Q4 2022 Porch Group Inc Earnings Call
So quickly looking at the financials. We ended 2022 with Q4 results of $64 million in revenue and $30 million and adjusted EBITDA loss.
Q4, adjusted EBITDA would have been $7 million better if it hadn't been for storm Elliot which occurred in the last week of the year.
For the 2022 full year year over year revenue growth was 43%.
Over the two years since we've been a public company, we've now grown revenue at a CAGR of 95%.
John is going to share more details on our financial results here shortly.
I'd like to reflect on 2022 is there were some some key successes that really did move us forward.
During the last year, our software division expanded its leadership position in the home inspection industry.
If our at home Inspector Pro and inspection software company that strengthen our SaaS offerings and residential warranty services, which has deepened our capabilities with home inspectors and home warranties.
By selling software to no more than 30000 home service companies, we have visibility into approximately 80% of all homebuyers as well as unique insights into the underlying properties.
In 2022.
We launched our well received porch app, which extends the experience we provide for our consumers and continues to gain traction.
We made great progress accessing more unique demand in data a core competitive advantage, which gives us the opportunity to build a delightful consumer experience and eventually the most effectively priced homeowners insurance.
To accelerate our expansion in the homeowners insurance in 2021, we acquired homeowners of America for HOA.
A company that provided us with both a regional insurance carrier and a managing general agency or MGA.
We've expanded that business, both with new geographies and distribution and I'm proud to share that in 2022 HOA was the fastest growing homeowners insurance carrier in the U S through the third quarter of the year.
We accomplished this while having 2022 gross loss ratio of 72% better than other carriers. Despite unexpected severe weather in our largest regions during the year.
But one of the reasons, we chose HLA as the company to acquire is that it uniquely have the characteristics that we liked.
Both an MGA and carrier business.
A great leadership team.
Greater capital efficiency and less volatility than most by feeding much of the premiums to reinsurance companies.
Strong historic underwriting results 15 years of historic claims data in a healthy financial position.
So we have the ambition to become an insurance company with a higher margin Commission and fee based model.
To operate with limited seasonality and large swings in results from weather.
All of which we believe would effectively create value for our shareholders long term.
While we continue to invest in strategic partnerships with reinsurance companies, we have been working for some time on the formation.
Structuring and strategy programming and pricing of a reciprocal exchange.
We will eminently file an application with the Texas Department of insurance to create this reciprocal.
If approved on the terms for both by porch supports insurance reciprocal exchange would be formed in Texas as an association owned by its policyholder members and not by ports group and our shareholders.
This new entity would purchase our HOA insurance carrier and withhold ongoing premiums and ordinary course claims costs.
Initially parts group will provide the required capital to operate the reciprocal Adam is going to discuss the expected benefits and key considerations related to the strategy shortly and our depot.
We have been looking forward to sharing more today as we believe this is a key time for our company and an attractive structure, which allows us to better leverage our advantages and improved profitability over time.
I will now hand, it over to Adam <unk> President of our insurance Division, who will kick off with this deep dive into this launch and to provide further context before Sean takes over to cover our results and guidance so Adam over to you.
Thanks, Matt.
Way of background I've been in the insurance industry for two decades and.
In 2022 was one of the most difficult years in my experience we.
We saw inflation, increasing claims costs, along with norms with hurricane Ian in Q3, and winter storm Elliot in Q4.
Plus increases in reinsurance pricing.
We will share updates today on how we are positioned for growth and profitability and our plans to mitigate volatility.
First let me take a step back and provide clarity on five different ways. One could operate in the home insurance industry. So you can better understand how we operate today and how that compares to a cyclical.
So one selling leads.
It is a simpler business less regulated.
But it lacks annuity revenue streams and the ability to deliver a great consumer experience.
Q as a retail insurance agents.
Two agencies commissions are limited.
And they also rely on carriers for underwriting risk.
So it adds a managing general agency our MGA.
The company's underwriting price for insurance products and needs for capacity of insurers and reinsurers commissions increase but there is exposure to reinsurance cycles.
For the fourth is a carrier insurance carriers rank your own products and hold all or some of the premiums on risk depending on legacy reinsurance carriers have more upside if claims are low, but they require capital to grow and carry volatility.
So today, we operate under modules two three and four.
Finally ever cyclical change.
As mentioned, we believe this is an attractive model for our business and strategy that will explain over the next few slides.
Cyclical exchange structure has been utilized by successful insurance businesses, such as farmers insurance.
As an example, <unk> into the day to day, operator behind partners and create substantial and consistent value from that relationship.
So what is over here.
Here's how the structural assuming the Texas Department of insurance also known as <unk>.
Proves the application as we will file.
The ports insurance, a cyclical change will be an association owned by its policyholder numbers and not by Portugal.
From a cyclical with issue the policies global premiums and capital requirements and pay claims from its balance sheet.
Which group will continue to manage pricing and claims on behalf of the reciprocal leveraging our data and consumer access.
These services, we expect to be paid fees comparable to the fees. We received in the past from reinsurance companies.
Distributions is available through a variety of channels, including both ports as b to B to C relationships as well as third party agencies.
Spectra launch in Texas, and as part of this we will transfer our HOA carrier entity, including the carriers assets and liabilities to the cyclical in exchange for a coupon bearing note.
That means on day, one of that transaction, while HOA carrier premiums from all of its current states will move into this newly formed entity.
Although separate.
With the success and capitalization of their a cyclical growth.
Of course, the important deployed.
As we will be financially responsible for the success of the cyclical initially <unk>.
So the earning significant fee income from that entity.
So to recap.
We will soon file the application of the PDI and <unk> approval process.
Really transfer the HOA carrier in premiums from all states instead of a cyclical in exchange for a coupon there yet.
We expect to launch a new ports insurance brand first in Texas.
Okay.
And lastly ports will provide operating services sooner cyclical for wish you will receive a fee.
So the next slide is to bring all this together I will highlight the long term benefits of this cyclical structure for stakeholders.
First <unk>.
Policyholder members are expected to benefit from new value propositions courts can provide.
Such as a 90 day home warranty products and more.
Also on this structure policyholders are the owners of the reciprocal allowing them to benefit from a true dividends or distributions.
Of course, as we have mentioned this structure will help us move towards our ambition to reduce direct exposure to seasonality and large swings in results due to weather.
And have higher margin more predictable profitability.
In the future <unk> financing will be replaced with third party capital.
And this we believe will create long term value for our shareholders.
Let me go one more.
Before turning over the call is Shawn I'll Echo what Matt said.
This is an exciting time for parts for Keytruda that is positioned well for growing profits and a more predictable way in the long term.
We expect 2023 would be a transition year.
And the shift towards vis a cyclical model assuming it is approved by the CDI, which is nice stats before Q3 of this year.
In the interim we expect to manage the business the current HLA business with an eye on profitability.
Let me share the key things, we will do this year to facilitate a smooth transition and launch a very simple two key initiatives in this regard.
First we expect to decrease the amount of quota share reinsurance in 2023 to approximately 50% <unk>.
Levels, given our substantial increase in the cost of reinsurance in the market broadly.
And in support of the transition to the reciprocal which really expect to see less and operates reinsurance purchasing more efficient.
This means we will have some additional exposure versus historical periods in particular weather related risks, which are typically more pronounced in the first half of the year.
Additionally, given the cost of increased cost of reinsurance, we expect to non renew approximately 37000 higher risk policies.
This will obviously tempered our near term growth of our insurance business in 2023.
But it is expected to increase profitability and help ensure the cyclical is appropriately capitalized at launch.
Proved by the PDI on terms.
So to summarize.
It's an exciting year in a long time coming.
We're actively working towards filing an approval and therefore, you would be positioned to drive more consistent profitable growth.
With less direct exposure to lever inflation and quota share reinsurance.
Sean over to you.
Thanks, Adam and good afternoon, everyone.
Before I dive into the fourth quarter results I just wanted to express how excited I am to be here at <unk>.
Being with Matt Matthew Adam and the rest of the wonderful team.
We have a tremendous opportunity to create value for our customers our shareholders and our employees by simplifying homeownership with insurance epicenter.
Taking a step back 2022 presented a challenging macro environment reports with increases and weather related events as well as rising inflation a decline in home sales tightening in price increases with reinsurance and challenging capital markets.
Each of these impacts in the short term business results like many other home service and insurance businesses.
The key takeaway for the fourth quarter of 2022 is that despite all of this we grew revenue 24% year over year, driven by our insurance segment.
Adjusted EBITDA was also impacted by a large ice storm weather event at the end of the year, which drove higher than average claims.
Winter storm Elliot impacted much of the country in Texas in particular.
And total cat weather impacted our adjusted EBITDA loss by approximately $7 million in the fourth quarter.
Starting now with our key financial metrics.
Fourth quarter 2022 revenue was $64 $1 million with the insurance segment growth, partially offset by the vertical software segment.
Fourth quarter revenue growth, excluding recent acquisitions of <unk> residential warranty services and home Inspector Pro was 19%.
Revenue less cost of revenue was $43 $9 million, resulting in a 69% revenue less cost of revenue margin.
Lower than prior year, driven by higher cat weather related insurance claims.
Normalizing for the cat weather revenue less cost of revenue would have grown 36% rather than 17%.
Adjusted EBITDA loss was $13 $3 million with cat weather accounting for approximately $7 million of that loss and otherwise driven by strong performance in our warranty business and strong expense control.
Gross written premium for our insurance segment was $131 million.
A 30% increase over the prior year driven by continued growth in policies and higher premium per policy starting to flow through.
Moving on to revenue by segment.
Revenue in our insurance segment was $31 2 million and 94% increase over the prior year driven by growth in policies premium per policy and strong growth in home warranty.
Insurance segment revenue increased from 31% of total revenue in the fourth quarter of 2021 to <unk>, 49% of revenue in the fourth quarter of 2022.
Revenue in our software segment was $33 million, which was a 7% decrease over the prior year due to our moving services group, which was directly impacted by a soft housing market that continue to face headwinds.
Fourth quarter home sales declined 34% year over year industry wide.
Our software and services subscription groups were relatively flat year over year.
As for adjusted EBITDA, Our insurance segment adjusted EBITDA was $700000 a decrease from the prior year driven by cat weather related insurance claims.
Software segment, adjusted EBITDA was $1 $1 million a decrease from the prior year driven by the housing market as mentioned.
Corporate expenses were $15 1 million, reducing to 24% of total revenue from 28% in 2021.
We invested in our data platform and App, which was offset by strong expense control.
Shifting now to our full year results.
Revenue for the full year 2022 was $276 million, 43% growth over the prior year.
Revenue growth excluding acquisitions from the prior year was approximately 21%.
Insurance segment revenue grew 119% in 2022.
Driven by growth in policies increased premium per policy and strong execution in our warranty business, including improvement in retention rates due to an improved value proposition for consumers.
Revenue in our vertical software segment grew 13% in 2022, despite the housing market.
Revenue less cost of revenue was $168 million a.
A 61% revenue less cost of revenue margin down from the prior year, primarily driven by cat weather related insurance claims as mentioned.
The adjusted EBITDA loss of $49 6 million was.
Was similarly impacted by these cat weather related insurance claims.
And finally gross written premiums at our insurance segment was $536 million growing 75% year over year.
Shifting now to the balance sheet, we ended the year with unrestricted cash plus investments of $307 million versus.
Versus $320 million as of the end of the third quarter.
We hold the convertible debt on our balance sheet of $425 million due in September 2026.
And in the fourth quarter of 2022, we repurchased approximately two 4 million shares at an average price of $1 82 per share.
Additionally, I want to provide that we do not currently hold any deposits with SCB.
As a reminder, our HOA insurance carrier must hold a certain amount of capital that can vary based on premium growth and other factors.
Historically, we have offset some of this capital requirement through effectively transferring the amount of premiums and losses to reinsurance partners either on a quota share or excess of loss basis.
HOA has been and continues to be rated AA exceptional bias rating agency.
To maintain that rating and to ensure the entity is appropriately capitalized.
<unk> grew transfer of $34 million in HOA in the fourth quarter, bringing HOS unrestricted cash balance was $78 million at the end of the year and its investment balance of $92 million.
We expect to transfer HOA to the reciprocal in exchange for a coupon bearing note.
Therefore, these cash and investment balances with transfer with the reciprocal.
And shifting now to our outlook for 2023.
We expect many of the headwinds faced in 2022 could continue into 2023, such as inflation potential weather volatility and declines in the housing market.
Given additional weather exposure as we prepare for the reciprocal launch we are providing a range for performance performance, which assumes no catastrophic weather events.
And with that our guidance for 2023 is revenue of $330 million to $350 million, increasing at least 20% year on year.
This assumes strong revenue growth expected in our insurance segment was relatively flat year over year revenues in our vertical software segment.
Until we see the housing market turn our starting assumption is for an 18% decline in industry wide home sales in 2023 versus 2022.
Revenue less cost of revenue of $170 million to $180 million.
In the first half of the year, our exposure to weather is the highest.
Given this is historically when our largest states have seen the highest claims volumes.
Therefore, we've assumed a 62% gross loss ratio for the year, excluding any cat weather higher than the historical average.
And given the pricing increases that have gone into effect. This loss ratio would equate to approximately a 24% increase in claims costs per policy compared to 2022.
Certainly, we hope for better weather and a slowing of inflationary costs, which could create upside to this range, but we believe this is the appropriate assumption at this time.
We have not assumed major losses for cat weather events, which would create downside outside of this range until the reciprocal score.
Adjusted EBITDA loss of $30 to $40 million, we're managing cost carefully and we remain on track for positive adjusted EBITDA for the second half of 2023 and beyond.
And finally gross written premium of approximately $500 million.
We anticipate that <unk> will review our reciprocal application in the latter part of 2023.
If approved we will revise our guidance to present, the new structure of the business, which we believe to be more attractive.
Until this time, we continue to be directly exposed to potential catastrophic weather events.
And I know.
That under U S. GAAP, we expect to consolidate the financial results of the reciprocal.
With <unk> group for a period of time.
As I mentioned, we continue to expect adjusted EBITDA profitability for the second half of 2023 and beyond even with the continued expected housing market downturn in 2023 and substantial increase in reinsurance bracket pricing.
Here's a bridge to demonstrate Hollywood achieved.
Comparing the adjusted EBITDA loss of $24 million in the second half of 2022 to the positive adjusted EBITDA expectation in the second half of 2023, driven is driven by a number of factors we are modeling a $10 million improvement.
Three between approved premium per policy increases in insurance that are rolling out.
Already and lower distribution costs.
Our previously stated price increases of insurance policies in Texas, and South Carolina are being rolled out at each customer renewal and the impact by the second half of the year is substantial.
Second a decrease of expenses by $5 million from a variety of it from a variety of G&A savings initiatives already in place.
And finally, given the underwriting actions, we are taking and given the severe weather. We saw in 2022, we expect more than $10 million improvement in claims costs between the second half of 2023 compared to 2022.
And finally before I hand, it over to Matthew a few housekeeping items I wanted to cover <unk>.
First as I enter my first full calendar year as <unk> CFO I plan to look at our Kpis in additional or alternative metrics to share.
You'll notice that in this presentation, we have added certain disclosures such as the gross loss ratio for our insurance business.
We expect to continue to provide this disclosure until we potentially transitions the reciprocal and it becomes less applicable.
Secondly, we plan to transition for reporting policy retention to a premium retention rate.
Which we believe is more meaningful as it also considers price increases and is more directly comparable to peers.
Additionally, Youll note in our press release issued today that we are restating, our unaudited financial statements for Q1 to Q3 of 2022.
Primarily due to the accounting related to reinsurance contracts.
Net impact of the restatement for the nine months ended September 32022 is additional revenue of $3 1 million in additional adjusted EBITDA loss of $2 3 million.
And finally, we have remediated the three material weaknesses that we had from 2021.
And we want to thank the team for their significant efforts on that front.
Separate from the progress we've made there we have identified a new material weakness for our HOA subsidiary.
And as a reminder, we acquired HOA in 2021 and was subject to Socs for the first time in 2022.
We will work towards we're meeting Remediated this weakness in 2023.
With that I'll turn it over to Matthew Nagel, our Chief operating officer to discuss our our key performance indicators for the fourth quarter Matthew.
Hello, everyone.
To be with you today I want to make sure it's understood that despite macro pressures and unusual weather impacts seen throughout 2022, the fundamentals of the business are strong and the team is performing well.
Looking to 2023, our strategic priorities remain clear and largely unchanged.
First we'll sell vertical software to more companies, where we become deeply embedded.
Such as increasing the percentage of customers that we can access and upsell.
Two we will extend our online experiences are digital tools and our consumer app.
With the aim to be their partner for their home and increase our b to B to C transactions.
We will further build out our data platform and leverage coach's unique insights to improve premium per policy for our insurance and warranty products.
And we will launch fortune insurance via reciprocal.
A key step towards reducing torch group's direct exposure to claims weather events and reinsurance.
In terms of quarterly Kpis I'll start with the average number of companies and average revenue per company per month. As a reminder, these metrics when taken together provide additional information on our total revenue for the quarter.
Definitions of these kpis are in the appendix.
Beginning with companies on the left the average number of companies in Q4 was approximately 30860.
Up 25% from the prior year showcasing that our teams are selling our software to more companies and increasing our penetration even in a difficult environment.
As we have mentioned growth in the number of companies is and will slow, especially until the housing market rebounds, we've seen home inspection companies start to go out of business or retire in Q4, and certain mortgage moving companies either close or compressed.
We recognized $693 in revenue per company per month in Q4.
A decrease of roughly 11% from the prior year. This.
<unk> was impacted by lower home purchase volumes, we expect this to continue in the short term but.
But in the medium term, we believe there is opportunity for growth in this metric by expanding software modules offered to companies gaining access to more consumers and helping more with more services like insurance and warranty.
<unk> now to monetize services and average revenue per monetized service monetize services include insurance policies home warranty movers home automation and security Internet and TV.
Other home services. So differently. This includes all revenue other than our B to B software and services subscription revenue.
We saw 213000 monetize services in the fourth quarter of 2000 to 2022.
A decrease of 18% from the prior year.
This shift was driven primarily by fewer homebuyers given the downturn in the housing market, which had a 34% decline was substantially worse than prior quarters.
Revenue per monetize service increased 46% to $219 up from $150.
The growth in revenue per monetized service is driven by the key services. We are focused on such as insurance and warranty, which may produce even higher revenue per service going forward.
Looking at insurance on Slide 27, the segment continues to grow and ended the fourth quarter with gross written premiums of $132 million with 389000 policies, while generating an average of $347 of revenue per policy per year.
On a rolling 12 month basis.
As of December 31, 2022, we had approximately 86% retention rate at our homeowners of America business as mentioned policy growth has and will continue to slow in 2023, as we non renewed certain higher risk policies.
Finally diving a little deeper into the gross loss ratio for insurance segment here you can see the gross loss ratio in the fourth quarter of 2022 with 56%.
Which included an approximately 25 percentage point impact from atypical weather events.
As was mentioned winter storm Elliot hit in a period when we typically see less major weather events.
The average gross loss ratio of the prior three years in Q4 was 31%.
Which was broadly in line with the 32% in Q4 2022, if you exclude these cat events.
This means we had approximately $7 million of additional expense in the fourth quarter of 2022.
Due to this higher than expected gross loss ratio.
Thanks, everyone I'll pass things back to Matt to wrap us up.
Thanks, Matthew Thanks, guys.
We returned 2023.
I couldnt be more excited given what's coming up this year.
First our strategic initiatives are continuing to progress nicely.
We're now approved with nine states, where we can use our property data and insurance pricing.
Our insurance price increases are rolling out to policyholders that renewal unexpected.
As expected our consumer App as I mentioned before is getting broadly distributed to homebuyers, but now it's across approximately half of our inspection company using our ISN software.
Home warranty is integrated into our experiences through a variety of channels with excellent growth.
And we're seeing good price increases in some of our vertical software products tied rolling out new software modules.
Second despite the internal cost expectations of the housing market and despite prioritizing profitability over growth for our insurance business because of the strong execution by our team we still expect to grow revenue north of 20% in 2023.
And lastly, we continue to be on track as John mentioned to become adjusted EBITDA profitable in the second half of this year and beyond which is an important milestone for the company.
For the potential launch of a reciprocal and momentum across the business. We are very excited about what the next several years will produce.
Thanks, much for the time and interest and with that we will open up the call for Q&A.
Great. Thank you Matt. Your line is now open for Q&A can I ask a question. Please raise your hand.
When you look at our best to get to all your questions in the remaining time today.
Okay question, one comes from Jason <unk> LTE Jason.
Hey, guys a few questions.
To help people understand the view has been a reciprocal exchange.
And 'twenty two how would that have impacted gross profit and EBITDA.
Therefore, I don't know water. So it will just take one at a time. So just how should we think about like.
How would it impact of the business had you already been a reciprocal exchange.
Yes, Jason Thanks for the question, let me just take the high level and then Sean if you want to provide any other details. Please please do so.
We obviously are not guiding right now Jason to what the numbers would be looking forward with the reciprocal we're going to wait to get it approved we have to go through that process with the <unk>, one and at that point in time, we would expect to.
Both update our guidance as well as to go deep with analysts so models can be appropriately updated.
Like we noted in the call it does have a materially positive impact.
Margins overall gross margins and EBITDA margins.
Does the claims cost that.
We are typically incurred.
And by that reciprocal entity, obviously looking at 2022 the Imp.
<unk> would have been material.
To the margin line because in particular of the amount of weather and unusual weather that occurred last year.
So without going into too much detail I'll.
I'll certainly comment, though it anything else, Sean or item that you guys want to add.
I can just give a little bit of perspective on how we were impacted by.
Some of the atypical weather that.
That we saw in the year.
In the third quarter, we had mentioned.
Hurricane in as approximately a $10 million impact and now in the fourth quarter, we had mentioned.
$7 million.
From winter storm from all the catastrophic weather, primarily winter storm Elliott in Q4.
Just just those two items that adds up to $17 million, which would have taken our 49 EBITDA loss down to 32, just doing the math there.
There are other things that impacted us in the year like inflation et cetera. Other other events, but just just taking those two big ones that we've disclosed.
Hey, good load perspective, and just.
I'll just add a second one and I'll take you prepared one offline.
The idea that.
For you to have kept going under the current model.
The economics of reinsurance given all the recent whether we're going to become.
On attractive and going in this direction.
Ends up being in Europe opinion kind of.
The more effective way.
I mean is that ultimately the catalyst.
Most of all quarters of kind of bad weather in the industry is how to deal with and kind of how thats impacted reinsurance along with like higher agent like specifically with catalyst.
It's actually Jason something that we have been talking about for quite a while in fact <unk> conversation we had almost immediately after acquiring HMA as we just look forward over a long period of time to talk about strategically how would we how would we best structure or how do we believe an insurance company with best restructured to scale into the level of scale.
We think we can grow this business into.
Again, one of the things that was attractive about HOA is that it was.
Capital Y at lower volatility and that it would see that at the time of acquisition approximately 90% of its premiums to third party reinsurers well as you get to larger and larger scale ceding about levels is more difficult and certainly to your point with the changes in the reinsurance landscape that also becomes more difficult or more expenses.
I feel very fortunate that those conversations for us it started that long ago. So we can kind of get out ahead start the work that's a material amount of work that goes into getting to this point ready to make these filings and.
And moving forward with this with the structure, but at the end of the day, it's our belief Jason that this structure positions us in the optimal way to be able to do what we want to do which is the scale of very large leading homeowners insurance company and to do so without having to.
Essentially being able to.
Essentially seed 100% of premiums in some respect.
Where we arent the direct.
Bearer of that the claims cost and weather volatility and so that's a big change for us, but it can be we believe.
Impactful bolster margins and valuation overtime.
Thanks.
Great. Thank you and thanks, guys, Hey, Dan from benchmark.
Thank you Dan.
Great. Thanks.
Matt Youre going to have to forgive a little bit of my ignorance on this.
But.
If you go through this process a.
Obviously, you believe there's a high likelihood of getting approved and it sounds like this is sort of the future.
Path to getting.
Call It let's call it a 100% asset light or limit your claims downside.
When you go through this how do you maintain your ability to transfer the data advantage you have to.
Two the exchanging charge them for that but effectively or help me think through kind of that process because.
You have almost a totally different go to market strategy as you kind of go through this year somewhat reliance on that you can still be a lead driver obviously through your own platform, but.
Hey.
Exchange. So just help me think for a couple of those things.
Yes happy to.
Adam I'll take the first crack and then layer in if you have anything to add.
So youre exactly right, Dan that we would not.
<unk> share this news today.
No, we werent confident and it being approved by the TDI. So we've had discussions with the TDI already we believe that that.
Yes, we will be able to work through that process to get it get it approved I'll also note that again there is many other examples reciprocals out in the industry. So farmers is one that we gave with.
The operator behind in a very attractive model for <unk>.
First of all USAA folks might not know, but they are members rush orders of USAA. If that's who they were used for insurance or Erie or pure a variety of others. So it's a structure that's been used before.
In terms of how we get.
Sure.
Credit essentially for our data advantage.
Yes by being able to create better underwriting results.
And being able to use our data to price more effectively we benefit in two ways.
One we can hope premiums grow faster right, so being able to provide lower pricing to the right consumers. We can go and be able to win more consumers to grow premiums more quickly the faster premiums grow the higher our fees are right because we get fees.
The percentage of the premiums. So we are very incentive to help premiums grow quickly our data gives us an advantage, but will do so.
Secondly.
We can paid fees.
Appropriately based on having a healthy sustainable reciprocal.
Exchange and so by being able to have the right customers priced correctly youre that affords us entity to be able to pay those fees.
Essentially growing fees over overtime.
Also here with us.
Okay, Great I will just make it more complicated.
Does this obviously.
Youre, reducing both saving levels also.
I guess, the GWB is sort of reflective of your plan to move to reciprocal exchange this year in the guide.
So now this kind of change.
The Tam at all in your minds.
And so you could go after obviously you can go after a smaller tam, but have it be substantially higher margin right.
But just can you help us think through that a little bit.
So I'll take the last one.
And then get the team involved but I think the Tam is interesting to us.
One like we noted in the call know Rfps are largely similar to the types of fees, we would get when we would see premiums to reinsurance companies and they would pay us so our RF take our opportunity is no not materially different no.
One thing that I do think it's interesting just in terms of the Tam of homeowners insurance just general category in general is that.
Unlike categories like auto insurance that have risk of being a smaller market over time as cars become safer.
Homeowners insurance that we get questions like okay.
Good industry to play in because of the weather right that's out there and whether that should increase over time in our view it actually becomes a very attractive.
A dynamic long term because insurance companies are going to price to be able to generate profit.
Just the reality of it.
Prices will go up as there is more weather, which means the Tam is going to grow and we believe the homeowners insurance team is going to grow substantially if you look forward over the next five years, but I'd be surprised if it's if the Tam is twice as large as it is now not at all and so not only are we going to be able to benefit from just executing our plan growing our in our book.
But we would expect prices in the Tam to continue to go up and we would be the direct beneficiary of that through the fee fee based model.
Got it that's helpful. I'd ask you My standard question, but it's something tells me, it's going to be a long calling up the focus Tonight. So I'll move along thank goodness there.
Thanks, Tom next topic, Corey from J P Morgan and takeaway.
Hey, thanks for the questions.
Just a couple more sticking on the reciprocal just in terms of financial impact just to make sure we understand when the weather does happen under this new.
The format is.
That basically just pull from the HOA cash reserves, then essentially has no impact on your P&L is that the right way to think about it.
And then does this impact the bundling opportunity like the torch home plan at all because of the limitations around what you do from that perspective.
One more but I'll stop there.
Sure so.
From a lever standpoint.
So as Sean mentioned on an adjusted EBITDA standpoint.
Report for the entity that or its shareholders.
So that would not be moved with leather. So the claims paid by the change will be shown on the exchanges balance sheet NPL profit and loss statement.
Yes.
Much.
So thats. The intent is we want to create a reliable source of capital that we can serve consumers D var pay their claims.
Taking all of the entity.
That's actually experiencing a lack of volatility and make it more efficient.
So then your second question was about the ports homeland and I think in many ways. This lets us do more there. So we want to find ways to make the value proposition for the reciprocal exchange of course insurance reciprocal Ashish.
Such that people get these kinds of offers with us. So we want to make it easy through the app courses for them to get them moving concierge, where looking at value propositions. We can offer our warranty for cyclical exchange we call channel.
We think it actually makes it easier from a branding and a ability to offer products what we do.
So that's something actually that we launch it we want to make sure happens now.
<unk> had anything to that.
Alright, I'll try one more too just for.
Through the first half of the year, where this is not effective yet.
And Youre.
Essentially only reaching 50, I think 50% of I heard correctly like will you pull back at all in terms of your insurance.
Sorry.
I would ask.
We pulled back at all in terms of like your growth in insurance policy to be less aggressive during that time period, given what you said.
Most variable whether part of the year and you'll have more exposure.
How do you how do you kind of thinking about that.
Yeah, So I can I can answer that so.
So first of all if I talk about reinsurance remember there are two kinds of reinsurance primarily that we as one is quota share where we see essentially a percentage of premium as a percent of losses.
<unk> excess of loss of cat excess of loss that only pays for an event.
Like a single event to catastrophe.
Like a hurricane.
So the 50% quota.
Quota share.
And so there are really a couple of things about our structure is that were going on at 50%. It is an appropriate way for us to manage.
The economics around the current reinsurance market. It's also a way for us to position <unk>.
To be sold as a subsidiary of the reciprocal of change as part of our application filing to do so at the PDI approves that.
That structure in better footing to be more efficient it doesn't change our use of cat ex ol wishes. If there is a large event.
Pay for the amount in excess.
Some retention I think the job.
Those two factors are why we potentially change the quota share this year as we work through the markets essentially there come from a long time to get ready and then the transition upon filing.
The second question was around policies, yes, I think there are range of things we do there the team has great science around.
When we see an application how we price it how we underwrite it we understand if it's a policy if it's profitable but at the macro level. We are at 37000 policies that we plan to non renew this year about half of those are already done.
And thats fundamentally because in the current market.
Those are good policies in the past, but theres a lag reinsurers are not regulated making charge as the price they feel is appropriate.
We are regulated and so those are just policies with it doesn't makes sense across the whole right now so.
So we will not renew those and it's one of the an example of a tactic that we're taking in part because we see that reinsurance costs on that level.
A related note just for understanding the question on not being profitable in the first half of the year and then profitable in the second half of the year. It really comes down to you non renew policies at the point of renewal for those customers and for the customers that we continue forward with the vast majority of it continue for but you also get the price increase from those customers.
At the renewal and so what happens is over the course of the first half of the year. We are in the process of non renewing those unprofitable policies, but you do have to carry some of that lack of profit during the first half of the year. You also at the point of renewal, we now get the benefit in the second half of the year from all of those price increases that go in.
That had been going into effect over the course of the last quarter or two and we will go into the quarter over into place over the course of this next quarter or two that really does make a substantial impact to the P&L and helps us drive the profitability in the second half of year and ongoing.
Thank you.
Okay.
This is Josh from Cantor.
Yes, hi, everyone. Good afternoon, Thanks for taking my question.
Matt you actually just touched on it but I'd love. It if we could talk a little bit deeper on providing some more color on the actual rollouts of these rate increases or if you can talk about specific markets. When do you expect these to start fully earning into the book.
And then you ought to provide a little detail on a little more color I mean listen what I just provided.
Okay.
Yesterday.
The simplest way to think about it is they take 12 months. So once we have them approved in programs and end market at.
The next one new any new customer that comes in we will pay that price.
And any renewal consumer will see that price at their venue.
And so that's by state so in some states like Texas, We had three price changes South Carolina for example, we have one.
So listen the ins and outs, but essentially it's over the 12 months from when we filed the increases that we're seeing some benefit of them already.
It takes a full 12 months to see 100%.
Understood and then on the software side can you elaborate a little more on how you plan on expanding your go to market strategy in 2023 to capture some more software customers.
Sure.
We are still very focused on growing our vertical software business.
One of the things that I would highlight is we've had some success rolling out some new modules in particular in the inspection space and in the title space and those give us new opportunities to go back to customers. It also gives us opportunities to drive more value per customer and so we continue to stay focus there is.
A little bit of headwinds just because a lot of our businesses are impacted by the slowdown in the housing market.
And that is something that we continue to work with Emory down.
But I would say the main focus is rolling out new modules and continuing to go after the core verticals were focused on.
Yes.
Understood. Thank you very much.
Thanks, Jonathan.
Next we have Jonathan <unk> Stephens.
Hey, guys, thanks, and congrats on getting the wheels in motion on the risk of course change.
Development and Sean I know, it's going to make life a lot easier for you at least on the guidance side when that's all sudden done but.
It does sound like you guys are going out to kind of operate the business.
Business as usual next couple of quarters.
I wanted to get a update on the reinsurance arrangements on I know you guys are in the heart of the renewal season. This probably is still a degree of uncertainty there, but just like to get your take on that and if pricing goes against you guys. Just how much you are willing to kind of lean on the incremental premiums and I don't know if youre willing to go into this level of depth for the guidance, but what.
Ranges that you have factored in the guidance right now.
Renewals are April one so we will know a lot more obviously just starting to get those quotes and from our providers. We've seen though in the market. There is just really good data out in the market in terms of what the pricing increases are and so we've built that fully into in the guidance and expectation and had been in our view appropriately conservative just given some of the unknown. There obviously, we'll get more infill.
<unk> here.
Shortly but we feel good about how we've set up guidance given given what's happening out there.
Okay. Thanks for that and then these insurance filings can be a little tricky to read I'm thinking I am seeing that.
OE in Texas premiums or maybe up 30% close to 30% for the year sounds pretty big driver for the business, but obviously, you're getting a lot of help elsewhere. So maybe if you could unpack and maybe just talk broadly to the impact of your larger incumbent stays longer larger legacy stage, maybe Texas, South Carolina versus the newer states you have open.
How much growth youre seeing out of that side.
So I can't answer that so I'd say at a high level.
We are we're very focused on profitability. So when we enter a new state we use existing partners, we had existing agents and our own agency.
And we tend to price in a way, where we know that we're competitive with some some companies in that state there had a history of being profitable and.
And we believe their profit.
And will they tend to me is a lot of our growth really comes from the states. We've been in for several years like Texas like South Carolina Lifelock Caroline.
And so thats why I would I would point you to as you know when you are reading a filing if youre looking at the increases.
Those states are really the states, we continue to be successful in and so changes there the most impactful to our business.
And the only thing I would add John is when Youre looking at the at those filings and <unk> seen that kind of a price increase remember that price increases have not been yet pushed through from many customers that have not yet hit their renewal.
So the price increases will actually be more as we get all of the customers going through that renewal and getting the benefit of that of that price increase so like I noted it is a substantial impact to the second half of that year given the approvals.
Hi.
Okay. Thanks, guys I appreciate it thanks.
Next we have Brian <unk>.
Hi, good morning, Thanks for taking the questions.
Just to drill a bit further into the transition.
The reciprocal conversion.
Yeah.
Do these conversions tend to drive a material amount of churn or attrition in the policyholder base near term.
Second of all your ability to grow that business post conversion.
Be dependent on launching the new both brands into more markets can you continue to grow and kind of satisfy the existing licenses and then just finally and I think you touched on this earlier, Matt but are there any limitations that this puts on your ability to cross sell broader of Pwc.
Services across the newer structure here.
And that was several questions, but I'll see if I can see if I can get them. So.
The application, we're making is in the state of Texas. So the insurance there are secular changes license state by state just like HOA.
To your first two points we would.
In the application apply to sell the insurance carrier in return for a coupon bearing to the reciprocal exchange entity.
So what that means is that we would we would have strong value propositions that we want consumers to switch from one entity to the other.
And a consumer that stays in the existing HOA company would be in a subsidiary of meetings. So thats one key way that we manage both.
The licensing risk, we will apply for licenses state by state.
And filings, but we will be able to use inside the reciprocal. The fact that <unk> is a subsidiary of the entity.
It also means that if a consumer chooses not to move for some reason.
That youll still be underneath that exchange umbrella, which is part of how we manage that risk. So I'd focus on those and then that I don't know if maybe you want to talk about how you think about it more broadly across categories that we're helping consumers with.
Yes, so in terms of how this transition can help.
That's just with our broad strategy, Brian and selling more b to B to C services I mean, we're excited about introducing the ports insurance Browns' first off so this will be the launch we've kind of hinted out or talked about in the past as soon as it's approved we would.
To start selling to new customers for insurance as well as transitioning existing customers into that brand. We noted in the prepared remarks that we will be bringing in.
<unk> value proposition set for these work insurance customers to be able to help that product really stand out in the market. So one of those examples is our existing 90 day warranty product, we'd be able to provide those customers, but there's a variety of things the ports can do and it's very different than others moving concierge, the app to help them manage their home.
So you recall check that's built in to monitor their appliances frame potential recalls and more.
<unk> has built over time of these unique capabilities for consumers and we can be able to bundle into into that insurance product to really help people holistically more than just insurance into both differentiate what that means is it does give us opportunities not just help with insurance, but to help them again with a variety of other services around their home that we.
Thank you create quite a lot of volume.
Thanks for that and then can you help us.
Understand how the fair value of the transfer is determined is that dictated by HOA. Its book value and if so can you tell us where that is currently carried and secondly, how long do you think it will take to get repaid on that that kind of a bridge no doubt you are providing as you recapitalize.
The reciprocal with third party capital.
I mean, I think first yes at market value book value. So when you have a transaction like this.
We use the market price look at comps and then yes setback the appropriate book value.
That purchase so that's exactly right.
And then the second question.
How long do you think it will take to recapitalize, the new entity with third party capital and take out.
When you are contributing.
Okay.
Choice gross Brian in terms of when we when the capital that will be priced right.
More than <unk>.
Our ability to go and get that capital is also a question of just the capital needs of the entity.
So one of the elements of our cyclical as the consumers. In addition to their premiums based surplus contribution so slight additional amount that goes into building surplus. So it's a more efficient way to build surplus overtime.
We would expect over the course of the first year or so assuming the cost of capital was right to be able to go out and look to bring third party capital in.
Alright. Thank you everyone I'm afraid that's what we have time for today.
Okay. Thank you very much for joining and we look forward to speaking to you soon.
Thank you all for the time and the interest we do appreciate it and have a great day.
Yeah.
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