Porch Group, Inc. Q4 FY2023 Earnings Call

Good afternoon, everyone and thank you for participating in Porch Group’s Fourth Quarter 2023 Conference Call. Today, we issued our fourth 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’s CFO; Matthew Neagle, Porch Group’s COO; and Jim Weld, GM of Rynoh, Porch’s title software company. Before we go further, I would like to take a moment to review the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements. Today’s discussion, including responses to your questions, reflects management’s views as of today, March 7, 2024. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans including the application for the reciprocal exchange based on current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We encourage you to consider the risk factors and other risks and uncertainties described in our SEC filings, as well as the risk factor information in these slides for additional information, including factors that could cause our results to differ materially from current expectations. 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, which are available on our website. The financial information provided today is preliminary, unedited and subject to revision upon completion of the closing and audit processes. As a reminder, this webcast will be available for replay along with the presentation shortly after this call on the company’s website at ir.porchgroup.com. I will now turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Over to you, Matt.

Thanks, Lois. Good afternoon, everybody. Thanks very much for joining. I couldn’t be more proud of the achievements and execution of the Porch team over the last year. Despite a sharp increase in interest rates over the last couple of years, higher cost of reinsurance and claims, challenges in the real estate market, and historically difficult weather events, the team stuck together, stayed focused and performed. We implemented our insurance profitability actions, which you’ll hear throughout today’s presentation. This includes enhancing underwriting activities, increasing premium per policy and non-renewing higher risk policies. We launched Porch warranty and new products for our software customers, increasing pricing while maintaining our high customer retention. And we reduced costs across our business while continuing investment across key growth initiatives. As a result of the work we have done, our financial results were strong and exceeded expectations. Revenue in the fourth quarter grew 79% to $115 million, which is $15 million above our prior guidance. Revenue less cost of revenue grew 82% to $80 million, $20 million above guidance. Q4 adjusted EBITDA profit was $12 million, an increase of $25 million compared to the fourth quarter of 2022 and $8 million above guidance. In every measure here, it was a great quarter. A few other key updates for the fourth quarter before we dive into the presentation: First, we handily beat the second-half 2023 profitability target we set 2 years ago with second-half adjusted EBITDA of $21 million. Next, we had no material weaknesses, which is a huge thanks to Shawn and the team for their expertise and leadership. This was a top priority for us as we completed system implementations and improved our control environment—a truly great achievement and well done team. Our business continues to make meaningful progress across many areas. In Q4 alone, we launched a new Rynoh product for title companies. We landed a new utilities partnership, released a new HVAC micro-warranty, and introduced a CRM product for smaller inspectors. Our moving business is executing a local full-service offering, expanding on our leadership position and providing moving labor to consumers. This product increases the size of our market opportunity and provides a higher margin offering. We released our first ESG report, which is available on our IR website, and we look forward to sharing more on this in the future. Finally, we were admitted into Deloitte Technology’s Fast 500 for 2023. Now over to you, Shawn, for the financials.

Thanks, Matt, and good afternoon everyone. As Matt mentioned, we are extremely pleased to accomplish our second half 2023 adjusted EBITDA target, despite market headwinds. I wanted to thank our teams for their contribution and hard work to achieve this critical milestone. Moving to Slide 9 here to get into the financials, revenue was $114.6 million in the fourth quarter of 2023, which is a growth of 79% over the prior year, driven by our insurance segment, which grew 179%, partially offset by the Vertical Software segment. Revenue less cost of revenue was $79.9 million, resulting in a margin of 70% of revenue, which is a 120 basis point increase over the prior year, driven by the insurance profitability actions and software price increases. Adjusted EBITDA was $11.7 million, a 10% margin and a $25 million increase over the prior year, driven by the insurance segment and strong cost control. Gross written premium was $112 million, a decrease compared to the prior year as we focus on profitability and reducing risk through non-renewals and new business restrictions in higher risk ZIP codes, partially offset by an increase in premium per policy. The insurance segment was 76% of total revenue in the fourth quarter, an increase from 49% in the prior year. Revenue from our insurance segment was $86.9 million, a growth of 179% over the prior year, driven by a 34% increase in premium per policy and lower reinsurance seating. Approximately one-third of the growth was from increases in premium per policy and two-thirds from the lower seating, partially offset by attrition with the non-renewals. Vertical Software revenue was $27.7 million, a decline compared to the prior year, driven by the housing market headwinds, which particularly impacted moving services, along with lower demand in corporate relocations. SaaS revenue remained resilient. Moving to adjusted EBITDA by segment, insurance segment adjusted EBITDA was $31.6 million in the fourth quarter of 2023, a 36% margin driven by insurance profitability actions, which resulted in a lower gross loss ratio compared to the prior year. Vertical Software adjusted EBITDA loss was $300,000 with continued market pressure in moving services. Corporate expenses were $19.7 million or 17% of total revenue, a 600 basis point improvement compared to the prior year. Moving now to the balance sheet, we are proud to have generated $34 million of operating cash flow in fiscal year 2023. We generated $43 million of operating cash flow in the second half of the year. We ended the year with $398 million of cash, cash equivalents, and investments. Excluding the $310 million at HOA, Porch held $87 million. Additionally, Porch Group held $39 million of restricted cash primarily for our captive and warranty businesses, as well as a $49 million surplus note from HOA. HOA surplus at December 31 was a healthy $52 million. In the first quarter of 2024, there have been four items that I would like to bring to your attention. First, we signed a strategic business agreement with Aon, who will support us in securing reinsurance and other services in 2024 and in the next several years. We released them from any Vesttoo-related claims; however, we will continue to pursue other non-Aon parties. We received approximately $25 million upfront cash in January 2024 and expect to receive approximately $5 million over the next 4 years. Second, as previously discussed, we tested connecting homebuyers with third-party insurance agencies to compare conversion and profitability versus EIG, our in-house agency. Our unit economics and profitability improved substantially in these tests given the cost associated with running the agency. Therefore, we sold EIG for $12 million cash in January of this year. EIG was a small business for us with annual commissions from third-party carriers of approximately $5 million and an adjusted EBITDA loss of around $3 million in 2023. While we will continue to prioritize selling our own insurance products like HOA and eventually Porch insurance to relevant homebuyers, when we connect consumers to agency partners and they sell third-party carrier products, we will receive high-margin revenue. Overall, this divestiture increases profitability in 2024 and ongoing and improves our balance sheet. Importantly, as part of the strategy around forming a reciprocal exchange, we want as many premiums as possible sold into our own insurance products and for Porch Group to be the operator of the reciprocal exchange with lower volatility and higher margins. Tighter alignment with third-party agencies can incent them to drive more of their customers to our carrier. Third, in February, we repurchased $8 million par value of our unsecured notes for $3 million cash at 37.5% of par, reducing our 2026 debt maturity to $217 million. Finally, we expect to file a Form S-3 shelf registration statement with the SEC soon around the timing of our 10-K, which will give us the flexibility to raise various forms of capital over the next 3 years. We do not currently have any imminent plans to raise capital; however, this is a good corporate practice and provides several options to reduce our 2026 notes over the next 2 years. Shifting now to our full-year 2023, revenue was $430 million, a 56% growth over the prior year, driven by 152% growth in our insurance segment. Revenue less cost of revenue was $210 million, a 25% increase over the prior year. There was a change to margins year-over-year due to mix shifts between insurance and vertical software segments, and a change in our reinsurance programs within insurance. The adjusted EBITDA loss was $44.5 million, a $5 million improvement over the prior year, driven by improvements in insurance profitability actions, while being offset by higher reinsurance costs in 2023 and historically challenging hail events in Texas in the second quarter. Gross written premiums were $525 million, relatively flat compared to the prior year, with the non-renewal of higher-risk policies offset by increases in premiums per policy. These changes drove notable improvement in profitability, building momentum in the second half of the year. With that backdrop, now let’s take a look at our 2024 guidance. Today, we are providing our full year 2024 guidance. For 2024, we expect revenue of $450 million to $490 million, growth of 5% to 14% driven by the insurance segment with relatively flat revenue in the software sector. We expect revenue, less cost of revenue, of $225 million to $240 million. We expect overall margins to be relatively flat compared to 2023 as increases in vertical software margins are offset by a mix shift toward higher growth but lower margin insurance segments. We have assumed a 63% gross loss ratio for the full year, in line with our 5-year weighted average. Overall, we expect adjusted EBITDA profit of $1 million to $10 million. The year-on-year improvement is predominantly driven by continued execution against our insurance profitability actions, the price increase in our SaaS businesses, and ongoing cost management efforts. We expect operating expenses to decrease by more than 10% compared to 2023. We anticipate gross written premiums of $460 million to $480 million. For reference, EIG’s written premium from third-party carriers was approximately $45 million in 2023. Our guidance implies managing to roughly flat on an apples-to-apples basis as third-party carrier written premium will be excluded under the new agency model. This includes executing further non-renewals and higher risk policies exiting the state of Georgia where we are unable to achieve the rates needed to reach our profit targets and being selective around bringing in attractive new business. Overall, at approximately flat premium, we are reducing our projected risk exposure by about 22% in 2024, which follows an approximately 26% reduction between 2022 and 2023. This drives lower expected reinsurance and loss costs. We believe our insurance profitability actions in 2022, 2023, and 2024 set us up well for sustainable, profitable growth in 2025 and beyond. It’s going to be an exciting time for the company. Now regarding adjusted EBITDA seasonality, we have historically experienced higher insurance claims in the first and second quarters. Therefore, as this illustrative chart shows, in 2024, we expect adjusted EBITDA to be negative in Q1, more negative in Q2, followed by profitability in Q3 and Q4. Overall, the midpoint of our 2024 adjusted EBITDA guidance is a $50 million increase compared to 2023. In 2024, we expect adjusted EBITDA to improve by approximately $10 million to $15 million in each quarter compared to the same quarters in the previous year. We are continuing to roll out additional price and deductible increases over the first half of 2024, which benefits the second half. Finally, given our progress and strong results, we secured an additional reinsurance product to protect the balance sheet and reduce our exposure to weather-related events. Earlier in 2024, we purchased $30 million of aggregate severe convective storm coverage, which includes hail protection. This means if we see a series of smaller storm or hail-related losses similar to what we encountered in Q1 and Q2 of 2023, we would have coverage adding to what we already have for larger events. Generally, if hail events were to drive worse than expected claims volumes in 2024, we are now much better protected, increasing our confidence in the upcoming year, and our typical reinsurance renewals will occur on April 1. Thank you all for your time today, and I’ll now hand over to Matthew to cover our KPIs and other business updates.

Thank you, Shawn. Hello, everyone. I will start with our KPIs. The average number of companies was 30,000 in the fourth quarter, broadly similar to last quarter and prior year with continued housing market headwinds. Average revenue per company per month increased 84% to $1,277 versus $693 in Q4 2022 as we continue to monetize the insurance opportunity more effectively. We had 220,000 monetized services in the quarter, an increase of 3% despite the headwinds in the housing market and decline in corporate relocations. Finally, average revenue per monetized service was $448, up 105% versus the prior year due to the growth in our higher value services such as insurance and warranty. I want to take a moment to highlight our SaaS revenue within the vertical software segment. Industry home sales declined 18% in 2022, and an additional 19% in 2023. Despite this, our software and subscription revenue have remained broadly consistent over that period. While we do not anticipate any improvement in the housing market in 2024, when the housing market recovers, it will serve as a tailwind for our businesses. Looking now at the Insurance segment, KPIs, which includes HOA, our insurance carrier, our warranty business, and as of December 31, it also included EIG. Gross written premium was $112 million from 310,000 policies in force in the fourth quarter. Policies in force declined 20% compared to the prior year, while GWP decreased 14%. This is due to non-renewals of higher-risk policies being partially offset by increased premium per policy. Annualized revenue per policy increased to $1,120, driven by premium per policy increases and lower seating. Posting now on HOA, our insurance carrier, annualized premium per policy increased 34% to $1,861. Premium retention was 96%, approximately 10 percentage points lower than the prior year, driven by the non-renewals we discussed. Our gross loss ratio was 36% in the fourth quarter, and I’ll provide more insight on that on the next slide. We welcome comparisons of our gross loss and combined ratios to all other property-centric carriers. As I said, the gross loss ratio for Q4 was 36%, and for the full year 2023, it was 69%. That’s even with a tough weather environment. Our combined ratio in the fourth quarter was 49%, and for the full year 2023, it was 88%. Here on Slide 21, you can see the detail from the last two years, including the split between catastrophic weather and non-cat payrolls. You can see the seasonality in the cat gross loss ratio with the first and second quarters being the worst weather quarters, as well as a non-cat gross loss ratio improving throughout the 2023 year to 30% in the fourth quarter. This clearly demonstrates our ability to identify and price risk. You can see the year-over-year improvement of our gross combined ratio from 77% in Q4 2022 to 49% in Q4 2023. The point to highlight here is our unique data improves our ability to underwrite policies effectively as we focus on profit. We provide discounts to lower-risk policies and surcharges to higher-risk ones. Over time, the mix shift of our book will lean towards lower-risk customers as we incentivize those customers to come to us and as we avoid loss-making customers. We continue to make great progress in leveraging this competitive advantage across the 22 states we write in and across different factors in payroll. We are not done yet with key underwriting changes. In 2024, we have already filed an 18% increase in Texas. We will implement additional increases in states where appropriate and are further increasing our deductibles. Overall, the rate changes we have made that you can see on the left-hand side of this slide have delivered a 30% CAGR in premium per policy between 2021 and 2023. Given the 2024 rate increases, we expect premium per policy to continue to grow. As we have said before, we believe the homeowners insurance base is highly attractive, given how significantly we expect the TAM to grow for many years ahead. Now, on to Deep Dives, Malcolm Conner, our Warranty business GM, shared insights into how we are well positioned to become a leader at our last earnings in Q2. We entered into the warranty space with the acquisition of American Home Protect in 2021 when it had $12 million of revenue. We achieved our 2023 revenue target, delivering $37 million in revenue and $7 million adjusted EBITDA. Noting 2023 adjusted EBITDA would have been even better, but included certain remaining acquisition costs. We expect warranty revenues to continue to grow as we expand distribution, with a 2024 revenue target of approximately $46 million. The business improved its profitability substantially and anticipates approximately $16 million in adjusted EBITDA at a 35% adjusted EBITDA margin. Looking ahead, we target 2028 revenue of approximately $100 million, which equates to a 22% CAGR with a 40% adjusted EBITDA margin as we invest in growth with attractive unit economics. Thank you, everyone. I’ll now hand over to Jim.

Thanks, Matthew, and hello, everyone. I’m Jim Weld, General Manager of Rynoh, and I have 15 years of title industry experience. Prior to leading Rynoh, I spent more than 3 years as President of Zillow’s title and escrow business. I’ve been a client of Rynoh and experienced firsthand how important and impactful this software is. Rynoh was built over many years around a single product called RynohLive that is very popular in the title industry. After the 2021 acquisition by Porch, Rynoh successfully transitioned from a one-hit wonder to a platform. Rynoh is a leading provider of SaaS solutions for our clients who are title and escrow agents who collect and disperse funds during a real estate closing. Rynoh’s clients operate in a highly complex and regulated environment. Therefore, Rynoh is critical to their control environment. Since inception, Rynoh has projected 24 million closings with disbursements of about $8 trillion. Back in 2021, more than 30% of all U.S. residential purchases and home refinances were protected by Rynoh software. Today, that number is approaching 40%. Our priorities are to build products that add value, save time, drive cost savings and efficiencies, and reduce the potential for errors. Our four core modules on this one platform support this streamlined workflow and are outlined here on slide 27. RynohLive is a module that automates bank transactions daily and alerts if payments fail to clear or do not reconcile with the accounting system. RynohEscheat was launched last year, which identifies funds that remain in escrow after closing and streamlines processes to either return or escheat funds to maintain regulatory compliance. RynohOpX integrates with many accounting systems and platforms and performs daily account reconciliation and alerts for a more expansive group of clients. We recently released a major new product called RynohVerifi, which helps protect clients from fraudulent payment schemes. The real estate industry experienced almost $400 million in losses from various forms of fraud in 2022, and we can help reduce this risk. In 2023, our client retention was 93% with a Net Promoter Score of 85, and an LTV to CAC of 10.6x—metrics we are very proud of and that highlight our opportunity ahead. Rynoh charges a transaction fee for every home and refinance closing that our clients perform. Overall industry transaction volumes declined 62% since 2021, with refinance volumes reducing more than 85% and home purchase volumes declining around 30%. Being primarily transaction-driven, you might think Rynoh’s revenues would have similarly decreased by 62%. However, during these last 2.5 years, we have grown revenue and profits with a very bright future. You can see the overall declines in transaction volume through the Rynoh platform over the last few years, from 4.3 million transactions in 2021 to 2.2 million transactions in 2023, a decline of 50%, even as our percentage of industry volumes has improved. As we roll out new products, we increased prices commensurate with the improved value we are providing. For example, the 2024 price increase of almost 30% was implemented with the launch of RynohVerifi in January of this year. As you can see on the graph, as we delivered more value, prices have increased by 97% between 2021 and 2023, more than offsetting transaction volume declines. Back in 2021, Rynoh was acquired for $36 million, and we had announced an expectation of it being a breakeven business after investments in product and marketing. We were able to greatly exceed that expectation even as the market transactions were cut in half. In 2023, we delivered $11 million in revenue and almost $6 million of adjusted EBITDA, a 52% adjusted EBITDA margin. Given the new product launch and impact on pricing, we expect Rynoh to deliver $14 million in revenue and a 60% adjusted EBITDA margin or $8 million in 2024. This assumes 2024 has flat home sales and refinance volumes compared to 2023. We target medium-term revenue of approximately $60 million and approximately $35 million in adjusted EBITDA, which assumes industry transactions should broadly double while we double pricing through our continued execution against our product roadmap. So thanks, everyone. I’ll hand it back over to Matt to wrap up.

Thanks, Jim. I appreciate it. We hope that today’s disclosures regarding our Rynoh and warranty business units are helpful. I note that these are just two of our many successful businesses at Porch that leverage our platform to differentiate and grow and then contribute back to expanding Porch Group’s advantages. Before wrapping, I want to take a step back and share our financial progress since we became a public company in December of 2020. Our business has grown more than 6x over the last 4 years. We’ve increased revenue at a 60% CAGR, and guidance is approaching $500 million in revenue in 2024. This is driven by our Insurance segment, which has grown from virtually nothing to over $300 million of revenue in 2023 and what was then a central part of our vision has certainly become a reality. Similarly, revenue less cost of revenue is expected to grow to $233 million in 2024, a 44% year-over-year CAGR. Our adjusted EBITDA guidance for the full year is $6 million at the midpoint, a key milestone for the company to be profitable on a full-year basis. The $21 million in second-half 2023 adjusted EBITDA, which was a $45 million improvement from the same 6 months in the prior year, shows that we are well positioned for significant profit growth potential ahead. I’ll remind you that this amount of progress has been made during a time when the housing market contracted significantly. I want to sincerely thank the team for their efforts and the significant progress that’s been delivered, as well as our long-term investors who see the vision and where we are heading. We look forward to speaking with you all during our Q1 earnings call in May, until then.

Your first question comes from Daniel Kurnos from Benchmark Company. Your line is open.

Great, thanks. Obviously, really strong end to the year. So congrats on the quarter, guys. Matt, I know you’re not going to talk about the reciprocal or update us later, but can you at least just give us a sense on if you’ve gotten the filings done or the audit completed on that front?

Shawn, you can update on some of the filings, but just let me quickly touch on the reciprocal. I’m happy to talk about it, actually, Dan. We don’t yet have timing. As we talked about previously, we will update here as we progress through the year. We continue to have a close working relationship with our friends at the TDI, who continue to do a nice job, and we’re excited about it. We remain confident that this is the right structure for the business and that it will happen in due course.

Yes. With respect to Dan, I think your question pertains to the financials for the insurance entity, which is part of that. That’s on track. We’re on top of it, and we’ll handle that in due course here in the month of March, which is when we typically do it.

Got it. Thanks. So Matt, just curious about the really good numbers regarding risk reduction. Now that you’ve got the additional convective storm coverage and incremental data expansion, I know you’ve guided to flat X CIG Gross written premium this year, but what’s your thought process now that you’ve derisked the model so much? I understand you’re waiting for the reciprocal, but are you considering getting more aggressive in adding policies, especially with the rates you’re currently getting?

Yes. I mean, it’s an exciting time, as you know, for those who have followed us and our long-term investors. The focus for the second half of last year, as well as 2024, is profitability. We wanted to ensure that we’ve demonstrated profits. For 2024, we clearly want to make it evident that we are profitable as a company on a full-year basis. We’ve made the moves needed to achieve this. Our insurance underwriting results show that we are positioned to grow with strong ongoing profitability. We believe we have made the necessary adjustments. While we’ve focused on restricting growth in certain geographies, we do expect to begin unlocking some of those restrictions over the course of 2024, setting up for nice growth in 2025. Our risk reduction efforts have allowed us to maintain a relatively flat premium year-over-year, which is a target we have focused on. We’ve significantly reduced the pool of risks and the total amount of risk. We’ve reduced risk by about 23% for 2024, compared to ’23 and 27% overall.

Got it. Shawn, just maybe one quick one for you—2023 was a bit noisy from an event standpoint. I’m trying to get a handle on how we should think about operating or free cash in 2024?

Yes. We were pleased to deliver $34 million of operating cash flow for the full year 2023, and we ended the year with around $400 million of cash, cash equivalents, and investments, which presents a very strong position. HOA, our carrier, had $52 million of surplus; the math points out that’s a great basis for that business to be at, with future profitability and the strong momentum we mentioned in the second half of the year. For cash flow in 2024, the way to think about it is first and foremost that we are guiding to positive adjusted EBITDA for the full year of around $6 million at the midpoint. Additionally, we have very little capex—historically, it’s been less than $10 million—and taxes are minimal for us. We do have just over $20 million of interest expense on coupon. We’ve seen a big driver of cash flow in 2023, as we’ve seen less, leading to better working capital. Therefore, we are starting 2024 in a strong position.

Got it. Here we see the springboard, I guess is what I am getting at here. Thanks, guys. I appreciate it. I will step off.

Thank you, Dan. Appreciate it.

Hi guys. Good afternoon. Congrats on a great quarter.

Thanks, John.

So, on the extra disclosures around warranty and Rynoh, that was great. Those are solid businesses. If you guys hit the 2024 targets for warranty and Rynoh and just sold EIG, that’s going to add back another $3 million of losses, which puts you at $27 million in EBITDA. Obviously, you’ve got the corporate segment; if you take that out, I mean you’re basically going to need about $40 million outside of warranty and Rynoh. So, a few questions here: First on just bigger picture—are you largely done with the cost actions within corporate as we think about this year? Then secondly, if you can help us unpack that remaining $40 million, is that mostly just HOA and improved gross loss ratio versus last year?

Yes, I can take that one. Those are good questions. First, I will say on the corporate cost actions, those are done. The benefits of the P&L will show in 2024, as they will be more visible compared to 2023, which was a partial year. The actions themselves are completed. Regarding insurance profitability, one of the things we mentioned in our prepared remarks is that we are $45 million better in adjusted EBITDA in the second half of the year than we were in the second half of 2022. More of that will come into 2024 as well. Additionally, we have some other drivers of profitability in our software businesses, where we are continuing to roll out products and increase prices as we create more value for our customers.

Okay. That’s very helpful. And kind of staying on that line of questioning, you mentioned the 63% gross loss ratio for this year that will be based on the past 5 years, which I believe you said was lower than normal. The last two years have been quite tough. How does that 63% gross loss ratio compare to your historical average beyond that 5-year look?

So, on the gross loss ratio: We believe we are quite well set up given what we’ve done with reinsurance. Last year, for example, was a tough weather year, particularly due to some hail incidents in Q1, which we were protected against. We would have received the $30 million backup of additional cover had last year happened again. As we look further back, the gross loss ratio has been around this level across time. However, things have changed significantly. When we put in place higher deductibles, we had a 2% wind and hail deductible that’s being raised to a 3%. That impacts the gross loss ratio significantly. This is an underappreciated factor.

Yes, and I think the other thing we are seeing in the book is improvements in underwriting and risk selection. Five years ago, HOA wasn’t utilizing Porch data, which is quite different now.

Okay. That’s very helpful.

Thanks, John.

Yes. Hi guys. Good afternoon. Thanks for taking my question. Congrats on the really strong quarter here. First, I just wanted to dive into the near-term profitability on the horizon: how are you thinking about future capital allocation? Could M&A potentially be on the table as we progress through ‘24 and ‘25?

I’ll take M&A first. I would not expect any significant M&A in 2024 as we need to focus solely on executing flawlessly and producing a solid, clean year. This is where we stand now. If M&A opens up again, we believe we have the capacity as a company. We look forward to the right timing to turn that engine back on.

Regarding capital allocation, we have many great opportunities to deploy capital and earn attractive risk-adjusted returns. The growth of the business itself is driving strong returns. We also have unsecured debt due in a couple of years, for which we have several options. While I won’t delve further into specifics today, we do have many attractive investments we are considering.

Got it. I appreciate the color there. I also wanted to discuss the cross-sell opportunity between the software side and the insurance side, particularly how you see that evolving, especially if the macro starts to ease a bit.

We are excited about the access that our software businesses give us to help home buyers, as well as the focus of our insurance strategy around helping home buyers. Our app brings together an excellent experience, and that’s core to what we are doing. We are seeing year-over-year improvements in the metrics surrounding this strategy. While the market has declined and limited our ability to cross-sell because fewer people are buying homes, we do anticipate growth in the coming year, which will positively affect our business.

Our next question comes from the line of Jason Helfstein from Oppenheimer. Your line is open.

Hey, this is Steve on for Jason. We have two questions. One, can you give us insights on January in terms of improving housing trends and how much that would help the software business? Also, can you provide any data point? On rate increases, are there any metrics regarding how many users for written premium or geographies have seen price increases this year or thus far? Thank you.

Sure. To repeat the first question—

I got it. It’s good. Regarding January specifically, obviously, if housing sales increase, that benefits our business. Just to reiterate, our guidance anticipates flat year-over-year results. We expect some fluctuation from month-to-month as the market continues to stabilize. There’s currently no notable deterioration at a market level year-over-year. Increased home sales will certainly help. I also want to acknowledge the recent wildfires in Texas, and we send our condolences to those affected. We genuinely have not seen any claims to date, and we do not anticipate that this will be a meaningful event for us—all of which demonstrates our risk selection ability. As Texas is our largest state, an 18% rate increase there will impact our overall results.

Your next question comes from the line of Danny Pfeiffer from JPMorgan. Your line is open.

Hi guys. Thanks for the questions. For the first, the sale of EIG—do you foresee any further opportunity to prune other non-core assets within the Porch portfolio? Was this more of a one-off transaction, or should we expect to see more?

We view EIG as a unique transaction for several reasons that aligned with our strategy. There are no anticipated divestitures on the immediate horizon as we are excited about our businesses and where they stand. EIG was an unique case wherein we could step away from a product while maintaining our strategic goals.

And for the second question, can you unpack the seasonal first half 2024 adjusted EBITDA loss guidance? How much is this impacted by the Aon reinsurance agreement and the severe storm coverage you purchased?

Yes. In the presentation today, I provided a slide that shows our adjusted EBITDA’s typical seasonal nature, which is driven by historically higher claims in the second quarter. We discussed strategies to protect against the kind of claims we saw last year with our reinsurance cover focused on hail storms. I’ve also mentioned we anticipate improvements of $10 million to $15 million year-over-year between Q1 and the same quarter last year. Most of this is driven by the insurance profitability actions leading to strong run rate profitability. This includes the $45 million year-over-year adjusted EBITDA improvement we witnessed in the second half of 2023, alongside ongoing price increases and cost management efforts in 2024.

Got it. Thanks.

Thank you.

Hi, everyone. Thanks for taking the questions. On capital structure, Shawn, could you discuss the path towards efficiently addressing the 2026 convertible maturity? You bought back a bit here at a discount. Will you continue to chip away at that? Also, regarding the corporate structure, will you have access to the sizable chunk of liquidity at HOA to assist with those maturities, depending on how the reciprocal evolves? Please help clarify the moving pieces.

Yes. To start, we ended the year in a strong position with about $400 million of cash, cash equivalents, and investments. Included in that is approximately $50 million surplus note between HOA and Porch Group to provide profitability for that business. January brought in another $35 million in cash from Aon and EIG, which will be reflected in our Q1 2024 balance sheet. HOA maintains a healthy position with $52 million of surplus at the end of 2023. We discussed generating adjusted EBITDA and profitability actions in 2024 to drive further improvement. Regarding the debt, I won’t dive into specifics, but we have several options to address it, and over two years to execute those options.

Okay, great, thanks for that color. Regarding the ‘24 guide and the noise from the past year—amid Vesttoo, lower seating on revenue in the back half, and the sale of the insurance agency—how do you foresee the level of organic revenue growth for 2024?

It’s all organic. We aim to manage the insurance book while reducing quota share—part of our reinsurance that we’ve reduced. We can do this because we enhanced the profitability of the book significantly. We have substantially improved our risk selection and profitability actions, yielding expectations that premiums per policy will grow further.

Got it. Thanks for taking the questions.

Thank you.

Great. Thank you, guys. I just wanted to ask about property data. I know you have been using that for the past two years. Can you give an overview of where you’ve seen that data provide a pricing edge or how frequently it’s being used in quoting? Any guidance on future utilization would also be greatly appreciated.

Certainly. We are excited about the advantages of data and the measurable results we see in underwriting. It provides us a significant edge and will remain a key opportunity moving forward. We can use property data in various ways, performing state filings informed by factors like the age and condition of roofs, plumbing types, and water heater locations. We believe we’re still at the early stages of leveraging this data. We expect continued exploration of more interior data moving forward.

And we have run out of time for our question-and-answer period. I will now pass the call over to Matt for closing remarks.

Thank you, everyone, for your questions and your time. I want to thank the Porch team for their efforts and the significant progress delivered. Also to our long-term investors who recognize the vision and future ahead for us. We look forward to speaking again during our Q1 earnings in May. Until then.