Porch Group, Inc. (NASDAQ:PRCH) Q2 2023 Earnings Call Transcript

Porch Group, Inc. (NASDAQ:PRCH) Q2 2023 Earnings Call Transcript August 9, 2023

Lois Perkins: Good afternoon, everyone, and thank you for participating in Porch Group’s Second Quarter 2023 Conference Call. Today, we issued our second quarter earnings release and related Form 8-K 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; Shawn Tabak, Porch Group CFO; Matthew Neagle, Porch Group COO; and Malcolm Conner, VP and GM of Home Services and Warranty. Before we go further, I’d like to take a moment to read the company’s Safe Harbor Statement within the meaning of the Private Securities Litigation Reform Act of 1995, which albeit important cautions regarding forward-looking statements.

Today’s discussion including responses to your questions reflects management’s views as of today, August 8, 2023. We do not undertake any obligation to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans, including the pending application for the reciprocal exchange based on current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We encourage you to consider the risk factors described in our SEC filings as well as the risk factor information in these slides for additional information.

We will reference both GAAP and non-GAAP financial measures on today’s call. Please refer to today’s press release for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. As a reminder, this webcast will be available for replay and also the presentation shortly after this call on the company’s website. at ir.porchgroup.com. And with that, I’ll turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Over to you, Matt.

Matthew Ehrlichman: Thank you, Lois. Good afternoon, everybody. I want to start by giving a shout out and sincere appreciation to the Porch team, who are doing exceptional work across our business units. We remain on track for adjusted EBITDA profitability in the second half of this year and beyond. And if we can achieve this in what continues to be a historically challenging macro market for both of our 2 industries, insurance and housing, it will be a tremendous milestone, a proud accomplishment and it would set us up for strong growth in margins as the markets improve. While property and casualty insurance carriers across the U.S. report massive losses in Q2 due to historically severe hailstorms and other weather and while our portion of this can risk overshadowing the work of the team, the fact remains with a long-term view, we are poised for great things.

Insurance companies will make money as more weather events allow for rates to continue to increase markedly. Our perspective is that the homeowners insurance industry TAM is poised to approximately double over the midterm, and we will be beneficiaries of this. Today, the team and I will talk about Q2 results, some new initiatives we’re working on and how we’re leaning into our unique and sustainable advantages to create value as markets improve. Shawn will provide an update on financial results and our revised outlook for 2023. Matthew will cover KPIs and trends in the business. And then Malcolm Conner, the GM of our warranty business will dive deeper into some of the exciting progress we’re making there. Moving to Slide 6 to review the high level financials.

Overall, we delivered solid execution in the quarter while continuing to face the same industry, weather and housing-related headwinds as previous quarters. Revenue in the second quarter grew 39% to $99 million, driven by our Insurance segment. Adjusted EBITDA loss in the second quarter was $43 million. Based on historic loss ratios and Texas weather seasonality, we had expected Q2 to be our largest loss-making quarter of the year as it’s typically the most expensive time for weather-related claims cost. The second quarter was on track with our expectations until as we recently disclosed, our insurance division was impacted by catastrophic weather losses exceeding our long-term average. To give this some context, Q2 2023 was the third most costly second quarter for weather losses in the U.S. since 1950.

Property claims services estimate losses were $20.6 billion nationwide which is well above the 5-year average of $15 million. For us, these events drove an approximate $18 million incremental loss. Looking ahead, Q3 and Q4 are typically when we see fewer weather-related claims. Related to our vertical software division, industry-wide home sales declined 21% in the second quarter year-over-year, with those headwinds impacting more transactional businesses like our moving group. So turning now to key updates in the quarter. First, the reciprocal exchange application continues to progress with the Texas Department of Insurance. Pending approval, we expect to launch Porch Insurance, a new brand and product that the reciprocal exchange will offer, which includes unique benefits for consumers, such as a 90-day warranty and special offers to customers within the Porch ecosystem.

The HOA product will continue to be available for customers as well. And certainly, we’re excited about what’s to come here. Second, we’ve continued to take aggressive underwriting actions to counter severe weather in our insurance business. We’re focused on improving overall performance by increasing premiums and policy deductibles where appropriate by lowering distribution and support costs in regions that are unprofitable, given current cost of reinsurance and shifting premiums toward the most attractive homes to underwrite. For 2023 and likely through 2024, given constraints to the insurance market as capital and risk mitigation partners, we will continue to carefully control gross written premium growth and balance the amount and type of premium with capital requirements, all with an eye towards profitability.

We are highly confident in our ability to grow premiums when surplus builds with favorable weather results and/or third-party capital and reinsurance returns. In addition to the capital constrained in harder reinsurance markets that we’ve discussed, there has just recently been in development with one of Porch’s larger reinsurance platforms called Vesttoo. There are claims that the collateral that backed Vesttoo is not valid. And while it’s early in our investigation and while the reinsurance was sourced and administered by 2 of our reputable reinsurance brokers, we are taking this issue seriously. We’ve terminated this agreement. We’ve already met with the Texas regulator and have secured certain supplemental reinsurance. Third update. You may recall last quarter, we discussed how our unique property data meaningfully impacts insurance pricing accuracy.

In Q2, we received approval to use the data in 2 further states bringing us now to 11 states total. Again, this data allows us to improve our risk accuracy in key insurance risk categories, and we’re seeing an approximate 15% to 20% improvement with . This means that we can charge a lower price for policies, which are low risk and more accurately priced higher risk policies. Fourth, we’re seeing early promising results from partnerships with third-party insurance agencies, where we now distribute some home buyer leads generated by our software division. These agencies sell these consumers insurance and commissions generated are then shared back with Porch. In addition to helping increase conversion rates at a lower cost approach versus relying only on our own insurance agency.

We’re excited about how we can use demand to incent and motivate these third-party partners to sell more of HOA and soon Porch insurance to all of their customers. Fifth, we continue to be excited about the rapid progress our warranty business is making. It wasn’t yet 2 years ago that we didn’t offer from warranties. That business has continued to expand, operating more types of warranty products through more channels. Malcolm will cover this later. I’ll now hand over to Shawn to cover our financial performance and guidance. Over to you, Shawn.

Shawn Tabak: Thanks, Matt. Good afternoon, everyone. Overall, the second quarter was in line with our expectations aside from the catastrophic weather events later in the quarter that we had previously announced. Our businesses and teams are performing well in the face of industry-wide headwinds with insurance being impacted by weather in the reinsurance market and vertical software facing a soft housing market. We continue to focus on being strong stewards of capital, focusing on investments that have strong business, product and channel unit economics, coupled with expense control. And finally, we raised $102 million of additional capital in Q2 which bolstered our balance sheet, which is solid as we look forward to these market headwinds turning to tailwinds.

Revenue was solid at $98.8 million in the second quarter of 2023, an increase of 39% over the prior year, driven by the insurance segment and partially offset by the software segment, where our moving services, in particular, continue to be impacted by the soft housing market. Revenue less cost of revenue was $17.4 million, which is 18% of revenue, lower than prior quarters due to an approximately $18 million loss due to the extreme and unexpected catastrophic weather towards the end of the quarter as well as expected weather-related claims costs tied to Q2 seasonality. We expect revenue less cost revenue margin to increase in Q3 and Q4 based on historical claims patterns. And post reciprocal, as discussed previously, our margin profile is expected to further improve as we mitigate exposure to weather and volatility at Porch Group.

Our vertical software segment revenue less cost of revenue margin increased by approximately 300 basis points over the prior year. Adjusted EBITDA loss was $43.1 million, driven by the extreme cat weather, hardened reinsurance market and the industry-wide decline in home sales, offset by strong expense control and an 11% year-over-year reduction in corporate G&A expenses. Gross written premium was $143 million, broadly in line with prior year as we have worked to manage premium growth. Looking at revenue by segment here on Slide 10. In the second quarter of 2023, revenue from our insurance segment was $64.3 million, growth of 127% over the prior year driven by an increase of approximately 15% in premium per policy and also lower reinsurance seating.

A key part of our strategy is continuing to increase premium per policy to drive revenue and profitability in the insurance business. We are expecting further increases the premium per policy over the next year. The insurance segment was 65% of group revenue in the quarter, an increase from 40% in the prior year. Vertical software revenue was $34.4 million, a decrease of 19% over the prior year due to the 21% industry-wide housing market year-over-year decline as well as a decline in corporate relocations, both of which impacted our moving services. Moving on to adjusted EBITDA by segment. Our Insurance segment had an adjusted EBITDA loss of $31.2 million in the second quarter of 2023 due to the extreme cat weather and harder reinsurance markets we’ve discussed.

Our HOA insurance carrier continues to focus on launching the reciprocal as well as improving underwriting performance, including future premium per policy increases, increasing deductibles and expanding the number of states where we’re approved to use our unique data to better price risk. Vertical software adjusted EBITDA was $1.8 million, impacted by the soft housing market and movings decline in corporate relocations. Corporate expenses were $13.8 million in the second quarter, reducing to 14% of total revenue from 21% in the prior year, driven by strong expense control. Moving to the balance sheet. As of June 30, we had $358 million of unrestricted cash and investments. This includes $192 million of cash and investments on our insurance carrier, HOA, which we expect to transfer to the reciprocal when approved and launched.

Excluding HOA, Porch held $167 million of unrestricted cash and investments, leaving us well capitalized. As a reminder, at the beginning of the second quarter, we issued $333 million of new senior secured notes, using $200 million to reduce our 2026 unsecured notes par value to $225 million and bolstering our balance sheet by adding $102 million of cash in the second quarter. In addition to the $167 million of unrestricted cash and investments at Porch Group, we held $39 million of restricted cash primarily for our captive and warranty business. This increase from $15 million in the first quarter as expected as we increase the amount of reinsurance provided by Porch’s captive to HOA given current market dynamics. We are hopeful the reinsurance markets will improve, but we anticipate continued usage of our captive in 2024.

As we reduce reinsurance provided by the captive in the future, we expect this cash to move back to unrestricted stacks. Additionally, we had some noncash items in Q2 that didn’t impact adjusted EBITDA but are reflected in GAAP net income. First, we recorded a $81 million gain on the retirement of our — of $200 million of our 2026 unsecured notes that I mentioned. Second, we had a $55 — $55 million goodwill impairment charge in light of the continued challenges with the reinsurance markets, volatile weather as well as our stock price performance. And also following the period end, the allegations against Vesttoo service. From an accounting perspective, we had a $48 million net receivable. Under GAAP, we evaluated whether we can overcome a rebuttable presumption and concluded that given the high bar and that we are early on in our investigation, which is ongoing, we wrote off the balance but intend to pursue recovery.

And finally, one quick item on housekeeping. In the second quarter, we have revised the definition for adjusted EBITDA, which now excludes the net receivable write-off related to the reinsurance as well as any subsequent recoveries and also restructuring costs. In Q2, our restructuring costs were around $1.1 million, which includes costs related to forming the reciprocal exchange. Now on to our outlook. Today, we are updating our full year 2023 guidance. Overall, the business is performing in line with our expectations, and the teams are executing well, including price increases in insurance and software segments. We are reiterating our revenue outlook for the year of $330 million to $350 million. However, given the extreme weather we’ve experienced, we will be cautious around revenue less cost revenue and adjusted EBITDA guidance, in particular, until we are able to launch the reciprocal.

We’ve made 2 adjustments there. First, as you may recall, our initial guidance did not include cat weather events in excess of our historical experience, including the approximately $18 million loss that we incurred in Q2 that we discussed today. So we have updated our guidance to account for these past losses. Second, we have also widened the ranges by $5 million to reflect the continued weather volatility and reinsurance market headwinds. Our updated guidance is revenue less cost of revenue, ranging from $145 million to $160 million and adjusted EBITDA loss ranging from $65 million to $50 million. We do continue to expect, on a cumulative basis, adjusted EBITDA to be profitable in the second half of this year as well as for 2024 and beyond.

This assumes cat weather is in line with historic trends which would equate to a 41% gross loss ratio for the second half of the year. Typically, we would see better weather in Q4 than in Q3, with both of these both of those quarters much better than Q2 and Q1. So we would expect adjusted EBITDA to increase as the year comes to an end. As a reminder, claims for catastrophic weather events in excess of our long-term historic averages are excluded from guidance and from this target. We are reiterating gross written premium guidance of $500 million and as mentioned, are continuing to focus our active efforts towards constraining growth of overall premium until reinsurance and the capital markets improve with an eye toward profitability. Thank you all for your time today.

And now I’ll hand over to Matthew to cover our KPIs. Over to you, Matthew.

Matthew Neagle: Thanks, Shawn. On Slide 15, I’ll run through an update on our KPIs. The average number of companies was 30,700 in the second quarter, broadly similar to Q1 2023 and a 7% increase from Q2 2022. Similar to previous quarters, home inspection, mortgage and title companies continue to be challenged with the decline in the housing market, with many businesses stopping operations or scaling back their footprint. Average revenue per company per month increased to $1,073, an increase of 31% year-over-year and 13% compared to the first quarter 2023. This was driven by the increase in reinsurance revenues. We had 245,000 monetized services in the quarter, an increase of 14% versus last quarter due to normal seasonality related to home purchases and moves.

This is down 27% versus prior year due to the industry-wide decline in home sales and a decline in corporate relocation in moving. Finally, average revenue per monetized service was $331, broadly flat versus the first quarter due to a slight mix shift with an increase in moving services purchased. This was up 109% versus Q2 2022 due to the growth in our higher-value services such as insurance and warranty. Looking now at the insurance KPIs. Gross written premium was $143 million, broadly in line with prior year from 358,000 policies in force in the second quarter. Annualized revenue per policy was $517 with the increase driven by lower reinsurance ceding levels and increased premium per policy. Premium revenue was 104% for the second quarter, a slight decrease versus Q1 2023 due to the 37,000 higher risk policies, which we are not renewing and as we manage reinsurance and capital levels.

As Shawn mentioned, the reciprocal once approved and launched, will help with a more efficient capital structure as well as mitigating weather impacts. Our insurance carrier had a gross loss ratio of 120% in the second quarter, consisting of 35% relating to non-cat and 85% relating to cat weather. As mentioned, the quarter was on track until we experienced what we have seen peers quote as a historic level of industry-wide catastrophe losses. In our Q1 earnings included the AM Best market share data, which demonstrates HOA’s outperformance versus the majority of our peers. At a high level, in the states where we write policies, our Q2 losses are in line with market performance. Across the industry, rates will continue to go up, growing the TAM and our future opportunity.

In our view, there’s no better opportunity than being an operator of a reciprocal in this rapidly growing market add. As Shawn said, our second half 2023 adjusted EBITDA profitability target assumes a 41% gross loss ratio, which is approximately 2 percentage points above our long-term average. This is also supported by continued increases in premium per policy as we discussed today. So assuming we don’t see wide variances from our historical claims, we feel confident in our loss ratio assumptions. To provide some insight into the assumptions behind the 41% we have provided here, the average claims cost per policy, we have assumed approximately $375 in the second half 2023 for average claims cost per policy which is 66% higher than the 5-year average.

Finally, on Slide 18, we have reiterated our 2023 strategic priorities. First, we will continue to develop new software for companies who use our software products and upsell more software through bundled solutions. We are extending our online experiences and increasing revenue per home buyer. We are improving premium per policy, as Shawn mentioned earlier, to help offset the hardened reinsurance market. We continue to wait on further feedback from the TDI on our reciprocal application and our guests — our goal of approval later in 2023. Thanks. Now I’ll hand it over to Malcolm.

Malcolm Conner: Thanks, Matthew, and hello, everyone. I’m Malcolm, VP and Group GM of our warranty business. I have been with Porch for 2.5 years now, having previously led and scaled American Water’s warranty business to greater than $130 million in revenues. I am excited to share more detail again about our warranty business and partnerships. We believe we are well positioned to become a leader in this space with our unique assets and lower cost of customer acquisition. We’re on track to go from $0 in revenue 2 years ago to approximately $35 million of revenue this year and above a 25% adjusted EBITDA margin. Most recently, we have begun operating in California and Florida and are now active in 49 states plus D.C. We are working on the approval process for Washington and look forward to that launching in the near future.

Starting on Slide 20. There are 3 key differences which set Porch apart from competitors in the warranty space and provide us a long-term advantage. First is our bundled handyman services. This appeals to customers who like to keep on top of home maintenance to prevent issues in the future, and those who have issues or repairs, which need a professional attention. Customers pay deductible against the services such as gutter or drive bit cleaning, saving the money on our home maintenance led to a significant improvement in our retention rates. Second is channel access. In addition to the traditional warranty channels such as real estate and direct-to-consumer, being part of Porch Group also means we can cross-sell our products through inspectors, contractors and other businesses.

Leveraging these existing customer channels provides lower customer acquisition costs and increases lifetime value. Third is our 90-day warranty product, which is provided largely through inspectors to home buyers doing the home purchase process to offer protection during those busy first few months. This provides us early access to a high volume of customers, both short-term warranties and continued coverage. Now summarizing our key distribution channels, which is part of what Porch Group provides us. First, is the real estate and home inspection where we offer our 90-day warranty, annual and 18-month products to their home buyers. This includes providing warranties through Porch’s moving concierge services. Second is utilities. We partner with large electric and gas utilities to provide a variety of services to their customers, including targeted and full home warranties.

We are excited to announce new partnerships with Pepco, Atlantic City Power and Delmarva Power, where we will utilize a co-branded journey to provide exclusive home service offerings to utility customers, including warranty and home maintenance. Third is retail and distributors where we sell our extended labor warranty at point-of-sale for products such as new roofs. We have just signed a distributor deal, which we will launch soon. Fourth, we sell direct-to-consumer. And finally, we are testing other nascent channels such as to assurance customers where we can offer warranties as an additional layer of protection to cover what homeowners insurance does not. It’s been an incredible couple of years during which time our warranty business has grown handsomely with very strong margins.

I will close with optimism about what is ahead for this business. We have an incredible team that we have built focused on each of our products and channels. Both the growth and the margin performance are expected to continue, and we look forward to sharing more in the future. Thanks, everyone. I’ll now hand it back over to Matt.

Q&A Session

Matthew Ehrlichman: Thank you, Malcolm. Thank you, team. Great work there, and congrats on the progress. To wrap up, we are pleased to reiterate our target to be adjusted EBITDA profitable in the second half of the year, ongoing. We are managing costs closely and are laser-focused on execution in order to accomplish these key milestones this year and next. We’re excited for the transition into a reciprocal structure and for the launch of Porch Insurance, as we’ve spoken about over the last few quarters. We do appreciate the patience and the support, and we’re getting closer to a time in which we believe we’ll be ideally structured to run the insurance business at scale. Overall, we’re still in the very early innings, and I’m confident that we have a strong business model and the team across the company to deliver. And with that, we’ll wrap the prepared remarks. Lois, please go ahead and open up the call for Q&A.

A – Lois Perkins: [Operator Instructions]. So question one comes from Josh at Cantor.

Joshua Siegler: So first of all, I’d like to ask on the insurance side of the business, understanding premium per policy. So how much rate do you think there still is to earn into the book? And do you believe that there’s a lot of potential to increase that premium per policy, especially as we head into ’24?

Matthew Ehrlichman: Josh, thanks for the question. Yes, what we’re seeing across the whole insurance industry is carriers taking more rate. I mean the reality like I mentioned before is, as there is weather that is more severe, as reinsurance pricing goes up, that simply allows carriers to be able to take very substantial rate increases. Hence, my comment on our expectation of this TAM doubling over that midterm period of time, we’re confident that rates will continue to go up. So for us directly, yes, we are in the process. Similar to what we did this last year of being able to put in additional rate filings for next year that we believe will be supported and approved by the relevant state regulators. As Shawn mentioned, at this point in time versus last year, rates are up 50%, give or take. So that’s a big deal. So as we look ahead and the markets normalize, we do think it puts us in a strong position given where rates should go.

Joshua Siegler: Got it. And then following up on the insurance side, I’d like to talk about new policies. So obviously, over the past couple of quarters, you’ve been in the process of non-renewing those higher risk policies. But as you’re thinking about actually bringing in new policies in force, especially given the housing market macro right now, how are you going out there and targeting some of these new perhaps lower-risk policies to add to the book?

Matthew Ehrlichman: There’s two key ways that we think about this. First is just in terms of geographies, so what geographies do we want to be in general. I want to make sure that we have, yes, the right diversification. But there are certain markets where we’d either take the appropriate rates; in certain states, that might be harder to do so. And so certainly, we are leaning into states where we can be able to sell policies at what we believe is the right rate that can be profitable for us and, frankly, non-renewing or pulling back on the states that we simply aren’t getting approval for the right rates because it’s not where we should put our focus for right now. So that’s number one. Number two, as we’ve talked about in the past, we do have a tremendous amount of unique data that we understand about properties that nobody else has.

And so for us, that allows us to be able to really target the customers where we believe they and their property are the lowest risk. And so that’s something that we’ll continue to be able to do on an ongoing basis.

Lois Perkins: Next, we’ll go to A.J. of Stephens.

Austin Hayes: Congrats on the quarter. First of all, can you help unpack the vertical software revenue, mainly looking for more clarity on rev growth across the transactional side of the noninsurance business versus subscription revenue? And then related to that, on the vertical software subscription revenue, can you help us better understand the impact of attrition from industry consolidation and then essentially, your best guess for how long that might linger as a headwind?

Matthew Neagle: Sure. I can take that. The overall — the vertical software business is impacted by the macro housing trends. We reported a 21% decline in the housing market. Our revenue decreased 19%. However, a large chunk of that was an impact to our moving business, which is primarily a service business. If you back out the impact of that business, the software part of the business reduced much less than the market trends, materially less than the market trends. So there is resilience in the software business despite the macro trends. Some of that is because of the stickiness and retention of our products, and we’ve been able to take some price increases, which has helped to offset this trend that we’re seeing that some of our target customer is folks who are getting closer to retiring and they’re taking this opportunity to say, “Maybe I’m done,” because the macro headwinds are harder.

We watch carefully what the market thinks will happen in 2024. It’s too early to forecast that. We actually look at the market forecast regularly, and the market can’t yet agree on what next year is going to do. So we’re seeing anything from a little bit of decline in the overall market. And some people are saying it could grow next year. It’s just too early to tell. But I think you’re going to want to see optimism back in the housing market before some of that softness on the company side is going to subside. And then your second — could you repeat your second question, which I think it was — could you repeat your second question?

Austin Hayes: Yes, I was just looking for some color on maybe like industry consolidation and just the impact of attrition. How long do you expect that headwind to last?

Matthew Neagle: Yes. That was my attempt to answer at the end there, which is I think we’ll continue to see a little bit of softness until there is optimism back in the market. And as of today, when people look at 2024, some people are negative, some people are positive, so it’s too early to tell. But you’re going to — we’re going to want to see optimism coming back in the real estate market.

Austin Hayes: Great. And then shifting gears a bit. In your guidance, I believe you were previously assuming negative 18% year-over-year growth. And apologies if I missed this, but for 2023, I didn’t see this, call it, this go around. So could you update us on that assumption. Is that still the underlying assumption is negative 18% year-over-year home sales for 2023?

Matthew Neagle: That’s currently the underlying forecast that we have.

Austin Hayes: Okay. And then just a follow-up on that. If we kind of look at the industry forecasters such as MBA, Fannie, NAR, they’re calling for a little bit better than that, at negative 15% year-over-year growth on average. Is this growth differential more of a unique Porch exposure thing? Or is this just conservative overall outlook for you guys here?

Matthew Ehrlichman: No. A.J., last year, we had used those forecasts and they were wrong last year. And so we wanted to just take a more conservative view as we entered into 2023. We’re holding that view through the year.

Lois Perkins: Next, Jason of Craig-Hallum.

Cal Bartyzal: This is Cal on here for Jason today. So just a couple from me. I guess, first, just to start, can you maybe just touch on how the decision to kind of reduce your reliance on the reinsurance maybe impact the cat claim losses in the quarter? And any intentions to change your reliance on reinsurance going forward?

Shawn Tabak: Yes, I can cover that. So this is Shawn, thanks for the question, Cal. The $18 million that we talked about is net of reinsurance recovery, so it’s our net exposure in the quarter. One of the things we’ve talked about last quarter for that and continue to talk about today is the reinsurance markets are continuing to have an impact on the business and our overall profitability. And so we saw a similar trend, obviously, there in Q2. Those reinsurance contracts, just for reference, take a year long. So until we get into the next reinsurance market, early next year will continue to be in the existing reinsurance contracts that we have. And so like I said, the net impact to the quarter for the specific extra cat losses was $18 million. And obviously, in addition to that, from a year-over-year perspective, you also have the hardened reinsurance markets impacting EBITDA for the insurance segment.

Cal Bartyzal: Perfect. And then I guess, last one for me. We’re seeing other home insurance providers with kind of the same profitability challenges and some turning policies. So if you could just talk a little bit on how aggressive you’re looking to get here in customer acquisition moving forward?

Matthew Neagle: Sure, I can take that, and Matt and Shawn may add. Our focus is on profitability and cash flow and taking advantage of the unique data we have to get what we think is profitable policies. And we’re going to continue to do that, and we’re going to continue to watch the reinsurance markets. We’ve non-renewed 37,000. It is possible we will do more than that and then replace with the ones that we think are attractive.

Lois Perkins: Great. Thanks. Now we’re going to go to Dan.

Daniel Kurnos: Can you guys hear me?

Matthew Ehrlichman: Yes.

Daniel Kurnos: Sorry, I don’t know what’s going on in my video, Matt, but I am here. So maybe Malcolm, I appreciate the incremental color on warranty. You guys are about 10% ahead of, I think, where we thought you’d be by the end of the year given the outlook you provided today. Either for you or Matt, can you just kind of talk through some of the KPIs around policy, per policy trends? And obviously, I know that it’s not necessarily an inflation price gain here, if you guys can price more accurately. And now that you’ve got all these other revenue streams, maybe just some more granularity on how we should think about the drivers of growth over the near term, what’s sort of attainable now and what’s more attainable longer term?

Malcolm Conner: Yes. Thanks for the question. I will sort of start here. Yes, in terms of warranty, very specific KPIs, we do not, just at this time, disclose a lot of detail about the specific KPIs of various business units. But what I can say is that we’ve been very successful in a few do things, such as our renewals and retention rates. We’re seeing that with the bundling of our handyman services, they have increased our renewal rates overall. Also earlier this year, we did launch Porch Warranty, so our own brand, and we are seeing some really good sales out of the gate with that.

Matthew Ehrlichman: I’d also just add, one of the things that the team has done a nice job of, Dan, is just leaning into the Porch platform and playbook. So Porch obviously has lots of companies, lots of partnerships through many different channels. We talked a lot about home inspection and real estate related. We talked less about things like utilities, large utility partnerships that we’ve had. That team has continued to, as Malcolm mentioned, add more new partnerships and be able to build deeper relationships with those existing partnerships to be able to help them and help their customers with more services like warranties. So the nice thing is that it is a multiproduct, multichannel strategy that they’re executing, and we are seeing success across many different channels.

Daniel Kurnos: Got it. That’s super helpful. And then I mean, of course, Matt, inevitably, the first headline that I saw today, not for you guys but in general, was just about flooding in the Southeast and some more extreme weather, which it’s kind of crazy out there right now. I guess, it didn’t seem like a lot of it was in Texas. I don’t know how much the Vesttoo issue leaves you incrementally exposed to direct weather events, if I’m reading that right. I may not be, so I apologize if I got that wrong, but just trying to get a sense, knowing that it should sequentially improve from Q2 but just, again, given some of the headlines and some of the other stuff, I mean, do you guys feel like you’re on track in Q3 to have sort of a more standard quarter from a cat weather perspective?

Matthew Ehrlichman: I can only communicate what has happened so far to date. Obviously, we cannot predict the next, what do we have, from a 6 weeks or so. But first, we don’t have flood exposure. We do not write flood insurance. So anything that you’re reading about that specifically would not apply to us. I would say there’s not been anything abnormal so far this quarter that would be outliers versus expectations.

Daniel Kurnos: Okay. That’s helpful. And then just lastly, just on the app development. I mean, we’ve had Malcolm now talk about some DTC opportunity. I know Matt, this is sort of on the wish list, especially given all of the cap requirement stuff, the reciprocal exchange and all the other things you’re doing in the short term. But just trying to get a sense of how you’re cooking all this together so that, eventually, you can have all of the Porch-branded products and then push harder on the DTC button, when that might start to take effect.

Matthew Neagle: Yes. I can comment a little bit on that. We continue to invest in our app. One of the things we’re excited about, in addition to bringing together the different services, is providing a really delightful and magical experience with the data because we get access to a lot of unique data about the home. And bringing it to life in a way that consumers can start to use it and use it on a day-to-day basis, we think, will be one of our differentiators. We continue to grow the number of app users. We have very high scores on our app in the app store. And then part of what we’re working on which the reciprocal will be a key trigger is starting to rebrand our consumer experiences around Porch, with the biggest one being insurance, and that will happen as we move into the reciprocal.

And then we’ll start laying on other touch points, other services that we offer, and continuing to bring them under the Porch umbrella. Once you get a number of services, like that all connected under a common experience and common brand, it gets easier to start talking about a DTC strategy because you can go push against a lot of opportunities at the same time.

Lois Perkins: Thanks. Next up, we have Ryan at KBW. Can you hear us, Ryan? We’ll come back to you in a moment. We have some written questions as well, so I’ll take one of those first. First up we have, what’s your plans to take care of the outstanding 2026 debt?

Shawn Tabak: I can take that one. So we have many paths. As a reminder for folks, just in Q2, we issued $333 million of senior secured convertible notes. Those are due in 2028. When we did that transaction, we also used $200 million of our proceeds to pay down our unsecured notes. That leaves us with $225 million of those that we will seek to take care of by 2026. With respect to our specific plans on those, we haven’t disclosed what those are. I would say there’s a variety of options that we have to do that and we certainly intend to take certain actions before at that time.

Lois Perkins: Okay. Let’s go to Ryan again. Okay, our second written question is for warranty, what was the revenue in 2022? What growth do you anticipate in 2024? And what are the claims costs as a percentage revenue and corresponding volatility?

Malcolm Conner: Thanks. I will be able to take that. I guess first of all, we typically do not disclose the specific financials for business units such as warranty. I will say, though, that we are on track to go from 0 in revenues from 2 years ago to approximately $35 million in revenue this year and that is with an adjusted EBITDA margin in excess of 25%. For ’24, we have not provided 2024 financials. However, we believe we will continue to see strong growth and high margins with this business. In a future Investor Day, we may break out more information here on warranty as well as other businesses. And finally, regarding claims, we do not disclose specific metrics. However, warranty is part of insurance and claims are presented there. Warranty claims are far lower than what we see in insurance businesses. And our warranty claims are fairly consistent over time. I would also note that our overall claims rate is below industry average.

Lois Perkins: Thanks, Malcolm. Ryan, can we try you more time?

Ryan Tomasello: Guys, can you hear me?

Matthew Ehrlichman: Yes. We got you, Ryan. There you are.

Ryan Tomasello: Sorry about that, tough day on Zoom. I appreciate you fitting me in here. Just wanted to unpack HOA’s capital position a bit. Just looking at statutory filings that we have, latest from 3/31, it looks like there was a little less than $70 million of surplus. Any chance you can give us an update on where that stands today, inclusive of 2Q, and how we should be thinking about the $48 million provision from Vesttoo? I guess essentially, just trying to understand where the surplus stands today and where you think that needs to be for the reciprocal exchange to take place and how you could fill that gap, if necessary.

Shawn Tabak: Yes. I could take that one, too. Still in process from a statutory perspective. I can talk to, obviously, HOA’s balance sheet, and we did give some information today just on the amount of liquid cash investments there. So again, there was just under $100 million of cash and also $93 million investments there, so a good amount there. With respect to the capital requirements of the HOA business, again, we didn’t announce anything on that today. I would just point to we talked about some of the levers that we have in our insurance business, gross written premium, increasing premium per policy, taking underwriting actions, the nature of the book. In certain areas, there’s higher risk than others, and that also impacts the cost of reinsurance. So we have a number of levers at our disposal as well to manage there.

Ryan Tomasello: Okay. And then just another one on HOA. I guess understanding that you’ll give more color once we get to the finish line of the reciprocal transaction, but any specific comments around what range of gross written premium is reasonable for the pro forma entity. This would be helpful as I think the market tries to put some parameters around what the economics can look like for that management fee when Porch transitions to attorney-in-fact and helping capitalize that business at a higher multiple.

Matthew Ehrlichman: Yes. Thanks, Ryan. I’ll take it. Obviously, today, we provided gross premium guidance for this year. We’re not providing guidance for 2024 at this point. The reality is, is that just, like this year, we’ll choose to manage gross written premium to really the level that we want to, that’s optimal, to be able to maximize profitability. We’re super clear on our focus of being able to deliver our goals or profitability in the second half of this year and then next year and ongoing. The great thing, and kudos and credit to that team, is that we have demonstrated very clearly our ability to grow gross written premium rapidly when there’s capital available, and really, when I say capital, reinsurance; that’s the normal market and appropriately priced.

There are channels and the unique things that Porch can do in our unique data, we can grow gross written premium very fast. That is not, in our view, our challenge. But similarly, the team has done a really nice job of managing gross written premium growth down so we can go after and hold the most attractive policies. We’ll decide on where we want to manage gross written premium to next year, when we get closer to next year, and we can start to see what the reinsurance markets and, therefore, the capital available looks like for next year. But too soon to communicate guidance.

Lois Perkins: Great. We also have Jason from Oppenheimer.

Jason Helfstein: I just like have a big picture question as we’re kind of all looking at what’s, again, unfolding just this quarter, obviously, in insurance but also in tech-enabled insurance. Look, I think this is like a scale question, right? I mean, I don’t know, maybe like weather gets better, maybe it doesn’t, who knows? I don’t think any of us are smart enough to kind of really know that. But it just feels like what the industry is going through is if you don’t have massive kind of like geographic diversification, this is just an incredibly difficult period to weather, no pun intended. Just like, should you be thinking about, like, trying to merge this with another InsurTech company who is also having scale issues but ultimately believe they have smart top of funnel? Just how do you think about that?

Matthew Ehrlichman: Yes. Thanks, Jason. I remain super clear in mind, and I believe we do, about our ability to go build one of the largest, one of the more important, insurance companies, period, full stop. That opportunity — there’s just a tremendous opportunity in front of us given our unique data advantages, given our unique demand advantages. I think that is there. Now we are not entering into this saying, “Hey, our bet is that weather is going to get better.” That is certainly something that is outside of our control. And the trends are clear around weather. But we’re operating and putting together the right structures that will allow us to be able to deliver the type of consistent results that we’ll walk through over time even as whether — even as and if weather trends continued to get worse.

So one of those is just pricing, like we’ve talked about. We’ve been able to take significant rate. Again, insurance companies, like I said, will make money. So you’re going to continue — if and as weather continues to get worse, you will see prices continue to go up. The TAM in this market will continue to grow and I believe will continue to grow very rapidly here as we look ahead. And so as that market is growing, with us being able to go and structure and build this reciprocal separately owned entity that goes and manages and holds that risk, and we are operating for that, to us is the right solution in the long term. So we can be able to participate in the growth. We can make sure that we operate this reciprocal to be very healthy and to be sustainable for indefinitely and us to be able to participate in that with commissions and fees.

We think that structure plays really well here. We do think geographic diversification helps. We do think that the reinsurance market will normalize over time. There’s been a set of reinsurance cycles in the past for a 2-or-so year period of time. The reinsurance market hardens, rates go up dramatically. And as reinsurance rates go up dramatically, guess what happens? They make a lot of money, more capital comes into the market, it becomes more competitive and rates normalize. And so we certainly expect that to be true here as we look ahead, which will very much help us. So do we need to take any other action outside of our strategy we are executing? No, I don’t think so. I think the that we just have to — I’ll use your pun, weather this weather storm and execute the plans that we’re doing, and I think we’ll be in a really good spot.

Jason Helfstein: And then is there risk that as, let’s just say, again, you’re getting your rates in order, your competitors are getting their rates in order, now coming out of this, they then try to kind of, I don’t know, outprice you out of the market because they’re bigger and they can absorb — kind of they can absorb, be more price competitive than, let’s just say, smaller players can. Is that a risk that we need to think about?

Matthew Ehrlichman: I don’t see that. I don’t believe we’re seeing those types of actions. I think that the large players are feeling, I would say, much more pain than the smaller players just given the size of their books. Some of the losses that you see announced are staggeringly large numbers. We see those players taking substantial rate increases as well. We think all insurance companies are certainly very wired and focused on making sure they are priced to profitability. And I don’t expect we’re going to see carriers trying to undercut price, being willing to lose, purposely lose, lots of money to be able to have a better competitive position. I don’t think that’s likely.

Matthew Neagle: And just keep in mind that given the way pricing is regulated, they couldn’t take sort of short-term actions to . They have to fundamentally set up their pricing to be low cost, and it would be difficult to change. And in some states, they may not be able to move it up if they needed to. So it would be a very risky strategy for the large players to do.

Lois Perkins: Okay. I guess another written question. Can you share more performance metrics by providing your reinsurance demand from your software businesses to third-party agencies?

Matthew Neagle: Sure. We don’t break out the specific share by channel. We are excited, though, that we have that diversified and low CAC — diversified channels both across agencies and our B2B2C and the low CAC nature of our B2B2C. One of the comments that Matt made in the script is maybe us rethinking how we can use some of that unique demand and getting agencies, who have larger distribution, excited about working with Porch because of getting access to our demand and having them think about offering Porch to all of their customers as part of getting access to demand. And so we’ve started to explore that strategy. Some of the early results are encouraging. It’s still very, very early there. But that B2B2C opportunity remains what we think one of the unique things that we’re going to be able to go after.

Lois Perkins: We have time for one more. What question do you believe — I’m sorry, or what do you believe will be the catalyst to help the stocks start to perform?

Matthew Ehrlichman: Well, I will take this, and then we’ll wrap up. I mean we are right at this, I believe, key moment that we have been working hard towards over the last, what, 18 months or so once the housing and reinsurance market has really turned on us in the industry. Getting to profitability in this market will be important and, I think, a real accomplishment. We all know that as the markets turn, we are going to have incredible tailwinds behind us. And so demonstrating that profitability and outperformance right now in this market not only I think is going to be an important financial goal, important for the company, but also, I think, can build a lot of confidence in the team’s ability to execute. So that’s one. On the second, catalyst, I think, as we talked about, the reciprocal approval is important just because we believe that we’ll have our insurance business optimally structured, in particular, for this market.

It’s something, obviously, we’ve been working on for a couple of years now since we acquired HOA, and we’re making progress. Third — two more. Third, we do expect, as Shawn mentioned, to hold an Analyst and Investor Day later this year. There’s an opportunity for us to simply share more about our business units exactly, the performance of many of our business units that are doing really well. I’m sure it’s on the details today, or on one of those business units, that we’re doing warranty. But there’s many of our businesses that are doing some really exciting things, and it’s just getting masked based on certain abnormal weather results. And so I do think that will be a fun moment. Then maybe lastly, just as the tailwinds do start to turn, as housing market goes from being a negative to at least being flat year-over-year and then, soon enough, we’ll start to see that increase, that will just show up in our numbers very quickly and drop to the bottom line.

And so I think that will also help us. We’re a few minutes past time. I just will say thanks, everybody, for the time and interest. We do appreciate it. Thanks all for the questions. Have a great rest of the day.

Lois Perkins: Thanks all, you can now disconnect.