Open Lending Corporation (NASDAQ:LPRO) Q4 2022 Earnings Call Transcript

Open Lending Corporation (NASDAQ:LPRO) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Good afternoon. And welcome to the Open Lending’s Fourth Quarter and Full Year 2022 Earnings Conference Call. As a reminder, today’s conference call is being recorded. On the call today are Keith Jezek, CEO; and Chuck Jehl, CFO. Earlier today, the company posted its fourth quarter and fiscal year 2022 earnings release and investor supplement to its Investor Relations website. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I’d like to remind you that this call may contain estimated and other forward-looking statements that represent the company’s view as of today, February 23, 2023. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances.

Please refer to today’s earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ from those expressed or implied with such statements. And now, I will pass the call over to Mr. Keith Jezek. Please go ahead.

Keith Jezek: Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today for Open Lending’s fourth quarter and full year 2022 earnings conference call. Before we begin, I would like to express my continued confidence in the long-term opportunities before us. The actions and behaviors of consumers, auto lenders, OEMs and dealerships, and the corresponding pricing dynamics we have experienced are not without precedent. However, what’s notably different in this cycle is the impact of the velocity and the magnitude of the Federal Reserve rate increases to the auto industry and more specifically to consumer affordability and lender liquidity. Having managed scaled businesses in the auto sector through the great Recession, as well as serving on the Open Lending Board during this time, I am encouraged by the response of our team and I am confident in our ability to manage through the current challenges.

I will speak more about how we are positioning the company to continue to gain share given our financial strength, our value proposition and our competitive position after reviewing our results. For the year, we certified over 165,000 loans, a slight decrease from the previous year. Total revenue for the year was $180 million, down 17% and at the lower end of our guidance. Adjusted operating cash flow for the year was $143 million, which was near the high end of our guidance. Now I will spend a few minutes on recent industry trends and expectations for 2023. First, on inventory, as many of you know, used vehicle sales in 2022 tumbled to their lowest levels in nearly a decade. Supply chain and chip shortage constraints have improved year-over-year, but sales for new autos remain well below historical levels as well.

Second, on affordability, we believe this will remain the most significant challenge for us in the near-term. The intended consequences of the Federal Reserve’s rate increases in 2022 and 2023 are impacting the auto sector and our current addressable market. Near- and non-prime consumers are being hit disproportionately by rising rates resulting in lower disposable income. As the Fed continues a path to reduce inflation, a more expensive auto payment driven by higher rates is dampening demand. For example, the weighted average auto loan rate for both new and used vehicles in sub-segments is up 200 basis points to 300 basis points. Next, on loan originations, in speaking with the treasury teams at credit unions and other financial institutions, they currently have alternatives for balance sheet capital in short-term duration instruments, as well as risk-free bills, notes and bonds in the treasury market.

To the extent these alternatives are more attractive, liquidity within the auto origination pool of capital is reduced. Telham data shows total loan originations were about $160 billion in the fourth quarter of 2022, down 21% from a year earlier and down 19% sequentially from the third quarter of 2022. In the peak of the pandemic when liquidity was high and federal stimulus relief was running rampant, credit unions held about 12% to 13% of their assets as cash, which was easily available to fund new loan demand. Now credit unions on average are down to approximately 6% of their total assets in cash. Some of our largest credit unions have a loan to share ratio in excess of 100%. This reduction in liquidity has impacted the borrowers who are most in need and have been hit hardest by inflationary pressures to their rent, food, energy and transportation.

Finally, our refinance business made up 43% of our certified loan volume at its peak in February of 2022, but has declined to 11% in December 2022. This business has been severely impacted by the unprecedented Federal Reserve actions throughout 2022 and now into 2023. Again, this constitutes a significant impact on affordability of our near- and non-prime borrowers. Based on prior cycles, it’s our sense that when rates begin to stabilize, we should begin to see improvement in this part of our business. In summary, the industry backdrop for the auto loan sector is experiencing historic challenges. That said, we believe these challenges will be temporary. We remain committed to our goal of gaining market share and we expect to be well positioned to meet pent-up demand as the industry recovers.

With that in mind, I want to discuss our areas of focus as we move throughout 2023 to position us well for this year and beyond, areas which I believe will support and strengthen our long-term competitive advantages; first, we look to further refine and optimize our sales channels; second, we will continue to enhance our technology offering; and equally as important, we are laser focused on attracting and retaining talent. Now to go into each area in a little bit more detail. First, sales, operations and marketing. To power our go-to-market efforts, we increased our sales, marketing and account management teams by nearly 30% in 2022 and we plan to continue to thoughtfully invest in these areas throughout 2023. We will keep a watchful eye on these investments, measure performance and ensure that they deliver the expected returns.

To strengthen our team’s future success, we organized our team into one group dedicated purely to selling, while the other focus is solely on account management. In short, we have aligned our efforts to maximize our sales efficiency. Our experienced sales team will continue to work primarily on closing new accounts. Their efforts will be aided by our expanded marketing team, which is supporting sales with a robust lead generation program to help secure new business. We are early in this initiative, but you may have already seen our earned media coverage in the Wall Street Journal, Automotive News, Auto Remarketing, Auto Finance News, Credit Union Times and payments.com. These are publications that decision-makers read daily, so we believe this will further support our sales team.

To lead these efforts, we have added a new Senior Vice President of Marketing to our leadership team. We are encouraged by our strong December sales, as well as other recent wins, including the addition of Crescent Bank, a top 50 bank auto lender in the U.S. Our account management team will center their attention on continued engagement and collaboration with our customers with the simple priority of building our base of business from existing customers by expanding their use of our program. We have launched various targeted customer promotions via multiple channels and we have produced a number of thought leadership pieces, including a highly attended National Association of Federal Credit Union’s webinar on loan securitization. We have improved our implementation process and shortened the time to go live for a new institution.

We have also added a Senior Vice President of Operations to improve client retention and drive operational best practices. While still early, we have seen significant progress from these investments for the full year 2022, our non-OEM business, primarily credit unions, was up 16%, driven by strong refinance volumes earlier in the year, while in contrast the large universal banks reported auto loan originations down 25% to 30% year-on-year. Now let me turn to our technology. We continue to have a distinct competitive advantage with significant barriers to entry, given our 20-plus years of proprietary data, sophisticated technology, including 5 second underwriting decisions, exclusive relationships with A rated insurance partners, deep lender relationships and regulatory knowhow and we will continue to strategically invest in our lenders production technology to remain a best-in-class risk-based solution for lenders seeking to serve non-prime customers.

To make car ownership more accessible for those in near- and non-prime credit segments, we increased our allowable vehicle age from nine years to 11 years. One of the criteria we set forth in conjunction with this modification was very specific mileage caps, as determined by our proprietary data set of auto valuations. With the average age of finance vehicles jumping from 5.4 years to 6.4 years for FICO scores below 640. This change allows financial institutions to grow their portfolios, while minimizing risk through Open Lending’s default insurance and risk management program. Equally as important, vehicles 10 years and olders comprise some 8% of all used car purchases. We have also expanded our loan approval exploration window from 30 days to 45 days for our direct and refinance channels.

This change offers our customers and refinance partners sufficient time needed to complete their respective funding processes. To support our go-to-market strategy enhancements and streamline onboarding of new customers, we recently expanded our integration to three new technology partners. And lastly, as we strive to lower delivery costs and improve integration time lines, we continue to modernize our infrastructure with cloud computing technologies. We welcomed our new Chief Information Officer in November to focus on our migration to the cloud, as well as on driving security, data integrity, DevOps and IT operations. He joins us from AmeriFirst Home Mortgage and brings a wealth of industry and technical experience. We are confident that our technology investments allow us to improve our time to market for developing, testing and developing secure applications that enhance customer satisfaction.

Lastly, we are also committed to attracting and retaining talent, creating a best-in-class organization. To lead these efforts, late last year, we announced the appointment of a Chief Human Resources Officer, focused on building a strong people strategy to support and expedite Open Lending’s mission. We expect to continue driving company culture centered on creating a diverse and collaborative environment to unlock value and foster growth for individuals, teams and the business. To wrap up, I couldn’t be more excited about our opportunity now having almost five full months in the CEO seat. This is driven by the fact that we continue to have a large and growing total addressable market, a profound competitive advantage and significant barriers to entry with our people and technology, as well as a business model that leverages both of these points.

We are focused on areas that we are confident will position the company for success for years to come. With that, I would like to turn the call over to Chuck to review Q4 and the full year in further detail, as well as to provide our thoughts on 2023 outlook. Chuck?

Chuck Jehl: Thanks, Keith. During the fourth quarter of 2022, we facilitated 34,550 certified loans, compared to 42,639 certified loans in the fourth quarter of 2021 and 42,186 certified loans in the third quarter of 2022. Total revenue for the fourth quarter of 2022 was $26.8 million, which includes an ASC 606 negative change in estimate of $12.8 million associated with our profit share, compared to $51.6 million in the fourth quarter of 2021. When excluding the impacts of ASC 606 change in estimate from both periods, revenue during the fourth quarter of 2022 was only down $5.5 million or 12% year-over-year. To break down total revenues in the fourth quarter of 2022, profit share revenue represented $6.1 million, program fees were $18.3 million and claims administration fees and other were $2.4 million.

It is important to note that while our certified loan volume was down in the fourth quarter of 2022 from the fourth quarter of 2021, our program fee revenue only decreased slightly due to mix of business certified, which resulted in higher unit economics. Turning to profit share, I want to remind everyone that profit share revenue is comprised of the expected earned premiums less the expected claims to be paid over the life of the contracts, less expenses attributable to the program. The net profit share to us is 72% and the monthly receipts from our insurance carriers reduce our contract asset each period. To further discuss the $6.1 million in profit share revenue in Q4, the profit share associated with new originations in the fourth quarter of 2022 was $18.9 million or $546 per certified loan, as compared to $24.7 million or $580 per certified loan in the fourth quarter of 2021.

As mentioned previously, we recorded a negative $12.8 million change in estimate as a result of an expected decrease of profit share in future periods due to higher than anticipated claims frequency and severity of losses. Notably, this was partially offset by lower anticipated prepaid due to the elevated interest rate environment. The Manheim Used Vehicle Value Index, which tracks the prices car dealers pay wholesale at auction for used cars is one of the macroeconomic factors we consider in evaluating our change in estimate each period end. This index fell nearly 15% year-over-year. That’s the largest one year decline in the history of the index. However, it’s worth noting that it remains highly elevated compared to prior 10-year trailing levels, and therefore, continues to impact auto affordability.

In comparison, during the fourth quarter of 2021, revenue included a positive $6.5 million change in estimated future revenues on certified loans originated in historical periods. This was primarily due to a positive realized portfolio performance attributable to lower frequency and severity of claims. Gross profit was $21.9 million and gross margin was approximately 82% in the fourth quarter of 2022, as compared to $46.9 million and gross margin of approximately 91% in the fourth quarter of 2021. For the quarter, gross margin excluding ASC 606 negative change in estimate would have been 88%. Selling, general and administrative expenses were $17.2 million in the fourth quarter of 2022, compared to $11.7 million in the fourth quarter of last year.

The increase year-over-year is primarily due to additional employees to support our growth, with a focus on our go-to-market sales strategy and investment in our technology, as previously discussed by Keith. Operating income was $4.8 million in the fourth quarter of 2022, compared to $35.2 million in the fourth quarter of 2021. Net loss for the fourth quarter of 2022 was $4.2 million, which was driven by the $12.8 million negative adjustment to our profit share contract asset, compared to net income of $27.8 million in the fourth quarter of 2021. Basic and diluted earnings per share was a loss of $0.03 in the fourth quarter of 2022, as compared to $0.23 in the previous year quarter. Adjusted EBITDA for the fourth quarter of 2022 was $8.5 million, as compared to $36.6 million in the fourth quarter of 2021.

There’s a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. Adjusted operating cash flow for the quarter was $33 million, as compared to $38 million in the fourth quarter of 2021. We exited the quarter with $380 million in total assets, of which $205 million was in unrestricted cash, $75 million was in contract assets and $65 million in net deferred tax assets. We had $167 million in total liabilities, of which $147 million was outstanding debt. During the fourth quarter, we announced the authorization by our Board of Directors to repurchase $75 million of our common stock through November of this year. This program reflects the confidence of our Board and the management team in our business model, free cash flow profile and the overall strength of our balance sheet.

During the quarter, we repurchased 2.6 million shares for approximately $18 million at an average price of $6.80 per share. We expect to continue to be opportunistic and open market purchases under the current authorization throughout the year. Before I touch on guidance, I would like to update you on a change within our insurance partner relationships. CNA, a partner of ours since 2017 has decided not to renew their agreement with Lenders Protection when their term concludes on December 31, 2023, due to a shift in CNA’s capital allocation priorities. We would like to thank them for their partnership over the years and their support as we work through and manage the runoff of existing policies over the coming years. As a reminder, one of our key initiatives over the past few years has been to minimize concentration risk by bringing additional A rated insurance carriers into our program.

We have successfully executed on this initiative as we have strong relationships with our three other insurance carriers to provide credit default insurance coverage to our auto lender customers. AmTrust, which is under contract through fourth quarter of 2028, American National Insurance Company under contract through second quarter of 2026 and Arch Insurance North America under contract through second quarter of 2027. We are working with all three of these carriers to transition our lender customers who had been insured with CNA to them, all of whom are interested in absorbing additional business from the Lenders Protection program. Now moving on to guidance, if inflation were to persist through 2023, it appears the Federal Reserve will stay the course and keep rates higher for a longer period.

While the bond market at times has appeared to be indicating a more favorable rate environment later in 2023, recent forecast from the Federal Reserve are more conservative, with current indications that the terminal Fed funds rate will be in the 6% range. These factors, as well as other macro and auto industry lending specific indicators are ever changing, and more specifically, it is difficult to have visibility into financial institutions future liquidity and the corresponding pace of auto originations. So, for these reasons, at this time, we feel it is prudent to take a more measured approach by providing only a quarterly outlook. Guidance for the first quarter of 2023 is as follows, we expect certified loans to be between 28,000 and $32,000, total revenue to be between $30 million and $34 million, and adjusted EBITDA to be between $13 million and $17 million.

In our guidance, we have taken the following factors into consideration. The Affordability Index of our target credit score borrower due to the continued inflated used car values, inflation, rising interest rates and overall consumer sentiment. An important driver in estimated profit share is the Manheim Used Vehicle Value Index, which we expect will continue a path of moderate declines over the next year. Also, as Keith outlined earlier, we will continue to invest this year. While this impacts our margins, we have a strong balance sheet and we will be well positioned as the overall macro and auto retail industry challenges subside. We would like to thank everyone for joining us today and we will now take your questions. Also joining us on the call will be John Flynn, Open Lending’s Chairman of the Board.

See also 11 Most Undervalued Financial Stocks and 12 Most Promising Growth Stocks To Buy.

Q&A Session

Operator: Thank you. Our first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

David Scharf: Hi. Good afternoon. Thanks for taking my questions. I wanted to dig in a little bit about profit sharing going forward as it relates to your carrier relationships. Can you kind of remind us the 72% portion that you keep has always been very generous and my understanding has been is because the carriers like the product on their end, because you provide all the customer acquisition costs and underwriting, and ultimately, the default insurance they are underwriting is very high ROE. Given CNA’s decisions, should we be thinking about whether your other three partners given the credit performance of the portfolio now, whether they are rethinking that 72-28 mix? I mean, are they — are there any discussions about the kind of returns that they require and whether they want those modified at all?

Chuck Jehl: Yeah. Hi, David. It’s Chuck and good visibility. It’s a great question. We have got the three carriers that will remain, and one, CNA has been a great partner for a long time and I’d tell you the business has been very profitable for them. And this is more of a capital allocation change for them and an underwriting decision for different products and not everybody can do everything. So it’s been very profitable to them and very profitable for our other three carriers. So we are strong relationships with the other three. Keith and I have met with them. John and Ross had a great hand off to us of those relationships and I have built them over the last couple of years as well and the appetite is very strong for our business at the current terms in unit economics.

David Scharf: Got it. And maybe just as a follow-up kind of same topic. Obviously, again, I am not surprised to see the contract asset prospectively be written down a bit non-prime auto, it’s probably deteriorated more than most other consumer credit asset classes. But after the write-down, how should we think about maybe a more kind of normalized level of profit share per loan throughout 2023, given all the affordability issues that are going to persist?

Chuck Jehl: Another great question. And David, what I’d tell you is, as we analyze that, the contract asset and our profit share every quarter, the biggest driver for, obviously, the 12.8% negative change in the quarter, and I will tell you year-to-date, that’s like 5.7% for the year negative. Basically the Manheim went down 15% in 2022, which is the largest single decline in the history of the index. And as we thought about this at Q3, just to give you a little bit more history, we anticipated that it would be down about 11% full year 2022. So the accelerated decline in the fourth quarter. As we put the Q4 originations on the books at the $546, we took that into consideration as long as well as stress into 2023 on defaults increasing, as well as the severity of loss due to the Manheim coming down.

So as we put that on, we booked that $5.46 per loan at about a 62% loss ratio. And I will tell you, as we think about that, that had a baseline of about 50% loss ratio, which is kind of historical averages that we look to, we put about 23% stress on the Q4 originations, which got it down to the 546, which it started at about, call it, a 788 profit share per set. So we feel good about the 546 per se, but obviously, as we kind of navigate through these volatile times in the economy and the auto industry specific and delinquencies, we will continue to review that. But we feel good about our book at 12/31 2022 and we will continue to monitor that.

David Scharf: Got it. Got it. It sounds like in Manheim actually more than consumer payments. Thank you.

Chuck Jehl: Yes, sir. Yeah. Go ahead, John.

John Flynn: Okay. One more comment to the insurance players.

David Scharf: Yes.

John Flynn: It’s worth noting, keep in mind that because this is written as a surplus lines policy and that every loan is targeting a 60% loss ratio, if it ever got out of whack and if it started to climb way beyond that, the 72% is a percentage of tax of the premium. So we can adjust the premium going forward to maintain the loss ratio that carriers are looking for. So I don’t think they would be negotiating of our percentages down. It’s a matter of as rates are rising everywhere in the country, the only thing a rate increase would do is increase the rate to the consumer, which would be easy to cover.

David Scharf: Understood. Very helpful. Thanks so much.

Chuck Jehl: Thanks, David.

David Scharf: Yeah. Thanks, Chuck.

Operator: Our next question comes from the line of Joseph Vafi with Canaccord. Please proceed with your question.

Joseph Vafi: Hey, guys. Good afternoon. Thanks for taking our questions. I know, Keith, you mentioned, a lot of hires and a lot of investment in the business. Were there some other moving parts in the G&A line that drove it up so materially here in Q4 and then another follow-up on that?

Chuck Jehl: Hey, Joe. I will take — I will start. This is Chuck. Good visibility. Yeah. If you think about the SG&A throughout 2022, we hired several folks in 2022 to help as we grow our go-to-market sales strategy and enhance our technology. So that’s kind of been throughout the year. The year-over-year Q4 to Q4, $11 million — $12 million to call it $17 million, that $5 million has progressed throughout the year. Sequentially, from Q3, we are actually down slightly from Q3 about $500,000. So, I wouldn’t say, it’s up sequentially, but year-over-year is just the headcount adds to kind of support our investment in the business as we wait for this pent-up demand that will be there as we know the industry recovers.

Joseph Vafi: Sure. Fair enough. And then on the adds, I know you mentioned Crescent being added here in the quarter. Maybe we could get a higher level view of appetite from new logos now. I mean, obviously, there’s a lot of headwinds in everything from the credit unions having lower cash balances to just inventories being down across the Board, is — how are prospective clients moving forward now versus maybe six months ago? And then if you could mention what those new tech partner integrations might mean to the business, that would be helpful? Thanks, guys.

Keith Jezek: Yeah. Sure. And as we mentioned in the comments, and this is Keith, Joe. I was mentioned in the comments, December was a really, really strong sales month for us, so that’s very encouraging, especially kind of given the end of the year and as we step off into 2023, just encouraged with the pipeline. A lot of the efforts of the new and expanded go-to-market strategies have been around segmentation and prioritization of the pipeline, and we really want to go after lending partners in a number of various segments. But first and foremost, just to kind of categorize them by, first and foremost, their potential for volume, second, whether or not they open all three channels, so that you have indirect, direct or refinance, their current loan to share or their liquidity balance, for most of them the type of LOS that they have, the loan origination system to make sure that we are already integrated with it, and then finally, most importantly, do they have the appetite to lend to this segment.

And what I will tell you is that the pipeline is robust for 2023 as we start the year and the value proposition is still the same as it’s ever been. There’s the need to serve the folks that perhaps they haven’t historically served.

Joseph Vafi: Fair enough and then on those integrations.

Chuck Jehl: Yeah. Joe, this is Chuck. From a tech partners perspective, integrating with additional LOS’ that make our time to first revenue quicker. So integrated, for example, with XLOS project with defi SOLUTIONS, as well as added a new refi partner with GetJerry. So a lot things that we are working on there to be ready and also grow search as we can and control what we can.

Joseph Vafi: Great. Thanks a lot guys.

Chuck Jehl: Yeah. Thank you, Joe.

Keith Jezek: Thank you, Joe.

Operator: Our next question comes from the line of Peter Heckmann with D.A. Davidson. Please proceed with your question.

Peter Heckmann: Hey. Good afternoon. So the cash flows for the company were very strong and I assume that is a reflection of the slowing of the business and just cash collections on the existing loan book of business. I guess when you think about that, I mean, the volatility that we have seen in acknowledging this has been a very, very unique and dynamic environment for auto sales, auto pricing, interest rates, but the dynamic around these really significant changes in profit sharing under ASC 606 or really just make it very, very difficult for a public company and expectations for a public company. Given the underlying cash flow, I guess, do you feel that Open Lending needs to remain a public company and/or would this business be more appropriately held within either a larger business or held as a private company where the quarter-to-quarter volatility in earnings wasn’t really going to be this big of an issue?

Keith Jezek: Well, maybe I will bet on that last question. I definitely don’t want to speculate on that. We are a public company today and working very hard for our shareholders to maximize value. Your question around ASC 606 and the volatility, I mean, yes, we had a lot of positive performance in 2021 and good ways into 2022. And the changes in the industry and the macro obviously impact us, but we provide transparency there and good disclosure, we feel. But I will tell you that from a cash perspective, obviously, the cash flow statement, we generated about $90 million in cash in 2022 and we have got a healthy cash balance at year end at $200 million, and obviously, we started the share buyback program and invested there. So, which is — and the volatility that’s out there, which is why we thought it was prudent to go to quarterly guidance this time just because of the precision and visibility into our customer’s liquidity, as well as auto loan originations.

So that’s — but we will continue to generate a lot of free cash flow in this business. It’s a great cash business and if you think about maybe instead of an adjusted operating cash flow metric, maybe even a free cash flow metric at about, call it, 85% to 90% of adjusted EBITDA, that’s kind of what we target.

Peter Heckmann: Yeah. I know I hear what you are saying and I sympathize it just — if you are having a hard time forecasting it then it’s just that much more difficult for us. So, I guess, I will continue to listen in and think about some of those factors driving the reversal here this quarter.

Keith Jezek: Okay, Peter. Thank you.

Operator: Our next question comes from the line of Vincent Caintic with Stephens. Please proceed with your question.

Vincent Caintic: Hi. Thanks for taking the question. Good afternoon. I wanted to go back to the profit share. So, wondering if you could kind of go into more detail about in the fourth quarter kind of what the big changes in assumptions were plus what gives you comfort that what you built into the expectations for profit share now or where they should be or could you give us sensitivity around if used car prices are different things move around what could profit share do? Thank you.

Keith Jezek: Yeah. No. Hi, Vincent. I think I said earlier when David asked the question around profit share, maybe I will start with what changed in the fourth quarter. It was an accelerated decline in the Manheim, unprecedented 15% for the year and when we were at Q3, we projected the Manheim to be down about 11%. So used car values is a direct driver of our estimate of future claims and severity of loss. So, it had a significant impact on us in the quarter, and as you may recall, earlier in the year, Cox was forecasting the Manheim to be down in Q1 and Q2, only 3% for the year. So, it was a significant change here in the later part of the year. As we think about sensitivities around it, the $546 that we discussed earlier where we put the Q4 originations on the books and we stress that, call it, about 23% from what we call the baseline, which is a 50% loss ratio and that’s stressed on defaults increasing, as well as severity of loss.

So that’s our estimate at this point in time, and if you think about it, that $546, if you think about sensitivity around it, for example, of every 5% maybe an incremental loss ratio or claims going up, that could be about $100 in unit economics in our profit share just from just an average unit sensitivity.

Vincent Caintic: Okay. That’s helpful. Thank you. And then on the insurance companies, so I appreciate you gave us the, I guess, how long each company’s contract goes up into. But I am sort of wondering if before a contract and an insurance company change anything, so can they slow down approvals or change otherwise change things that might affect the volume all else being equal? Thank you.

Keith Jezek: Yeah. I mean we have great relationships, as we said earlier, and as a partnership with our carriers and we review all changes, underwriting changes together with our approvals, as well as theirs. So, I mean, again, it’s a strong appetite for our business and it’s been very profitable for AmTrust, in particular, as well as Arch and Aneco going forward and they are excited to get more flow of our business as CNA exits and changes their priorities. So we continue — origination volume is — this year was $4.7 billion for us, and obviously, with our — going into 2023 it’s — volume is going to be down, but there’s plenty of capacity, not only for 2023, a lot of growth into the future with our three carriers.

Vincent Caintic: Great. That’s helpful. Thank you.

Keith Jezek: Yeah. Thank you.

John Flynn: Vincent, it’s also worth noting that one carrier can make a change all three have to agree to it. So it’s not like one and decide they want to slow down by changing an underwriting rule.

Vincent Caintic: Yeah. Great point, John. Thank you.

Operator: Our next question comes from the line of John Davis with Raymond James. Please proceed with your question.

Unidentified Analyst: Good afternoon. This is Madison on for JD. I wanted to start on OpEx. I think it will step down again in 1Q based on the guide, but is there a way you can help us think about the right OpEx run rate just given the current macro backdrop and some of your comments around retention and investments throughout the year?

Chuck Jehl: Yeah. I mean, Madison, as you pointed out, at the midpoint of the guide for Q1 since we just went to a Q1 outlook, I think, a slight downtick there from obviously Q4 levels. And — but, again, as we think about our investments in 2023, as we invest in the business, these are measured thoughtful investments and we can slow those down if we need to the pace of those investments in our business. So I’d just say in that range of Q4, but probably slightly down a bit just on the Q1 guide on OpEx.

Unidentified Analyst: Okay. That’s helpful. And then I understand near-term margins are under pressure, a lot given the macro headwinds. But just as we think about the longer term model, is there anything structurally that’s changed that would limit your ability to get back to that 60% plus EBITDA margin over time?

Chuck Jehl: If we think about margins, we want to grow our business, and obviously, there’s headwinds today and challenges that as we invest. And if you think about the Q1 outlook, the margins are so 43%, EBITDA margins to 50% from the low to the high. We think that’s temporary as we invest in the business now. As others are retrenching and not, we look at this as an opportunity to really be positioned well for the pent-up demand as the industry and auto specific recovers. So we believe our margins will improve as our revenues go up and we can leverage the SG&A that’s on the books today.

Keith Jezek: And Madison, this is Keith, and thanks, Chuck. I will just add on those investments and why we feel it’s the right time. As Chuck mentioned, these are all measured and prudent investments that are based on through the lens of data and analytics to make sure that the right investments at the right time and they fall into two very simple camps. The first is increasing our capacity and number of lender partners as capacity per lender customers down, it’s important to grow overall capacity. So, when the market comes back, it will rise together. And then the second one is in the technology investment in product and that’s simply to help our application volumes flow as best they can through our funnel, especially when the time when applications are down. So they are around increased market penetration and they are around increasing volume of outflows given the current environment.

Unidentified Analyst: Okay. Got it. I appreciate the color and thanks for taking the questions.

Chuck Jehl: Thanks, Madison.

Keith Jezek: Thanks, Madison.

Operator: Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.

Faiza Alwy: Yes. Hi. Thank you. So, first, I wanted to follow up on the point I think John made around premium increases to account for that ASC 606 or to offset some of those ASC 606 headwinds. So curious if you — if there have been any premium increases to-date and if that’s included within the adjustment this quarter, and if not, sort of how quickly do you think those premium increases can happen?

Chuck Jehl: Yeah. John, you want to

John Flynn: Hey, Chuck.

Chuck Jehl: Yeah. You want to start and then I will kind of jump in as well.

John Flynn: Yeah. At this point, we have never had a premium increase and all the years we have been doing business, we have had on reduction in premium of 15% and that was a significant time ago. If you remember in following us over the last few years, one of the things we have done, which effectuates almost what would look like a premium increase is, we have reduced the advance rate on the loan. If you remember how we price loans that you have got 95% LTV, 100%, 105% and so on. So if we were only doing an advance off of 90% of the value that would appear to be a higher premium to ensure that loan. So, we did that twice. I think it was a 5% impact when COVID happened and 2.5% not that long ago. To answer the second part of your question, how quickly could it happen?

If we feel the need to increase premiums, it’s a 30-day notice to be insured. So we could send one notice out to all of our insured credit unions, banks, funding sources and within 30 days to have that premium increase in place.

Faiza Alwy: Got it. Thank you. And then just a follow-up question broadly on the macro environment and I am curious in terms of what do you need for a recovery or really for normalization in your business, because obviously, there have been a number of headwinds over the last, call it, three years and it seems like the headwinds have been shifting and coming from different angles. And at this point, it seems like you are — there’s obviously supply chain headwinds that have been continuing. There seem to be seem to be multiple headwinds as it relates to whether it’s affordability and then some of the issues that you are talking about as it relates to defaults, things like that and then it seems like there’s an issue with the credit union funding, sort of what do you need to happen from a macro perspective for things to normalize?

Keith Jezek: Yeah. And Faiza, this is Keith. Yeah. I think you articulated it pretty well. I mean it is the conundrum of our wonderful automotive retail industry that supply chain was buffeted and supplied was hurt during COVID and right after COVID and once as an industry, we have started to figure that out a little bit, albeit manufacturer specific. Now we have this demand shortage. So, we kind of got supply figured out and now we have this demand dynamic. And it’s captured, I think, best in the Cox Moody’s Affordability Index, which as I am sure everyone on the call is aware, is now at 44 weeks on average to pay for the median used car. So that’s at an all-time high. So that’s the key factor. What do we need to make that affordable go away.

So it’s very straightforward. We have got to have used car prices come down, which we are forecasting that they are going to happen in 2023 and we need rates to stabilize and come down. So that’s one of the most important things for the business. I think one of your follow-on questions is just liquidity. Our thought and thinking and John or Chuck, please jump in, is that especially as it relates to credit unions that, that liquidity and the balance sheets are going to get better in the second half of the year. For the very simple reason of, one, they have more deposits coming in as they have raised rates to attract those deposits. And secondly, just as their current loan, auto loan portfolio starts to roll off. I mean, John or Chuck, anything to add?

Chuck Jehl: That’s great.

John Flynn: Well, the one I would add to that, too, Keith, and one of the things you will find for these credit unions, because some of the stock with these low interest rate loans on longer term loans. Yeah, that makes them gunshided out there and do the seven-year, 10-year, 15-year mortgages, they would rather an NCUA is a real proponent of a shorter duration, average like two and a half years to three and a half years auto loan at a decent return. I think you are going to see credit unions particularly get back to their core business, which is helping those near-prime consumers, the under serve people get into an affordable car to get to work them back, while being able to generate a decent yield with a short duration loan.

Faiza Alwy: Understood. Thank you so much.

Chuck Jehl: Hey, Faiza. One thing I will follow up. As John mentioned, we have not had a formal actually price increase or I guess not many. When we put in the vehicle value discount, as John referenced in 2020 and then also again in 2022, that two and half — 2.5% vehicle value discount kind of equates to about a 10% to 11% effective premium increase and that’s still an effect that we put in April of last year.

Operator: Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl: Hey, guys.

Chuck Jehl: Hi, Mike.

Mike Grondahl: Any date on the — Howdy. Any update on the two OEMs and any outlook on any future OEM customers?

Keith Jezek: Well, Mike, yeah, hey, this is Keith. Happy to take that. Just on the future OEM customers, let me just say that, really encouraged currently by the frequency of our engagement with what’s in the pipeline. And then based on relationships that I have had just in the past throughout my career, the introduction of two multiple new logos into that sales pipeline, I am further encouraged by just what the activity there is that a number of the prospects have passed through quantifiable stage gates and kind of the flow of — from prospect to close. Now to be clear, these are very, very large accounts. They are closing is unpredictable. But just to repeat very encouraged by the frequency of interaction and then the formal passing through of stage gates to get to the ultimate relationship.

Chuck Jehl: Yeah. And Mike, I will jump in on OEM one and two. Obviously, if you look at our key performance indicators in our supplemental deck, down year-over-year quarter, as well as full year. But we are encouraged that Q3 to Q4 that stabilized in that business is actually going up a bit. So we are good to see that momentum in OEM one and two.

Mike Grondahl: Got it and good to hear on the future. Did you guys disclose like what percent of your volume CNA was?

Keith Jezek: No. We haven’t and they have been with us over the years since 2017. But they are not our largest carrier.

Mike Grondahl: Got it. Okay. Many thank you.

Keith Jezek: Yeah. Thanks, Mike.

Operator: Our next question comes from the line of Spencer James with William Blair. Please proceed with your question.

Spencer James: Hi. Thanks for taking the question. This is Spencer on for Bob Napoli. The core non-refi non-OEM starts were a bit stronger seasonally than we anticipated. Could you talk about what customer activity is driving that and maybe how we should think of mix of certs between OEMs, refi and core for your March quarter guide?

Chuck Jehl: Yeah. Obviously, maybe start with the refi. I think Keith in our prepared comments, our refi business is down, obviously, with seven rate hikes in 2022 and then one already in 2023, that severely impacted our refinance channel there. So it was 43% Feb of 2022, and as low as, call it, 11% in December. So, if you think about year-over-year, Spencer, the core non-OEM business, if you will, is up 16%, which we will be pleased to see. In fourth quarter, it was down, but obviously, the — when we revised the guide for the year, that was taken into consideration in the liquidity constraints on our large customers primarily. And as we think about going forward, I think, the OEMs are on track to continue at the pace they are and we believe we have hopefully through and are going to be adding more to us as we go forward.

But the mix of the business is hard to say right now with not giving a full year outlook and we are learning each day on kind of where we are heading here. But maybe Keith has something to add more about the kind of the non-core versus core customers.

Keith Jezek: Yeah. I mean we are encouraged by the growth of just the large majority of our customers and look forward to that continued participation in the program in 2023.

Chuck Jehl: Correct.

Spencer James: Okay. Thank you for the color. And as a follow-up, average program fee per cert has continued to improve and it looks like the improvement in program fee per cert has somewhat lagged the increase in average loan size. Could you talk about what drives the lag in program fee versus loan side? Is it a lag or is there another — is there a mix related component that I am missing?

Chuck Jehl: No. I think it’s more of a mix related component, because it’s — our program fee is based on a percentage of the loan amount. So there wouldn’t be a lag there. Larger volume customers get a discount there on the program fee, Spencer. So it’s just really a mix and lower concentration in some of our larger customers that got — did more volume in the past that brought that down a bit.

Spencer James: Okay. I appreciate it. And there’s been a ramp in program fee per set over the course of the year. Should we expect that to be primarily correlated with loan size for 2023 or are there other factors to consider?

Chuck Jehl: Yeah. I think so.

Spencer James: Appreciate it. Thank you.

Chuck Jehl: Thanks, Spencer.

Operator: There are no further questions in the queue. I’d like to hand the call back to Keith Jezek for closing remarks.

Keith Jezek: Well, thank you, Operator. Just as we close, I — if I may I’d just like to share a thought or two on the industry. As many of you know, I have dedicated my entire career, the majority of my entire career serving automotive retail for many reasons, but the most simple is the fact that at trillions of dollars, automotive retail is the single largest non-healthcare related consumer retail on the planet. 93% of households in the U.S. have at least access to at least one car and that far outpaces the number of consumers who own a cell phone or a smartphone at 85%. What we are seeing now is an especially strong cyclical cyclicality and what I have observed throughout my career is that automotive and automotive for cans, in particular, always comes back.

The manufacturers, the OEMs will ramp up production. They will run multiple shifts. They will produce cars and then follow those with wonderful incentives for consumers. Dealers are wildly resilient. They always find a way to put people in cars, whether it would be new or used cars. And lenders, especially where we gain their appetite for auto loans, which are comparatively short duration and exhibit historically very, very low delinquencies. And when the industry comes back, it’s almost always led by used cars, which is good for us, because as we all know, used cars is the primary source of our business. 85% of our volume comes from used, while 15 is from new and it comes back quickly and used and the reason for that is very, very straightforward.

Consumers can defer, delay the purchase of a new car, but they can’t defer or delay the purchase of transportation. And with the average age of the car on the road approaching 13 years, we think there’s phenomenal pent-up demand and so I just wanted to share my perspective, just over my career in the auto sector and couldn’t be more enthused about the future of Open Lending. And with that, I’d like to thank everybody for joining us today.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.