Porch Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 10 speakers on the call.

Operator

Good afternoon, everyone, and thank you for participating in Porch Group's Q2 2024 Conference Call. Today, we issued our earnings release and filed a related Form 8 ks with the SEC. The press release can be found on our Investor Relations website at ir.portgroup.com. Joining me here today are Matt Ehrlichman, Portrait Group's CEO, Chairman and Founder Sean Tabak, Portrait Group's CFO Matthew Nagle, Portrait Group's COO and Michelle Theys, GM of Portrait Group Media, Data and Marketing. Before we go further, I'd like to take a moment to review the Company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 which provides important cautions regarding forward looking statements.

Operator

Today's discussion, including responses to your questions, reflects management's views as of today, August 6, 2024. 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 application of formation for the reciprocal 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 disclaim any obligation to update publicly any forward looking statements whether in response to new information, future events or otherwise, except as required by applicable law.

Operator

We encourage you to consider the risk factors and other risks and uncertainties described in our SEC filings as well as the risk factor information on these slides. For additional information, including factors that could cause our results to differ materially from current expectations, 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 to the most comparable GAAP measures discussed during this earlier call which are available on our website. The financial information provided today is preliminary, unaudited and subject to revision upon completion of the closing and audit processes. As a reminder this webcast will be available for replay along with the presentation shortly after this call on the company's website at ir.portrait.com.

Operator

I'll now turn the call over to Matt Perlickman, CEO, Chairman and Founder of Portrait. Over to you,

Speaker 1

Matt. Thanks, Louis. Good afternoon, everybody. Thanks for joining us today. We have some great progress that I'm excited to share.

Speaker 1

First, our insurance profitability actions, including utilizing our unique data, continues to result in attritional losses being significantly better than planned and substantial year over year improvements in our insurance gross combined ratio. 2nd, we have refiled the reciprocal exchange application. This gets us a step closer to what we believe is the optimal structure for scaling with reduced exposure to unusual weather events. And, as we'll share more today, we are excited to announce that we've launched our Home Factors data products to help third parties improve their risk assessment and marketing. We have home factors for virtually every home in the U.

Speaker 1

S. To identify important information about the property, all uniquely known by Porch. Our results in the Q2 were solid despite continued macro headwinds. While we budget and plan for catastrophic weather based on our historical experiences, trends and buffer for volatility, In the past 3 months, there have been 2 uncommon weather events, both so rare that they are classified as more than 1 in 10 year occurrences. In May, Houston experienced a hurricane like event with 100 mile an hour sustained winds, which impacted our Q2 by $23,000,000 net of reinsurance.

Speaker 1

More recently in July, Hurricane Beryl was a category 1 hurricane as it progressed through Houston and is expected to impact our Q3 by $30,000,000 net of reinsurance. We want to highlight these rare events as our execution related to what we control was very strong. Overall in the 2nd quarter, revenue grew 12% to $111,000,000 Revenue less cost of revenue grew 10% to $19,000,000 Adjusted EBITDA loss was $35,000,000 an $8,000,000 improvement over the prior year and right about on track with our plan. Again, the May Houston cat event lowered revenue less cost of revenue and adjusted EBITDA by $23,000,000 We saw continued strong underwriting execution in our insurance business leading to lower claims versus our expectations, price increases leading to higher profitability in our software businesses, and overall strong cost control. Sean will take you through those details shortly.

Speaker 1

Unexpected weather will happen periodically in the homeowners insurance industry and while disruptive for policyholders and near term results for the impacted period, it creates long term opportunity for the industry at large. It means we and the industry will continue to raise prices and will fuel significant expansion in the size of the homeowners insurance market. Operating as a reciprocal exchange can help mitigate weather and claims volatility, while still being able to participate in the growth of this industry. This, in our minds, is a very exciting place to play. And as I mentioned, we're very pleased today to announce the key milestone of filing our new and updated application to create the Porch Insurance Reciprocal Exchange with the Texas Department of Insurance and we are working closely with the TDI targeting approval later this year.

Speaker 1

As a reminder, as proposed, at launch the HOA carrier will be sold to the reciprocal for a surplus note back to Porch Group with all parties, with all policies, premium, losses, and certain costs such as reinsurance will move into the reciprocal entity, which will be owned by its policyholders similar to a mutual company. The reciprocal will pay claims directly from its balance sheet. We at Porch Group will handle the day to day operations receiving fees as a percentage of gross written premium. Importantly, our expenses will be less volatile than they are today and will include mostly fixed costs such as employee salaries. We're excited about what this will mean for our customers and our future, transition to a more predictable higher margin and lower volatility Porch.

Speaker 1

Along with the reciprocal application, we also announced today that Porch Group has contributed 18,300,000 Porch shares to HOA to support this critical planned transition. This contribution helps to bolster HOA's balance sheet strength and rating after Q2 weather impacted surplus. And in addition, the contribution strengthens HOA's long term surplus position, which better positions HOA for any future third party surplus note capital raising efforts and importantly is expected to support premium growth in 2025 and beyond. HOA will hold the shares on its balance sheet and we currently do not expect the shares to be sold. The value is then included in HOA's surplus, which had a healthy buffer as compared to regulatory requirements at the end of Q2.

Speaker 1

To the extent that pork stock increases then, this would grow HOA surplus. If and as we execute and increase the value of Porch Group, this can create an important and long term opportunity in a flywheel. Additional surplus translates into supporting more premium for HOA and the reciprocal. We believe more premium would drive more fee based income and profit for Porch Group post reciprocal. We would expect more profit at Porch Group to increase our valuation over time, in turn increasing surplus, set reciprocal and HOA.

Speaker 1

We believe we're set up for a very exciting future ahead. A last few quick notes before I turn the call over to Sean. Our software businesses remain resilient and delivered growth despite a sluggish housing market which declined 3% year over year in Q2. Our warranty business launched a new product called surge protection and although early days we are seeing strong conversion through our moving concierge channel. Michelle Toews, who joins us today and leads our data division for Porch, is going to share more about the progress with Home Factors, including new clients and case studies.

Speaker 1

We see a great deal of promise here, given both the uniqueness and demonstrated value of our data. We mentioned previously that we are vigorously pursuing parties concerning the best due fraud, which was discovered in 2023. In Q2 of this year, our legal firm hired on a contingent fee basis filed suit against 2 parties. These things take time, so we'll look to update you as further as it progresses. And last, finally, we've been recertified as a great place to work again this year with year over year improvements in key metrics that we track.

Speaker 1

My goal from the outset of founding Porch was to build a truly great and enduring company and ensuring we're a great place to work with a set of values that are real is critical and core to making this happen. Now, Sean, over to you.

Speaker 2

Thanks, Matt. Good afternoon, everyone. Before we get into the detail, I'll provide some high level thoughts on our financial performance in the Q2. Overall, we're pleased with the Q2 being broadly in line with our expectations. Attritional claims outperformed our expectations and the related loss ratio improved over the prior year.

Speaker 2

This is a testament to the insurance profitability actions we discussed previously around the 3 P's product, price and portfolio. As Matt noted, these are the things we can control and the team executed well against these. This was offset by the May Houston Cat event, which drove volatility in the quarter. I'll give more details on that shortly. In our software business, we saw improvements in our profitability driven by price increases as we execute our strategy to roll out new functionality for our customers while increasing price.

Speaker 2

And importantly, we remain diligent with strong cost control. Now let's take a closer look. Revenue was $110,800,000 in the Q2 of 2024, a 12% increase over the prior year, driven by our insurance segment, which grew 22%. Revenue less cost of revenue was $19,200,000 with a margin of 17% of revenue, consistent with the prior year. Overall, the vertical software revenue less cost revenue margin increased approximately 800 basis points to 83%, offsetting growth in the lower margin insurance segment.

Speaker 2

Adjusted EBITDA loss was $34,800,000 an $8,400,000 improvement over the prior year, with all segments contributing to the improvement. As a reminder, on the seasonality of our business, Q2 is typically when we see the lowest adjusted EBITDA for the year given weather related insurance claims. We continue to focus on controlling and reducing operating expenses, such as audit fees and contractor costs. In the Q2, sales and marketing expenses as a percent of revenue decreased by 400 basis points over the prior year. Similarly, product and technology and G and A also decreased as a percent of revenue.

Speaker 2

Gross written premium was $117,000,000 a decrease from the prior year as we focused on profitability and non renewal of higher risk policies. The non renewals were completed this quarter, impacting our insurance KPIs, which Matthew will discuss shortly. The insurance segment was 71% of total revenue in the 2nd quarter, an increase from 65% in the Q2 of 2023. Revenue from our Insurance segment was $78,300,000 a 22% increase over the prior year. This was driven by a 28% increase in premium per policy and lower reinsurance ceding, which more than offset the decrease in policies in force due to the non renewals and the Q1 sale of our legacy in house insurance agency, EIG.

Speaker 2

Vertical Software segment revenue was $32,600,000 a decrease of 5% over the prior year. Within that, the software and services subscription businesses increased 4% over the prior year, driven by price increases in Rhino and Inspection and overall was offset by the moving business. Shifting to claims costs in our insurance segment. Here we break down the cost of revenue between attritional and other costs and catastrophic weather claims. In the Q2, attritional claims performed $17,000,000 better than anticipated.

Speaker 2

Additionally, our typical seasonal catastrophic weather claims also performed better than we anticipated. In the Q2, the May Houston Cat event drove approximately $23,000,000 in cost of revenue, net of reinsurance. To the point of it being categorized as a 1 in 10 year event, in HOA's 15 year history, it had never experienced something like this. So while this was unfortunately one of the years where this wind event occurred, this was largely offset with strong execution against the areas within our control. Moving to adjusted EBITDA by segment.

Speaker 2

Overall adjusted EBITDA loss was $34,800,000 in the Q2 of 2024. The insurance segment adjusted EBITDA loss was $27,300,000 an improvement of $3,900,000 over the prior year. The vertical software adjusted EBITDA was $4,800,000 a $3,000,000 improvement over the prior year, driven by price increases in our software and services subscription businesses and cost control. The vertical software adjusted EBITDA margin increased to 15% in the quarter. Client retention remained strong at 98% in Rhino in the Q2.

Speaker 2

Corporate expenses were $12,200,000 or 11% of total revenue, a 300 basis point improvement over the prior year with strong cost control. Stepping back from the quarter, let's take a look at our performance in the first half of twenty twenty four. Year to date, we've delivered revenue of $226,000,000 a 22% increase over the prior year, driven by the insurance segment. Adjusted EBITDA loss in the first half of twenty twenty four was 52,000,000 dollars a $13,000,000 improvement over the prior year. Our insurance segment adjusted EBITDA loss was $30,000,000 an $8,000,000 improvement over the prior year.

Speaker 2

Our vertical software segment adjusted EBITDA was $6,000,000 a $4,000,000 improvement over the prior year, driven by price increases and cost control. Corporate and other expenses also decreased year over year. Operating cash outflow was $26,000,000 in the Q2 of 2024 and $18,000,000 for the first half of twenty twenty four. As of June 30, we had $410,000,000 in cash, cash equivalents and investments. And excluding the $293,000,000 of HOA, Porch held $117,000,000 broadly in line with the prior quarter.

Speaker 2

Additionally, Porch Group held $11,000,000 of restricted cash and cash equivalents, primarily for our captive and warranty businesses and a $49,000,000 surplus note from HOA. HOA surplus at June 30 was approximately $40,000,000 This number includes approximately 18,000,000 Porch Group shares contributed into the HOA into HOA to which a discount is applied per our insurance accounting rules. Since the shares are held by HOA, a wholly owned subsidiary of Porch Group, and are not owned by a third party, The shares are eliminated in our consolidated financial statements. They are accounted for as treasury shares and therefore these shares are excluded from our weighted average shares outstanding when calculating earnings per share. Moving on to guidance.

Speaker 2

Today, we are updating our full year 2024 outlook for our profit metrics. Our updated profit guidance is primarily driven by 3 items. 1st, as I mentioned, in Q2 we saw strong performance against the things we can control, including underwriting performance and related attritional losses in our insurance business, price increases in our software business, and strong cost control. This has been offset by 2 catastrophic weather events, which fall outside the range of our typical expectations for catastrophic weather included in our original guidance. The first was the $23,000,000 May Houston Cat event in Q2.

Speaker 2

The second is another weather event, Hurricane Beryl, which made landfall in Houston in the 1st week of July that we expect to have $30,000,000 in claims costs of revenue, net of reinsurance in Q3. We are reiterating full year 2024 revenue of 4 $50,000,000 to $470,000,000 with growth of 5% to 9%. As I noted last quarter, we expect growth to be front end weighted with a tough comp in Q3. And as a reminder there, in Q3 of 2023, we had lower reinsurance seating and thus higher revenue immediately post the best to reinsurance fraud discovery. Last year, we called out the revenue impact of this as $30,000,000 in Q3 of 2023.

Speaker 2

We expect revenue less cost revenue of $190,000,000 to $200,000,000 which incorporates the items I've mentioned. Again, any incremental cat events exceeding historic trends are not included in our guidance and would negatively affect the range. Overall, we expect adjusted EBITDA loss of $20,000,000 to $10,000,000 which incorporates the items I mentioned. At the midpoint, this is a decline of $22,500,000 from our previous adjusted EBITDA guidance. Given this now includes $53,000,000 of additional costs related to the 2 weather events, this highlights the degree of our business has outperformed that which we control and what our normalized results would have been expected to produce.

Speaker 2

This guidance indicates that our second half of twenty twenty four is still expected to be more profitable than the $21,000,000 of positive adjusted EBITDA we produced in the second half of twenty twenty three despite Hurricane Bear. Although we are guiding to what is most probable, I will note we have not lost sight of our full year profitable target and are working towards that, maximizing efforts on what we can control. And finally, we expect gross written premiums of 4 $60,000,000 to $480,000,000 Thank you all for your time today, and I'll now hand over to Matthew to cover our KPIs.

Speaker 3

Thanks, Sean, and hello, everyone. Let's look at our KPIs. The average number of companies was 29,000 in Q2, slightly lower due to the mortgage title and inspection industries continuing to feel pressure in the housing and refinance markets and fewer companies operating for the time being. There are signs of possible changes to interest rates and home sales growth beginning in 2025, which we clearly would welcome. Average revenue per company per month increased 17% to $12.53 over the prior year, driven by lower seating and premium increases.

Speaker 3

We had 231,000 monetized services in the quarter, 5% lower than the prior year. Average revenue per monetized service was $3.95 up 19% from last year due to continued growth in insurance. Looking now at our insurance segment KPIs, which as a reminder included EIG Insurance Agency in 2023, which we have since divested. In the Q2, gross written premium was $117,000,000 from 232,000 policies in force. As Sean mentioned, these KPIs were impacted by non renewals completed this quarter.

Speaker 3

This process is now complete. Annualized revenue per policy was $1,348 an increase of 161 percent from the prior year driven by premium increases in lower seating. Focusing now on HOA, our insurance carrier, annualized premium per policy increased 28% to $2,059 Premium retention was 88%, lower than the prior year driven by the non renewal actions. Our gross loss ratio was 117% in Q2. On Slide 21, we present the gross loss ratio split by cat and attritional losses.

Speaker 3

As Sean said, our attritional losses outperformed. Our attritional gross loss ratio was 21%, 14 percentage points better than prior year. As you can see in the chart, this was offset by catastrophic weather claims with the cat loss ratio increasing 11 percentage points year over year to 96%, of which 22 percentage points were from the May Houston event. The overall current year gross loss ratio was 117%, an improvement from 120% last year. Our gross combined ratio in Q2 was 124%, an improvement from 180% last year, which again goes to highlight that even in Q2, which is a quarter in our year with the most losses, the amount of improvement we have made to the insurance business.

Speaker 3

Last quarter, we discussed the 3 Ps driving our strong underwriting performance. Today, we'll also outline our expectations for premium growth. 1st product, we'll continue leveraging our unique data, which is crucial for our insurance profitability. Michelle will elaborate on this shortly. We're also revising deductibles and policy terms, like introducing a roof schedule that adjusts replacement value based on the roof's age, thereby reducing our risk and mitigating customer price increases.

Speaker 3

2nd, on price, the slide shows a 28% increase in earned premium per policy over the prior year, reflecting adjustments for a high frequency, high severity environment. In part due to the recent weather events, we anticipated continuing to raise prices meaningfully. 3rd, portfolio. We completed non renewals of unprofitable policies and are now starting to work through reopening certain zip codes and geographies that we had closed in order to manage the premium levels of our business to current levels. Given the progress we have made overall, we are ready for growth and we expect premium to increase nicely in 2025 and beyond, both adding policies and step up in REIT.

Speaker 3

Thank you, everyone. I'll now turn over to Michelle for our quarterly deep dive.

Speaker 4

Good afternoon, everyone. I am Michelle Toews, GM of Porch Group Media, Porch's Data and Marketing Solutions division. I've been with the business for 9 years with my 30 year career being spent focused on creating data products for many types of use cases and customers. I am super excited about where our business is and the opportunities that lie ahead. Porch Group Media, formerly B12, was acquired by Porch in January 2021, and we've rapidly evolved into a leader in Uber Marketing and Data Products.

Speaker 4

We've upgraded our data platform and now leverage unique data on properties and consumers. Through our solutions, we help brands to reach consumers who have important and time sensitive needs for home improvement projects and when purchasing a new home. Recently, we launched Home Factors, which offers detailed property and homeowner insights, allowing companies to reach the right consumer at the right time and helps them better assess risk and pricing for their services. Today I'm going to explain the use of our unique property and consumer data and how we can gain an underwriting and pricing advantage for our homeowners insurance business. Additionally, I'm going to highlight some new data products we're launching to assist other companies that we're targeting in non competitive markets.

Speaker 4

Porch's extensive property and mover data is structured into intelligence and combined with other sources to form a vast data platform with billions of data points. This enables us to generate predictive insights, including home factors, for nearly every property in the US. We long utilized machine learning and recently were incorporating new AI technologies to rapidly structure and extract insights from our data. Our data platform team is innovating at an impressive pace, now producing a new home factor every few weeks, allowing us to continually bring impactful products to market. Our insights cover both interior and exterior property details, such as type of pipe, roof condition and water heater location, providing valuable information on property condition and risk that would be impossible to gather any other way.

Speaker 4

One of our home factors is the presence of water intrusion. Imagine knowing which properties are likely to have a water stain on the wall, rust around the water heater, or corrosion near washing machine pipes. Historical claims data shows a strong correlation between these signs and future water claims. By identifying homes with these risks, we can accurately assess and price them. Our data suggests that about 65 percent of HOA's policyholders should face an 8% to 10% surcharge, while around 30% could receive a 20% discount on premiums.

Speaker 4

This allows carriers to set pricing more accurately for lower or higher risk customers or avoid underwriting higher risk customers likely to generate a claim. It also rewards and encourages homeowners to take care of their home. We are really excited to announce that we are currently in market monetizing Home Factors, and we're encouraged by the early testing we're seeing. After 2 years of quietly developing unique valuable products, we've proven their advantage with our insurance carrier HOA, who uses the data delivering top tier loss ratio performance. Today, I'm excited to share 3 use cases demonstrating how we are monetizing the data while maintaining our competitive edge.

Speaker 4

First, we're targeting 3rd party insurance carriers in non competitive states to use home factors. Early results match our findings with HOA, showing significant correlation between our insights and claims frequency and severity, proving value for pricing and decision making. 2nd, a large retailer is using our data to market to their customers more effectively. Instead of broad based ads, they're using home factors like window repair needed or roof replacement required to pinpoint the right consumer at the right time within their database, leading to a 30% increase in purchase intent signals. 3rd, a home security company improved customer retention by 8% and reduced cancellations by 9% using our MoverMatch program.

Speaker 4

MoverMatch identifies customers in the process of moving, allowing businesses to connect with them early in the decision making process. This is particularly valuable for mover solutions as the first to contact the consumer often wins the business. Overall, we're still early in our journey, but we are thrilled at the progress we're making and we are eager to release additional Home factors in Q3 of this year and we have a robust roadmap ahead of us that will remain unique to what Porch can provide. Thanks, everyone. I'll hand it over to Matt to wrap up.

Speaker 1

Thanks, Michelle. It's a big deal for us. I'm very excited to watch it continue to progress. I'll say that there are several significant high margin opportunities ahead for Porch and certainly the opportunity to monetize impactful data products is one of those. To wrap up, one of the other high margin opportunities is, of course, our homeowners insurance opportunity in business and how it scales, particularly following the reciprocal launch.

Speaker 1

As we mentioned, we will keep the market informed on progress and updates as we continue forward in 2024. Once approved, we would expect to host an Investor Day and at that point, we'll provide more details on the higher margin economic model and forward looking guidance. We're committed to continuing to write profitable homeowners insurance business and expect to grow premium nicely in 2025 beyond. While we revised our adjusted EBITDA guidance range to include the known July hurricane event, we are still focused on this full year positive adjusted EBITDA objective. We aim to continue our track record of strong execution on what we control and we'll be maximizing all efforts to achieve that goal.

Speaker 1

We aim to execute flawlessly over the remaining 5 months of the year and again do expect to have a very high profitability second half. We have a number of catalysts ahead and are excited to deliver for you all. With that, we'll wrap the prepared remarks and pass the call to the operator. Rob, if you can go ahead and open up the call for Q and A.

Speaker 5

Certainly. We will now begin the question and answer session. Your first question comes from the line of Dan Kurnos from The Benchmark Company. Your line is open.

Speaker 6

Thanks. Good afternoon. Just two quick ones for me. I guess, Matt, it's always tricky walking the fine line between opening up the aperture and preparing to scale. And then obviously, you get these cat events that hit cash flow.

Speaker 6

So I'm just kind of curious on your sort of willingness now to invest in growth near term, and or more thoughts on derisking the portfolio until you get the TDI approval? And then on home factors, just I mean, any more color on how we should think about the data opportunity? V12 had retail exposure, which we heard about today, and so it's kind of a broad brush. So, I'd just love to think about either the TAM or how we should think about that impact in the P and L. Thanks.

Speaker 1

Yes. I'm happy to. Maybe I'll take the first. And Michelle, why don't you take the second? So, I mean, in terms of growth, Tim, kind of what we're talking about today is we don't think these events really change our plan.

Speaker 1

Obviously, you could see in our P and L this year, we just our businesses' core outperformance could have absorbed 1 of these 1 in 10 year events, not 2 of those 1 in 10 year events. But the reality is that we see what's happening in terms of attritional losses. We see how the business, the core business is performing on a run rate basis. And we're not that far away in terms of our expectations from being able to get the business, in our view, again optimally structured through the reciprocal. So, like Matthew and I both mentioned, we are through that period of non renewals and it is time to start unlocking zip codes that we had closed and really starting to position and open up growth, which we do expect to be able to again grow premiums nicely in 2025.

Speaker 1

Michelle, do you want to take the second question?

Speaker 4

Sure. Sure. I guess a few points. I would say that we're at the very beginning of our journey. We are optimists, we are very optimistic for the opportunity.

Speaker 4

There's tons of valuable predictive insights that are growing across the the industry, so we know that for sure. We have proven case studies, and we're seeing some positive results with HOA and validation across other businesses. So we're feeling really confident. We've already started monetizing the product and we're having a great deal of conversations across different industries. And I think the final point I would say is, I've had the opportunity to create many data products over my career, and I've never had so much excitement from clients as I've seen with Homefactors in such a really short period of time.

Speaker 1

And maybe I'll just layer on 2 quick thoughts. I think that's all perfectly said. One, it's fun to start unpacking this, Dan, I think just for the market. Obviously, this has been our strategy and our plan for some time. It's been a bit since we had acquired B12 and there's been a lot of, I would just say, core fundamental work to be able to get to this time, where we're able to kind of share that we are now out monetizing some of these really cool, very unique data products with 3rd party partners.

Speaker 1

Again, it's not like it's a big surprise to me, I suppose, that there's strong interest in the market because, one, we have data about properties that no one else has. And we have home factors now for virtually every home in the U. S. And 2, we know definitively with all the work we've done with Homeowners of America over the last set of years with that data that it creates real and substantial value in being able to predict risk. And so, the market is going to, I believe, be really excited about it, which means it should become a really meaningful business for us.

Speaker 1

It should be very high margin and it's really accretive to everything you see today. So, again, we're at the beginning of the journey, but it should be a fun time. And if we really pull it off, Michelle nails it and knocks out of the park. Once you get those first set of third party partners using the data, You start to create momentum in the market where now everybody really needs to use the data to be able to be competitive. And that's happened in a variety of times across multiple different data companies.

Speaker 1

And so, we think that we're positioned really well there.

Speaker 6

Got it. Super helpful. Thanks guys. Appreciate it.

Speaker 1

Thanks Dan.

Speaker 5

Your next question comes from the line of John Campbell from Stephens. Your line is open.

Speaker 7

Hey guys, This is Jonathan on for John. Thanks for taking my questions. So drilling down on your vertical software revenue, particularly the portion that's transactional, would you expect that rev to outpace the national market when a housing recovery begins? Or would you say that rev is more closely tied to the national relocation or corporate moves market?

Speaker 1

Matthew, do you want to take that?

Speaker 8

Go ahead.

Speaker 1

Go ahead, John.

Speaker 2

I was just going to say, yes, Matthew, you joined in. I was just gonna say that our vertical software segment, if I just peel back the onion there, we've seen the mark the overall housing market continue to be soft and struggle this year. And really we have 2 types of businesses there. We have our more traditional software and services businesses. Those we saw growth this quarter of around 4%.

Speaker 2

And then to your point, Jonathan, we had the moving businesses where we saw a decline more consistent with the overall housing market decline. I think our opportunity there as the housing market recovers is as there's more folks that are moving. I think we have a good opportunity to beat the market there and, you know, grow our revenue in those businesses really nicely. The other thing I'll point out also on from a profitability perspective, those businesses have improved profitability quite substantially over the last couple of years, even in this down housing market. So I think as the market recovers, we will get additional leverage there from the profit more profitable structure cost structure we have for those businesses in the years to come.

Speaker 3

I would just add 2 small points. 1, to build on Sean's profitability. These businesses are very scalable. And so we can handle many more transactions with little to no variable costs. And so you're going to see whatever impact you see on the revenue, there's going to be significant flow through to the bottom line.

Speaker 3

The other thing to keep in mind is some of those businesses monetize refinances. And so there's kind of 2 markets we can monetize. 1 is the moves in the real estate transactions and we will certainly benefit as the market recovers. But then also as interest rates decline and the refinancing market comes back, that will also be a tailwind for us.

Speaker 1

Last thing to add, just to make sure I wasn't missed. Just I'm not sure if people understand that there's 2 ways that we feel pressure right now in the market. Matthew hit the transaction volume with both home sales and refinance. But the other is, if you just think about these companies that are operating in these markets, it's just harder to run a business. So, there's fewer companies that are out there.

Speaker 1

So, as the market turns around, not only will it just be more transactions which flow straight into our systems and into revenue, but you'll also just have more companies that are joining and entering into these markets, which gives us more businesses to be able to sell to and partner with.

Speaker 7

Got it. Thank you. Thank you for the color there. And then as a follow-up, looking at insurance, in recent quarters, you guys have exited certain states where you felt like you couldn't be profitable. Would you ever consider exiting a market like Houston where these wet cat weather events are occurring and seem to be occurring on a consistent basis, it almost seems like?

Speaker 1

Yes. I would say, we would of course consider whatever creates the most shareholder value long term. Certainly, we are pragmatic and that is our focus to go build a great long term business. We do not think that means exiting Houston, to be clear. Like Houston has actually been over time for HOA an attractive and highly performing market.

Speaker 1

Now, obviously, there's going to be that recency bias because just in the last 3 months there were 2 of those events. But we do think that overall that market is well suited for us and to be effective and profitable going forward. The only other thing I would add is again just to stress the point, when these events happen, yes, it is unfortunate for those near term results, but it creates a lot of opportunity in the market. And so, we do think it means that there will be meaningful price increases because at the end of the day, carriers, insurance carriers are going to make sure they're priced to be able to generate profit. And so, we will certainly follow along with what the market would do there.

Speaker 8

Got it. Thanks, guys.

Speaker 5

Your next question comes from the line of Jason Helfstein from Oppenheimer. Your line is open.

Speaker 9

Hi. This is Steve Hohman on for Jason. So just two questions from us. One is, why did you guys decide to update the reciprocal application? I'm just wondering what kind of information changed versus once you initially applied whenever that was, let's say, it was like 9 months ago or so.

Speaker 9

Then secondly, does your updated full year guide assume any improvement in the housing market within either of your segments?

Speaker 1

I'll take the first and Sean or if you'd like to take the second. When we say update the reciprocal application, really what we're talking about is just getting the reciprocal application back on file. So, if you recall, more than a year ago, we were on file. We had to pull that back when there was the best due fraud, the problem with a reinsurance partner that we had worked with. We worked with the TDI to be able to wait the appropriate amount of time, make sure the business was just performing really well and healthy.

Speaker 1

We've certainly crossed the key milestones that we needed to. And now, we've refiled the application. In terms of updates, we're really just updating for actuals that have happened over this period of time, but the core strategy and what we're implementing certainly remains the same.

Speaker 2

Yes. With respect to the housing market, we continue to expect fairly stagnant housing market. And so that's what we've considered in our guidance for now. Certainly, any positive momentum there you know, would have an impact. But, we've continued to be, I think, more on the conservative side of what we would expect there.

Speaker 6

Got it. Thank you.

Speaker 5

Your next question comes from the line of Ryan Tomasello from KBW. Your line is open.

Speaker 8

Hi, everyone. Thanks for taking the questions. On the reciprocal exchange regarding the $18,000,000 $18,000,000 share, excuse me, contribution to HOA, was that figure determined with the consultation of TDI? And then the $40,000,000 statutory surplus figure that you cited, is that a pro form a figure that's fully burdened for 2Q cat and the 3Q cat from Berking Barrel? Or is there something timing dynamic there that has yet to flow through to fully bake in that impact to the $40,000,000

Speaker 2

I can take that.

Speaker 1

You want to take that? Okay, great.

Speaker 2

Yeah. I was just maybe I'll just start with the second one real quick. So that's our June 30 surplus number for HOA. We said approximately $40,000,000 So that's burdened by the cap that we saw in May for the Houston event. You know, as we look forward here, one thing I would just point to is second half of the year is typically when we generate the most surplus at HOA and in particular, with the increases in profitability that we saw this year.

Speaker 2

One data point you can look at is last year in the second half of the year, our insurance segment generated about $50,000,000 in adjusted EBITDA. And not all of that goes to HOA, but I think it can just give you a sense as to the scale, even without the additional work that we've done this year and we saw in our results in the first half. As to the general seasonality of our business and how we generate more profits in the second half of the year. The first question was about the share contribution. We, of course, contributed $18,000,000 18,000,000 shares, excuse me, into HOA.

Speaker 2

You know, a couple things on that. It bolsters the balance sheet. The company independently, to answer your specific question, the company, we decided to do it because it has the strategic benefits that we talked about. I think Matt showed the flywheel where you can adding the shares in strengthens the long term surplus that supports future premium growth, additional premium growth in 2025 and beyond. And then that we can also benefit from future appreciation of PortShares there like by adding additional creating additional surplus, which again creates the opportunity for more premium.

Speaker 2

And under the reciprocal model, as we noted, that that generates fees for Porch Group. I think it's also a strategic benefit. So as we launch the reciprocal, I think we can create strategic alignment with the reciprocal after launch and importantly, as we bring in external capital sources there to further generate surplus or increase surplus there. So I think the net from all that is it supports HOA's transition to the reciprocal. And so those those are really the reasons that we thought it was the right thing to do.

Speaker 2

One technical point I think that we called out just so folks understand, the shares, they're not traded currently. They're not included in weighted average shares outstanding. When we calculate our earnings per share, they're effectively treated like treasury shares. So there's they're not voting shares at the moment.

Speaker 1

One last point on

Speaker 8

the HOA's

Speaker 1

surplus ranks. I think I know where you're going. And just one thing that Sean didn't know, just to make sure it's clear. The $30,000,000 net impact tied to barrel is not just all HOA. We have a captive reinsurer as well that sits behind it.

Speaker 1

And so, if you're thinking about your question might have been thinking about, okay, what happens to HOA surplus? We actually we expect HOA surplus to remain consistent and actually grow here as it goes throughout the year and remain in a strong position. So, that's kind of what you were thinking about. We're well set up to make sure HOA continues to be healthy and we do not expect additional contributions into HOA, including given barrel.

Speaker 8

Okay, great. Yeah, thanks for clarifying that, Matt and Sean. And then on the accounting treatment, Sean, you already kind of touched on

Speaker 6

it, but I guess a

Speaker 8

bit of an interesting kind of dynamic here trying to understand if there's any triggering event for that accounting treatment to change once you hopefully get the reciprocal off the ground, if ultimately those shares would be included in the consolidated share count after you deconsolidate HOA? Just trying to understand the accounting there on the math because clearly this is real capital that was issued to backfill HOA's balance sheet. So if you can just walk us through how that accounting may or may not change going forward.

Speaker 2

Yes. I think one thing that's important to note is in addition to the fly wheel that we talked about and supporting more capital HOA, when we do the reciprocal exchange and effectively transfer HOA to the reciprocal, we'll get a surplus note back equal to effectively the net assets of HOA, plus or minus some adjustments there. And so that would include the whatever the share value is at that point in time. And I guess on the consolidated VAE accounting, I will probably cover that at a future date. But for now, those are the additional sources of value and how we would operate there as the reciprocal is launched.

Speaker 8

Okay. Thanks for taking the questions.

Speaker 1

Thanks, Ryan.

Speaker 5

Your next question comes from the line of Jason Kreyer from Craig Hallum Capital Group. Your line is open. Great. Thank you, guys. So Matt, earlier this year, you talked about the addition of some hail and wind coverage you put in place.

Speaker 5

Just curious if that helped you at all in this quarter, if that's in position to help you as we get into the back half of the year?

Speaker 2

Yes, I could take that one. Yes, so as a reminder for folks, I think what Jason is referring to, this year we secured an additional kind of reinsurance product for severe convective silk quorum, severe convective storm parametric coverage. I think we had articulated earlier this year as we purchased $30,000,000 of aggregate severe convective storm and that includes hail. And the coverage there was really geared towards a series of smaller storms or hail related losses, which is really what we saw in the first half of twenty twenty three. And the approximate cost there for this coverage was about $5,000,000 for the year.

Speaker 2

So a couple of things to note there. And that's a reminder on what the product is. So a couple of things to know. It's an aggregate cover, so it's evaluated over the course of the full year. So we'll have more information on the cover received there later this year.

Speaker 2

Additionally, the other thing I'd note is that the May Houston event was primarily a large wind. Really it was a hurricane like event with wind speeds up to 100 miles per hour on a straight line and sustained basis. So as of now, we've not included any assumptions in our financials or guidance for for that as of

Speaker 5

June. Okay. Thank you for that. And then just any early perspective on exposure to Debbie and I know that that kind of just hit or is just happening, but just as we think through, where you've got more density of policies, if you feel like you've got exposure there.

Speaker 2

Yeah. So 1st and foremost, I think as Matt mentioned, our thoughts are with the customers and community rather of those that are impacted by the hurricane. A couple of things to note. We don't write policies in Florida. We talked about a couple of quarters ago how we've moved out of Georgia.

Speaker 2

In South Carolina, we don't rank within 50 miles of the coast. And overall, I would say in South Carolina, we've also reduced our exposure as part of the portfolio profitability actions that we talked about. So far, this looks to be mostly rain event. And as a reminder, we don't cover flood. So the event is obviously happening as we speak, but I think that can give some context as to our exposure in the region there.

Speaker 5

Got it. Thanks for the color. There are no further phone questions. Lois, do we have any written questions?

Operator

Thanks, Rob. We have one here. Sean, you mentioned the full year adjusted EBITDA possible target. What are you doing to drive this?

Speaker 2

Yeah, I could take that one. So, I wanted to first make sure we are it's clear some of the things we talked today about today in terms of the improvements and the performance of the business. What we've guided to today is essentially a 30 dollars 1,000,000 improvement year over year based on the midpoint of our full year adjusted EBITDA guidance. And that's even with 50 $3,000,000 of additional costs from these 2, 1 10 year events. And as we mentioned, I think today a couple of times driven by the profitability actions, the price increases in software and strong cost control.

Speaker 2

Now we typically buffer for we have enough buffer for 1, 1 in 10 year effect. This year, it looks like we're having 2 barrel obviously in addition to the May event. So overall if I just step back from that I think what it highlights is the improvement in the business and also that what we have been presented this year is 21 in 10 year events. I'd say there are other things we're working on that are outside the scope of what we typically would include in our guidance to try and offset the impact of these items. And overall we remain very focused on our profitability goals at the company.

Speaker 5

That concludes our question and answer session. I will now turn the call back over to Matt for closing remarks.

Speaker 1

Thank you. Thanks all for the questions. I appreciate it. As we talked about, it's a pretty exciting time, pretty new time for the company. Obviously, we're working hard to get the reciprocal on file and get the business structure in the ideal way that we would like to.

Speaker 1

And we're excited to share more when it's the right time around some of the details there. Per the question, we're excited and focused on growing premium while still executing on the profitability that Shauna just talked about. And hopefully, at some point in the not too soon future, some of the what has been headwinds, like the housing market, will start to turn to tailwinds. We know that will happen. It's just a matter of how far off in the future and we will be able to benefit meaningfully as that does happen.

Speaker 1

And then lastly, maybe I'll just close with fun to be able to announce kind of the launch of a new key product, Home Factors, that has, we believe, again, a tremendous amount of potential and very high margins. With that, I appreciate everybody's time and the continued support certainly. We will talk to you guys again at our Q3 earnings in November. Until then.

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Key Takeaways

  • Utilizing its unique data in Q2, the company’s insurance profitability actions drove attritional losses significantly better than planned and improved its year-over-year insurance gross combined ratio.
  • Refiled the reciprocal exchange application with the Texas Department of Insurance to launch the Porch Insurance Reciprocal Exchange, aiming to mitigate weather-driven volatility and shift to a lower-volatility, higher-margin operating model.
  • Contributed 18,300,000 Porch shares to its insurer HOA to bolster surplus and support planned premium growth in 2025 and beyond through a surplus-enhancing flywheel structure.
  • Launched Home Factors data products with property-level risk and condition insights for virtually every U.S. home, signing early third-party clients including insurers, a retailer, and a security company.
  • Revised full-year 2024 adjusted EBITDA guidance to a $20M–$10M loss range, incorporating $23M of Q2 and $30M of expected Q3 net weather-related costs, cutting guidance by $22.5M at the midpoint.
AI Generated. May Contain Errors.
Earnings Conference Call
Porch Group Q2 2024
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