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spk00: 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 8K 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, Sean Tabak, Porch Group's CFO, and Matthew Nagel, Porch Group's COO. 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 Security 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, November 7th, 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 cause our results to differ materially from current expectations. We will reference both gap and non-gap financial measures on today's call. Please refer to today's press release for reconciliations of non-gap measures to the most comparable gap 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.forgegroup.com.
spk09: I'll now turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Forge Group. Over to you, Matt.
spk10: Thanks, Lois. Good afternoon, everyone. Thank you for joining.
spk04: We had a strong quarter with our highest profit as a company, including $9 million of positive adjusted EBITDA in the quarter. We're 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 five 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 per 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 Vestu, 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 AMBEST market share report. In the third quarter, our loss ratios continue to demonstrate strength at a 39% gross loss ratio and a 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 Madalia 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 of the actions we've 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 six, 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. Sean 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 Sean. As we previously shared, the allegations against Vestu, one of our former larger reinsurance platforms, surfaced 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 enable the 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 Sean to cover our financial performance and guidance. Over to you, Sean. Thanks, Matt, and good afternoon, everyone.
spk03: 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-to-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 mixed 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 rent and premium was $154 million, relatively consistent with the prior year, as we managed the risk profile through targeted non-renewals, removing higher risk policies, which are data and modeling deemed to be unprofitable in this environment, and offset by increases in premium per policy. 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 seating. Approximately half of the revenue growth in the insurance segment was due to less seating related to the Vestru 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 homeowner's 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 30, 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 whipped through from the Vestu Trust when we terminated the relationship. In addition, Porch Group held $18.7 million of unrestricted 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, Quartz 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 HOM. In addition, Quartz Group acquired the rights to all Vestu-related claims from HOM. 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 Vestu's fraud and its impact from a financial perspective. Last quarter, we discussed that HOA had a reinsurance contract for which Vestu arranged capital. Vestu 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 Vestu, 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 in our 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 investor-related contract effective at the start of Q3, we therefore see that 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 seating 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 rate and 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.
spk01: Thanks, Sean. 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 in corporate relocation and 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 rate and 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 rate in 2024. Our insurance carrier had a gross loss ratio of 39% in the third quarter. As Sean 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 hail. 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 risks. We have 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% for other parallels. 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-enforced measures. We reviewed contractors, advisors, and vendors, and have driven cost reductions. This includes running an RFP process for new audit firms, where there was 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.
spk10: Thanks, everyone. I'll now hand it back to Matt. Thanks, Matthew. Thanks, Sean.
spk04: Before we move to Q&A, I'll just make some final points. First, as we've said today, we are on track for 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 the 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 win. 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 of the last quarter, more than 2.3 million, reiterating my belief in the long-term vision and opportunity. This 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.
spk09: Thank you. If you would like to ask a question on the phone lines today, you can press star 1 on your telephone keypad. To remove yourself from the queue, it is star 1 again. We do ask that you please limit yourself to one question and one follow-up. Allow me one moment while we assemble the queue. We'll take our first question from Daniel Kernos with benchmarks.
spk06: Great, thanks. Good afternoon. Matt, you know, just quickly just on the reciprocal process. I mean, I don't think the TDI could have gotten a closer look at your books than what just happened. 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.
spk04: Yeah, first I'll just take the moment to give a tip of the cap to the TDI team that we worked with. Tremendous amount of respect coming out of the process for just the quality of the people, the partnership. Really, they worked with us in a very appropriate and fair, sometimes tough but fair, but a very appropriate way. I just really have appreciation for for how quickly they were able to move to review the company and help us move out of supervision after the Vestu 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 know in turn, we'll be able to take a breath, be able to go and update the, the, the application, which is currently incomplete and in pending status, you know, as, as, as we're going through that supervision process, I'd expect us to be able to have that up to date, you know, in the 2024 year. And then, and then we'll be able to provide an update on timing as we, as we get into next year.
spk10: All right.
spk04: Fair enough.
spk06: 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, which I think is also underpinning the reciprocal concept. And Matthew, if you want to chime in here too, 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 gonna 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.
spk01: Yeah, 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.
spk04: And then the one last thing I would add, Dan, to the last part of your question on taking more or less risk. Sean 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 the 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. All right.
spk10: Well, nice job in the quarter, and thanks for all the color. Appreciate it, guys. Thanks, Dan.
spk09: We'll take our next question from John Campbell with Stephen.
spk10: Hey, guys. Good afternoon. Hey, John.
spk02: Hey, congrats on a good snapback quarter. Very good results, you guys. And I apologize, I did have to jump on a little late here. So I don't know if you've already addressed this, but I was hoping that you guys can maybe talk to the loss. If you can maybe unpack the kind of combined ratio for the insurance side of things, as best as you can tell, how much of that was just generally less loss activity or maybe just less severity of losses versus the strategic askings. that you guys have taken on the higher risk policies as well as maybe just better avoiding bad policies through the proprietary data?
spk03: Yeah, I can take that one. Yeah, look, I think overall the insurance segment adjusted EBITDA and increased $20 million year over year. The significant driver of that is the actions that we've taken around Improving the gross loss ratio from increasing premiums per policy. Our team did a really great job getting out ahead of the market there. You know, the various underwriting actions that we've taken specifically on the policies and some of the changes that we'll be continuing to do that we talked about today. Non-renewing higher risk policies. And I think the other thing that we talked about, we're seeing significant benefit from the data that we have and leveraging that data to improve our underwriting results, which I think are already really great. As Matt said last year, in 2022, we were a top decile performer with respect to gross loss ratio. But as we continue to leverage that data more and more, those 40, 50, 60 pages of inspection reports, we continue to see benefits through our loss ratios. And you saw that today with the non-CAT loss ratio decreasing quite significantly year over year.
spk04: Alain, just two other quick things for you, John, just to round out the answer. Sure. One, I would also say from a combined ratio, the team's done a really nice job of managing expenses also. And that's happened across our business. But there has been good cost reduction, which certainly helps the combined ratio overall. I mean, a 58% combined ratio is obviously, we feel very proud of kind of where the business is at. And so I certainly would want to credit the team for that work also. But it really is, you know, all of those things combined, you know, it's executing on each of those things together, which builds up to that 39%, you know, combined ratio. Last comment, in case you missed it, I did note in the comments that there was $8 million of meaningful net catastrophe related losses, particularly primarily from large hail event toward the end of the quarter. And I wanted to note that specifically just to call out that the results weren't from this very unusual, pristine weather quarter. It really is from the operational changes that the team has put into place to account for what we know to be true, which is there will be meaningful weather events.
spk02: Yeah, that's a great point. Thanks for clarifying that. A similar kind of question here, just kind of unpacking or trying to better understand the insurance revenue drivers. How much of the growth this quarter kind of stem from just better renewal pricing versus the less reinsurance seating? And then I don't know if you guys are able to disclose, but like just broadly, roughly what percent of the book today, the PNC book is HOA versus agency?
spk04: Sean, why don't you take the first one and I'll take the second.
spk03: Yeah, sounds good. So the revenue growth year over year, about half of it for the insurance segment was driven by the Vestu contract termination. And then the remaining half is driven by also just general less seating that we did, as well as I mentioned the premium per policy increased, um, uh, 38% year over year as the, as the team got out ahead of the market and, um, and, and increased, uh, increased prices.
spk04: So those are the key components, um, of, of that, um, of the increase to revenue there. Yeah. So about $30 million, John, from the quarter, you know, tied to seating seating less, um, the, and then in terms of second note, no change in policies, John, the, uh, we don't break out the percent of the policies from agency or carrier.
spk02: Okay, that's helpful. But I guess just directionally, agencies may be rising a little bit in the mix.
spk04: I mean, I would say both of those parts of the insurance business, I would say are performing well. But clearly, like we indicated, we are in the carrier business, clearly managing gross written premium to a very specific target. level. Like Matthew said, in the quarter, we tried to manage it to basically flat written premium year over year with obviously much, much fewer policies and therefore fewer risks, which clearly then drove the results we saw.
spk10: Okay. Very helpful. Thank you, guys. Thanks, John.
spk09: We'll take our next question from Jason Helpstein with Oppenheimer.
spk07: Thanks. I want to clarify on slide 13, the $30 to $10 million and $2 million of the impact from Best Dude, that was just in the third quarter, correct?
spk10: That's correct.
spk07: Okay, so you'll have, I mean, effectively you're not, I mean, you're taking 100% of the risk in the fourth quarter until... be approval or reciprocal, correct? Is that like the idea that you're not going to sign up another reinsurance company and just kind of manage it yourself until then?
spk03: And maybe I'll clarify. It's a good question. Hey, Jason, thanks for the question. So the $30 million I think I referenced, that was specifically from the net impact of terminating the Vestu contract. Um, you know, we did then obviously go out and procure reinsurance. Um, now we, we, we bought it in August, um, when, which is obviously different than when we, we typically buy it. So we thought about obviously the remaining risks, um, that we have, um, you know, in the business, um, and the specific perils, the specific geographies, um, et cetera, uh, to make sure that we have appropriate coverage there. Um, But specific to Q3, the net impact of seeding less from terminating the Vestu contract is $30 million to revenue, $10 million to revenue, less cost revenue. And when you get to the bottom line, it really didn't have much of an impact. It was about $2 million of adjusted EBITDA. So that was the impact to Q3 specifically. You could pretty much double that for the same type of thing you would expect for Q4.
spk04: Let me just double down just to make sure it's clear in the notes. And this was included in some previous press releases we made about this topic. But the team did an excellent job. Our reinsurance team did an excellent job post the Vestu termination at going out to the third party reinsurance market and refilling our excess of loss stack and bringing other top tier grade A reinsurers into that program. And so we have fully rebuilt that program and have had that in place for a while now to make sure that we are protected. So I certainly don't want you or others to feel like we are not using reinsurance. We terminated that particular partner and then have been able to go get other high-quality reinsurers in place.
spk07: So basically, the current status has led to, let's say, fourth quarter guidance. this will be the framework until you get the approval of the reciprocal, all the pieces are in place.
spk04: Yes, we have the reinsurance partners in place for our program. The next renewal cycle for us would be April 1st, the core reinsurance cycle. So obviously we would then look to renew partners. And yes, this would continue to be the structure and approach until the reciprocal launches. Even then, obviously, the reciprocal will continue to use reinsurance and will help manage those placements, you know, for that entity. But this is how we'll continue to present, you know, between now and then.
spk07: And then just to follow up, as we're thinking about next year, you've given us kind of the target of flat or better positive for EBITDA next year. I mean, you know, just given the implied ratios for the insurance business in the back half, is there a way to think about kind of How would we think about maybe growth rate and premium and kind of revenue to get to that EBITDA given we know that like corporate expenses would be about $55 million for the company next year kind of run rate?
spk03: Yeah, Jason, I think it's a good question. I'd say first and foremost, as Matt mentioned about 18 months ago, we talked about adjusted EBITDA profitability for the second half of this year and beyond. And we're obviously really happy to deliver a really strong adjusted EBITDA of $9 million in Q3. And also, we're well on our way to the important second half profitability target for this year. We've also talked about a lot of actions that we've taken to control expenses and how much of a focus profitability has become or is at the business, in addition to how we think about the insurance book in general and non-renewing policies and things like that. So we'll come back in March with more color on 2024 and more specifics on 2024 when we do you know, our next update. For now, you know, pedals to the floor here for us and the team to execute in Q4 and bring home that, you know, adjusted EBITDA profitability.
spk10: Okay, thank you. Jason?
spk09: We'll take our next question from Joss Siegler with Cantor Fitzgerald.
spk11: Yeah. Hi, guys. Good evening. Thanks for taking my question today. First, I wanted to start on the data advantage and how it impacts your loss ratios. So you're live with utilizing unique data in 12 states. I was wondering what the rollout would look like to leverage this same initiative in more states moving forward.
spk10: Thanks. Yeah.
spk01: I would think about it on a couple of dimensions. The first is rolling it out to additional states. Keep in mind, as the carrier, we don't write policies in all 50 states. But the other dimension is we're just getting started in leveraging our data for pricing. And so there's opportunities for us to pull out more types of data from our inspection reports. There's also room still for us to apply the same type of analysis on additional perils. And so we're, we're actively working on all those things. And then of course the pricing and rating is a, is a process. You've got to file, get it approved, roll it out. So there, there is a little bit of a leg there, but we're excited so far. We have, real improvements, measurable improvements to the accuracy of our risk models, and we feel we're early in what's possible.
spk10: Okay, got it.
spk11: And I was wondering if you could talk a little bit about the operating leverage of this business, especially post the $20 million benefit that you've already arrived at.
spk10: If the macro bounces back, how are you thinking about the leverage of this business moving forward? Yeah, I think I could take that one.
spk03: I mean, I think from a fundamental perspective, we look to be strong stewards of capital. And as part of that, you know, we think a lot about capital allocation. And as Matt said, investing in the businesses that are driving strong unit economics, strong returns. And so we'll continue to take that approach and be diligent. You know, as I said, you know, we will provide more guidance in March when we come back. But, you know, clearly there's been a focus to drive strong expense control of the business. And I think that that's ingrained in a lot of processes that we have around the business and will continue to operate in that manner.
spk04: Yeah, I would say, Josh, it is something that we plan to talk more about here today. We look forward, frankly, to sharing, you know, quite a bit more detail about, you know, about business units, you know, across Porch, what their, you know, revenue loss, cost of revenue margins are. what the incremental EBITDA margins are as we invest in these businesses and how that really can flow through our results. That's not for today. We haven't shared that information yet, but it is something that we are looking forward to talking more about here this next year.
spk10: Excellent. Yeah, really looking forward to hearing more about that in the future. Thanks for taking my questions, guys. Thanks, Josh.
spk09: We'll take our next question from Jason Krayer with Craig Hellam Capital Group.
spk05: Great, thank you. Just wanted to focus on some of the KPIs. So obviously, pretty impressive growth in the revenue for policy figure. Wondering if we can strip that out in terms of the contribution from the Vestu settlement, how much of that comes from taking RAID, how much of that comes from feeding lower reinsurance, and just try to look at it from more of an organic basis on where that'll go from here.
spk04: Yeah, Jason, easiest way to do that is probably just to look at kind of revenue from the quarter. Again, half of the revenue, you know, growth in the insurance segment came from less seating. Again, approximately $30 million of revenue came from that in the quarter. And then the balance from, you know, from all the rest of the operational changes, the price increases, et cetera. So that would be the right proxy to use if you're applying that into that KPI.
spk10: Yeah.
spk05: Okay, we'll try to dissect that a little bit further as well then. Maybe one more just on the outlook for vertical software. Obviously, housing continues to be challenged by high interest rates. Just curious your perspective or what you see as the opportunities for stability or return to growth there.
spk01: Yeah, I'll take that. The first thing I would say is a lot of our businesses are tied to the housing market. But when you look at that vertical software segment, there's really kind of two lines. There's our software business, and then there's our move and post-move services. The software business, and you can see this in more detail in the queue, is almost flat year over year, despite a 17% market decline. And that just speaks to the value and the resiliency of those products that they've been able to basically overcome the market headwinds. It's really the move services portion that has been hit really hard. Some of that is tied to just the number of housing sales. Some of it is changes to remote working and people being relocated less. But those, although I work closely with those businesses, they have a lot of focus right now. And so I am optimistic that they're going to be able to find growth even if the market stays flat. But certainly when the market turns back, we're going to be very, very well positioned.
spk10: Thank you. We'll take our next question from Nikhil Vijay with KBW.
spk08: Hi, this is Nikhil Vijay on for Ryan Tomasello. Thanks for taking my questions. Firstly, I just wanted to check if you guys have spent any time thinking about how potential changes to the industry's commission structure could impact Forge, especially around the opportunities that could arise in that fluid story timeline. One debate topic that comes up often is the referral source that buyer agents provide for any adjacent service providers and how that might be disrupted. Do you have any initial thoughts you could share?
spk01: So I can take that. We have certainly noticed the kind of landmark case there with the NAR, which is essentially calling into question the commission rate structure for real estate agents. And is it too high in the US? We have talked about it internally. We think it's going to put more scrutiny on the real estate agent commission and the services that they provide. And it could lead to more negotiation between buyers and sellers and agents and buyers and sellers. The place where we get interested in what could potentially flow from that, one is if the commissions are lower, agents are going to have to be more efficient. and there may be fewer agents. And that actually makes it easier for us to partner with the real estate industry if there's fewer agents to partner with. The second is, as it gets more competitive, agents are going to be looking for ways to stand out. Agents are going to be looking for ways to take some of the services that they do and not have to worry about doing them themselves. And that plays really well to our core thesis that consumers going through a home purchase, are going through a really stressful time in their life, and we can step in at scale and provide all sorts of wraparound services to benefit that consumer and to make that agent look well. So obviously it's early, lots of things are going to unfold, but things that cause agents to want to be more competitive, I think plays well to our value problem.
spk04: Yeah, generally, you know, there's more home sale transactions we benefit, right? So there'll be more inspections, more transactions you know that the title industry is dealing with those are all good things for us and if commissions are lower and that allows housing to be that much more affordable you know for consumers clearly that that would benefit you know our our core our core businesses if you know warranties happen to not get bundled into a home transaction and that because that's not really a market, a channel that we have focused on. And that leaves that consumer available for us to be able to help them with a home warranty. That again, that would just help our business.
spk08: Thanks. That's very helpful. And then I also have a follow-up on vertical software segment. Can you discuss what customer types and products you are seeing more traction and demand in the current environment?
spk10: What customer types and products? Yeah. Within the vertical software segment.
spk01: Yeah. Yeah. So we, I mean, we have, we operate in multiple different segments there. I think broadly speaking, we've the, that part of our business has held up fairly well despite the headwinds. We're obviously looking at ways that we can help those businesses to either save money or to grow their business. Right. And so a lot of our innovation has been focused on that type of feature. So there's, for example, things we're doing that allow inspectors to move the cost of the inspection to the close and they can help the consumer save a little bit of money up front and they get to make more money at the same time. There's stuff we're doing in the mortgage space that essentially reduces some of the fees that happen throughout the process for a service that we offer. And then, of course, in the title space, we're now rolling out several new products driven at essentially automating additional workflows for title companies. And so for us, it's really emphasized the role that we can play to help these businesses be more efficient at a time they need to be really lean and help these businesses generate more revenue. And those customers are very open now to those ideas. So some of these products are actually gaining traction because people are like, this isn't a nice to have.
spk10: I need to do some of these things to be more efficient or generate more revenue. Got it. Thanks. That's very helpful. And congrats again on the good quarter. Thank you.
spk09: Thank you, and that does conclude today's presentation. Thank you for your participation today, and you may now disconnect.
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