more accurately priced higher risk policies.

Speaker 1

4th, we're seeing early but promising results from partnerships with 3rd party insurance agencies where we now distribute some home buyer leads generated by our software division. These agencies sell these consumers' insurance and commissions generated are then shared back with Porch. In addition to helping increase conversion rates at a lower cost of Porch versus relying only on our own insurance agency. We're excited about how we can use demand to incent and motivate these third party partners to sell more of HOA and soon porch insurance to all of their customers. 5th, we continue to be excited about the rapid progress our warranty business is making.

Speaker 1

It wasn't yet 2 years ago that we didn't offer home warranties. That business has continued to expand, offering more types of warranty products through more channels. Malcolm will cover this later. I'll now hand it over to Sean to cover our financial performance and guidance. Over to you, Sean.

Speaker 2

Thanks, Matt. Good afternoon, everyone. Overall, the Q2 was in line with our expectations aside from the catastrophic weather events later in the quarter that we had previously announced. Our businesses and teams are performing well in the face of industry wide headwinds, with insurance being impacted by weather and the reinsurance market and vertical software facing a soft housing market. We continue to focus on being strong stewards of capital, focusing on investments that have strong business, product and channel unit economics coupled with expense control.

Speaker 2

And finally, we raised $102,000,000 of additional capital in Q2, which bolstered our balance sheet, which is solid as we look forward to these market headwinds turning to tailwinds. Revenue was solid at 98 point $8,000,000 in the Q2 of 2023, an increase of 39% over the prior year, driven by the insurance segment and partially offset by the software segment, where our moving services, in particular, continue to be impacted by the soft housing market. Revenue less cost of revenue was $17,400,000 which is 18% of revenue, lower than prior quarters due to an approximately $18,000,000 loss due to the extreme and unexpected catastrophic weather towards the end of the quarter as well as expected weather related claims costs tied to Q2 seasonality. We expect revenue less cost revenue margin to increase in Q3 and Q4 based on historical claims patterns. And post reciprocal as discussed previously, our margin profile is expected to further improve as we mitigate exposure to weather and volatility at Porch Group.

Speaker 2

Our vertical software segment revenue less cost of revenue margin increased by approximately 300 basis points over the prior year. Adjusted EBITDA loss was $43,100,000 driven by the extreme cat weather, hardened reinsurance market and the industry wide decline in home sales, offset by strong expense control and an 11% year over year reduction in corporate G and A expenses. Gross written premium was $143,000,000 broadly in line with prior year as we have worked to manage premium growth. Looking at revenue by segment here on Slide 10, in the Q2 of 2023, Revenue from our Insurance segment was $64,300,000 growth of 127% over the prior year, driven by an increase of approximately 15% in premium per policy and also lower reinsurance seating. A key part of our strategy is continuing to increase premium per policy to drive revenue and profitability in the insurance business.

Speaker 2

We are expecting further increases to premium per policy over the next year. The Insurance segment was 65% of group revenue in the quarter, an increase from 40% in the prior year. Vertical software revenue was $34,400,000 a decrease of 19% over the prior year due to the 21% industry wide housing market year over year decline as well as a decline in corporate relocations, both of which impacted our moving services. Moving on to adjusted EBITDA by segment. Our Insurance segment had an adjusted EBITDA loss of $31,200,000 in the second of 2023 due to the extreme cat weather and hardened reinsurance markets we've discussed.

Speaker 2

Our HOA insurance carrier continues to focus on launching the reciprocal as well as improving underwriting performance, including future premium per policy increases, increasing deductibles and expanding the number of states where we're approved to use our unique data to better price risk. Vertical software adjusted EBITDA was $1,800,000 impacted by the soft housing market and moving's decline in corporate relocations. Corporate expenses were $13,800,000 in the 2nd quarter, reducing to 14% of total revenue from 21% in the prior year, driven by strong expense control. Moving to the balance sheet. As of June 30, we had $358,000,000 of unrestricted cash and investments.

Speaker 2

This includes $192,000,000 of cash and investments on our insurance carrier, HOA, which we expect to transfer to the reciprocal when approved and launched. Excluding HOA, Porch held $167,000,000 of unrestricted cash and investments, leaving us well capitalized. As a reminder, at the beginning of the second quarter, We issued $333,000,000 of new senior secured notes, using $200,000,000 to reduce our 20.26 unsecured notes par value to $225,000,000 and bolstering our balance sheet by adding $102,000,000 of cash in the 2nd quarter. In addition to the $167,000,000 of unrestricted cash and investments at Porch Group, we held $39,000,000 of restricted cash, primarily for our captive and warranty business. This increased from $15,000,000 in the Q1 as expected, as we increase the amount of reinsurance provided by Portia's captive to HOA given current market dynamics.

Speaker 2

We are hopeful the reinsurance markets will approve, but we anticipate continued usage of our captive in 2024. As we reduce reinsurance provided by the captive in the future, we expect this cash to move back to unrestricted status. Additionally, we had some non cash items in Q2 that didn't impact adjusted EBITDA, but are reflected in GAAP net income. First, we recorded a $81,000,000 gain on the retirement of our of $200,000,000 of our 2026 unsecured notes that I mentioned. 2nd, we had a $55,000,000 goodwill impairment charge in light of the continued challenges with the reinsurance markets, volatile weather as well as our stock price performance.

Speaker 2

And also following the period end, the allegations against Vastu Service. From an accounting perspective, we had a $48,000,000 net Under GAAP, we evaluated whether we can overcome a rebuttable presumption and concluded that given the high bar And that we are early on in our investigation, which is ongoing. We wrote off the balance, but intend to pursue recovery. And finally, one quick item on housekeeping. In the Q2, we have revised the definition for adjusted EBITDA, which now excludes the net receivable write off related to the reinsurance as well as any subsequent recoveries and also restructuring costs.

Speaker 2

In Q2, our restructuring costs were around $1,100,000 which includes costs related to forming the reciprocal exchange. Now, on to our outlook. Today, we are updating our full year 2023 guidance. Overall, the business is performing in line with our expectations and the teams are executing well, including price increases in Insurance and Software segments. We are reiterating our revenue outlook for the year of $330,000,000 to $350,000,000 However, given the extreme weather we've experienced, We will be cautious around revenue less cost revenue and adjusted EBITDA guidance, in particular, until we are able to launch the reciprocal.

Speaker 2

We've made 2 adjustments there. First, as you may recall, our initial guidance did not include cat weather events in excess of our historical experience, including the approximately $18,000,000 loss that we incurred in Q2 that we discussed today. So we have updated our guidance to account for these past losses. 2nd, we have also widened the ranges by $5,000,000 to reflect the continued weather volatility and reinsurance market headwinds. Our updated guidance is revenue less cost of revenue ranging from $145,000,000 to $160,000,000 and adjusted EBITDA loss ranging from $65,000,000 to $50,000,000 We do continue to expect on a cumulative basis adjusted EBITDA to be profitable in the second half of this year as well as for 2024 and beyond.

Speaker 2

This assumes cat weather is in line with historic trends, which would equate to a 41% gross loss ratio for the second half of the year. Typically, we would see better weather in Q4 than in Q3 with both of these both of those quarters much better than Q2 and Q1. So we would expect adjusted EBITDA to increase as the year comes to an end. As a reminder, claims for catastrophic weather events in excess of our long term historic averages are excluded from guidance and from this target. We are reiterating gross written premium guidance of $500,000,000 and as mentioned, are continuing to focus our active efforts towards constraining growth of overall premium until reinsurance and the capital markets improve with an eye toward profitability.

Speaker 2

Thank you all for your time today. And now, I'll hand over to Matthew to cover our KPIs.

Speaker 1

Go ahead and go off mute. Matthew?

Speaker 3

Thanks, Sean. On Slide 15, I'll run through an update on our KPIs. The average number of companies with 30,700 in the 2nd quarter, broadly similar to Q1 2023 and a 7% increase from Q2 2022. Similar to previous quarters, home inspection, mortgage and title companies continue to be challenged with the decline in the housing market, with many businesses stopping operations rescaling back their footprint. Average revenue per company per month increased to $10.73 an increase of 31% year over year and 13% compared to the Q1 2023.

Speaker 3

This was driven by the increase in reinsurance revenues. We had 245,000 monetized services in the quarter, an increase of 14% versus last quarter due to normal seasonality related to home purchases and moves. This is down 27% versus prior year due to the industry wide decline in home sales and a decline in corporate relocation and moving. Finally, average revenue per monetized service was 3 of $31 broadly flat versus the Q1 due to a slight mix shift with an increase in moving services purchased. This was up 109% versus Q2 2022 due to the growth in our higher value services such as insurance and warranty.

Speaker 3

Looking now at the insurance KPIs. Gross rate and premium was $143,000,000 broadly in line with prior year from 358,000 policies in force in the Q2. Annualized revenue per policy was $5.17 with the increase driven by lower reinsurance seating levels and increased premium per policy. Premium revenue was 100 and 4% for the Q2, a slight decrease versus Q1 2023 due to the 37,000 higher risk policies, which we are non renewing and as we manage reinsurance and capital levels. As Sean mentioned, the reciprocal, once approved and launched, will help with a more efficient capital structure as well as mitigating weather impacts.

Speaker 3

Our insurance carrier had a gross loss ratio of 120% in the second quarter, consisting of 35% relating to non cat and 85% relating to cat weather. As mentioned, the quarter was on track until we experienced what we have seen peers quote as a historic level of industry wide catastrophe losses. In our Q1 earnings, we included the AM best market share data, which demonstrates HOA's outperformance versus the majority of our peers. At a high level, in the states where we write policies, our Q2 losses are in line with market performance. Across the industry, rates will continue to go up, growing the TAM and our future opportunity.

Speaker 3

In our view, there's no better opportunity than being an operator of a reciprocal in this rapidly growing market. As Sean said, our second half twenty twenty three adjusted EBITDA profitability target assumes a 41% gross loss ratio, which is approximately 2 percentage points above our long term average. This is also supported by continued increases in premium per policy as we discussed today. So assuming we don't see wide variances from our historical claims, we feel confident in our loss ratio assumptions. To provide some insight into the assumptions behind the 41% we have provided here, the average claims cost per policy, We have assumed approximately $3.75 in the second half twenty twenty three for average teams' cost per policy, which is 66% higher than the 5 year average.

Speaker 3

Finally, on Slide 18, we have reiterated our 2023 strategic priorities. 1st, we will continue to develop new software for companies who use our software products and upsell more software through bundled solutions. We are extending our online experiences and increasing revenue per home buyer. We are improving premium per policy, as Sean mentioned earlier, to help offset the hardened reinsurance market. We continue to wait on further feedback from the TDI on our reciprocal application and are against our goal of approval later in 2023.

Speaker 3

Thanks. Now I'll hand it over to Malcolm.

Speaker 4

Thanks, Matthew, and hello, everyone. I'm Malcolm, VP and Group GM of our Warranty Business. I have been with Porch for two and a half years now, Having previously led and scaled American Water's warranty business to greater than 130,000,000 in revenues. I am excited to share more detail again about our warranty business and partnerships. We believe we are well positioned to become a leader in this space with our unique assets and lower cost of customer acquisition.

Speaker 4

We're on track to go from 0 in revenue 2 years ago to approximately $35,000,000 of revenue this year and above a 25% adjusted EBITDA margin. Most recently, we have begun operating in California and Florida and are now active in 49 states plus D. C. We are working on the approval process for Washington and look forward to that launching in the near future. Starting on Slide 20.

Speaker 4

There are 3 key differences which set Porch apart from competitors in the warranty space and provide us a long term advantage. 1st is our bundled handyman services. This appeals to customers who like to keep on top of home maintenance to prevent issues in the future and those who have issues or Pairs which need a professional attention. Customers pay a deductible against the services such as gutter or dry vent cleaning. Saving the money on home maintenance led to a significant improvement in our retention rates.

Speaker 4

2nd is channel access. In addition to the traditional warranty channels such as real estate and direct to consumer, Being part of Porch Group also means we can cross sell our products through inspectors, contractors and other businesses. Leveraging these existing customer channels provides lower customer acquisition costs and increases lifetime value. 3rd is our 90 day warranty product, which is provided largely through inspectors to homebuyers during the home purchase process to offer protection during those busy 1st few months. This provides us early access to a high volume of customers, both short term warranties and continued coverage.

Speaker 4

Now summarizing our key distribution channels, which is part of what Porch Group provides us. 1st Is the real estate and home inspection where we offer our 90 day warranty, annual and 18 month products to their homebuyers? This includes providing warranties through Porches Moving Concierge Services. 2nd is utilities. We partner with large electric and gas utilities to provide a variety of services to their customers, including targeted and full home warranties.

Speaker 4

We are excited to announce new partnerships with Pepco, Atlantic City Power and Delmarva Power, where we will utilize a co branded journey to provide exclusive home service offerings to utility customers including warranty and home maintenance. 3rd is retail and distributors where we sell our extended labor warranty at point of sale for products such as new roofs. We have just signed a distributor deal which we will launch soon. 4th, we sell direct to consumer. And finally, we are testing other nascent channels such as to insurance customers where we can offer warranties as an additional layer of protection to cover what homeowners insurance does not.

Speaker 4

You know, it's been an incredible couple of years, during which Our warranty business has grown handsomely with very strong margins. I will close with optimism about what is ahead for this business. We have an incredible team that we have built focused on each of our products and channels. Both the growth and the margin performance are expected to continue, and we look forward to sharing more in the future. Thanks, everyone.

Speaker 4

I'll now hand it back over to Matt.

Speaker 1

Thank you, Malcolm. Thank you, team. Great work there and congrats on the progress. To wrap up, we are pleased to reiterate our target to be adjusted EBITDA profitable in the second half of the year and ongoing. We are managing costs closely and are laser focused on execution in order to accomplish these key milestones this year and next.

Speaker 1

We're excited for the transition into a reciprocal structure and for the launch of Porch Insurance as we've spoken about over the last few quarters. We do appreciate the patience and the support and we're getting closer to a time in which we believe will be ideally structured to run the insurance business at scale. Overall, we're still in the very early innings, and I'm confident that we have a strong business model and the team across the company to deliver. And with that, we'll wrap the prepared remarks. Lois, please go ahead and open up the call for Q and A.

Operator

Great. Thanks, Matt. The lines are now open for Q and A. To ask a question, please click the raise your hand icon. We'll do our best to get through all your questions in our remaining time.

Operator

So question 1 comes from Josh Acantil. Over to you, Josh.

Speaker 5

Yes, hi. Thanks for taking my question today. So first of all I'd like to ask On the insurance side of the business, understanding premium per policy. So how much rate do you think there still is to earn into the book? And do you believe that there's a lot of potential to increase that premium per policy, especially as we head into 2024?

Speaker 1

Hey, Josh. Thanks for the question. Yes, what we're seeing across the whole insurance industry is Is carriers taking more rate? I mean, the reality, like I'd mentioned before, is as there is weather that is more severe, As reinsurance pricing goes up, that simply allows carriers to be able to take very substantial rate increases, Hence, my comment on our expectation of this TAM doubling over that midterm period of time, We're confident that rates will continue to go up. So for us directly, yes, we are in the process, similar to what we did this last year of being able to put in additional rate filings for next year that we believe will be supported and approved by the relevant state regulators.

Speaker 1

As Sean mentioned, at this point in time versus last year, our rates are up 50%, give or take. And So that's a big deal. So as we look ahead and the markets normalize, we do think it puts us in a strong position given where rates should go.

Speaker 5

Got it. And then following up on the insurance side, I'd like to talk about new policies. So obviously over the past couple You've been in the process of non renewing those higher risk policies. But as you're thinking about actually bringing in new policies in force, Especially given the housing market macro right now, how are you going out there and targeting some of these new Perhaps lower risk policies to add to the book.

Speaker 1

There's 2 key ways that we think about this. First is just in terms of Geographies. So what geographies do we want to be in generally? We want to make sure that we have, yes, the right diversification, but there are certain markets where we can either take the appropriate rate, certain states where that might be harder to do so. And so certainly, we are leaning into states where we can be able to sell policies at what we believe is the right rate that can be profitable for us.

Speaker 1

And frankly, non renewing or pulling back on states that we simply aren't Getting approval for the right rates because it just doesn't it's not what we should put our focus right now. So that's number 1. Number 2, as we've talked about in the past, we do have a tremendous amount of unique data that we understand about properties that nobody else has. And so for us, that allows us to be able to really target the customers where we believe they and their property are the lowest risk. And so that's something that we'll continue to be able to do on an ongoing basis.

Speaker 5

Great. Thanks very much, Matt. Appreciate it.

Speaker 1

Thank you.

Operator

Thanks. Next, we'll go to Ajay at Stephens. Over to you, Ajay.

Speaker 6

Hey, good evening guys. Congrats on the quarter and thanks for taking our questions. First off, can you help unpack the vertical software revenue, mainly looking for more clarity on rev growth across the transactional side of the non insurance business versus the subscription revenue. And then related to that, on the vertical software subscription revenue, can you help us better understand the impact of attrition from Industry consolidation and then essentially your best guess for how long that might linger as a headwind?

Speaker 3

Sure. I can take that. The overall the vertical software business is impacted by the macro housing trends. We reported a 21% decline in the housing market. Our revenue decreased 19%.

Speaker 3

However, A large chunk of that was an impact to our moving business, which is primarily a service business. If you back out the impact of that business. The software part of the business reduced much less than the market trends, materially less than the market trends. So there is resilience in the software business despite the macro trends. Some of that is because of the stickiness and retention of our products and we've been able to take some price increases, which has helped to offset this trend that we're seeing that some of our target customer is Folks who are getting closer to retiring and they're taking this opportunity to say, maybe I'm done because the micro headwinds are harder.

Speaker 3

We watched carefully what the market thinks will happen in 2024. It's too early to forecast that. We actually look at the market forecast regularly, and the market can't yet agree on what next year is going to do. So we're seeing anything from a little bit of decline in the overall market and some people are saying it could grow next It's just too early to tell. But I think you're going to want to see optimism back in the housing market before some of that softness On the company side, it's going

Speaker 4

to subside.

Speaker 3

And then your second could you repeat your second Question, which I think it was yes, could you repeat your second question?

Speaker 6

Yes, I was just looking for some color on maybe like industry consolidation and just the impact of attrition. And how long do you expect that headwind to last?

Speaker 3

Yes, that was my attempt to answer it at the end there, which is, I think we'll continue to see a little bit of softness until there's optimism back in the market. And as of today, when people look at 2024, Some people are negative, some people are positive, so it's too early to tell. But you're going to we're going to want to see optimism coming back in the landscape market.

Speaker 6

Great. Thanks for the color there, Matthew. And then shifting gears a bit. In your guidance, I believe you were previously assuming negative 10% year over year growth and apologies if I missed this. But for 2023, I didn't see this call at this go around.

Speaker 6

So can you update us on that assumption? Is that still the underlying assumption of negative 18% year over year home sales for 2023?

Speaker 3

That's currently the underlying forecast that we have.

Speaker 6

Okay. And then just a follow-up on that. If we kind of look at the industry forecasters such as NBA, Fannie, NAR, they're calling for a little bit better than that at Negative 15% year over year growth on average. Is this growth differential more of a unique sports Exposure thing or just some just conservative overall outlook from you guys here?

Speaker 1

No, AJ, last year, we had I used those forecasts and they were wrong last year. And so we wanted to just take a more conservative view as we entered into 2023. We're holding that view through the year.

Speaker 6

Okay, perfect. Thank you, Matt.

Speaker 1

Thank you.

Operator

Great. Thank you. Next to Jason at Pagano. Thank you.

Speaker 7

Hey, this is Cal on here for Jason today. So just a couple from me. I guess first just to start, Can you maybe just touch on how the decision to kind of reduce your reliance on the reinsurance maybe impact the cat claim losses in the quarter? And any intentions to change your reliance on reinsurance going forward?

Speaker 2

Yeah, I could cover that. So this is Sean. Thanks for the question, Cal. The $18,000,000 that we talked about is net of reinsurance recovery. So it's our net exposure in the quarter.

Speaker 2

One of the things we've talked about last quarter before that and continue to talk about today is the reinsurance markets are continuing to have an impact on the business and our overall profitability. And so we saw a similar trend obviously there in Q2. Those reinsurance contracts, just for reference, are a year long. So until we get into the next reinsurance market early next year. We'll continue to be in the existing reinsurance contracts that we have.

Speaker 2

And so, like I said, the net impact to the quarter for the specific extra cat losses was $18,000,000 And obviously, in addition to that, from a year over year perspective, You also have the hard injury insurance markets impacting EBITDA for the insurance segment.

Speaker 7

Perfect. Thanks. And then I guess last one for me. You know we're seeing other home insurance providers with kind of the same profitability Challenges and some churning policies. So if you could just talk a little bit on how aggressive you're looking to get here in customer acquisition moving forward.

Speaker 7

Thanks.

Speaker 3

Sure. I can take that and then Sean can layer You know, our focus is on profitability and cash flow and taking advantage of the unique data we have to get what we think is profitable policies. And we're going to continue to do that and we're going to continue to watch the reinsurance markets. We've not renewed $37,000 It is possible we will do more than that and then replace with the ones that we think are attractive.

Speaker 7

Perfect. Thanks, guys. Appreciate it.

Speaker 1

Thank you.

Operator

Great, thanks. Now we're going to go to Dan. Over to you, Dan.

Speaker 7

Can you guys hear me?

Speaker 1

Yes. Hey, Dan. How are you?

Speaker 8

Hey, good. Sorry. I don't know what's going on in my video, Matt, but, I am here. So Maybe, Malcolm, appreciate the incremental color on warranty. You guys are about 10% ahead of, I think, where we thought you'd be by the end of the year, given The outlook you provided today, either for you or Matt, can you just kind of talk through some of the KPIs around See per policy trends and obviously I know that it's not necessarily an inflation price gain here if you guys And price more accurately.

Speaker 8

And now that you've got all these other revenue streams, maybe just some more granularity on how we should think about the drivers of growth over the near term, what's Sort of attainable now and what's more attainable longer term?

Speaker 4

Yeah, thanks for the question. I will sort of start Here. Yeah, in terms of warranty, you know, very specific KPIs, you know, we do not at this time disclose A lot of detail about the specific KPIs of various business units. But what I can say is that we've been very successful in a A few things such as our renewals and retention rates, we're seeing that with the bundling of our Handyman services, They have increased our renewal rates overall. Also, earlier this year, we did launch Porch warranty is our own brand, and we are seeing some really good sales out of the gate with that.

Speaker 1

I'd also just add one of the things that the team has done a nice job of Dan is just, You know, just leaning into the Porch platform and playbook. So Porch obviously has lots of companies, lots of partnerships through many different, you know, Channels. We talk a lot about, you know, home inspection and real estate related. We talk less about things like utilities, large utility partnerships, you know, that we've had. And that team has continued to, as Malcolm mentioned, add more new partnerships and be able to build deeper relationships with those existing You know, partnerships to be able to help them and help their customers with more services like warranties.

Speaker 1

So the nice thing is that it is a multi product, multi Channel strategy that they're executing and we are seeing success across many different channels.

Speaker 8

Got it. That's super helpful. And then, I mean, you know, of course, Matt, inevitably the first headline that I saw today, not For you guys, but in general, it was just about flooding in the southeast and some more extreme weather, which it's kind of crazy out there right now. I guess, You know, it didn't seem like a lot of it was in Texas. I don't know how much the VESTSU issue leaves you incrementally exposed to direct weather events, if I'm reading that right.

Speaker 8

And I may not I apologize if I got that wrong, but just trying to get a sense knowing that it should sequentially improve from Q2, but just Again, given some of the headlines and some of the other stuff, I mean, do you guys feel like you're on track in Q3 to have sort of a more standard quarter from cat weather perspective?

Speaker 1

I can only communicate what has happened so far to date. Obviously, I cannot predict the next, where we have from a 6 weeks or so. But but first, we don't have flood exposure. We do not write flood insurance. So anything that you're reading about that specifically would not apply to us.

Speaker 1

I would say There's not been anything abnormal so far this quarter that would be outliers versus expectations.

Speaker 8

Okay. Yeah, that's helpful. And then just lastly, just on the app development, I mean, we've had Malcolm now talk about some D2C opportunity. I know Matt is sort of on the wish list, especially given all of the cap requirement stuff, the reciprocal exchange, all of the things you're doing in the short term. But Just trying to get a sense of how you're cooking all this together so that eventually you can have all of the Porsche branded products and then pushed harder on the DTC See button when that might start to take

Speaker 6

effect. Yeah.

Speaker 3

I can comment a little bit on that. We continue to invest in our app. One of the things we're excited about in addition to bringing together the different services It is providing a really delightful and magical experience with the data because we get access to a lot of unique data at home and bringing it to life in a way that consumers can start to use it and use it on a day to day basis. We think will be one of our differentiators. We continue to grow the number of app users.

Speaker 3

We have very high scores on our app in the app store. And then part of what we're working on, which the reciprocal will be a key trigger is starting to rebrand our consumer experiences around reports with the biggest one being insurance and that will happen as we move into the reciprocal and then we'll start laying on other touch points, other services that we offer and continuing to bring them under the Porch umbrella. Once you get a number of services like that all connected under a common experience and a common brand. It gets easier to start talking about a DTC strategy because you can Go push against a lot of opportunities at the same time.

Speaker 8

Got it. Super helpful. Thanks for bearing with my pictureless commentary and questions.

Speaker 1

Thanks, Dan. Appreciate it.

Operator

Okay. Next up, we have Brian at KBW. Over to you, Brian. Okay, we'll come back to you in a moment. We have some written questions as well, so I'll take one of those first.

Operator

First off, we have what are your plans to take care of the outstanding 2026 debt?

Speaker 2

Yes, I can take that one. So we have many paths. As a reminder, for folks is in Q2, we issued $333,000,000 of senior secured convertible notes. Those are due in 2028. When we did that transaction, we also used $200,000,000 of our proceeds to pay down our unsecured notes.

Speaker 2

That leaves us with $225,000,000 of those that we will seek to take care of by 2026. With respect to our specific plans on those, we haven't disclosed what those are. I would say there's a variety of options that we have to do that. And we certainly intend to take certain actions before that time.

Operator

Okay. Our second question is for warranty, what was the revenue in 2022? What growth do you anticipate in 2024? And what are the claims costs as a percentage of revenue and corresponding volatility? Hey,

Speaker 4

thanks. I will take that. I guess, first of all, we typically do not disclose these Specific financials for business units such as warranty. I will say though that we are on track to go from 0 in revenues from 2 years ago to approximately $35,000,000 in revenue this year and that is with an adjusted EBITDA margin in excess of 25%. For 2024, we have not provided 2024 Financials.

Speaker 4

However, we believe we will continue to see strong growth and high margins with this business. In a future Investor Day, we may break out more information here on warranty as well as other businesses. And finally, regarding claims, We do not disclose specific metrics. However, warranty is part of insurance And claims are presented there. Warranty claims are far lower than what we see in insurance businesses.

Speaker 4

And our warranty claims are fairly consistent over time. I would also note that Our overall claims rate is below industry average.

Operator

Thanks Malcolm. Ryan, should we try you one more time?

Speaker 3

Thanks, guys. Can you hear me?

Speaker 1

Yes, we got you now. There you are.

Speaker 9

Sorry about that. Tough day on Zoom. Appreciate you fitting me in here. Just wanted to Unpack HOA's capital position a bit. Just looking at statutory filings that we have latest from threethirty one, it looks like there was A little less than $70,000,000 of surplus.

Speaker 9

Any chance you can give us an update on where that stands today, inclusive of 2Q And how we should be thinking about the $48,000,000 provision from Investu. I guess, essentially just trying to understand Where the surplus stands today, and where you think that needs to be for the reciprocal exchange to take place, and how, You know, you could fill that gap if necessary.

Speaker 2

Yeah, I could take that one. So It was still in process from statutory perspective. I can talk to obviously HOA's balance sheet. We did give some information today just the amount of liquid cash and investments there. So again, there was just under $100,000,000 of cash And also $93,000,000 of investments there.

Speaker 2

So a good amount there. With respect to the capital requirements of the HOA business. Again, we didn't announce anything on that today. I would just point to We talked about some of the levers that we have in our insurance business, gross written premium, increasing Premium per policy, taking underwriting actions, the nature of the book in certain areas, there is a higher risk than others and that also impacts the cost of reinsurance. So, we have a number of levers at our disposal As well, to manage there.

Speaker 9

Okay. And then just, another one on HOA. I guess, Understanding that you'll give more color once we get to the finish line of the reciprocal transaction, but Any specific comments around what range of gross written premium is reasonable For the pro form a entity, this would be helpful as I think the market tries to put some parameters around what, You know, the economics could look like for that management fee when Porch transitions to attorney in fact and helping capitalize that business at a higher multiple.

Speaker 1

Yes. Thanks, Ryan. I'll take it. The obviously, today, we provided gross written premium guidance for this year. We're not providing guidance for For 24, you know, at this point, the reality is, is that we just like this year, we'll choose to manage gross written premium to, you know, really to the level that we want to that's optimal to be able to, you know, to maximize profitability.

Speaker 1

We're super clear on our focus of being able to deliver on our goals for profitability in the second this year and the next year and ongoing. The great thing, you know, and kudos and credit to that team, Is that we have demonstrated very clearly our ability to grow gross written premium rapidly. You know, when there's capital available, and really, when I say capital, you know, reinsurance That's a normal market and appropriately priced. Through our channels and the unique things that Porch can do and our unique data, we can grow gross written Very fast. That is not, you know, in our view, you know, our challenge.

Speaker 1

But similarly, the team has done a really nice job of managing gross written premium Broke down so we can go after and hold the most attractive policies. We'll decide, you know, on where we want to manage gross written premium to next year When we get closer to next year and we can start to see what the reinsurance markets and therefore the capital available looks like, you know, for next year, But too soon to communicate

Speaker 9

guidance. Got it. Thanks for being flexible with the technical difficulties.

Operator

Great. We also have Jason from Oppenheimer on the call. Your line should be open, Jason.

Speaker 1

Hey there.

Speaker 10

I just like kind of a big picture question. We're kind of all looking at what's Again unfolding just this quarter obviously in insurance but also tech enabled insurance. Like, I think there's like a scale question, right? I mean, I don't know, maybe like weather gets Better, maybe it doesn't, who knows? I don't think any of us are smart enough to kind of really know that.

Speaker 10

But it just feels like what The industry is going through is if you don't have massive kind of like geographic diversification, this is just an incredibly difficult Period to weather, no pun intended. I just like, should you be thinking about like Trying to merge this with another insurtech company who is also having scale issues, but ultimately believes they have smart top of funnel and You know, just how do you think about that?

Speaker 1

Thanks. Yeah. Thanks, Jason. The I remain super clear minded, and I believe we do, about our ability to go build 1 of the largest, one One of the more important homeowners insurance companies, period, full stop. You know, that opportunity, there's just a tremendous opportunity in front of us, given our unique Data advantages, given our unique demand advantages, I think that is there.

Speaker 1

Now, we are not, you know, entering into this, you know, saying, hey, our bet is that weather is going to get You know, that is certainly something that is outside of our control and the trends are clear, you know, around weather. But we're operating and putting together the right structures that will allow us to be able to deliver the type of consistent results that we'll want to over time, So even as weather even as and if weather trends continued to get worse. So one of those is just pricing like we've talked about. We've been able to take significant rate. And again, insurance companies, like I said, will make money.

Speaker 1

So you're going to continue if and as weather continues to get worse, you will see prices continue to go up. You know, the TAM in this market will continue to grow and I believe will continue to grow very rapidly here, as we look ahead. And so as that market is growing, you know, with us being able to go and structure, you know, and Build this reciprocal separately owned entity that goes and build and manages and holds that risk and we are operating, You know, that to us is the right solution in long term. So we can be able to participate in the growth. We can make sure that we operate this We're still perplexing to be very healthy and to be sustainable, you know, for, you know, indefinitely and us to be able to, to participate in that, you know, with with commissions and fees.

Speaker 1

We think that structure plays really well here. We do think geographic diversification helps. We do think that the reinsurance market will normalize over time. There's been a set of reinsurance cycles in the past where for a 2 or so year period of time, The reinsurance market hardens, rates go up dramatically. And as reinsurance rates go up dramatically, guess what happens?

Speaker 1

They make a lot of money. More capital comes into the market, it becomes more competitive and rates normalize. And so we certainly expect that to be true here as we look ahead, which will very much help us. So do we need to take any other action outside of our strategy of executing? No, I don't think so.

Speaker 1

I think We just have to I'll use your pun, whether this weather storm and execute the plans that that we're doing and I think we'll be in a really good spot.

Speaker 10

And then is there risk that, as let's just say, Again, you're getting your rates in order, other your competitors are getting their rates in order. They're coming out of this, they then try to Kind of, I don't know, out price you out of the market because they're bigger and they can absorb, you know, kind of They can endure being more price competitive than, let's just say, smaller players can. Is that a risk that we need to think about?

Speaker 1

I don't see that I don't believe we're seeing those types of actions. I think that the large players are feeling, I would say, much more pain than the smaller players just given the size of their books. Some of the losses that you see We all announced our, you know, staggeringly large numbers. We see those players taking substantial rate increases as well. We think all insurance companies are certainly very wired and focused on making sure they are priced to profitability.

Speaker 1

And I don't expect, you know, we're going to see carriers trying to undercut price being willing to lose purposely lose lots of money to be able to have a better competitive position. I don't think that's likely.

Speaker 3

And just keep in mind that given the way pricing is Regulated, they couldn't take sort of short term actions to steal share. They'd have to fundamentally set up their pricing to be low cost And it would be difficult to change. And in some states, they

Speaker 9

may not be able to

Speaker 3

move it up if they needed to. So it's it would be a very risky strategy for I have a large player sitting.

Speaker 10

Thank you. That's helpful.

Operator

Over to another written question, can you share more performance metrics about providing your insurance demand from your software businesses to third party agencies?

Speaker 3

We don't break out the specific share by channel. We are excited though that we have that diversified and low CAC diversified channels both across agencies and our B2B2C And the low cap nature of our B2B2C. One of the comments that Matt made in the script is Maybe us rethinking how we can use some of that unique demand and getting agencies who have larger distribution Excited about working with Porch because of getting access to our demand and having them think about offering ports to all of their customers as part of getting access to demand. And so we've started to explore that strategy. Some of the early results are encouraging.

Speaker 3

It's still very, very early there, but that B2B2C opportunity remains We think one of the unique things that we're going to be able to go after.

Operator

I think we have time for one more. What question do you believe oh, sorry, what do you believe will be the catalyst to help the stock start to perform?

Speaker 1

Well, I will take this and then we will wrap. I will wrap this. I mean, we are Right at this, I believe, key moment that we have been working hard towards over the last, You know what, 18 months or so once the housing and reinsurance markets really turned on us in the industry. Getting to profitability in this market will be important and I think a real accomplishment. We all know that as the markets turn, we are going to have incredible tailwinds behind us.

Speaker 1

And so demonstrating that profitability and that performance right now in this market, not only I think It's going to be an important financial goal, important for the company, but also I think can build a lot of confidence in this team's ability to execute. So that's 1. 2nd, Catalyst, I think, is as we've talked about, but the reciprocal approval is important just because We believe that it will have our insurance business optimally structured, in particular for this market. So it's something obviously we've been working on for a couple of years now since we acquired HOA and we're making progress. 3rd, 2 more.

Speaker 1

3rd, we do expect, as Sean mentioned, to hold an Analyst and Investor Day later this year. There's an opportunity for us to simply share more about business units, exactly the performance of of many of our business units that are doing really well. I'm sure it's in the details today around one of those business units that we're doing in warranty, But there's many of our businesses that are doing some really exciting things and it's just getting masked based on certain abnormal weather results. And so I do think that'll be a fun moment. And then maybe lastly, just as the tailwinds do start As housing market goes from being a negative to at least being flat year over year and then soon enough, we'll start to see that increase, That will just show up in our numbers very quickly and drop the bottom line.

Speaker 1

And so I think that will also help us. We are a few minutes past time. Just will say thanks everybody for the time and interest. We do appreciate it. Thanks all for the questions.

Speaker 1

Have a great rest of the day.

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Earnings Conference Call
Porch Group Q2 2023
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