Open Lending Corp Q4 FY2024 Earnings Call

Greetings, and welcome to the Open Lending Fourth Quarter and Full Year 2024 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are Jessica Buss, Chairman of the Board of Directors and Chief Executive Officer; and Chuck Jehl, Interim Chief Financial Officer and a member of the Board of Directors. I would like to pass the call over to Ryan Gardella, Investor Relations, to read the Safe Harbor statement. Please go ahead.

Thank you, and we appreciate you all joining us. Prior to the start of this call, the company posted the fourth quarter and full year 2024 earnings release and supplemental slides to its Investor Relations website. In the release, you will find a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I would like to remind you that this call may contain estimates and other forward-looking statements that represent the company's view as of today, March 31, 2025. 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 by such statements. And now I will pass the call over to Chuck to give an update on our business and financial results for the fourth quarter and full year 2024.

Thank you, and good morning, everyone, and thank you for joining us today. While the automotive lending industry and broader automotive market continued to navigate through challenging market conditions, we continue to focus on taking prudent steps aimed to maximize our future opportunity. Specifically, we are focused on strategic efforts intended to drive new customer acquisitions and certified loan growth from new and existing customers, optimize profitability for our lenders, our insurance carrier partners and ultimately Open Lending, make targeted investments that are expected to improve the experience of our lender customers and their borrowers. As part of our goal of optimizing profitability, each quarter, we review the performance of our active certified loans to identify trends and adjustments we believe are needed to improve performance of our new originations. For the fourth quarter of 2024, we identified new information that negatively impacted our outlook on the performance of our back book of loans, which has in turn, negatively impacted our operating results. In summary, this review led to an $81 million negative Change In Estimate or CIE, associated with our profit share revenue contract asset to reflect our expectations of the performance on the approximately 411,000 active certified loans in our portfolio. The negative CIE was a result of further deterioration of our 2021 and 2022 vintages, as well as two additional factors that have negatively impacted performance of our 2023 and 2024 vintages. For fiscal year 2024, we generated 110,652 certified loans, $24 million in revenue and adjusted EBITDA of negative $42.9 million, largely due to our fourth quarter results and the impact of the negative CIE. I recognize these results are disappointing to our shareholders. They are equally disappointing to me and to the Board. To address this issue, we have implemented corrective actions that are designed to yield improved performance of our new originations, while allowing us to continue our mission of serving the underserved, which I'll talk about shortly. First, let me discuss the deterioration of our back book. We continue to see deterioration of our 2021 and 2022 vintages, which combined make up approximately 40% of our active certified loans. These loans were made at the peak of the Manheim Used Vehicle Value Index or MUVVI of 257.7 in late 2021. The MUVVI has since declined to 204.1 as of February of 2025. This represents more than a 20% decline in used vehicle values over the past three to four years. This significant decline has caused more consumers who bought used cars in this period to end up with negative equity on their automotive loans, which in turn has increased the likelihood of default on vehicles that are now worth significantly less than their outstanding loan balance. These two vintages are estimated to have accounted for 40% of our total negative change in estimate for the fourth quarter of 2024. The poor performance of these loans in these two vintages is not unique to Open Lending. In fact, this phenomenon continues to negatively impact all lenders participating in the automotive lending industry. As we have noted previously, we believe macroeconomic conditions also increased the likelihood of future claims from these vintages. Specifically, we are continuing to see elevated claims and there was an increase in 60-plus day delinquencies in the fourth quarter of 2024 from these vintages. Deterioration in these other historical vintages accounted for approximately 20% of the negative change in estimate for the fourth quarter of 2024. In addition to the deterioration of our back book, two cohorts drove incremental underperformance of our 2023 and 2024 vintages. These two cohorts were borrowers with credit builder tradelines and borrowers with fewer positive tradelines. First, credit builder tradelines primarily consist of credit builder cards. Credit builder cards work by allowing consumers to deposit a specific amount of money, often at the discretion of the consumer, into a credit builder account linked to a credit card. The consumer can then spend up to the amount deposited in the account on the card. Though this means that the card issuer is not actually extending credit, monthly payment activity is reported to the credit bureaus, and a history of timely payments can increase the consumer's credit score. Many of these cards are approved by issuers without a hard credit pull. Moreover, since there is no preset credit limit, high utilization is not reported to the bureaus. While credit builder cards have been available to consumers for many years, they have seen a significant increase in usage over the last couple of years. The increasing use of credit builder products has negatively impacted the lending industry, but the risk profile associated with them is still challenging to assess by industry participants at this time. Through our analysis of the credit builder issuers in our portfolio, we have learned that the credit builder tradelines peaked at around 15% of our originations in the third quarter of 2024. Based on our performance data, borrowers with a credit builder tradeline performed twice as poorly as similarly scored borrowers without a credit builder tradeline. In addition to the credit builder tradelines, we saw an impact from borrowers with limited positive tradelines. In the fourth quarter of 2023, we launched our enhanced proprietary Lenders Protection scorecard known as LP2.0, and enhanced our underwriting standards. The underwriting enhancements in the scorecard were supported by third-party historical performance data. As we discussed during the earnings call for the third quarter of 2024, following our implementation of LP2.0, we have seen an increase in positive limited tradelines or thin files, which do not have a deep credit history. Consistent with our standard practice, we observed six months of age performance data before considering any underwriting changes. Under this approach, the first reliable data showing deterioration that we saw was with respect to May and June 2024 performance, and we promptly increased our cutoff score based on this data. For the fourth quarter of 2024, we had sufficient performance data on multiple monthly vintages to identify the negative impact of borrowers with fewer positive tradelines. Combined, adjustments related to borrowers with credit builder tradelines and borrowers with fewer positive tradelines contributed the remaining 40% of our negative profit share change in estimate in the fourth quarter of 2024. As a result, we have taken corrective actions designed to ensure that Open Lending's portfolio does not continue to facilitate the underwriting and insurance of these underperforming loans. In the third and fourth quarters of 2024, we made adjustments to our underwriting rules for borrowers with credit builder tradelines, including negatively impacting their Lenders Protection scores and increasing their premiums to price more appropriately for the risk. The net effect of these underwriting adjustments is a decrease in the approval rate on this cohort. We anticipate that these actions will reduce the mix of borrowers with credit builder tradelines to under 5% of our fiscal 2025 certified loan volume, compared to approximately 15% of our fiscal 2024 certified loan volume. We also implemented further credit tightening in the first quarter of 2025 on borrowers with limited positive tradelines by increasing the minimum number of positive tradelines needed for an approval. We anticipate that these actions will decrease the mix of borrowers with limited positive tradelines from 10% in 2024 to less than 0.5% in 2025. While we have implemented targeted credit tightening and pricing actions throughout the last 24 months, we anticipate taking further actions to increase pricing and tighten credit. These actions are intended to help ensure the performance and profitability of our new originations in order to further optimize results for our lenders, our insurance carrier partners and ultimately Open Lending. We believe, based on the information we have available at this time, that the changes that we have made to date are expected to result in improved performance and results for our new originations. Despite these disappointing financial results, there are many positive areas of strength in our business. Our Lenders Protection program continues to see strong interest from the market, highlighted by 58 new customers signed in 2024, including 13 in the fourth quarter of 2024. We believe that our value proposition is strong, and we also believe that lenders truly value our platform to provide credit to the underserved near-prime and non-prime consumers. Next, I wanted to address our outlook for the first quarter of 2025. Currently, we expect total certified loans to be between 27,000 and 28,000 in the first quarter of 2025. We plan to provide additional outlook metrics as soon as reasonably practical. Jessica has been serving as the Chairman of the Board and has been named Chief Executive Officer effective immediately. I will support Jessica as Interim Chief Financial Officer during the transition period and will assist in identifying a permanent CFO. Before moving on to our financials in more detail, I'd like to pass the call to Jessica.

Thank you, Chuck, for your many contributions to Open Lending. Since joining the company in 2020, Chuck has been a critical part of the management team, leading the company through a challenging and volatile period for Open Lending and the industry. I am looking forward to continuing to work with you as a member of the Board. And thank you, everyone, for joining us here today. I have served on the Board of Open Lending for the past five years and most recently held the title of Chief Executive Officer of Argo Group, a subsidiary of Brookfield Wealth Solutions. I have spent my entire career in the insurance industry, and I intend to bring that experience and expertise to bear on the current challenges and opportunities at Open Lending as we further our legacy of serving the underserved. In the coming days or weeks, we plan on taking concrete steps to review the overall operations of our business. At a high level, my goal as CEO of Open Lending will be to focus on profitable unit economics, growth, the right rate for individual loans and a pricing approach that seeks to enhance predictability and reduce volatility for both unit economics and our contract assets. We are moving through a complex macroeconomic environment, and we expect that tariffs and other developments may prolong or exacerbate this environment. Now more than ever, I believe we need a sophisticated, segmented and real-time data-driven pricing model designed to enhance predictability of the profit share component of revenue. In addition, we intend to continue to enhance and refine our tools and scorecards in an effort to predict the drivers of frequency and severity of defaults. Further, we will be identifying potential cost efficiencies and process improvements throughout the loan life cycle that may further streamline our business, as well as planning to focus our future investments on our core Lenders Protection program. Together, I believe this will drive value for our business and all our stakeholders. I look forward to providing more details in the coming weeks and months as well as getting to know each of you better and hearing your unique perspectives.

Thank you, Jessica. Now I'd like to provide an update on our financial results for the fourth quarter of 2024. During the fourth quarter of 2024, we facilitated 26,065 certified loans, compared to 26,263 certified loans in the fourth quarter of 2023. Total revenue for the fourth quarter of 2024 was negative $56.9 million, which includes $81.3 million of the aforementioned ASC 606 negative change in estimate associated with our profit share. To break down total revenues in the fourth quarter of 2024, program fee revenues were $13.7 million. Profit share revenue was negative $73.2 million, net of the negative change in estimate, and claims administration fees and other revenue was $2.5 million. As a reminder, profit share revenues comprise the expected earned premiums less the expected claims to be paid over the life of the contracts unless the expense is attributable to the program. The net profit share to us is 72%, and any losses in the net profit share are accrued and carried forward for future profit share calculations. The negative change in estimate during the fourth quarter of 2024 reduced our contract asset and for certain loans caused the cash consideration previously received to be in excess of the expected profit share revenue. The amount of excess funds and the forecasted losses were recorded as an excess profit share receipts liability. Profit share revenue in the fourth quarter of 2024 associated with new originations was $8.2 million or $314 per certified loan, as compared to $13.2 million or $501 per certified loan in the fourth quarter of 2023. The $81.3 million negative profit share change in estimate recorded in the current quarter is associated with cumulative total profit share revenue previously recognized of approximately $410 million for periods dating back to January of 2019, the ASC 606 implementation date, and represents over 411,000 insured in-force loans in the portfolio. Operating expenses were $15.4 million in the fourth quarter of 2024, compared to $17.9 million in the fourth quarter of 2023. Operating expenses decreased 14% year-over-year. Operating loss was $78.6 million in the fourth quarter of 2024, compared to operating loss of $8.3 million in the fourth quarter of 2023. Net loss for the fourth quarter of 2024 was $144.4 million, compared to a net loss of $4.8 million in the fourth quarter of 2023. Given the magnitude of the losses related to the profit share revenue change in estimate for the fourth quarter, we recorded a valuation allowance on all of our deferred tax assets of $86.1 million, which increased our income tax expense. Net loss per share was $1.21 in the fourth quarter of 2024 as compared to a net loss of $0.04 per share in the fourth quarter of 2023. Adjusted EBITDA for the fourth quarter of 2024 was negative $73.1 million as compared to negative $2.1 million in the fourth quarter of 2023. There is a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. We exited the fourth quarter with $296.4 million in total assets, of which $243.2 million was unrestricted cash and $15 million in contract assets. We had $218.3 million in total liabilities, of which $139.7 million was outstanding debt. While we are disappointed with our results for the quarter and year, we believe we have taken actions that are necessary to better position Open Lending now and in the future. Against an increasingly challenging macroeconomic backdrop, we are also taking concrete steps to tighten our credit standards and increase pricing where needed in an effort to drive revenue and reinvest in our core Lenders Protection program. While we continue to closely monitor our loan portfolio's performance, we have confidence in our model and believe we have an opportunity to regrow our certified loans in the future. I want to personally thank our entire Open Lending team for their dedication to our company, our customers and our partners. We are all grateful for your diligent work and dedication to our mission. I would also like to thank Open Lending's customers, partners, investors and analysts for your business and support over the last five years. We will now take your questions.

The floor is now open for questions. Please follow the operator instructions. Today's first question is coming from Vincent Caintic of BTIG. Please go ahead.

Hi, good morning everyone. Thanks for taking my questions. Jessica, welcome. I look forward to working with you. Maybe focusing — just kind of your perspective, Jessica, with your long insurance company background. If you can give us an overview of what you think from the insurance perspective is going on essentially with Open Lending. Maybe a broad question: when we look at what's happened — the stock price is down and there are questions on what structurally needs to change, if anything, and what the economics are going to be. Maybe you can talk about your perspective of what happened and what needs to change in order to move the company going forward? And if there are any big structural changes needed economically? Thank you.

Yes, thanks, Vincent. I appreciate the question. Maybe just to start, let me talk a little bit about why I decided to make the change and come here and a little bit about my background. I've been on the Board of Directors for the last five years and have watched the company evolve over time. Through that process, what we've learned is half of our unit economics really come from our profit share, which is truly an insurance product. I spent my entire career in the insurance industry and really feel like an insurance-type approach to both pricing, claims and operations would be beneficial to the foundation the company has already built. The perspective I'd like to bring is to focus on profitable unit economics and to enhance predictability and reduce the volatility of our profit share component. The way we are going to do that is to build on the already good pricing work that's been done by the team, but to do it in a more sophisticated, segmented and real-time basis — bringing forward performance segmentation across our business and looking at how we can price on a real-time basis like an insurance company would price a true insurance product. We would do rate reviews quarterly and implement rate increases, but it also includes implementing rate decreases for better-performing loans. So we need to look at each individual loan, price it appropriately, bring in better risks, drive out poor-performing risk or get the right adequate rate. I believe we can use more feedback data — a better feedback loop to break down silos between what we call 606, which in essence represents our reserving perspective, and underwriting/pricing to understand what actually happened and what we could have done from an underwriting or pricing perspective to increase performance or reduce volatility of those individual loans, as we would in the insurance world. A good example looking backward is the 2021 and 2022 vintages coming off of COVID, when we had very high used car prices. Today, we would have a forward-looking perspective and likely need to raise rates because when people bought cars at the highest levels and the MUVVI moves down, the severity of those defaults is much larger than we would have priced for. Today, we are starting to think about those things forward-looking instead of just being reactive, and that is where I think we ran into some problems. Another issue was the super-thin files and tight underwriting guidelines. Again, reviewing on a real-time basis, bringing performance and delinquency data quicker into the system and adjusting is critical. We need predictive modeling to take that data and be better predictors of how ultimate loss costs will perform over time, measuring whether we are right, and then adjusting in real time — again, like a true insurance product. We will also look to decrease prices on better-performing loans to attract better business while increasing prices on poorer-performing segments. Ultimately, the goal is to drive more loan volume in the 20% to 60% loss ratio business and drive out the higher loss ratio business. That will be better for our credit unions and customers as well.

Okay. That's super helpful detail. I'm encouraged by that. Thank you, Jessica. Maybe just to give us some perspective: it sounds like there is perhaps a lot of infrastructure and things that need to be done. How difficult is this, how much work and how much investment needs to be put in to achieve these things? Just to give us some perspective. Thank you.

Yes. I would say that the infrastructure and the piping and the tools are built. The team has done a great job with the LP2.0 scorecard. Matt Roe has joined us as Chief Underwriting Officer — that was a big addition last year, bringing in the underwriting view. We now have actuaries on staff that are helping on the pricing side, and Josh has joined us on the product side. What we need to do is bring that all together. We will need to build more in-depth data ingestion and accelerate receiving performance and delinquency data into the system and adjusting. The biggest addition will be predictive modeling: how do we take that data, be better predictors of how ultimate loss costs will perform over time and then measure whether we are right, adjusting in real time like an insurance company. So it's less about large infrastructure changes and more about rethinking how we collect data, what data we retain, how we price and then how we measure performance relative to expectations. Building predictive models is an actuarial exercise rather than a pure infrastructure project. It will take time for that to earn through. We've already taken corrective actions, as Chuck mentioned, with underwriting changes on super-thin files, rate increases on poor-performing files and rate decreases where we've performed better. Those are good initial steps. We'll continue to get more granular in the approach. Everything earns out over multiple years, but we expect to see a meaningful lift from changes already made and continued improvement with less volatility over time.

Okay, thank you very much. Last one from me — a lot of investor questions are about this separate topic, but trying to understand the remaining exposure from the profit share and the make-whole agreements. It was helpful to get the data point that 40% of your active certified loans are from the 2021 and 2022 vintages. If I take that 40% times the 411,000 that's 165,000 certs. Can you help us understand what's the remaining principal balance and maybe insurance at risk? Just so I can understand how much make-whole can be clawed back and what other remaining exposure there might be? Thank you.

Yes, Vincent, this is Chuck. You're right on the 40% of the in-force loans and the amounts of loans still in the portfolio. The adjustments we've taken on the change in estimate in the fourth quarter and prior quarters have virtually taken the unit economics that we had previously booked on those vintages pretty much down — not necessarily to zero, but written down significantly. It's a vintage-by-vintage process. You're asking about principal balance — I don't have that exact number in front of me of what's left outstanding on that. But as you know, loans amortize more heavily to the front end, so balances are reduced over time. That would be something we'd have to get back to you on. The amount of the write-down for those vintages has been substantial. Prior adjustments over the past seven quarters and then, of course, this adjustment in the fourth quarter account for roughly 40% of the $80 million change we took in the quarter related to the 2021 and 2022 vintages specifically.

Okay, got it. I'll get back in the queue. Thank you, Jessica, thank you, Chuck.

Yeah, thanks Vincent.

The next question is coming from John Hecht of Jefferies. Please go ahead.

Good morning, guys. Thanks for taking my questions and congratulations, Jessica. I look forward to working together. The first question I have is on the credit builder tradelines and the modifications in dealing with that customer base. How much does this affect your addressable market? And where can you go to offset the loss of that type of customer?

John, I'll start and then Jessica can jump in. As we said in the prepared comments, this is new information we started seeing late in the third quarter and primarily in the fourth quarter as we did our analysis. It became a bigger piece of our book throughout 2024. Roughly 30% of our 2024 volume were these fewer positive tradelines, and then about 15% were thin files and then roughly 15% super-thin. The fewer positive tradelines are those with fewer than three positive tradelines. We've adjusted for that and took action in late third quarter, again in the fourth quarter and in Q1 to minimize those. When we put out an outlook for Q1 between 27,000 and 28,000 certified loans, that's actually up sequentially from Q4. So I don't see it as a huge impact on our go-forward volume.

Maybe to add, we are looking to scale the business across market cycles, but right now we are focused on quality over quantity. With segmented pricing, we can attract and replace super-thin loans with better-performing business from our base customers like credit unions. We'll be able to do that through pricing: super-thins will be priced out or filtered by underwriting rules, and we can write more better-quality business by providing appropriate rates, which could include rate decreases. We will optimize the portfolio with a targeted approach on the types of loans we want to write — more hunting and gathering of the right loans.

Okay. And then the second question: what do you think needs to happen in the market for the OEMs to have more flow coming through their channels?

Some of what we've seen in the OEMs is similar across the portfolio, John. The credit builder risks and the fewer positive tradelines affected some OEM flows and to a lesser extent some of our credit union customers. We took tightening actions in 2024 that affected those flows. We're very excited about signing OEM 3, which we announced a month or two ago. That relationship is in pilot and is growing across their dealerships. That should help grow the combined OEM business throughout 2025.

Great. Thanks very much.

Thanks John.

The next question is coming from Peter Heckmann of D.A. Davidson. Please go ahead.

Good morning. Thanks for taking the question. As regards your insurance carriers, correct me if I'm wrong, but I think you have three insurance carriers that are active currently. How does their capacity compare to maybe the 110,000 loans that you certified in 2024? Do they continue to have capacity well in excess of that?

Yes. The capacity from our three active carriers is plenty of capacity to continue growing the company into the future at much larger levels.

I'd add that we've been having ongoing conversations with the carriers. They are excited about the work we're doing and pleased with the overall long-term performance of the portfolio. We have no restrictive caps on capacity. They like doing business with us and would like to do more business with Open Lending. That part of the ecosystem is healthy for us.

Okay, great. How do you feel some of the credit unions that historically participated in direct mail for refinancing are positioning for 2025? Do you think rates need to come down another 50 basis points, or are they looking at other dynamics?

Refinance was a little less than 4% of our business in 2024. We were encouraged late last year thinking we'd have more rate reductions, but that has slowed and paused a bit. We don't necessarily need rates to come down; we needed them to stabilize, which we've seen. It's more about credit unions working through loan-to-share and capacity issues from 2023 and 2024. We're seeing loan-to-share improvements and deposit growth — deposit growth was about 4.6% across the credit union business, up from lows around 1% to 1.5%. That is encouraging because deposit growth supports lending in auto. Credit unions like short-term auto paper, and we should start seeing benefits across all channels, including refinance.

Okay. So no guarantees, but the setup appears that refinance could see some recovery in 2025?

Yes. Consumers who would benefit from affordability improvements could drive that, absolutely.

All right. Thank you.

Yeah, thanks Pete.

The next question is coming from John Davis of Raymond James. Please go ahead.

Hi, good morning guys. I'll add my congrats to Jessica — look forward to working with you. Just to touch on the insurance carriers from a different angle: how is their profitability? Are they still making money? Are they seeing losses? Is there any potential risk to the 72% that you guys get to keep? Could there be any downward pressure on that percentage to improve carrier profitability?

Long-term profitability for the insurance carriers has been very strong across market cycles. There will always be vintages or years where certain products don't perform as expected, and some vintages have been higher loss ratio than anticipated. But across the board, their performance and combined ratios have been stable. Remember the carriers get to keep 8% off the top, so their combined ratio leverage is stable relative to changes in loss ratios. There have been no discussions about changing the profit share participation percentage between the carriers and Open Lending, so we would expect that to continue as it always has.

Okay, that's helpful. If I look at the profit share per certified loan and the change in estimate, I think it was roughly $314 in the fourth quarter versus historically closer to $500. Were you over-earning at $500? Is $314 the right way to think about 2025? What do you need to do to get back closer to historical levels versus the fourth quarter?

The $314 per certified loan in the fourth quarter reflects a constrained profit share under ASC 606 guidance, which requires us to constrain profit recognition where it is probable there will be a reversal. Historically, the $500 figure was booked based on a projected 60% loss ratio. If you look at the CIE adjustments we've taken over the past quarters, those would have brought that $500 closer to the $300 range. We have taken corrective actions that we believe will, over time, restore unit economics closer to the historical levels tied to a 60% loss ratio target. However, we won't reflect that until we see the underwriting changes and pricing take effect and observe actual improvement in loan performance. The constrained booking is consistent with the guidance based on recent performance and back-book deterioration, and we will re-evaluate as we see better performance.

The constrained booking under ASC 606 is based on recent performance in the back book. The further deterioration we discussed and recent underperforming cohorts led to the constraint we recorded. We hope the changes will perform better over time and allow us to return to prior unit economics.

And on tariffs — tariffs would likely be positive for the back book as they increase collateral prices and therefore reduce severity on defaults. If tariffs persist, they could keep used vehicle prices higher, which would increase severity if we don't price appropriately. We don't want to end up in the same position as in 2021 and 2022 when used car prices were at an all-time high and we didn't price for the subsequent decline. If we believe tariffs will have a long-term impact on used car prices, we will adjust pricing to reflect that in our severity calculations. In the near term, tariffs are generally positive for the back book.

Ladies and gentlemen, as there are no further questions, I will now hand the conference over to Jessica for her closing comments.

Thank you. We appreciate your interest and support, and I'd like to again thank the Open Lending team members for your hard work and dedication to our company. Thank you everyone and have a great day.

Thank you.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines. We'll end the webcast at this time. Enjoy the rest of your day.