Porch Group, Inc. (NASDAQ:PRCH) Q3 2023 Earnings Call Transcript

Porch Group, Inc. (NASDAQ:PRCH) Q3 2023 Earnings Call Transcript November 7, 2023

Porch Group, Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.24.

Lois Perkins: Good afternoon, everyone, and thank you for participating in Porch Group’s Third Quarter 2023 Conference Call. Today, we issued our third quarter earnings release and related Form 8-K to the SEC. The press release can be found on our Investor Relations website at ir.porchgroup.com. Joining me here today are Matt Ehrlichman, Porch Group’s CEO, Chairman and Founder; Shawn Tabak, Porch Group’s CFO; and Matthew Neagle, Porch Group’s COO. Before we go further, I’d 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 cautions regarding forward-looking statements. Today’s discussion including responses to your questions, reflects management’s views as of today, November 7, 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 application 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 encourage you to consider the risk factors and other risks and uncertainties described in our SEC filings as well as the risk factor information in 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 earnings call. 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.porchgroup.com. I’ll now turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Over to you, Matt.

Matt Ehrlichman: Thanks, Lois. Good afternoon, everyone. Thank you for joining. We had a strong quarter, with our highest profit as a company, including $9 million of positive adjusted EBITDA in the quarter. We are delivering on our targets and are increasing revenue and adjusted EBITDA guidance significantly. The team’s done an incredible job. I’m fired up and excited to share the news with you guys. Before we dive in, I’d like to take 5 minutes to share a few thoughts and then we will dive into the presentation. So, when the interest rates changed dramatically, softening the housing market and driving increased costs in the reinsurance market, we expected 12 to 18 challenging months as these market headwinds took hold.

Over these last 18 months, we’ve executed early and effectively with underwriting actions, including premium for policy increases, risk exclusions and deductible increases in our insurance business, launching new modules coupled with price increases in our software businesses, a keen focus on capital allocation in areas that are generating strong returns, like our warranty business and cost reduction initiatives throughout to drive adjusted EBITDA profitability. While we could foresee certain headwinds this macro environment would cause, there were other unexpected challenges thrown at us at the same time, including a widespread global fraud by Vesttoo, one of our reinsurance partners, and historically challenging weather events for our insurance business.

During this period, we’ve shown what we’re about, stay focused and execute effectively against everything we control. We have continued to lock up our unique property and consumer data, and we’ve proven our ability to use this information to price homeowners insurance better than other carriers. In 2022, this showed up in top tier combined loss ratios for the AM Best market share report. In the third quarter, our loss ratios continued to demonstrate strength at a 39% gross loss ratio and the 58% combined ratio. A 39% Q3 loss ratio continues to demonstrate the power of our unique property data and our ability to select risk better than others. Premium per policy increased almost 40% year-over-year, and we expect another material increase in 2024.

In this massive and growing homeowners insurance market, we are managing our gross written premiums carefully, including non-renewals to be squarely focused on profit, capital, and lowering volatility. If our data suggests policies will be unprofitable, then we are not interested in retaining that business. We know definitively that there is tremendous demand for our insurance products and that we can grow at our discretion, but now is the time for discipline, now is the time for a focus on profitability. I’m excited to share our results today as our strategy and execution bear fruit. It was, March 2022 when we communicated our goal and expectation of achieving adjusted EBITDA profitability for the second half of 2023. I can confirm that we’re well on our way to achieving that target.

In the third quarter, we posted $9 million in positive adjusted EBITDA, a significant milestone for our company, with $130 million in revenue and $77 million in revenue less cost revenue. Further, this profitability was posted despite $8 million of net catastrophic weather related costs, including a large Texas hailstorm at the end of Q3 and Hurricane Idalia in Georgia and South Carolina. The point here, though, is not that we’re surprised the weather is getting worse. That’s clear. It’s that it was not pristine weather in Q3 that drove our results. The takeaway is that we have taken the required actions to proactively address this dynamic, driving profitability even in a quarter with historically bad weather events. All the actions we previously shared around price increases, non-renewing unprofitable policies, utilizing our unique data and other underwriting actions have rolled through our customer base and are making substantial impacts.

So, moving to slide 6, revenue in the third quarter grew 67% to $130 million. Revenue less cost of revenue grew 72% to $77 million. Adjusted EBITDA was a $9 million profit, better than expected, and $20 million better than the same quarter prior year. Shawn and Matthew will talk about these areas in more detail and the actions we’ve taken to get here. Lastly, a few key updates before turning the call over to Shawn. As we previously shared, the allegations against Vesttoo, one of our former larger reinsurance platforms serviced in the third quarter. We terminated the agreement on August 4th, effective July 1st, and soon thereafter, our insurance carrier, HOA, was placed under temporary supervision by the TDI. We are pleased to announce that the TDI lifted their supervision of HOA last week after a detailed review of HOA’s finances and go-forward operating plan.

I want to give a tremendous credit to our team who’s been focused on this, who worked with the TDI expeditiously to respond to their questions, and enabled a move out of supervision quickly. Their efforts, the historically good performance from HOA, the strong results from Q3, and the strength of the go-forward plan which Porch’s unique data supports to produce underwriting advantages, all played a part in this process. As mentioned last quarter, we began to connect some homebuyers in our ecosystem with third-party agencies rather than our own. Here, we are able to see higher conversion rates overall with a lower cost structure. These partnerships are progressing nicely and performing well. Our software businesses continue to launch new products to drive margin during a time when these industries continue to deal with the housing market, which declined 17% year-over-year in Q3.

We’re improving our cross selling and expanding our relationships with software customers. As an example, unit sales in our inspection business increased more than 20% versus Q2 2023. I’ll now hand it over to Shawn to cover our financial performance and guidance. Over to you, Shawn.

Shawn Tabak : Thanks, Matt, and good afternoon, everyone. Overall, our business is performing well, and we are managing continued interest rate and housing market headwinds. Q3 results were strong with adjusted EBITDA of $9 million, ahead of our expectations and setting us up well to achieve our important second half adjusted EBITDA profitability target. Revenue was $129.6 million in the third quarter of 2023, an increase of 67% over the prior year, driven by the insurance segment and partially offset by the vertical software segment. Revenue less cost revenue was $76.6 million, resulting in a margin of 59% of revenue, which is a 170 basis-point increase over the prior year. Both segments had a year-over-year increase in revenue less cost of revenue margin, approximately 10 percentage points better in the insurance segment, driven primarily by an improvement in gross loss ratio with increases in premiums per policy, non-renewal of higher risk policies and other underwriting actions, and a 7 percentage point improvement in the vertical software segment margin driven by mix shift toward higher margin businesses.

Adjusted EBITDA was $8.8 million, a $19.7 million increase over the prior year, primarily driven by the increase in insurance segment adjusted EBITDA coupled with strong expense control. Gross written premium was $154 million, relatively consistent with the prior year as we manage the risk profile through targeted non-renewals, removing higher risk policies, which our data and modeling deemed to be unprofitable in this environment and offset by increases in premium propulsive. Looking at revenue by segment on slide 10, in the third quarter of 2023, revenue from our insurance segment was $95.2 million, growth of 195% over the prior year, driven by a 38% increase in premium per policy and lower reinsurance ceding. Approximately half of the revenue growth in the insurance segment was due to less ceding related to the Vesttoo termination.

Overall, the insurance segment was 73% of group revenue in the quarter, an increase from 42% in the prior year. Vertical software revenue was $34.3 million, a decrease of 24% compared to the prior year, driven by a 17% industry-wide housing market decline. Our moving services business, in particular, continues to be impacted by the soft housing market. In the third quarter, moving services declined faster than the industry, driven by declines in our corporate relocations business. In our vertical software segment, we remain focused on rolling out new products with associated price increases to support future profitable growth. Moving to adjusted EBITDA by segment, both segments delivered positive adjusted EBITDA in the third quarter. Insurance segment adjusted EBITDA was $19 million in the third quarter of 2023, a 20% margin.

Our homeowners insurance business drove the majority of adjusted EBITDA in this segment, benefiting from the improvements to the gross loss ratio that I mentioned. Vertical software adjusted EBITDA was $3.2 million, a 9% margin with fixed cost control actions offsetting some of the revenue decline. Corporate expenses were $13.4 million in the third quarter, reducing to 10% of total revenue from 20% in the prior year, driven by strong expense control and timing of certain accounting and other expenses, which will be incurred in the fourth quarter. Moving to the balance sheet. As of September 30th, we had $458 million of unrestricted cash and investments. This includes $347 million of cash and investments at HOA, which we expect to transfer to the reciprocal when approved and launched.

Excluding HOA, Porch held $89 million of unrestricted cash. Total unrestricted cash and investments increased by approximately $100 million in Q3, with cash flow from operations of $84 million. In addition to the adjusted EBITDA of $8.8 million, cash flow from operations was also driven by working capital at HOA due to timing of payments, some of which will be made in Q4, as well as $48 million of cash that we withdrew from the Vesttoo trust when we terminated the relationship. In addition, Porch Group held $18.7 million of restricted cash and $22.5 million of investments, primarily for our captive and warranty businesses. As previously announced, in the third quarter, our parent company, Porch Group, invested $57 million in HOA, our wholly owned insurance carrier subsidiary.

In return, Porch Group received a $49 million surplus note with a 10-year term and an interest rate of SOFR plus 975 points. This is an intercompany note, although payment is subject to TDI approval based on surplus levels at HOA. In addition, Porch Group acquired the rights to all Vesttoo related claims from HOA. This investment restores HOA’s surplus to a healthy level. And at September 30, it was $53 million. I also wanted to provide an update on Vesttoo’s fraud and its impact from a financial perspective. Last quarter, we discussed that HOA had a reinsurance contract for which Vesttoo arranged capital. Vesttoo has since filed for bankruptcy in U.S. Federal Court and admitted that its team committed a massive fraud impacting many in the industry.

As soon as we learned of these issues, our team quickly mobilized to assess the situation, terminate the contract, and maximize recovery. We assembled a task force, which includes Matt, Matthew, and myself, charged with recovering funds, replacing reinsurance cover, and addressing the TDI supervision order. HOA was also appointed by the U.S. bankruptcy trustee to a five-member creditor committee that is currently empowered to investigate Vesttoo, the banks and others, and seek recoveries. This approach will help all creditors pursue recovery while managing the costs associated. We have engaged a top tier contingent fee law firm and are beginning our pursuits of funds. We are currently intending to vigorously enforce our rights and pursue all damages.

At the right time, we will provide more information on the law firm, the specific companies that we will be pursuing with claims and litigation, and which reinsurance broker we anticipate working with going forward. We are also pursuing other avenues of recovery, which I will not comment on further at this time. I’d like to share more about the estimated financial impact here. By terminating the Vesttoo related contract effective at the start of Q3, we therefore ceded less premium, resulting in approximately $30 million increase in revenue, approximately $10 million increase in revenue less cost of revenue and approximately $2 million increase of adjusted EBITDA. This impact will continue in Q4, driving a portion of the substantial increase in 2023 guidance.

So, let’s take a look at that. Today, we are increasing our full year 2023 guidance, reflecting the strong results from Q3 and the positive trends we are seeing in the business that we discussed today. We are increasing our revenue outlook for the year to $415 million, reflecting the reinsurance ceding changes I just mentioned as well as the organic outperformance across the business, including the impact of premium per policy increases. Similarly, we are also increasing revenue less cost of revenue outlook to $190 million with an adjusted EBITDA loss of $52 million, which suggests $4 million of positive adjusted EBITDA in Q4. This continues to assume a 35% gross loss ratio in the fourth quarter of 2023, in line with historic experiences.

Claims for catastrophic weather in excess of our long-term historical average are excluded from our guidance. We are on track to deliver adjusted EBITDA profitability on a cumulative basis in the second half of this year and for full year 2024 and beyond. We are reiterating gross written premium guidance of $500 million. Thank you all for your time today, and I’ll now hand over to Matthew to cover our KPIs and other business updates.

Matthew Neagle: Thanks, Shawn. Quite a bit to update on today, so we’ll dive right in. On slide 16, I’ll quickly update on our KPIs. The average number of companies was 31,000 in the third quarter, broadly similar to last quarter and prior year with continued housing market headwinds. Average revenue per company per month increased 72% to $1,436 versus $833 in Q3 2022 as we continue to monetize the insurance opportunity more effectively. We had 225,000 monetized services in the quarter, a decrease of 29%, predominantly due to housing headwinds and corporate relocation in moving. Finally, average revenue per monetized service was $510, up 176% versus prior year due to the growth in our higher value services such as insurance and warranty.

Looking now at the insurance KPIs. Gross written premium was $154 million, broadly flat versus prior year from 334,000 policies in force in the third quarter. We are managing against our plan effectively, not renewing those policies previously mentioned that are higher risk and implementing our premium per policy increases in underwriting changes that boost our loss ratio. The team is doing an excellent job of executing against our targets. We wanted to manage premiums largely flat this year to focus on profitability with lower weather risk volatility, lower reinsurance costs, and lower capital requirements. The fact that we are able to execute to our premium targets with 57,000 fewer policies and the corresponding risks is a huge win. With our data, we are able to effectively identify which of these policies would most likely be unprofitable.

And you can see the impact to our gross loss ratio and to our results. Premium retention was 100% for the third quarter with premium per policy increases offsetting the impact from non-renewals. Annualized revenue per policy was $1,139, an increase from $300 in the prior year. This quarter, we’ve added annualized premium per policy, which we believe is a more useful, way to understand the unit economics of our insurance business. Premium per policy was $1,762 in the third quarter, an increase of almost 40% versus prior year, and we expect to take even more rates in 2024. Our insurance carrier had a gross loss ratio of 39% in the third quarter. As Shawn said, our fourth quarter 2023 adjusted EBITDA profitability target assumes a 35% gross loss ratio, which is equivalent to approximately $160 of average claims cost per policy in the quarter.

You can compare that to our $110 five-year fourth quarter average for claims cost per policy. Part of the progress against profitability you see is due to having the insurance underwriting changes we have previously announced, start to flow into the results. Our 39% gross loss ratio in the quarter consists of 32% relating to non-cat and 7% relating to catastrophic weather. Matt mentioned, there was $8 million in cat-related losses net of reinsurance in the quarter, which were above our historic trends, mostly due to the end of quarter Texas storm. You can see the non-cat loss ratio of only 32% versus 52% in the prior year, this demonstrates how our unique data really shines and makes a substantial impact on identifying lower risk. We’ve also included our combined loss ratio of 58%, showing a 35-percentage-point improvement versus prior year.

There are other key changes the team have been working on which I would like to highlight. We continue to expand the use of our proprietary data in more states, now 12, where we use it for pricing. We have increased deductibles meaningfully with a minimum wind or hail deductible of 2% of the home value and 1% to other perils. We will implement further deductible increases in 2024 which will decrease claims rate as well as losses per claim. Additionally, we will implement coverage exclusions in certain geographies including for wind. We are exiting the state of Georgia. We are serious about profitability and when a state does not allow us to implement the rates we need to hit our profitability targets, as was true here, we will prioritize being strong stewards of capital.

And we are executing on the 37,000 non-renewals as previously discussed, avoiding losses where our data signal that they are higher risk policies. We will continue to look at non-renewing more policies in 2024, particularly in high-risk geographies. Through these actions, we expect to strategically manage gross written premium lower in 2024 to focus on profit, capital, and lower volatility. After our additional actions are rolled through, we will be well positioned for profitable growth as we then look ahead. Finally, I would like to share an update on cost reduction activity that we have executed over this last year. 18 months ago, when we saw the macro headwinds coming and communicated reaching profitability in H2 2023, we tasked our business unit leaders to execute a cost review.

Through this process, we have eliminated approximately 300 roles through reduction in force measures. We reviewed contractors, advisers, and vendors and have driven cost reductions. This includes running an RFP process for a new audit firm where there is an opportunity to maintain quality while reducing spend substantially. In total, our cost management efforts have reduced our annualized spend by approximately $20 million, making an impact in H2 2023 and continuing forward. Thanks, everyone. I’ll now hand it back to Matt.

Matt Ehrlichman: Thanks, Matthew. Thanks, Shawn. Before we move to Q&A, I’ll just make some final points. First, as we said today, we are on track our second half 2023 adjusted EBITDA profitability target. I appreciate the patience of our shareholder base and we’re excited about our Q3 results of $9 million of positive adjusted EBITDA. Second, now that the TDI supervision has been lifted, we will be able to restart reciprocal application next year with target approval in 2024. I continue to look forward to operating on a fee based, less weather sensitive model. Third, we continue to expand use of our unique property data and look to roll out to further states with more new insights. This and the other underwriting actions we’ve mentioned are significant in driving profitability.

Going from a 54% non-cat loss ratio down to 32%, obviously, is a big one. Finally, we believe we have a strong business model and the right team in place to deliver against our strategic goals. We’re balancing growth and profitability during this time with a strong eye toward increasing value. I and others at the Company have purchased shares in the open market over the last quarter, more than 2.3 million, reiterating my belief in the long-term vision and opportunity. These next six months will be exciting times for us with many important updates, and I look forward to demonstrating significant momentum for our shareholders. So, that will wrap the prepared remarks. We’ll pass the call to the operator. Please go ahead and open the call for Q&A.

Operator: Thank you. [Operator Instructions] We’ll take our first question from Daniel Kurnos with Benchmark.

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Q&A Session

Daniel Kurnos: Matt, just quickly just on the reciprocal process, I mean, I don’t think that TDI could have gotten a closer look at your books than what just happens. I know you said target 2024. Is there any reason why that’s not early ‘24? Are you kind of reevaluating the process? I just want to get an understanding where your head’s at on that?

Matt Ehrlichman: Yes. First, I’ll just take the moment to give a tip of the cap to the TDI team, that we work with. Tremendous amount of respect coming out of the process for just the quality of the people, the partnership, really, they work with us in a very appropriate and fair, sometimes tough but fair, but very appropriate way. I just really have appreciation for how quickly they were able to move to kind of review the company and help us move out of supervision after the Vesttoo problem. In terms of reciprocal, frankly, Dan, we just weren’t able to focus on that while we were in supervision. Understandably, the TDI was solely focused on the HOA business unit and wanted to remain focused on that. And so, obviously, we’re just released out of supervision last week.

We now, in turn, will be able to take a breath, be able to go and update the application which is currently incomplete and in pending status, as we’re going through that supervision process. I’d expect us to be able to have that up-to-date in the 2024 year, and then we’ll be able to provide an update on timing as we get into next year.

Daniel Kurnos: And then just — I know you started talking about this last quarter in terms of the third-party agency. I mean, you have a tremendous lead gen opportunity, right, which I think is also underpinning the reciprocal concept. And Matthew, if you want to chime in here too, like you guys talked about managing gross written premiums down next year to be more profitable. How do we think about either the revenue impact or how quickly the third-party stuff scales? And, if you are going to manage it down, your willingness to take on more or less risk in the reinsurance market, if you feel like you’ve got a better handle on, obviously, the exposure to cat risk?

Matthew Neagle: Yes. I can jump in, and, Matt, you can layer on. The first point around the third-party agencies, we are interested and excited about having a more diverse fulfillment network for all of those leads that we have. And, of course, through that, we don’t really have to take on any of the risk, and we get the benefit of all of their coverage, carrier panels, and expertise. And so, we think, doing that can be a smart play for us and can also provide incentives for those agencies over time to sell more of our products. I think with GWP and managing it closely, we are very focused on profitability. We’re very confident. We can grow GWP as needed. We have a bunch of actions that we’ve taken that we want to see roll through the business, including more price increases, changes to deductibles, changes to exclusions. All of that we think will position us for a lot of long-term growth.

Matt Ehrlichman: And then the one last thing I would add, Dan to your — last part of your question on taking more or less risk. Shawn did note we would like to and expect to use our captive reinsurance vehicle less next year, and so that would kind of signal that we would like to carry less risk generally. Obviously, our strategy generally is to be able to end up launching the reciprocal and then transferring the risk bearing entity into a completely separate third-party entity that we don’t own and manage it from a fee and commission perspective. We think that’s the attractive structure for us, here going forward. Between now and then, given how well our book has performed, I mean, it’s substantially better than others in the industry. That creates we know really good opportunity as we come up on the reinsurance renewals for this next year, to be able to get the right structure in place so that we can carry less risk, here in 2024.