Porch Group, Inc.

Good afternoon, everyone, and thank you for participating in Port Group's third quarter 2024 conference call. Today, we issued our earnings release and filed our related Form 8K with the SEC. The press release can be found on our investor relations website at ir.portgroup.com. Joining me here today are Matt Ehrlichman, Port Group's CEO, Chairman and Founder, Sean Tabak, Port Group's CFO, Matthew Nagel, Port Group's COO, and Nicole Pelly, EVP and GM of the Porch platform. Before we go further, I would like to take a moment to review the company's safe harbour statement within the meaning of the Private Security Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements. Today's discussion, including responses to your questions, reflects management's views as of today, November 7th, 2024. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans, including the expected benefits and timing of the launch of the reciprocal exchange, based on current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We disclaim any obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law. We encourage you to consider the risk factors and other risks and uncertainties described in our SEC filings, as well as the risk factor information in these slides. For additional information, including factors that could cause our results to differ materially from current expectations. We will reference both 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, which are available on our website. The financial information provided today is preliminary, unaudited and subject to revision upon completion of the closing and audit processes. As a reminder, this webcast will be available for replay along with a presentation shortly after this call on the company's website at ir.porchgroup.com. Thank you. I'll now turn the call over to you, Matt.

Thanks, Lois. Good afternoon, everybody. Thanks for joining us. We are excited, certainly, about today's update, so let's get started. In October, we announced that the Texas Department of Insurance approved our application to form and license Porch Insurance Reciprocal Exchange, or PIRE, with the core structural and economic terms aligned with what was proposed in our application. In the coming weeks, we expect to complete customary administrative procedures and form and fund the reciprocal, file appropriate rates for PIRE, and complete the acquisition of HOA at the start of January, 2025, when Porch Insurance will officially be available to policyholders. We then expect our insurance business to be conducted under this new model, with Porch Group acting as the operator of the reciprocal, mitigating direct exposure to insurance claims and weather events for Porch Group shareholders. This announcement is a long time coming, a key milestone for Porch, and the result of tremendous work by our team. I send my thanks to our partners at the TDI as well. We believe a reciprocal is the optimal structure expected to result in higher margins and more predictable financial results for Porch, and believe it will allow us to scale our insurance operations more profitably over time. While we've constrained premium growth to approximately flat until we receive this approval, just this past week, we announced Porch Insurance in Texas, reactivated many channel partners, and launched our premium growth plan with an eye toward a strong 2025. Sean and Nicole will share next steps for Pyre and the value creation opportunities ahead shortly. All right, here I'll hit on some Q3 accomplishments. First, we are profitable. We delivered record quarterly results with adjusted EBITDA at positive $17 million and achieved positive operating cashflow of $12 million, both exceeding expectations. Net income in Q3 was positive at $14 million. This is all despite Hurricane Beryl, a severe weather event occurring in early Q3, which we had mentioned last quarter. Importantly, we expect to be adjusted EBITDA profitable ongoing, marking today as a significant milestone for the business. Our insurance profitability actions are compounding and making a substantial impact. Pricing, deductibles, the use of home factors, our unique property data, all contributing. We implemented further insurance premium per policy increases and total premium per policy increased 25% year over year. Our gross loss ratio in Q3 was 57%. And without catastrophic weather, our attritional loss ratio was 21%. Again, outperforming expectations. The insurance carrier is healthy. and expected to approach $100 million of surplus at the end of the year, which would be by far its highest in its history, and is expected to post strong positive net income for the full year 2024. Next, we have fully implemented AI models into our data platform and home factor data products. We launched three new home factors in the quarter and are seeing incredible results in better predicting losses and risk of a home. Multiple third-party carriers are currently testing our Home Factor's data products against their historical claims, and the results are resounding. We can help unlock meaningful underwriting and pricing advantages, given our unique insights into approximately 90% of homes in the US. In the vertical software segment, we continue to roll out new products and features as we increase pricing. I'm very pleased with how high our customer retention rates remain. And finally, during the third quarter, we used $20 million of cash to repurchase $43 million of our September 2026 unsecured debt, bringing us to a total of $51 million par value repurchased this year. Now over to you, Sean, to cover the financials.

Thanks, Matt, and good afternoon, everyone. Let's turn to our third quarter financial results. First, a quick reminder that Q3 is a difficult comparison against the prior year. Last year in Q3, we discovered that one of our legacy reinsurance partners, Vestu, had committed a global fraud and therefore we terminated that reinsurance contract and looked for replacement reinsurance. During that period of time, we had a period of lower reinsurance seating, which resulted in additional revenue of $30 million in the third quarter of 2023, additional revenue, less cost of revenue of $10 million and adjusted EBITDA of $2 million. With that as a backdrop, third quarter 2024 revenue was $111.2 million in line with our expectations. This was a 14% decrease from the prior year driven by the best due matter. And it was offset by a 25% increase in premium per policy in our insurance segment. Revenue less cost revenue was $64.1 million, a margin of 58% and ahead of our expectations. Adjusted EBITDA was $16.9 million, an $8.1 million improvement from the prior year, and ahead of our expectations, driven by the insurance segment and strong cost control. Gross written premium decreased 10% from the prior year, driven by the divestiture of our legacy insurance agency, EIG, in the first quarter of this year. We've managed HOA gross written premiums to be roughly flat year over year. With the recent approval of the reciprocal, we will now begin to execute our premium growth plan. Taking a closer look at revenue, the insurance segment was 72% of total revenue in the third quarter, relatively consistent with the prior year. Revenue from our insurance segment was $79.9 million, a 16% decrease from the prior year, driven by the best-do matter. Vertical software segment revenue was $31.3 million, a decrease of 9% from the prior year. Within this segment, software and services subscriptions revenue increased 7% from the prior year, a 300 basis point acceleration over the growth rate in the second quarter of 2024, and driven by price increases in Rhino and inspection software. This was offset by a revenue decline in the moving business, which exited the unprofitable corporate relocations offering. redirecting focus to higher margin services. Now let's dig into the insurance segment, cost of revenue. Cost of revenue related to attritional claims was $16 million, better than our expectations by $13 million. Cost of revenue related to catastrophic weather claims was $26 million. In the quarter, there were two hurricanes that drove approximately $37 million in cost of revenue net of reinsurance. Hurricane Beryl was a one in 10 year event that occurred in early July, and Hurricane Helene was a smaller event for us that developed later in the quarter and impacted the Carolinas. This was partially offset by $13 million of favorable prior period development. With our underwriting changes, previous weather events were smaller than we had previously estimated. Recently, Hurricane Milton occurred in early October. And as a reminder, we do not have exposure in Florida and therefore no exposure to this event. Moving to adjusted EBITDA. Overall adjusted EBITDA was $16.9 million in the third quarter of 2024 a positive improvement from the prior year. The insurance segment adjusted EBITDA was $24.8 million, a $5.7 million increase from the prior year, driven by the insurance profitability actions that Matt mentioned. The vertical software adjusted EBITDA was $5.1 million, a $1.9 million improvement from the prior year, driven by price increases in our software and services subscription businesses and strong cost control. The vertical software adjusted EBITDA margin increased to 16% in the quarter. Corporate expenses were $13 million or 12% of total revenue, broadly flat from the prior year. Operating cashflow was positive at $12 million in the third quarter of 2024. As of September 30, 2024, we had $405 million in cash, cash equivalents and investments, Excluding the $317 million at HOA, Porch held $88 million. This was $29 million lower than the prior quarter, predominantly due to the repurchase of $43 million in par value of the 2026 unsecured notes for $20 million of cash. The repurchases were done at an average of 47% of par value. Taking a step back, I wanted to provide some context on capital allocation. First, we maintain an appropriate minimum level of operating cash to run the business. Second, we allocate capital toward investment opportunities that we expect to generate the highest risk adjusted return and in excess of our internal hurdle rate, which is well above our weighted average cost of capital. Given the performance in our insurance business in Q3, we had excess cash available, and were presented with an opportunity to deploy it against the unsecured notes at appropriate rates, despite the low coupon. In Q4, we expect to have two primary uses of cash, $10 million for an interest payment on the secured notes and $10 million for the seed funding of the reciprocal exchange entity, which we will cover in more detail shortly. As we shift to the reciprocal model and launch PIRE, we will continue to focus on the health of the insurance carrier and its surplus, and on satisfying related regulatory capital and other requirements. After the $10 million injection to start PIRE, we do not anticipate the insurance entities will need additional cash nor equity from Porch Group. Case in point, we expect HOA will end this year at record high surplus at approximately $100 million compared to $50 million at the end of the prior year. HOA surplus on September 30 was approximately $70 million. Shifting now to guidance, we are updating our full year guidance day reflecting our strong Q3 performance. We expect 2024 revenue of $440 million to $455 million with 2% to 6% growth. One thing I'll note is the prior year revenue was higher due to the Vestu fallout in Q3 2023 and the divestiture of EIG in January of this year. Revenue-less cost of revenue guidance is updated with a $10 million improvement, now $200 million to $210 million. Overall, we expect adjusted EBITDA loss of $7.5 million to a profit of $2.5 million, a $12.5 million improvement compared to previous guidance. The midpoint of this range results in $32 million of adjusted EBITDA in the fourth quarter, which is a $20 million improvement over the fourth quarter of 2023. For the full year, the midpoint would be a $40 million improvement over full year 2023, highlighting the profitability improvements of the business. We expect gross written premiums of $460 million to $470 million. We'll now focus on our reciprocal exchange deep dive for this quarter. I'm pleased to have Nicole here to discuss this section with me.