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spk06: participating in Port Group's full-year 2022 conference call. Today, we issued our fourth quarter earnings release and related form 8K 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, Port Group's CEO, Chairman and Founder, Sean Kabak, Port Group's CFO, Matthew Nagel, Port Group's COO, and Adam Kornick, Pret President of Porch Group's Insurance Division. Before we go further, I would like to take a moment to read the company's safe harbour 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, March 14th, 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, and anticipated impacts from pending or completed acquisitions 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. 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 a presentation shortly after this call on the company's website at ir.porchgroup.com. And with that, I'll turn the call over to Matt Ehrlichman, CEO, Chairman, and Founder of Porch Group. Over to you, Matt.
spk09: Thank you, Lois. Welcome aboard. Good afternoon, everybody. I founded Porch a decade ago now with the mission to simplify homeownership. and over the years we have focused on building sustainable advantages that would allow us to win in key areas of focus the most valuable services for the home now with homeowners insurance at the center so first off i want to welcome sean our new cfo fantastic to have you on board and i'll just start by saying that i am proud of the work and contributions from the entire porch team in 2022 as we dealt with the impacts of inflation, challenging capital markets, unusual weather volatility, and the housing market that slowed substantially. Many, if not all, home service and insurance businesses faced these same headwinds, but we stayed focused on what we can control, and we took advantage of 2022 to move forward in our strategy and toward near-term profitability. We extended our market position and our software products in key verticals, We grew our insurance business with improved underwriting and increasing policies. We successfully integrated past acquisitions, we matured our financial systems, and we diversified our board by adding strong new members. So quickly looking at the financials, we ended 2022 with Q4 results of $64 million in revenue and $13 million in adjusted EBITDA loss. Q4 adjusted EBITDA would have been $7 million better if it hadn't been for Storm Elliott, which occurred in the last week of the year. For the 2022 full year, year-over-year revenue growth was 43%. Over the two years since we've been a public company, we've now grown revenue at a CAGR of 95%. Sean's going to share more details on the financial results here shortly. I'd like to reflect on 2022 as there were some key successes that really did move us forward. During the last year, our software division expanded its leadership position in the home inspection industry. We acquired Home Inspector Pro, an inspection software company that strengthened our SaaS offerings and residential warranty services, which has deepened our capabilities with home inspectors and home warranties. By selling software to now more than 30,000 home service companies, we have visibility into approximately 80% of all home buyers, as well as unique insights into the underlying properties. In 2022, we launched our well-received Porch app, which extends the experience we provide for consumers and continues to gain traction. We made great progress accessing more unique demand and data, a core competitive advantage, which gives us the opportunity to build a delightful consumer experience, and eventually the most effectively priced homeowners insurance. To accelerate our expansion into homeowners insurance, in 2021, we acquired Homeowners of America, or HOA, a company that provided us with both a regional insurance carrier and a managing general agency, or MGA. We've expanded that business both with new geographies and distribution, and I'm proud to share that in 2022, HOA was the fastest growing homeowners insurance carrier in the U.S. through the third quarter of the year. We accomplished this while having 2022 gross loss ratios of 72% better than other carriers, despite unexpected severe weather in our largest regions during the year. One of the reasons we chose HOA as the company to acquire is that it uniquely had the characteristics that we liked. Both an MGA and carrier business, a great leadership team, greater capital efficiency and less volatility than most by ceding much of the premiums to reinsurance companies, strong historic underwriting results, 15 years of historic claims data, and a healthy financial position. So we have the ambition to become an insurance company with a higher margin commission and fee-based model and to operate with limited seasonality and large swings in results from weather, all of which we believe would effectively create value for our shareholders long-term. While we continue to invest in strategic partnerships with reinsurance companies, we have been working for some time on the formation, structuring, and strategy programming and pricing of a reciprocal exchange. We will imminently file an application with the Texas Department of Insurance to create this reciprocal. If approved on the terms proposed by Porch, the Porch Insurance Reciprocal Exchange would be formed in Texas as an association owned by its policyholder members and not by Porch Group and our shareholders. This new entity would purchase our HOA insurance carrier and would hold ongoing premiums and ordinary course claims costs. Initially, Porch Group would provide the required capital to operate the reciprocal, and Adam's going to discuss the expected benefits and key considerations related to this strategy shortly in our deep dive. We have been looking forward to sharing more today, as we believe this is a key time for our company. and an attractive structure which allows us to better leverage our advantages and improve profitability over time. So I'll now hand it over to Adam Kornick, president of our insurance division, who will kick off with this deep dive into this launch and to provide further context before Sean takes over to cover results and guidance. So Adam, over to you. Thanks, Matt.
spk13: By way of background, I've been in the insurance industry for two decades, and 2022 was one of the most difficult years in my experience. We saw inflation increasing claims costs along with storms, with Hurricane Ian in Key 3 and Winter Storm Elliot in Key 4, plus increases in reinsurance pricing. We'll share updates today on how we are positioned for growth and profitability and our plans to mitigate volatility. First, let me take a step back and provide clarity on five different ways one could operate in the home insurance industry. So you can better understand how we operate today and how that compares to a reciprocal. So one, selling leads. It is a simpler business, less regulated, but it lacks annuity revenue streams and the ability to deliver a great consumer experience. Two, as a retail insurance agency. So agencies' commissions are limited, and they also rely on carriers for underwriting risk. Three, your third is a managing general agency, or MGA. Here, companies underwrite in price for uninsurance products and use the capacity of insurers and reinsurers. Commissions increase, but there is exposure to reinsurance cycles. Four, the fourth is a carrier. Insurance carriers write their own products and hold all or some of the premiums and risks, depending on where to see its reinsurers.
spk02: Carriers have more upside if claims are low, but they require capital to grow and carry volatility. But today, we operate under models two, three, and four.
spk13: Finally, a reciprocal exchange. As mentioned, we believe this is an attractive model for our business and strategy that we'll explain over the next few slides. A reciprocal exchange structure has been utilized by successful insurance businesses such as Farmers Insurance. As an example, Zurich owns the day-to-day operator behind Farmers and creates substantial and consistent value from that relationship. So what is a reciprocal? Here's how the structure will work. Assuming the Texas Department of Insurance, also known as the TDI, approves the application as we will file. The Porsche Insurance reciprocal exchange will be an association owned by its policyholder members and not by Porsche Group. The reciprocal would issue the policies, hold the premiums and capital requirements, and pay claims from its balance sheet. George Group will continue to manage pricing and claims on behalf of the reciprocal, leveraging our data and consumer access. For these services, we expect to be paid fees comparable to the fees we've received in the past from reinsurance companies. Distribution is available through a variety of channels, including both Portis B2B2C relationships, as well as third-party agencies. We expect to launch in Texas, and as part of this, we would transfer our HOA carrier entity, including the carrier's assets and liabilities, to the reciprocal in exchange for a coupon bearing note. That means on day one of that transaction, all HOA carrier premiums from all of its current states would be moved into this newly formed entity. Although separate, the success and capitalization of the reciprocal will, of course, be important to port. As we will be financially responsible for the success of the reciprocal initially.
spk02: And we'll also be earning significant fee income from that. For the recap, we'll soon file the application of the TDI and then work through the approval process.
spk13: We will transfer the HOA carrier and premium from all states into the reciprocal in exchange for a coupon bearing note. We expect to launch the new porch insurance brand first in Texas. And lastly, porch will provide operating services to the reciprocal for which it will receive a fee. So the next slide is to bring all this together, I will highlight the long term benefits of this reciprocal structure for stakeholders. First. Policyholder members are expected to benefit from new value propositions Porch can provide, such as a 90-day home warranty product and more. Also in this structure, policyholders are the owners of the reciprocal, allowing them to benefit from any future dividends or distributions. For Porch, as we have mentioned, this structure will help us move towards our ambition to reduce direct exposure to seasonality and large swings in results due to weather, and have higher margin, more predictable profitability. In the future, porch financing will be replaced with third-party capital.
spk02: And this, we believe, will create long-term value for our shareholders. Let me go one more.
spk13: Before turning over to call to Sean, I'll echo what Matt had said. This is an exciting time for porch group and should have us positioned well for growing profits in a more predictable way in the long term. We expect 2023 to be a transition year. As we shift towards this reciprocal model, assuming it is approved by the TDI, which we did not expect before Q3 of this year. In the interim, we expect to manage the business, the current HOA business, with an eye on profitability. Let me share the key things we will do this year to facilitate a smooth transition and launch of the reciprocal. Two key initiatives in this regard. First, we expect to decrease the amount of closure reinsurance in 2023 to approximately 50% CD levels, given a substantial increase in the cost of reinsurance in the market broadly and in support of the transition to the reciprocal, which we would expect to see less and operate its reinsurance purchasing more efficiently. This means we'll have some additional exposure versus historical periods, in particular weather-related risks, which are typically more pronounced in the first half of the year. Additionally, given the increased cost of reinsurance, we expect to non-renew approximately 37,000 higher-risk policies. This will obviously temper the near-term growth of our insurance business in 2023, but is expected to increase profitability and help ensure the reciprocal is appropriately capitalized at launch if approved by the TDI on terms we propose. So, to summarize, it's an exciting year and a long time coming. We are actively working towards filing and approval, and therefore you'd be positioned to drive more consistent profitable growth with less direct exposure to lever inflation and quota share reinsurance. Sean, over to you.
spk04: Thanks, Adam. And good afternoon, everyone. Before I dive into the fourth quarter results, I just wanted to express how excited I am to be here at Porch, working with Matt, Matthew, Adam, and the rest of the wonderful team. We have a tremendous opportunity to create value for our customers, our shareholders, and our employees by simplifying home ownership with insurance at the center. Taking a step back, 2022 presented a challenging macro environment for Porch, with increases in weather-related events, as well as rising inflation, a decline in home sales, tightening and price increases with reinsurance, and challenging capital markets. Each of these impacted short-term business results, like many other home service and insurance businesses. The key takeaway for the fourth quarter of 2022 is that despite all of this, we grew revenue 24% year over year, driven by our insurance segment. Adjusted EBITDA was also impacted by a large ice storm weather event at the end of the year, which drove higher than average claims. Winter storm Elliott impacted much of the country, and Texas in particular. In total, cat weather impacted our adjusted EBITDA loss by approximately $7 million in the fourth quarter. Starting now with our key financial metrics. Fourth quarter 2022 revenue was $64.1 million, with the insurance segment growth partially offset by the vertical software segment. Fourth quarter revenue growth, excluding recent acquisitions of Flowify Residential Warranty Services and Home Inspector Pro, was 19%. Revenue-less cost of revenue was $43.9 million, resulting in a 69% revenue-less cost of revenue margin, lower than prior year, driven by higher CAT weather-related insurance claims. Normalizing for the CAT weather, revenue less cost of revenue would have grown 36% rather than 17%. Adjusted EBITDA loss was $13.3 million with CAT weather accounting for approximately $7 million of that loss and otherwise driven by strong performance in our warranty business and strong expense control. Gross written premium for our insurance segment was $131 million. a 30% increase over the prior year driven by continued growth in policies and higher premium per policy starting to flow through.
spk02: Moving on to revenue by segment.
spk04: Revenue in our insurance segment was $31.2 million, a 94% increase over the prior year driven by growth in policies, premium per policy, and strong growth in home warranty. Insurance segment revenue increased from 31% of total revenue in the fourth quarter of 2021 to 49% of revenue in the fourth quarter of 2022. Revenue in our software segment was $33 million, which was a 7% decrease over the prior year due to our moving services group, which was directly impacted by a soft housing market that continued to face headwinds. Fourth quarter home sales declined 34% year-over-year industry-wide. Our software and services subscription groups were relatively flat year-over-year. As for adjusted EBITDA, our insurance segment adjusted EBITDA was $700,000, a decrease from the prior year driven by CAT weather-related insurance claims. Software segment adjusted EBITDA was $1.1 million, a decrease from the prior year driven by the housing market as mentioned. Corporate expenses were $15.1 million, reducing to 24% of total revenue from 28% in 2021. We invested in our data platform and app, which was offset by strong expense control.
spk02: Shifting now to our full year results,
spk04: Revenue for the full year 2022 was $276 million, 43% growth over the prior year. Revenue growth excluding acquisitions from the prior year was approximately 21%. Insurance segment revenue grew 119% in 2022, driven by growth in policies, increased premium per policy and strong execution in our warranty business, including improvement in retention rates due to an improved value proposition for consumers. Revenue in our vertical software segment grew 13% in 2022, despite the housing market. Revenue less cost of revenue was $168 million, a 61% revenue less cost of revenue margin, down from the prior year, primarily driven by cat weather-related insurance claims, as mentioned. The adjusted EBITDA loss of $49.6 million was similarly impacted by these cat weather-related insurance claims. And finally, gross written premiums in our insurance segment was $536 million, growing 75% year over year. Shifting now to the balance sheet, we ended the year with unrestricted cash plus investments of $307 million versus $320 million as of the end of the third quarter. We hold convertible debt on our balance sheet of $425 million due in September 2026. And in the fourth quarter of 2022, we repurchased approximately 2.4 million shares at an average price of $1.82 per share. Additionally, I want to provide that we do not currently hold any deposits with SVB. As a reminder, our HOA insurance carrier must hold a certain amount of capital that can vary based on premium, growth, and other factors. Historically, we have offset some of this capital requirement through effectively transferring the amount of premiums and losses to reinsurance partners, either on a quota share or excess of loss basis. HOA has been and continues to be rated A exceptional by its rating agency. To maintain that rating and to ensure the entity is appropriately capitalized, Quartz Group transferred $34 million to HOA in the fourth quarter, bringing HOA's unrestricted cash balance to $78 million at the end of the year and its investment balance to $92 million. We expect to transfer HOA to the reciprocal in exchange for a coupon-bearing note.
spk02: Therefore, these cash and investment balances would transfer with the reciprocal.
spk04: And shifting now to our outlook for 2023, we expect many of the headwinds faced in 2022 could continue into 2023, such as inflation, potential weather volatility, and declines in the housing market. Given additional weather exposure as we prepare for the reciprocal launch, We are providing a range for performance, which assumes no catastrophic weather event. And with that, our guidance for 2023 is revenue of $330 to $350 million, increasing at least 20% year-on-year. This assumes strong revenue growth expected in our insurance segment, with relatively flat year-over-year revenues in our vertical software segment. Until we see the housing market turn, our starting assumption is for an 18% decline in industry-wide home sales in 2023 versus 2022. Revenue less cost to revenue of $170 to $180 million. In the first half of the year, our exposure to weather is the highest, given this is historically when our largest states have seen the highest claims volumes. Therefore, we've assumed a 62% gross loss ratio for the year, excluding any cat weather higher than the historical average. And given the pricing increases that have gone into effect, this loss ratio would equate to approximately a 24% increase in claims costs per policy compared to 2022. Certainly, we hope for better weather and a slowing of inflationary costs, which could create upside to this range, but we believe this is the appropriate assumption at this time. We have not assumed major losses for cat weather events, which would create downside outside of this range until the reciprocal is formed. Adjusted EBITDA loss of 30 to $40 million, We are managing costs carefully and we remain on track for positive adjusted EBITDA for the second half of 2023 and beyond.
spk02: And finally, gross written premium of approximately $500 million.
spk04: We anticipate the TDI will review our reciprocal application in the latter part of 2023. If approved, we will revise our guidance to present the new structure of the business, which we believe to be more attractive. Until this time, we continue to be directly exposed to potential catastrophic weather events. And then note that under U.S. GAAP, we expect to consolidate the financial results of the reciprocal with Porch Group for a period of time. As I mentioned, we continue to expect adjusted EBITDA profitability for the second half of 2023 and beyond. even with the continued expected housing market downturn in 2023 and substantial increase in reinsurance pricing. Here's a bridge to demonstrate how we would achieve this. Comparing the adjusted EBITDA loss of $24 million in the second half of 2022 to the positive adjusted EBITDA expectation in the second half of 2023 is driven by a number of factors. We are modeling a $10 million improvement between approved premium per policy increases in insurance that are rolling out already and lower distribution costs. Our previously stated price increases of insurance policies in Texas and South Carolina are being rolled out at each customer renewal, and the impact by the second half of the year is substantial. Second, a decrease of expenses by $5 million from a variety of G&A savings initiatives already in flight. And finally, given the underwriting actions we are taking and given the severe weather we saw in 2022, we expect more than $10 million improvement in claims costs between the second half of 2023 compared to 2022.
spk02: And finally, before I hand it over to Matthew, a few housekeeping items I wanted to cover.
spk04: First, as I enter my first full calendar year as Porch CFO, I plan to look at our KPIs in additional or alternative metrics to share. You'll notice that in this presentation, we have added certain disclosures, such as the gross loss ratio for our insurance business. We expect to continue to provide this disclosure until we potentially transition to the reciprocal and it becomes less applicable. Secondly, we plan to transition from reporting policy retention to a premium retention rate, which we believe is more meaningful as it also considers price increases and is more directly comparable to peers. Additionally, you'll note in our press release issue today that we are restating our unaudited financial statements for Q1 to Q3 of 2022, primarily due to the accounting related to reinsurance contracts. The net impact of the restatement for the nine months ended September 30, 2022 is additional revenue of $3.1 million and additional adjusted EBITDA loss of $2.3 million. And finally, We have remediated the three material weaknesses that we had from 2021, and we want to thank the team for their significant efforts on that front. Separate from the progress we've made there, we have identified a new material weakness for our HOA subsidiary. And as a reminder, we acquired HOA in 2021 and was subject to SOX for the first time in 2022. We'll work towards remediating this weakness in 2023. With that, I'll turn it over to Matthew Nagel, our Chief Operating Officer, to discuss our key performance indicators for the fourth quarter. Matthew.
spk01: Hello, everyone. Great to be with you today. I want to make sure it's understood that despite macro pressures and unusual weather impacts seen throughout 2022, the fundamentals of the business are strong and the team is performing well. Looking to 2023, our strategic priorities remain clear and largely unchanged. First, we'll sell vertical software to more companies where we become deeply embedded, such as increasing the percentage of customers we can access and upsell. Two, we will extend our online experiences, our digital tools, and our consumer app with the aim to be their partner for their home and increase our B2B2C transactions. We will further build out our data platform and leverage Porch's unique insights to improve premium per policy for our insurance and warranty products. And we will launch Porch Insurance via reciprocal as a key step towards reducing Porch Group's direct exposure to claims, weather events, and reinsurance. In terms of quarterly KPIs, I'll start with the average number of companies and average revenue per company per month. As a reminder, These metrics, when taken together, provide additional information on our total revenue for the quarter. Definitions of these KPIs are in the appendix. Beginning with companies on the left, the average number of companies in Q4 was approximately 30,860, up 25% from the prior year, showcasing that our teams are selling our software to more companies and increasing our penetration, even in a difficult environment. As we have mentioned, growth in the number of companies is and will slow, especially until the housing market rebounds. We have seen home inspection companies start to go out of business or retire in Q4, and certain mortgage and moving companies either close or compress spend. We recognize $693 in revenue per company per month in Q4, a decrease of roughly 11% from the prior year. This KPI was impacted by lower home purchase volumes. We expect this to continue in the short term, but in the medium term, we believe there is opportunity for growth in this metric by expanding software modules offered to companies, gaining access to more consumers, and helping with more services like insurance and warranties. Shifting now to monetized services and average revenue per monetized service. Monetized services include insurance policies, home warranty, movers, home automation and security, internet and TV, and other home services. Said differently, this includes all revenue other than our B2B software and services subscription revenue. We saw 213,000 monetized services in the fourth quarter of 2022. a decrease of 18% from the prior year. This shift was driven primarily by fewer homebuyers, given the downturn in the housing market, which at a 34% decline was substantially worse than prior quarters. Revenue per monetized service increased 46% to $219, up from $150. The growth in revenue per monetized service is driven by the key services we are focused on, such as insurance and warranty, which may produce even higher revenue per service going forward. Looking at insurance on slide 27, the segment continues to grow and ended the fourth quarter with gross rent premiums of $132 million with 389,000 policies while generating an average of $347 of revenue per policy per year. On a rolling 12 month basis, as of December 31st, 2022, we had approximately 86% retention rate at our homeowners of America business. As mentioned, policy growth has and will continue to slow in 2023 as we now renew certain higher risk policies. Finally, diving a little deeper into the gross loss ratio for insurance segment, here you can see the gross loss ratio in the fourth quarter of 2022 was 56%, which included an approximately 25 percentage point impact from atypical weather events. As was mentioned, winter storm Elliott hit in a period when we typically see less major weather events. The average gross loss ratio over the prior three years in Q4 was 31%. which was broadly in line with the 32% in Q4 2022 if you exclude these CAT events. This means we had approximately $7 million of additional expense in the fourth quarter of 2022 due to this higher than expected gross loss ratio. Thanks, everyone.
spk02: I'll pass things back to Matt to wrap us up. Thanks, Matthew. Thanks, guys.
spk09: As we turn to 2023, look, I couldn't be more excited given what's coming up this year. First, our strategic initiatives are continuing to progress nicely. We're now approved with nine states where we can use our property data in insurance pricing. Our insurance price increases are rolling out to policyholders at renewal and expected. As expected, our consumer app, as I mentioned before, is getting broadly distributed to home buyers. But now it's across approximately half of our inspection companies using our ISN software. Home warranty is integrated into our experiences through a variety of channels with excellent growth. And we're seeing good price increases in some of our vertical software products tied to rolling out new software modules. Second, despite the internal cautious expectations of the housing market and despite prioritizing profitability over growth for our insurance business, because of this strong execution by our team, we still expect to grow revenue north of 20% in 2023. And lastly, we continue to be on track, as Sean mentioned, to become adjusted EBITDA profitable in the second half of this year and beyond, which is an important milestone for the company. For the potential launch of the reciprocal and the momentum across the business, we are very excited about what the next several years will produce. Thanks much for the time and interest. And with that, we will open up the call for Q&A.
spk02: Great.
spk06: Thank you, Matt. The lines are now open for Q&A. To ask a question, please raise your hand. We will do our best to get through all your questions in the remaining time today. So question one comes from Jason at Oppenheimer. Over to you, Jason.
spk11: Hey, guys. A few questions. So just help people understand, if you had been a reciprocal exchange in 22, how would that have impacted gross profit and EBITDA? I'll just ask them in order. So let's just take one at a time. So just how should we think about how it would impact the business had you already been a reciprocal exchange?
spk09: Yeah, Jason, thanks for the question. Let me just take the high level. And then, Sean, if you want to provide any other details, please do so. We obviously are not guiding right now, Jason, to what the numbers would be looking forward with the reciprocal. We're going to wait to get it approved. We have to go through that process with the TDI first. And at that point in time, we'd expect to both update our guidance as well as to go deep with analysts so that the models can be appropriately updated. Like we noted in the call, it does have a materially positive impact to margins overall, both gross margins and then EBITDA margins, because the claims costs that are typically incurred are borne by that reciprocal entity. Obviously, looking at 2022, the impact would have been material to the margin line because in particular of the amount of weather and unusual weather that occurred last year. So without going into too much detail, you know, I'll certainly comment that way. Anything else, Sean or Adam, that you guys would like to add?
spk04: I can just get a little bit of perspective on how we were impacted by some of the atypical weather that we saw in the year. In the third quarter, we had mentioned uh, hurricane Ian as approximately a $10 million impact. And now in the fourth quarter, we had mentioned, um, $7 million, um, from winter storm out from all the catastrophic weather, primarily winter storm Elliot and Q4, um, just, just those two items. That's that adds up to $17 million, which would have taken our 49 Eva dot loss down to 32, just doing the math there. Um, you know, there are other things that impacted us in the year, like inflation, et cetera, other, other events, but just, just taking those two big ones that we've disclosed may get a little perspective also.
spk11: And just, you know, and I'll just say a second one. I'll take, keep the third one offline. I mean, the idea that for you to have kept going under the current model for the economics of reinsurance, given all the recent weather, we're going to become unattractive and, and, going in this direction ends up being, in your opinion, kind of the, you know, the more effective way? I mean, it's like, I mean, is that ultimately the catalyst? Like multiple quarters of kind of bad weather and the industry's had to deal with and kind of, how that's impacted reinsurance along with like higher rates, like specifically the catalyst.
spk09: Yeah, that's great. It's actually, Jason, something that we have been talking about for quite a while. In fact, Adam and I, it's a conversation we had almost immediately after acquiring HOAs. We just looked forward over a long period of time to talk about strategically, you know, how would we best structure or how do we believe an insurance company would best be structured to scale into the level of scale that we think we can grow this business into? Again, one of the things that was attractive about HOA is that it was capital light, lower volatility, and that it would seed at the time of acquisition approximately 90% of its premiums to third-party reinsurers. Well, as you get to larger and larger scale, seeding at that level is more difficult. And certainly to your point with the changes in the reinsurance landscape, that also becomes more difficult or more expensive. I feel very fortunate that those conversations for us had started that long ago so we can kind of get out ahead and start the work. It's a material amount of work that goes into getting to this point, ready to make these filings. And moving forward with this with this structure. But at the end of the day, it's our belief, Jason, that this structure positions us in the optimal way to be able to do what we want to do, which is to scale a very large leading homeowners insurance company and to do so without having to essentially being able to essentially seed 100 percent of premiums in some respect. where we aren't the direct bearer of the claims cost and weather volatility. And so that's a big change for us that can be, we believe, very impactful both to margins and valuation over time.
spk02: Great, thank you. And next we'll go to Dan from Benchmark.
spk06: Over to you, Dan.
spk03: Great, thanks. Matt, you're going to have to forgive a little bit of my ignorance on this, um, you know, but if you go through this process, a, you know, obviously you believe there's a high likelihood of it getting approved. And it sounds like this is sort of the future path to getting, you know, call it, let's call it a hundred percent asset light or, you know, limit your claims downside. Um, When you go through this, how do you maintain your ability to transfer the data advantage you have to the exchange? Do you charge them for that effectively? Or help me think through kind of that process because you have almost a totally different go-to-market strategy as you kind of go through this and you're somewhat reliant on them. You can still be a lead driver, obviously, through your own platform, but they own the exchange. So just help me think through a couple of those things.
spk09: Yeah, happy to. And Adam, I'll take the first crack and then layer in if you have anything to add. So you're exactly right, Dan, that we would not announce and share this news today if we weren't confident in it being approved by the TDI. So we've had discussions with the TDI already. We believe that, yes, we'll be able to work through that process to get it approved. i'll also note that again there's many other examples of reciprocals out in the industry so farmers is one that we gave with zurich as the operator behind a very attractive model from zurich but others as well usaa folks might not know but they are members slash owners of of usaa if that's who they were used for insurance or you know erie or pure or a variety of others so it's a structure that's been used you know before In terms of how we get credit, essentially, for our data advantage, well, yes, by being able to create better underwriting results and being able to use our data to be able to price more effectively, we benefit in two ways. One, we can help premiums grow faster. So being able to provide lower pricing to the right consumers, we can go and be able to win more consumers to grow premiums more quickly. The faster premiums grow, the higher our fees are, because we get fees as a percentage of the premiums. And so we are very incented to help premiums grow quickly. Our data gives us an advantage to be able to do so. Secondly, we can pay fees appropriately based on having a healthy, sustainable, reciprocal exchange. And so by being able to have the right customers priced correctly, that affords this entity to be able to pay those fees and have potentially growing fees over time. Adam, anything else that you would add?
spk02: I think you did great. I would just make it more complicated.
spk03: Does this, you know, obviously, you know, you're reducing both seeding levels and also, you know, I guess the GWP is sort of reflective of your plan to move to reciprocal exchange this year in the guide. So does this kind of change the TAM at all in your minds? And who you can go after? Obviously, you can go after a smaller TAM, but have it be substantially higher margin, right?
spk02: Um, but just, can you help us think through that a little bit?
spk09: So I'll, I'll take this last one, um, and then get the team involved. But I think the TAM's interesting in two, two ways. Um, One, like we noted in the call, no, our fees are largely similar to the types of fees we would get when we would see premiums to reinsurance companies and they would pay us. So our take, our opportunity is not materially different. No. One thing that I do think is interesting just in terms of the TAM of homeowners insurance, just general, you know, the category in general, is that Unlike categories like auto insurance that have risk of being a smaller market over time as cars become safer, homeowners insurance, we get questions like, okay, is this a good industry to play in because of the weather that's out there and the weather that should increase over time? In our view, it actually becomes a very attractive dynamic long term because insurance companies are going to price to be able to generate profit. That's just the reality of it. Prices will go up as there is more weather, which means the TAM is going to grow. And we believe that the homeowners insurance TAM is going to grow substantially. If you look forward over the next five years, would I be surprised if the TAM is twice as large as it is now? Not at all. And so not only are we going to be able to benefit from just executing our plan, growing our business, but we would expect prices in the TAM to continue to go up, and we would be the direct beneficiary of that through this fee-based model.
spk03: Got it. That's helpful. I'd ask you my standard app question, but if something tells me it's going to be a long call and not the focus tonight, Matt, so I'll move it along. Thanks, Dan. Good to see you.
spk07: Thanks, Dan. Next up is Corey from JP Morgan. Over to you, Corey.
spk02: Hey, thanks for the questions.
spk12: Just a couple, sticking on the reciprocal, just in terms of financial impact, just to make sure we understand when a weather does happen under this new format, does that basically just pull from the HOA cash reserves? Then it essentially has no impact on your P&L. Is that the right way to think about it? And then does this impact the bundling opportunity like with porch home plan at all? Like are there limitations around what you can do from that perspective? I have one more, but I'll stop there. Sure.
spk13: So from a lever standpoint, So as Sean mentioned, on an adjusted EBITDA standpoint, we would report for the entity that or its shareholders own. And so that would not be moved with Weber. So the claims paid by the exchange would be shown on the exchange's balance sheet NPL, profit and loss statement. So that's the intent is we want to create a reliable source of capital, right? But we can serve consumers, be there, pay their claims, but they can own the entity. That's actually experiencing the lever volatility and make it more efficient. So, then your 2nd question was about the porch home plan. And I think in many ways, this lets us do more there. So we want to find ways to make the value proposition for the reciprocal exchange, the portion insurance reciprocal exchange, such that people get these kinds of offers with us. So we want to make it easy through the app or through the phone for them to get a moving concierge. We're looking at value propositions we can offer around warranty through the reciprocal exchange or recall check. So we think it actually makes it easier from a branding and an ability to offer products what we do. So that's something actually that as we launch it, we want to make sure it happens.
spk02: Matt or Matthew, I don't know if you want to add anything to that. Sorry, I'm muted. I'll try one more too.
spk12: for the first half of the year where this is not effective yet, I mean, you're, you're essentially only re-insuring 50, I think 50% of heard correctly. Like, will you pull back at all in terms of your insurance? Oh, sorry. When you pull back at all in terms of like your growth and insurance policy to be less aggressive during that time period, given, I think you said it's the most variable weather part of the year, you'll have a little more exposure.
spk02: Just how are you, how are you kind of thinking about that?
spk13: Yeah, so I can answer that. So first of all, if I talked about reinsurance, remember there are two kinds of reinsurance primarily that we use. One is quota share, where we see essentially a percent of premium and a percent of losses. And the other is excessive loss or cat excessive loss that only pays for an event, like a single event, a catastrophe, like a hurricane. So the 50% refers to quota share. And so there are really a couple of things about that structure is that we're down to 50%. It's an appropriate way for us to manage the economics around the current reinsurance market. It's also a way for us to position HOA to be sold as a subsidiary of the reciprocal exchange as part of our application, part of our filing to do. So if the TDI approves that, It puts that structure in better footing to be more efficient. It doesn't change our use of XOL, which is if there is a large event, it would pay for the amount in excess of some retention. So those two factors are why we've intentionally changed the quality of share this year as we've worked through the markets. It's something we've worked on for a long time, getting ready, and then the transition upon filing. The second question is around policies. Yes, I think there are a range of things we do there. The team has great science around when we see an application, how we price it, how we underwrite it, how we understand if it's a policy that's profitable. But at the macro level, there are 37,000 policies that we plan to non-renew this year. About half of those are already done. And that's fundamentally because in the current market, those are good policies in the past, but there's a lag. Reinsurers are not regulated. They can charge us the price they feel is appropriate. We are regulated. And so those are just policies that it doesn't make sense for us to hold right now. But we will not renew those. And it's an example of a tactic that we're taking in part because we see that reinsurance cost and that leverage.
spk09: A related note, just for understanding this question on not being profitable in the first half of the year and then profitable in the second half of the year, it really comes down to you non-renew policies at the point of renewal for those customers. And for the customers that we continue forward with, the vast majority we continue forward with, you also get the price increase from those customers at the renewal. And so what happens is over the course of the first half of the year, we are in the process of non-renewing those unprofitable policies, but you do have to carry some of that lack of profit during the first half of the year. You also, at the point of renewal, we now get the benefit in the second half of the year from all those price increases that have been going into effect over the course of the last quarter or two, and will go into place over the course of this next quarter or two. That really does make a substantial impact to the P&L and helps us drive the profitability in the second half of the year and ongoing.
spk02: Thank you.
spk07: Thank you. Over to Josh from Cantor.
spk08: Yes. Hi, everyone. Good afternoon. Thanks for taking my question. Matt, you actually just touched on it, but I'd love if we could dive a little bit deeper on providing some more color on the actual rollouts of these rate increases, or if you can talk about specific markets. When do you expect these to start fully earning into the book?
spk09: Adam, do you want to provide a little detail and a little more color from what I just provided?
spk13: Yeah, so the simplest way to think about it is they take 12 months. So once we have them approved and programmed and in market, at the next renewal, any new customer that comes in will pay that price. And any renewal consumer will see that price at their renewal. And so that's by state. So in some states like Texas, we had three price changes. South Carolina, for example, we had one. So there's some ins and outs, but essentially it's over the 12 months from when we file the increases. So we're seeing some benefit of them already, but it really takes a full 12 months to see 100%.
spk08: Understood. And then on the software side, can you elaborate a little more on how you plan on expanding your go-to-market strategy in 2023 to capture some more software customers?
spk01: Sure. We are still very focused on growing our vertical software business. One of the things that I would highlight is we've had some success rolling out some new modules, in particular in the inspection space and in the title space. And those give us new opportunities to go back to customers. It also gives us opportunities to drive more value per customer. And so we continue to stay focused. There's a little bit of headwind. just because a lot of our businesses are impacted by the slowdown in the housing market. And that is something that we continue to work with them every day on. But I would say the main focus is rolling out new modules and continuing to go after the core verticals we're focused on.
spk02: Understood. Thank you very much. Thanks, Josh. Thank you.
spk07: Next, we have John from Stevens.
spk05: Hey guys, thanks. Congrats on getting the wheels in motion on the reciprocal exchange. That's an exciting development. And Sean, I know it's going to make life a lot easier for you, at least on the guidance side when that's all said and done. But it does sound like you guys are going to have to kind of operate the business, you know, business as usual next couple quarters. I wanted to get an update on the reinsurance arrangements. I know you guys are in the heart of the renewal season. There's probably still a degree of uncertainty there, but Just like to get your take on that. And if pricing goes against you guys, just how much you're willing to kind of lean on the incremental premiums. And I don't know if you're willing to go into this level of depth for the guidance, but what that range is that you have factored in guidance right now.
spk09: Yeah, renewals are April 1st, so we will know a lot more. Obviously, just starting to get those quotes in from the providers. We've seen, though, in the market, there's just really good data out in the market in terms of what the pricing increases are. And so we've built that fully into guidance and expectations. And we, in our view, are appropriately conservative, just given some of the unknown there. Obviously, we'll get more information here shortly, but we feel good about how we've set up guidance given what's happening out there. Okay.
spk05: Thanks, Pat. And then these insurance filings can be a little tricky to read. I'm thinking I'm seeing that HOA and Texas premiums are maybe up 30%, close to 30% for the year. So that was a pretty big driver for the business, but obviously you're getting a lot of help elsewhere. So maybe if you could unpack and maybe just talk broadly to the impact of, you know, your larger incumbent stage or larger legacy states, maybe Texas, South Carolina versus the newer states you've opened, how much growth you're seeing out of that side.
spk02: I can answer that.
spk13: So at a high level, we are very focused on profitability. So when we enter a new state, we use existing partners we have, existing agents in our own agency. And we tend to price in a way where we know that we're competitive with some companies in that state that have a history of being profitable. And we believe they're profitable. And what that tends to mean is a lot of our growth really comes from the states we've been in for several years, like Texas, like South Carolina, like North Carolina. And so that's what I would point you to is when you're reading the filings, you're looking at the increases, those states are really the states we continue to be most successful in. And so changes there are the most impactful to our business.
spk09: And the only thing I would add, John, is when you're looking at those filings and you're seeing that kind of a price increase, remember that price increases have not been yet pushed through for many customers that have not yet hit their renewal. And so the price increases would actually be more as we get all of the customers going through that renewal and getting the benefit of that price increase. So like I noted, it is a substantial impact to the second half of that year, given the approvals we've gotten.
spk02: Okay.
spk09: Thanks, guys.
spk02: Appreciate it. Thanks.
spk07: Next, we have Ryan from KBW. Okay.
spk10: Hi, everyone. Thanks for taking the questions. Just to drill a bit further into the transition post the reciprocal conversion, do these conversions tend to drive a material amount of churn or attrition in the policyholder base near term? Second, will your ability to grow that business post-conversion be dependent on launching the new porch brand into more markets, or can you continue to grow status quo based on existing licenses and then just finally and i think you touched on this earlier matt but are there any limitations that this puts on your ability to cross sell broader b2b to see services across the the newer structure here i think that was several questions but i'll see if i can see if i can get them so uh
spk13: The application we're making is in the state of Texas. So the insurance or reciprocal exchange is licensed state by state, just like HOA. To your first two points, we would, in the application, apply to sell the insurance carrier in return for a coupon bearing note to the reciprocal exchange entity. So what that means is that we would have strong value propositions, but we want consumers to switch from one entity to the other. But even a consumer that stays in the existing HOA company would be in a subsidiary of the exchange. So that's one key way that we manage both the licensing risk of we will apply for licenses state by state and filings, but we'll be able to use inside the reciprocal the fact that HOA is a subsidiary of that entity. It also means that if a consumer chooses not to move for some reason, that they'll still be underneath that exchange that risk of churn. So I'd focus on those. And then Matt, I don't know if maybe you want to talk about how you think about it more broadly across categories that we're helping consumers with.
spk09: Yeah, so in terms of how this transition can help That's just with our broad strategy, Ryan, and selling more B2B to C services. I mean, we're excited about introducing the Porsche Insurance brand, you know, first off. So this will be the launch we've kind of hinted at or talked about in the past. As soon as it's approved, we'd be able to start selling to new customers, Porsche Insurance, as well as transitioning existing customers into that brand. We noted in the prepared remarks that we will be bringing in an expanded value proposition set for these port insurance customers to be able to help that product really stand out in the market. So one of those examples is our existing 90-day warranty product we've been able to provide to those customers. But there's a variety of things that Porch can do. It's very different than others. You know, moving concierge, the app to help them manage their home, free recall check that's built in to monitor their appliances for any potential recalls and more. You know, that's a lot of what Porch has built over time are these unique capabilities for consumers that we can be able to bundle into that insurance product to really help people holistically, you know, more than just insurance and to be able to differentiate their products. What that means is it does give us opportunities to not just help with insurance, but to help them, again, with a variety of other services around their home that we think can create a lot of value.
spk10: Thanks for that. And then can you help us understand how the fair value of the transfer is determined? Is that dictated by HOA's book value? And if so, can you tell us where that's currently carried? And secondly, how long do you think it will take to get repaid on that transfer?
spk09: of bridge note that you're providing as you recapitalize the reciprocal with third-party capital i'm happy to take the first yes it's market value book value um so when you have a transaction like this um you know we we use the the market price look at comps and then yes set the set the appropriate book value um for that that purchase so that's exactly right and then the second question
spk10: How long do you think it will take to recapitalize the new entity with third-party capital and take out what you're contributing?
spk09: It's actually a choice for us, Ryan, in terms of when the capital will be priced right. More than... our ability to go and get that capital. It's also a question of just the capital needs of the entity. So one of the elements of reciprocal is that consumers, in addition to their premiums, pay a surplus contribution. So a slight additional amount that goes into building surplus. So it's a more efficient way to build surplus over time. But we would expect over the course of the first year or so, assuming the cost of capital was right, to be able to go out and look to bring third party capital in.
spk02: Great. Thank you, everyone. I'm afraid that's all we have time for today.
spk06: So thank you very much for joining and we look forward to speaking to you soon.
spk09: Thank you all for the time and the interest. We do appreciate it. Have a great day. We'll see you soon.
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