Porch Group, Inc. Q2 FY2024 Earnings Call

Good afternoon, everyone, and thank you for participating in Porch Group's Second Quarter 2024 Conference Call. Today, we issued our earnings release and filed our related Form 8-K with 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 and Chairman and Founder; Shawn Tabak, Porch Group's CFO; Matthew Neagle, Porch Group's COO; and Michelle Taves, GM Porch Group Media, Data and Marketing. Before we go further, I'd 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, August 6, 2024. 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 application and formation for the reciprocal exchange based on its current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We disclaim any obligation to update publicly any forward-looking statements whether in response to new information, future events or otherwise, except as required by applicable law. We encourage you to consider the risk factors and other risks and uncertainties described in our SEC filings as well as a 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, unaudited and subject to revision upon completion of the closing and audit processes. As a reminder, this webcast will be available for replay, along with the presentation shortly after this call on the company's website at ir.porchgroup.com. I'll 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 for joining us today. We have some great progress that I'm excited to share. First, our insurance profitability actions, including utilizing our unique data, continue to result in attritional losses being significantly better than planned, and substantial year-over-year improvements in our insurance gross combined ratio. Second, we have refiled the reciprocal exchange application. This gets us a step closer to what we believe is the optimal structure for scaling with reduced exposure to unusual weather events. And as we'll share more today, we are excited to announce that we've launched our home factors data products to help third parties improve the risk assessment and marketing. We have home factors for virtually every home in the U.S. to identify important information about the property, all uniquely known by Porch. Our results in the second quarter were solid despite continued macro headwinds while we budget and plan for catastrophic weather based on our historical experiences, trends, and buffer for volatility. In the past three months, there have been two uncommon weather events, both so rare that they are classified as more than one in 10-year occurrences. In May, Houston experienced a hurricane-like event with 100-mile-an-hour sustained winds, which impacted our second quarter by $23 million net of reinsurance. More recently in July, Hurricane Beryl was a Category 1 hurricane as it progressed through Houston and is expected to impact our third quarter by $30 million net of reinsurance. We want to highlight these rare events as our execution related to what we control was very strong. Overall, in the second quarter, revenue grew 12% to $111 million. Revenue, less cost of revenue, grew 10% to $19 million. Adjusted EBITDA loss was $35 million, an $8 million improvement over the prior year and right about on track with our plan. Again, the May Houston cat event lowered revenue less cost of revenue and adjusted EBITDA by $23 million. We saw continued strong underwriting execution in our insurance business leading to lower claims versus our expectations, price increases leading to higher profitability in our software businesses, and overall strong cost control. Shawn will take you through those details shortly. Unexpected weather will happen periodically in the homeowners insurance industry. And while disruptive for policyholders and near-term results for the impacted period, it creates long-term opportunity for the industry at large. It means we and the industry will continue to raise prices and will fuel significant expansion in the size of the homeowners insurance market. Operating as a reciprocal exchange can help mitigate weather and claims volatility while still being able to participate in the growth of this industry. This, in our mind, is a very exciting place to play. And as I mentioned, we're very pleased today to announce the key milestone of filing our new and updated application to create the Porch Insurance Reciprocal Exchange with the Texas Department of Insurance, and we are working closely with the TDI targeting approval later this year. As a reminder, as proposed, at launch, the HOA carrier will be sold to the reciprocal for a surplus note back to Porch Group, with all parties, with all policies, premium, losses, and certain costs such as reinsurance, will move into the reciprocal entity, which will be owned by its policyholders similar to a mutual company. The reciprocal will pay claims directly from its balance sheet. We at Porch Group will handle the day-to-day operations, receiving fees as a percentage of gross written premium. Importantly, our expenses will be less volatile than they are today and will include mostly fixed costs such as employee salaries. We're excited about what this will mean for our customers and our future, transition to a more predictable, higher margin and lower volatility at Porch. Along with the reciprocal application, we also announced today that Porch Group has contributed 18.3 million Porch shares to HOA to support this critical planned transition. This contribution helps to bolster HOA's balance sheet strength and rating after Q2 weather impacted surplus. And in addition, the contribution strengthens HOA's long-term surplus position, which better positions HOA for any future third-party surplus note capital raising efforts and importantly, is expected to support premium growth in 2025 and beyond. HOA will hold the shares on its balance sheet, and we currently do not expect the shares to be sold. The value is then included in HOA's surplus, which had a healthy buffer as compared to regulatory requirements at the end of Q2. To the extent that Porch stock increases then, this would grow HOA surplus. If and as we execute and increase the value of Porch Group, this can create an important and long-term opportunity in a flywheel. Additional surplus translates into supporting more premium for HOA and the reciprocal. We believe more premium would drive more fee-based income and profit for Porch Group post reciprocal. We would expect more profit at Porch Group to increase our valuation over time, in turn, increasing surplus reciprocal and HOA. We believe we're set up for a very exciting future ahead. A last few quick notes before I turn the call over to Shawn. Our software businesses remain resilient and delivered growth despite a sluggish housing market, which declined 3% year-over-year in Q2. Our warranty business launched a new product called Surge Protection. And although early days, we are seeing strong conversion through our moving concierge channel. Michelle Taves, who joins us today and leads our data division for Porch, is going to share more about the progress with Home Factors, including new clients and case studies. We see a great deal of promise here given both the uniqueness and demonstrated value of our data. We mentioned previously that we are vigorously pursuing parties concerning the Vesttoo fraud, which was discovered in 2023. In Q2 of this year, our legal firm hired on a contingent fee basis filed suit against two parties. These things take time, so we'll look to update you as this progresses. Lastly, we've been recertified as a great place to work again this year with year-over-year improvements in key metrics that we track. My goal from the outset of founding Porch was to build a truly great and enduring company, and ensuring we're a great place to work with a set of values that are real is critical and core to making this happen. Now, Shawn, over to you.

Thanks, Matt. Good afternoon, everyone. Before we get into the detail, I'll provide some high-level thoughts on our financial performance in the second quarter. Overall, we're pleased with the second quarter being broadly in line with our expectations. Attritional claims outperformed our expectations, and the related loss ratio improved over the prior year. This is a testament to the insurance profitability actions we discussed previously around the three Ps: product, price, and portfolio. As Matt noted, these are the things we can control, and the team executed well against these. This was offset by the May Houston cat event which drove volatility in the quarter. I'll give more details on that shortly. In our software business, we saw improvements in our profitability driven by price increases as we execute our strategy to roll out new functionality for our customers while increasing the price. Importantly, we remain diligent with strong cost control. Now let's take a closer look. Revenue was $110.8 million in the second quarter of 2024, a 12% increase over the prior year, driven by our Insurance segment, which grew 22%. Revenue, less cost of revenue, was $19.2 million with a margin of 17% of revenue, consistent with the prior year. Overall, the vertical software revenue less cost of revenue margin increased approximately 800 basis points to 83%, offsetting growth in the lower-margin insurance segment. Adjusted EBITDA loss was $34.8 million, an $8.4 million improvement over the prior year, with all segments contributing to the improvement. As a reminder, the seasonality of our business, Q2 is typically when we see the lowest adjusted EBITDA for the year given weather-related insurance claims. We continue to focus on controlling and reducing operating expenses such as audit fees and contractor costs. In the second quarter, sales and marketing expenses, as a percent of revenue, decreased by 400 basis points over the prior year. Similarly, product and technology and G&A also decreased as a percent of revenue. Gross written premium was $117 million, a decrease from the prior year as we focus on profitability and nonrenewal of higher-risk policies. The nonrenewals were completed this quarter, impacting our insurance KPIs, which Matthew will discuss shortly. The insurance segment was 71% of total revenue in the second quarter, an increase from 65% in the second quarter of 2023. Revenue from our Insurance segment was $78.3 million, a 22% increase over the prior year. This was driven by a 28% increase in premium per policy and lower reinsurance seating, which more than offset the decrease in policies in force due to the nonrenewals and the Q1 sale of our legacy in-house insurance agency, EIG. Vertical Software segment revenue was $32.6 million, a decrease of 5% over the prior year. Within that, the software and services subscription businesses increased 4% over the prior year, driven by price increases in Rynoh and inspection which overall was offset by the moving business. Shifting to claims costs in our insurance segment. Here, we break down the cost of revenue between attritional and other costs and catastrophic weather claims. In the second quarter, attritional claims performed $17 million better than anticipated. Additionally, our typical seasonal catastrophic weather claims also performed better than we anticipated. In the second quarter, the May Houston cat event drove approximately $23 million in cost of revenue, net of reinsurance to the point of being categorized as a one-in-10-year event. In HOA's 15-year history, it had never experienced something like this. So while this was unfortunately one of the years where this wind event occurred, this was largely offset with strong execution against the areas within our control. Moving to adjusted EBITDA by segment. Overall adjusted EBITDA loss was $34.8 million in the second quarter of 2024. The insurance segment adjusted EBITDA loss was $27.3 million, an improvement of $3.9 million over the prior year. The vertical software adjusted EBITDA was $4.8 million, a $3 million improvement over the prior year, driven by price increases in our software and services subscription businesses and cost control. The vertical software adjusted EBITDA margin increased to 15% in the quarter. Client retention remained strong at 98% in Rynoh in the second quarter. Corporate expenses were $12.2 million or 11% of total revenue, a 300 basis point improvement over the prior year with strong cost control. Stepping back from the quarter, let's take a look at our performance in the first half of 2024. Year-to-date, we've delivered revenue of $226 million, a 22% increase over the prior year, driven by the insurance segment. Adjusted EBITDA loss in the first half of 2024 was $52 million, a $13 million improvement over the prior year. Our Insurance segment adjusted EBITDA loss was $30 million, an $8 million improvement over the prior year. Our Vertical Software segment adjusted EBITDA was $6 million, a $4 million improvement over the prior year driven by price increases and cost control. Corporate and other expenses also decreased year-over-year. Operating cash outflow was $26 million in the second quarter of 2024, and $18 million for the first half of 2024. As of June 30, we had $410 million in cash, cash equivalents, and investments. Excluding the $293 million of HOA, Porch held $117 million, broadly in line with the prior quarter. Additionally, Porch Group held $11 million of restricted cash and cash equivalents, primarily for our captive and warranty businesses, and a $49 million surplus note from HOA. HOA surplus at June 30 was approximately $40 million. This number includes approximately 18 million Porch Group shares, contributed into the HOA to which a discount is applied per our insurance accounting rules. Since the shares are held by HOA, a wholly-owned subsidiary of Porch Group, and are not owned by a third party, the shares are eliminated in our consolidated financial statements. They are accounted for as treasury shares and therefore, these shares are excluded from our weighted average shares outstanding when calculating earnings per share. Moving on to guidance. Today, we are updating our full year 2024 outlook for our profit metrics. Our updated profit guidance is primarily driven by three items. First, as I mentioned, in Q2, we saw a strong performance against the things we can control, including underwriting performance and related attritional losses in our Insurance business, price increases in our Software business and strong cost control. This has been offset by two catastrophic weather events, which fall outside the range of our typical expectations for catastrophic weather included in our original guidance. The first was the $23 million May Houston cat event in Q2. The second is another weather event, Hurricane Beryl, which made landfall in Houston in the first week of July, that we expect to have $30 million in claims costs through revenue, net of reinsurance in Q3. We are reiterating full year 2024 revenue of $450 million to $470 million, with growth of 5% to 9%. As I noted last quarter, we expect growth to be front-end weighted with a tough comp in Q3. And as a reminder there, in Q3 of 2023, we had lower reinsurance seating in those higher revenue immediately post the Vesttoo reinsurance fraud discovery. Last year, we called out the revenue impact of this as $30 million in Q3 of 2023. We expect revenue less cost of revenue of $190 million to $200 million, which incorporates the items I've mentioned. Again, any incremental cat events exceeding historic trends are not included in our guidance and would negatively affect the range. Overall, we expect adjusted EBITDA loss of $20 million to $10 million, which incorporates the items I've mentioned. At the midpoint, this is a decline of $22.5 million from our previous adjusted EBITDA guidance. Given this now includes $53 million of additional costs related to the two weather events, this highlights the degree of our business has outperformed that which we control and what our normalized results would have been expected to produce. This guidance indicates that our second half of 2024 is still expected to be more profitable than the $21 million of positive adjusted EBITDA we produced in the second half of 2023, despite Hurricane Beryl. Although we are guiding to what is most probable, I will note, we have not lost sight of our full-year profitable target and are working towards that, maximizing efforts on what we can control. Finally, we expect gross written premiums of $460 million to $480 million. Thank you all for your time today. And I'll now hand over to Matthew to cover our KPIs.

Thanks, Shawn, and hello, everyone. Let's look at our KPIs. The average number of companies was 29,000 in Q2, slightly lower due to the mortgage title and inspection industries continuing to feel pressure from the housing and refinance markets and fewer companies operating for the time being. There are signs of possible changes to interest rates and home sales growth beginning in 2025, which we clearly would welcome. Average revenue per company per month increased 17% to $1,253 over the prior year, driven by lower seating and premium increases. We had 231,000 monetized services in the quarter, 5% lower than the prior year. Average revenue per monetized service was $395, up 19% from last year due to continued growth in insurance. Looking now at our insurance segment KPIs which, as a reminder, included EIG Insurance Agency in 2023, which we have since divested. In the second quarter, gross written premium was $117 million from 232,000 policies in force. As Shawn mentioned, these KPIs were impacted by nonrenewals completed this quarter, and this process is now complete. Annualized revenue per policy was $1,348, an increase of 161% from the prior year, driven by premium increases and lower seating. Focusing now on HOA, our insurance carrier, annualized premium per policy increased 28% to $2,059. Premium retention was 88%, lower than the prior year, driven by the nonrenewal actions. Our gross loss ratio was 117% in Q2. On Slide 21, we present the gross loss ratio split by cat and attritional losses. As Shawn said, our attritional losses outperformed. Our attritional gross loss ratio was 21%, 14 percentage points better than prior year. As you can see in the chart, this was offset by catastrophic weather claims with the cat loss ratio increasing 11 percentage points year-over-year to 96%, of which 22 percentage points were from the May Houston event. The overall current year gross loss ratio was 117%, an improvement from 120% last year. Our gross combined ratio in Q2 was 124%, an improvement from 180% last year, which again goes to highlight that even in Q2, which is a quarter in our year with the most losses, the amount of improvement we have made to the insurance business. Last quarter, we discussed the three Ps driving our strong underwriting performance. Today, we'll also outline our expectations for premium growth. First, product we'll continue leveraging our unique data, which is crucial for our insurance profitability. Michelle will elaborate on this shortly. We're also revising deductibles and policy terms like introducing a roof schedule that adjusts replacement value based on the roof's age, thereby reducing our risk and mitigating customer price increases. Second, on price. The slide shows a 28% increase in earned premium per policy over the prior year, reflecting adjustments for a high frequency, high severity environment. In part due to the recent weather events, we anticipate continuing to raise prices meaningfully. Third, portfolio. We completed nonrenewals of unprofitable policies and are now starting to work through reopening certain ZIP codes and geographies that we had closed in order to manage the premium levels of our business to current levels. Given the progress we have made overall, we are ready for growth, and we expect premium to increase nicely in 2025 and beyond, both adding policies and step up in rate. Thank you, everyone. I'll now turn over to Michelle for our quarterly deep dive.

Good afternoon, everyone. I am Michelle Taves, GM of Porch Group Media, Porch's Data and Marketing Solutions Division. I've been with the business for nine years with my 30-year career being spent focused on creating data products for many types of use cases and customers. I am super excited about where our business is and the opportunities that lie ahead. Porch Group Media, formerly V12, was acquired by Porch in January 2021, and we've rapidly evolved into a leader in mover marketing and data products. We've upgraded our data platform and now leverage unique data on properties and consumers. Through our solutions, we help brands to reach consumers who have important and time-sensitive needs for home improvement projects and when purchasing a new home. Recently, we launched Home Factors, which offers detailed property and homeowner insights, allowing companies to reach the right consumer at the right time and helps them better assess risk and pricing for their services. Today, I'm going to explain the use of our unique property and consumer data and how we can gain an underwriting and pricing advantage for our homeowners insurance business. Additionally, I'm going to highlight some new data products we're launching to assist other companies that we're targeting in noncompetitive markets. Porch's extensive property and mover data is structured into intelligence and combined with other sources to form a vast data platform with billions of data points. This enables us to generate predictive insights, including Home Factors for nearly every property in the U.S. We long utilized machine learning and recently we're incorporating new AI technologies to rapidly structure and extract insights from our data. Our data platform team is innovating at an impressive pace, now producing a new Home Factor every few weeks, allowing us to continually bring impactful products to market. Our insights cover both interior and exterior property details such as type of pipe, roof condition and water heater location, providing valuable information on property condition and risk that would be impossible to gather in any other way. One of our Home Factors is the presence of water intrusion. Imagine knowing which properties are likely to have a water stain on the wall, rust around the water heater, or corrosion near washing machine pipes. Historical claims data shows a strong correlation between these signs and future water claims. By identifying homes with these risks, we can accurately assess and price them. Our data suggests that about 65% of HOA's policyholders should face an 8% to 10% surcharge, while around 30% could receive a 20% discount on premiums. This allows carriers to set pricing more accurately for lower or higher risk customers or avoid underwriting higher-risk customers likely to generate a claim. It also rewards and encourages homeowners to take care of their home. We are really excited to announce that we are currently in market monetizing Home Factors, and we're encouraged by the early testing we're seeing. After two years of quietly developing unique valuable products, we've proven their advantage with our insurance carrier, HOA, who uses the data, delivering top-tier loss ratio performance. Today, I'm excited to share three use cases, demonstrating how we are monetizing the data while maintaining our competitive edge. First, we're targeting third-party insurance carriers in noncompetitive states to use Home Factors. Early results match our findings with HOA showing significant correlation between our insights and claims frequency and severity, providing proof of value for pricing and decision making. Second, a large retailer is using our data to market to their customers more effectively. Instead of broad-based ads, they're using Home Factors like window repair needed or roof replacement required to pinpoint the right consumer at the right time within their database, leading to a 30% increase in purchase intent signals. Third, a home security company improved customer retention by 8% and reduced cancellations by 9% using our Mover Match program. Mover Match identifies customers in the process of moving, allowing businesses to connect with them early in the decision-making process. This is particularly valuable for mover solutions as the first to contact the consumer often wins the business. Overall, we're still early in our journey, but we are thrilled at the progress we're making and we are eager to release additional Home Factors in Q3 of this year, and we have a robust road map ahead of us that will remain unique to what Porch can provide. Thanks, everyone. I'll hand it over to Matt to wrap up.

Thanks, Michelle. It’s a big deal for us. I’m very excited about the progress. I’ll say that there are several significant high-margin opportunities ahead for Porch. Certainly, the opportunity to monetize impactful data products is one of them. To wrap up, one of the other high-margin opportunities is, of course, our homeowners insurance opportunity and business and how it scales, particularly following the reciprocal launch. As we mentioned, we'll keep the market informed on progress and updates as we continue forward in 2024. Once approved, we would expect to host an Investor Day, and at that point, we'll drive more details on the higher-margin economic model and forward-looking guidance. We're committed to continuing to write profitable homeowners insurance business and expect to grow premium nicely in 2025 and beyond. While we revised our adjusted EBITDA guidance range to include the known July hurricane event, we are still focused on this full year positive adjusted EBITDA objective. We aim to continue our track record of strong execution on what we control, and we’ll be maximizing all efforts to achieve that goal. We aim to execute vastly over the remaining five months of the year and again, do expect to have a very high profitability second half. We have a number of catalysts ahead and are excited to deliver for you all. With that, we'll wrap the prepared remarks and pass the call to the operator. Rob, if you can go ahead and open up the call for Q&A.

Your first question comes from Dan Kurnos from The Benchmark Company. Please go ahead.

Thanks. Good afternoon. Just two quick ones for me. I guess, Matt, it's always tricky walking the fine line between opening up the aperture and preparing to scale. And then obviously, you get these catastrophic events that hit cash flow. So I'm just kind of curious on your willingness to invest in growth near term or more thoughts on derisking the portfolio until you get the TDI approval. And then on Home Factors, any more color on how we should think about the data opportunity V12 had retail exposure, which we heard about today. So I'd just love to think about either the TAM or how we should think about that impacting the P&L.

Yes. Happy to. Maybe I'll take the first, and Michelle, why don't you take the second. In terms of growth, Dan, kind of what we're talking about today is we don't think these events really change our plan. Obviously, you could see in our P&L this year, our business is just core outperformance could have absorbed one of these one-in-10-year events, not two of those one-in-10-year events. And the reality is, is that we see what's happening in terms of attritional losses. We see how the core business is performing on a run rate basis. And we're not that far away in terms of our expectations from being able to get the business, in our view, again, optimally structured through the reciprocal. So like Matthew and I both mentioned, we are through that period of nonrenewals, and it is time to start unlocking ZIP codes that were closed and really starting to position and open up growth, which we do expect to be able to again grow premiums nicely in 2025. Michelle, do you want to take the second question?

Sure. Sure. I guess a few points. I would say that we're at the very beginning of our journey. We are very optimistic about the opportunity. There's tons of valuable predictive insights that are growing across the industry. So we know that for sure. We have proven case studies, and we're seeing some positive results with HOA and validation across other businesses. So we're feeling really confident. We've already started monetizing the product, and we're having a great deal of conversations across different industries. And I think the final point I would say is I've had the opportunity to create many data products over my career, and I've never had so much excitement from clients as I've seen with Home Factors in such a really short period of time.

And maybe I'll just layer on two quick thoughts. I think it's all perfectly said. One, it's fun to start unpacking this, Dan, I think, just for the market. Obviously, this has been our strategy and our plan for some time. It's been a bit since we had acquired V12, and there's been a lot of, I would just say, core fundamental work to be able to get to this time, where we're able to share that we are now out monetizing some of these really cool, very unique data products with third-party partners. Again, it's not like it's a big surprise to me, I suppose, that there's strong interest in the market because, one, we have data about properties that no one else has. And we have Home Factors now for virtually every home in the U.S. And two, we know definitively with all the work we've done with Homeowners of America over the last set of years with that data, that it creates real and substantial value and being able to predict risk. And so the market is going to, I believe, be really excited about it, which means it should become a really meaningful business for us. It should be very high margin and it's really accretive to everything you see today. So again, we're at the beginning of the journey, but it should be a fun time. If we really pull it off, Michelle nails it and knocks it out of the park, once you get that first set of third-party partners using the data, you'll start to create momentum in the market where now everybody really needs to use the data to stay competitive. And that's happened in various times across multiple different data companies. So we think that we're positioned really well there.

Got it. Super helpful. Thanks, guys. Appreciate it.

Your next question comes from the line of John Campbell from Stephens. Your line is open.

Hi guys. This is Jonathan on for John. Thanks for taking my questions. So drilling down on your vertical software revenue, particularly the portion that's transactional, would you expect that revenue to outpace the national market when a housing recovery begins? Or would you say that revenue is more closely tied to the national relocation or corporate moves market?

Matthew, do you want to take that? Go ahead.

I was going to say the vertical software segment. I just peel back the onion there. We've seen the overall housing market continue to be soft and struggle this year. And really, we have two types of businesses there. We have our more traditional software and services businesses. Those we saw growth this quarter of around 4%. And to your point, Jonathan, we had the moving businesses where we saw a decline more consistent with the overall housing market decline. I think our opportunity there as the housing market recovers is as there are more folks that are moving, I think we have a good opportunity to beat the market there and grow our revenue in those businesses really nicely. The other thing I'll point out also from a profitability perspective, those businesses have improved profitability quite substantially over the last couple of years, even in this down housing market. So I think as the market recovers, we will get additional leverage there from the more profitable cost structure we have for those businesses in the years to come.

I would just add two small points. One, to build on Shawn's profitability. These businesses are very scalable, and so we can handle many more transactions with little to no variable cost. And so you're going to see whatever impact you see on the revenue, there's going to be significant flow-through to the bottom line. The other thing that you mind is some of those businesses monetize refinances. And so there's kind of two markets we can monetize. One is the moves in the real estate transactions, and we will certainly benefit as the market recovers, but then also as interest rates decline and the refinancing market comes back, that will also be a tailwind for us.

I want to emphasize one last point to ensure it's clear. There are two primary pressures we are facing in the market. Matthew discussed the impact of transaction volume on home sales and refinancing. Additionally, operating in these markets has become more challenging for companies, leading to a decrease in the number of players. As the market begins to improve, we expect not only an increase in transactions, which will directly boost our revenue, but also an influx of new companies entering these markets. This will provide us with more opportunities to sell to and partner with additional businesses.

Got it. Thank you. Thank you for the color there. And then as a follow-up, looking at insurance, in recent quarters, you guys have exited certain states where you felt like you couldn't be profitable. Would you ever consider exiting a market like Houston where these weather events are occurring and seem to be occurring on a consistent basis?

Yes, we will certainly consider whatever creates the most long-term shareholder value. Our focus is on building a strong long-term business. Exiting Houston is not something we believe is necessary, as it has historically been an attractive and high-performing market for HOA. While recent events may create a temporary bias due to their frequency in the last three months, we believe the market is ultimately well-suited for us to operate effectively and profitably in the future. It's important to note that while these events can negatively impact short-term results, they also present significant opportunities in the market. We anticipate that this will lead to meaningful price increases, as insurance carriers will need to ensure their pricing supports profitability. We will definitely align with the market trends in this regard.

Got it. Thanks, guys.

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

This is Steve Hromin on for Jason. So just two questions from us. One is, why did you guys decide to update the reciprocal application? I'm just wondering what kind of information changed versus once you initially applied whenever that was, let's say it was like nine months ago or so. And then secondly, does your updated full year guide assume any improvement in the housing market within either of your segments?

I'll take the first question, and Shawn can address the second. When we mention updating the reciprocal application, we are essentially referring to getting the application reinstated. Over a year ago, we had it on file but had to withdraw it due to the Vesttoo fraud, which involved our reinsurance partner. We collaborated with the TDI to ensure we waited the appropriate period and confirmed that the business was performing strongly and healthily. We have now met the key milestones required and have refiled the application. The updates we are making reflect the actual developments that have occurred during this timeframe, but our core strategy and implementation plan remain the same.

Yes. With respect to the housing market, we continue to expect a fairly stagnant housing market. And so that's what we've considered in our guidance for now. Certainly, any positive momentum there would have an impact. But we've continued to be, I think, more on the conservative side of what we would expect there.

Your next question comes from the line of Ryan Tomasello from KBW. Your line is open.

Hi, everyone. Thanks for your questions. Regarding the $18 million contribution to HOA for the reciprocal exchange, was that amount determined with TDI's input? Also, is the $40 million statutory surplus you're mentioning a pro forma figure that fully accounts for the second and third quarter catastrophe losses from Hurricane Beryl, or are there timing factors that haven't been incorporated yet into that $40 million?

I can take that. I'll start with the second question regarding our June 30 surplus number for HOA, which is approximately $40 million. This figure is influenced by the catastrophic events we experienced in May due to the Houston incident. As we look ahead, the second half of the year is usually when we generate the most surplus at HOA. Specifically, last year during this period, our insurance segment produced about $50 million in adjusted EBITDA. While not all of that contributes directly to HOA, it illustrates the general seasonality of our business, where we tend to generate higher profits in the latter half of the year. Regarding the first question about the share contribution, we contributed 18 million shares to HOA, which enhances the balance sheet. We made this decision due to the strategic advantages it provides, as Matt highlighted in his presentation. By adding these shares, we strengthen our long-term surplus, which will support premium growth in 2025 and beyond. Additionally, this move allows us to benefit from the potential appreciation of Porch shares, further increasing our surplus and, consequently, our ability to secure more premiums. Under the reciprocal model, this action also generates fees for Porch Group, adding to its strategic value. As we launch the reciprocal, this approach can foster alignment and attract external capital sources to bolster our surplus even further. Ultimately, we believe this decision supports HOA's transition to the reciprocal. One technical note to clarify: the shares we contributed are not currently traded and are not part of the weighted average shares outstanding for our earnings per share calculations; they are effectively treated as treasury shares and do not have voting rights at this time.

One last point on HOA's surplus. Ryan, I think I know where you're going and just to clarify something Shawn didn't mention. The $30 million net impact side of Beryl is not solely from HOA; we also have a captive reinsurer that plays a role. If you're considering what happens to HOA's surplus, we actually expect it to remain stable and even grow as the year progresses, keeping it in a strong position. This aligns with your thoughts. We're well positioned to ensure HOA stays healthy, and we do not anticipate additional contributions into HOA, including due to Beryl.

Okay. Great. Thanks for clarifying that, Matt and Shawn. And then on the accounting treatment, Shawn, you already kind of touched on it, but I guess, a bit of an interesting kind of dynamic you're trying to understand if there's any triggering event for that accounting treatment to change once you hopefully get the reciprocal off the ground if, ultimately, those shares would be included in the consolidated share count after you deconsolidate HOA. Just trying to understand the accounting there on the math because clearly, this is real capital that was issued to backfill HOA's balance sheet. So if you can just walk us through how that accounting may or may not change going forward.

Yes, I think it’s important to note that in addition to the flywheel we discussed and supporting more capital for HOA, when we execute the reciprocal exchange and transfer HOA to the reciprocal, we will receive a surplus note back that is equivalent to the net assets of HOA, with some adjustments. This will include the share value at that time. We will likely address the consolidated VIE accounting at a later date. For now, those are the additional sources of value and our operational approach as the reciprocal is launched.

Okay. Thanks for taking the questions.

Your next question comes from the line of Jason Kreyer from Craig-Hallum Capital Group. Your line is open.

Great. Thank you, guys. So Matt, earlier this year, you talked about the addition of some hail and wind coverage you put in place. Just curious if that helped you at all in this quarter if that's in a position to help you as we get into the back half of the year?

Yes. I could take that one. Yes. So as a reminder for folks, I think what Jason was referring to, this year, we secured an additional kind of reinsurance product for severe convective storm parametric coverage. I think what we had articulated earlier this year, as we purchased $30 million of aggregate severe convective storm, and that includes hail. The coverage there was really geared towards a series of smaller storms or hail-related losses, which is really what we saw in the first half of 2023. The approximate cost for this coverage was about $5 million for the year. So a couple of things to note there. And that’s just a reminder on what the product is. It’s an aggregate cover, so it’s evaluated over the course of the full year. So we’ll have more information on the cover received there later this year. Additionally, the other thing I’d note is that the May Houston event was primarily a large wind. It really was a hurricane-like event with wind speeds up to 100 miles per hour on a sustained basis. As of now, we’ve not included any assumptions in our financials or guidance for that as of June.

Thank you for that. Can you provide any early insights on exposure to the recent event? I understand it has just occurred, but as we assess the areas with a higher concentration of policies, do you believe you have exposure there?

Yes. So first and foremost, I think as Matt mentioned, our thoughts are with the customers and community of those that are affected by the hurricane. A couple of things to note. We don’t write policies in Florida. We talked about a couple of quarters ago how we’ve moved out of Georgia. In South Carolina, we don’t rank within 50 miles of the coast. We’ve also reduced our exposure as part of the portfolio profitability actions that we talked about. So far, this looks to be mostly a rain event. And as a reminder, we don’t cover flood. The event is obviously happening as we speak, but I think that can give some context as to our exposure in the region there.

Got it. Thanks for the color.

There are no further phone questions. Lois, do we have any written questions?

Thanks, Rob. We have one here. Shawn, you mentioned the full year adjusted EBITDA from profitable target. What are you doing to drive this?

Yes, I can address that. First, I want to clarify some of the improvements and business performance we discussed today. We are projecting a $30 million increase year-over-year based on the midpoint of our full-year adjusted EBITDA guidance, even with an additional $53 million in costs due to two rare events. As mentioned earlier, our profitability actions, software price increases, and strong cost control have contributed to this improvement. Typically, we plan for one rare event, but this year we are experiencing two: Beryl and the event in May. Overall, this situation emphasizes the progress we’ve made in the business despite facing these two unusual events. We are also pursuing other initiatives beyond our usual guidance to mitigate the impact of these challenges. Our focus on achieving our profitability goals remains strong.

That concludes our question-and-answer session. I will now turn the call back over to Matt for closing remarks.

Thank you. Thanks, all, for the questions. I appreciate it. As we talked about, it's a pretty exciting time and a pretty new time for the company. Obviously, we're working hard to get the reciprocal on file and get the business structure in the ideal way that we would like to. We're excited to share more when it's the right time around some of the details there. Per the question, we're excited and focused on growing premium while still executing on the profitability that Shawn just talked about. Hopefully, at some point in the not too distant future, some of the what has been headwinds like the housing market will start to turn to tailwinds. We know that will happen. It's just a matter of how far off in the future, and we will be able to benefit meaningfully as that does happen. Lastly, maybe I'll just close with fun to be able to announce kind of the launch of a new key product, Home Factors, that has, we believe, again, a tremendous amount of potential and very high margins. With that, I appreciate everybody's time and the continued support, certainly. We will talk to you guys again at our Q3 earnings in November, until then.

This concludes today's conference call. Thank you for your participation. You may now disconnect.