Porch Group, Inc.

Good afternoon, everyone, and thank you for participating in Porch Group's first quarter 2023 conference call. Today, we issued our first quarter earnings release and related form 8K to the SEC. The press release can be found on our Investor Relations website at ir.porchgroup.com today. Joining me here today are Matt Ehrlichman, Porch Group CEO, Chairman and Founder, Sean Tabak, Porch Group CFO, Beth Nagle, Porch Group COO, and Nicole Pelly, SVP of Product and Technology. 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 portions regarding forward-looking statements. Today's discussion, including responses to your questions, reflects management's views as of today, May 10th, 2023. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans. including the pending application for the 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 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 report. 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.

Thanks, Lois. Good afternoon, everybody. It hasn't been long since we last spoke in March. And in that time, the business has progressed nicely, which we look forward to discussing with you today. Overall, the Q1 2023 operating environment is not dissimilar to what we experienced in Q4 2022. The home service and insurance industries faced home sales and weather headwinds. And as expected, we were impacted by them as well. As the insurance industry and weather trends evolve, it creates not only a growing homeowner's insurance market, but substantial opportunity. And we are well positioned to become a leader given our unique demand and data advantages. I'm pleased to have Nicole join us today to talk through advancement from this last quarter in some of these areas. So moving to slide six to review the high-level financials. In the first quarter, revenue grew 37% to $87 million. with solid revenue growth in our warranty and homeowners insurance businesses. Q1 2023 adjusted EBITDA loss was $22 million. The underlying businesses performing well, however, as expected and built into our 2023 plan, the reinsurance market has hardened. While our April 2023 renewals were successful, given our strong relative past performance, excluding the impact of reinsurance market, Q1 profitability would have increased by approximately $15 million in our insurance segment. As a reminder, we rely on reinsurance to both mitigate weather risk and to offset a portion of the capital requirements associated with operating a homeowner's insurance carrier. So while our insurance business saw strong and profitable gross performance, in fact, a 97% gross combined ratio in 2022 by our carrier entity. The reinsurance cost weighs on our net results until our premium price increases have flowed through all policyholders. We believe the impact of reinsurance is transitory and the market dynamics will improve over time as it has in the past. And if not, Porch and really all other carriers will continue to raise prices and ensure these increased costs are fully loaded into what is offered to consumers. Margins in the industry were challenged in 2022 because of weather and expected to be compressed in 2023 because of the reinsurance markets until price catches up. But to highlight capabilities and performance, we think it is helpful to note not only that our insurance business was profitable on a gross basis, but also show how our insurance business compared to the rest of the homeowners insurance carriers in 2022. I mentioned last quarter that HOA was the fastest growing homeowners carrier through the third quarter 2022 as measured by gross written premium. AMBEST has now released their full year 2022 report ranking 50 different homeowners insurance peers based on direct written premium growth. I'm happy to share that we end of the year ranked third. Importantly, though, in addition to growing rapidly, we demonstrated a leading gross combined ratio. And so as you can see in the bottom chart on this slide, The AMBEST market share report shows gross combined ratio of HOA and 50 peer carriers in 2022. And here, HOA was also the third best performer. Although there are two insurers with better loss ratios, those companies had much slower growth. And this demonstrates our ability to use our unique capabilities to grow premium while also maintaining strong underlying performance. Again, as we mentioned, our strategy is to manage our premium growth carefully in 2023 to drive our business to profitability. As I mentioned, we've made a number of successes in the quarter. First, the insurance strategic initiatives announced in the fourth quarter 2022 are on track. So in March, we filed the application to form the reciprocal exchange with the Texas Department of Insurance, which I'll touch on more shortly, in which we believe is key to reducing the weather volatility within our earnings. To facilitate this transition to a more efficient reinsurance system for the reciprocal exchange, we moved our reinsurance seating rates to approximately 50% in January, successfully placed our excess of loss reinsurance treaties in April, continuing to further leverage our captive reinsurer to fill any reinsurance needs where it makes sense, and are in the process of non-renewing approximately 37,000 of our higher risk policies. I'm happy to share that we successfully launched porch warranty in February. This is our own whole home warranty product that covers systems and appliances within the home. Nicole will comment on this later in the presentation. I will note the home sales industry declined 26% in Q1 year over year and continues to impact our software and moving services businesses. Despite this ongoing lower demand environment, our software businesses continue to iterate, launching new modules and capabilities to take more share. And Nicole will touch on our progress also in today's presentation. Finally, after the quarter end, we secured a $333 million of new senior secured convertible notes that tied into a $200 million pay down of our existing unsecured note, which is due in September of 2026. It's a great transaction for us as it increases Porch Group's capital by more than $100 million, replacing the capital which will transfer with the reciprocal on approval. And it also provides a two-year maturity extension for much of our debt while maintaining the same $25 per share conversion price at the cost of a 6.75% coupon rate on the new money. Finally, I want to spend a moment to provide a reminder about our strategy to form a reciprocal exchange. We've been thinking through this since we first acquired HOA two years ago with the objective to move the insurance business to higher margins and without the volatility from direct exposure to weather. Provided we receive approval from the Texas Department of Insurance, the HOA carrier business, including all its assets such as cash and investments, as well as its liabilities will move to the new entity and be owned by its policyholder members. In exchange, Porch will receive a coupon bearing note, the terms of which will be provided following approval. We will continue to operate the insurance business, such as selling the policies and managing claims processing in return for fees from the reciprocal. This means once the reciprocal exchange is in place, We lose the potential upside profitability in good weather conditions. However, we do not have the same claims downside when there are frequent and severe weather events. And as a result, our revenue and profitability are steady and predictable. We are in active discussions now with the Texas Department of Insurance and still anticipate approval later in the second half of this year. I'll now hand the call over to Sean to cover our financial performance and guidance. Over to you, Sean.

Thanks, Matt. Hello, everyone, and good afternoon. Revenue was solid at $87.4 million in the first quarter of 2023, which is an increase of 37% over the prior year, driven by growth in the insurance segment and partially offset by the software segment, which continues to be impacted by the soft housing market. As a reminder, quarter one and two typically have the highest claims cost per HOA, with quarter two historically being the period with the most weather events. In the first quarter of 2023, the gross loss ratio for HOA was 79% compared to 81% in the prior year. Revenue less cost of revenue was $36.1 million, which is 41% of revenue. As Matt mentioned, the reinsurance markets have hardened as expected, which resulted in a reduction in revenue-less cost revenue by approximately $15 million in the first quarter of 2023 compared to the prior year. Our price increases, which we disclosed previously, are well underway and being rolled out, which will have a larger impact in the second half of this year, given the timing of renewals for the underlying policies. Adjusted EBITDA loss of $21.9 million was in line with our expectations, a decrease from the prior year driven by reinsurance as noted, and to a lesser extent, the soft housing market impact on the software segment. Excluding the reinsurance market dynamic compared to the first quarter in the prior year, adjusted EBITDA loss would have been approximately $7 million. And finally, gross written premium was $115 million, an increase of 12% over the prior year. Moving on to revenue by segment, in the first quarter of 2023, revenue from our insurance segment was $58.7 million, growth of 101% over the prior year, driven by strong growth in our warranty business based on demand and renewals, as well as HOA due to increases in premium per policy and lower reinsurance seeding. Approximately half of the revenue growth in the insurance segment was due to seeding less and the balance from the operational wins. Insurance segment revenue increased from 46% of total porch group revenue in the first quarter of 2022 to 67% of total revenue in the first quarter of 2023. Vertical software revenue was $28.6 million, a decrease of 17% over the prior year due to the housing market declining 26% industry-wide year-over-year. The biggest impact of the housing market decline was on our moving services group, which continues to have these macro headwinds directly impacts its revenue. Our B2B software revenue was relatively flat year-over-year. with market share growth, key initiatives, and pricing offsetting the housing market impacts. At a segment level, our insurance segment adjusted EBITDA loss was $7.2 million. As Matt mentioned, the underlying contribution margin in our HOA insurance carrier increased by 500 basis points compared to the prior year when excluding the impacts of reinsurance. The vertical software adjusted EBITDA loss was $400,000. Corporate expenses were $14.3 million in the first quarter of 2023, reducing to 16% of total revenue from 21% in the prior year, driven by strong expense control. Now onto our outlook. Today, we are reiterating the full year 2023 guidance provided eight weeks ago. REVENUE RANGING FROM $330 MILLION TO $350 MILLION WHERE WE CONTINUE TO EXPECT AN 18% DECLINE IN HOME SALES FOR THE FULL YEAR 2023 WITH A GREATER IMPACT ON THE DIFFICULT HOUSING MARKET IN THE FIRST HALF OF THE YEAR VERSUS THE SECOND HALF OF THE YEAR WHEN THE COMPS BECOME EASIER. REVENUE LESS COST OF REVENUE RANGING FROM $170 MILLION TO $180 MILLION where we have assumed a 62% gross loss ratio for the year. This assumes cat weather events will be in line with our historical averages. Any unusual catastrophic weather events in excess of our historical norms are not included in our guidance assumption. Adjusted EBITDA loss ranging from $30 million to $40 million, where we expect on a cumulative basis adjusted EBITDA to be profitable in the second half of the year and beyond. And finally, gross rent premiums of $500 million. Shifting to the balance sheet, we ended the first quarter with $272 million of cash and investments. This includes $165 million of cash and investments in our insurance carrier, HOA, that we expect will transfer to the reciprocal when approved and launched. Excluding HOA, Porch held $107 million of cash and investments at the end of the first quarter. In addition, we held $15 million of restricted cash in relation to our warranty and captive businesses. And as Matt mentioned earlier, we are increasing the amount of excess of loss reinsurance provided by Fortress Captive to HOA where it makes sense and can provide strong returns. To support this, we expect to hold approximately $43 million of cash to collateralize this placement and it will therefore show as restricted cash in future quarters and remain as such for the next 12 months. And finally, in the first quarter of 2023, we repurchased 1.4 million shares for $3.1 million under the existing share repurchase program. We will continue to evaluate whether to repurchase or otherwise transact in shares or notes, and we'll do so if and when we think it is in the best interest of shareholders. And finally, A brief update related to the issuance of our new $330 million senior secured convertible notes, which we closed in April after the end of the quarter. We are pleased with the deal, which reduces our medium-term September 2026 debt maturity from $425 million to $225 million and bolsters the balance sheet by adding $102 million of cash. These new secured notes have a coupon of 6.75%. AND MAINTAIN THE SAME CONVERSION PRICE OF $25 WHICH WAS IMPORTANT FOR US TO MINIMIZE FUTURE DELUTION FOR SHAREHOLDERS. THIS INCREASED COUPON PAYMENT IS PARTIALLY OFFSET BY APPROXIMATELY 5% INTEREST WE ARE CURRENTLY EARNING ON INTEREST-BEARING CASH DEPOSITS. THE $330 MILLION OF THE NEW SECURED NOTES ARE DUE OCTOBER 2028. Thank you all for your time today, and I'll now hand it over to Matthew to cover our KPIs.