Q4 2024 Open Lending Corp Earnings Call
Speaker Change: [music].
Greetings and welcome to the open lending fourth quarter and full year 2024 earnings conference call.
Jessica Buss: As a reminder, today's conference call is being recorded on the call today are Jessica Buss Chairman of the board of Directors and Chief Executive Officer, and Chuck <unk> interim Chief Financial Officer, and a member of the board of directors.
Like to pass the call over to Ryan Gardella Investor Relations to read the Safe Harbor statement. Please go ahead.
Jessica Buss: Thank you and appreciate you all joining us prior to the start of this call. The company posted a fourth quarter and full year 2024 earnings release and supplemental slides. So its investor Relations web site in the release you will find the reconciliation of non-GAAP financial measures. The most comparable GAAP financial measures discussed on this call.
Jessica Buss: Before we begin I would like to remind you that this call may contain estimates and other forward looking statements that represent the company's view as of today March 31, 2025 open lending disclaims any obligation to update these statements to reflect future events or circumstances.
Jessica Buss: Please refer to today's earnings release, and our filings with the SEC for more information concerning factors cause actual results to differ from those expressed or implied.
Jessica Buss: And now I will pass the call over to Chuck to give an update on our business and financial results for fourth quarter and full year 2024.
Chuck: Thank you and good morning, everyone and thank you for joining us today.
Chuck: While the automotive lending industry and broader automotive market continued to navigate through challenging market conditions. We continue to focus on taking prudent steps aimed to maximize our future opportunity.
Chuck: Specifically, we are focused on strategic efforts intended to drive new customer acquisitions and certified loan growth from new and existing customers.
Chuck: Optimize profitability for our lenders and our insurance carrier partners and ultimately open lending.
Chuck: Make targeted investments that are expected to improve the experience of our lender customers and their borrowers.
Chuck: As part of our goal of optimizing profitability each quarter. We review the performance of our active certified loans to identify trends and adjustments. We believe are needed to improve performance of our new originations.
Chuck: For the fourth quarter of 2024, we identified new information that negatively impacted our outlook on the performance of our back book of loans, which is in turn negatively impacted our operating results.
Chuck: In summary, this review led to an 81 million negative change in estimate or C. O E associated with our profit share revenue contract asset to reflect our expectations of the performance on the approximately 411000 active certified loans in our portfolio.
Chuck: The negative C. I E was a result of further deterioration of our 2021 and 2022 vintages as well as two additional factors that have negatively impacted performance of our 2023 and 2024 vintages.
Chuck: For fiscal year 2024, we generated 110652 certified loans $24 million in revenue and adjusted EBITDA of negative $42 9 million.
Chuck: Largely due to our fourth quarter results and the impact of the negative C. I E.
Chuck: I recognize these results are disappointing to our shareholders there.
Chuck: They are equally disappointing to me and to the board.
Chuck: To address this issue we have implemented corrective actions that are designed to yield improved performance of our new originations, while allowing us to continue our mission of serving the underserved, which I'll talk about shortly.
Chuck: First let me discuss the deterioration of our back book.
Chuck: We continue to see deterioration of our 2021, and 2022 vintages, which combined make up approximately 40% of our active certified loans.
Chuck: These loans were made at the peak of the Manheim used vehicle value index or movie of $257 seven in late 2021.
Chuck: The movie has since declined to 204 dot one as of February of 2025.
Chuck: This represents more than 20% decline in used vehicle values over the past three to four years.
Chuck: This significant decline is caused more consumers who bought used cars in this period to end up with negative equity on their automotive loans, which in turn has increased the likelihood of default on vehicles that are now worth significantly less than their outstanding loan balance.
Chuck: These two vintages are estimated to have accounted for 40% of our total negative change in estimate for the fourth quarter of 2024.
Chuck: The poor performance of these loans in these two vintages is not unique to open lending and in fact this phenomenon continues to negatively impact all lenders participating in the automotive lending industry.
Chuck: As we have noted previously we believe macroeconomic conditions also increase the likelihood of future claims from these vintages, specifically, we are continuing to see elevated claims and there was an increase in 60 plus day delinquencies in the fourth quarter of 2024 from these vintages.
Chuck: Deterioration in these other historical vintages accounted for approximately 20% of the negative change in estimate for the fourth quarter of 2024.
Chuck: In addition to the deterioration of our back book two cohorts drove incremental underperformance of our 2023 and 2024 vintages.
Chuck: These two cohorts, where borrowers with credit builder trade lines and borrowers with fewer positive trade lines.
First credit builder trade lines, primarily consists of credit builder cards credit builder cards work by allowing consumers to deposit a specific amount of money often at the discretion of the consumer into our credit builder account linked to a credit card.
Chuck: The consumer can then spend up to the amount deposited in the account on the card, though this means that the card issuer is not actually extending credit.
Chuck: Monthly payment activity as reported to the credit bureaus.
Chuck: And a history of timely payments can increase the consumer's credit score.
Chuck: Many of these cards are approved by issuers without a hard credit pool.
Chuck: Moreover, since there is no preset credit limit how utilization has not reported to the bureaus.
Chuck: While credit builder cards had been available to consumers for many years. They have seen a significant increase in usage over the last couple of years.
The increasing use of credit builder products has negatively impacted the lending industry.
Chuck: But the risk profile associated with them is still challenging to assess by industry participants at this time.
Chuck: Through our analysis of the credit builder issuers in our portfolio, we have learned that the credit builder trade lines peaked at around 15% of our originations in the third quarter of 2024.
Just on our performance data borrowers with a credit builder trade line performed twice as poorly as similarly scored borrowers without a credit builder trade line.
Chuck: In addition to the credit builder trade lines, we saw an impact from borrowers with limited positive trade lines in the fourth quarter of 2023, we launched our enhanced proprietary lenders protection scorecard known as L. P to point out and enhanced our underwriting standards.
Chuck: The underwriting enhancements in the scorecard were supported by third party historical performance data.
Chuck: As we discussed during the earnings call for the third quarter of 2024, following our implementation of L. P. 2.0, we have seen an increase in positive limited trade lines or thin files, which do not have a deep credit history.
Chuck: Consistent with our standard practice, we observed six months of age performance data before considering any underwriting changes under this approach. The first reliable data showing deterioration that we saw was with respect to May June 2020 for performance and we promptly increased our cutoff score based on this data.
Chuck: For the fourth quarter of 2024, we have sufficient performance data on multiple monthly vintages to identify the negative impact of borrowers with fewer positive trade lines.
Chuck: Combined adjustments related to borrowers with credit builder trade lines and borrowers with fewer positive trade lines contributed the remaining 40% of our negative profit share a change in estimate in the fourth quarter of 2024.
Chuck: As a result, we have taken corrective actions designed to ensure that open lending portfolio does not continue to facilitate the underwriting and insurance of these underperforming loans.
Chuck: In the third and fourth quarters of 2024, we made adjustments to our underwriting rules for borrowers with credit builder trade lines, including negatively impacting their lenders protection scores and increasing their premiums to price more appropriately for the risk.
Chuck: The net effect of these underwriting adjustments as a decrease in the approval rate on this cohort.
Chuck: We anticipate that these actions will reduce the mix of borrowers with credit builder trade lines to under 5% of our fiscal 2025 certified loan volume.
Chuck: Compared to approximately 15% of our fiscal 2024 certified loan volume.
Chuck: We also implemented further credit tightening in the first quarter of 2025 borrowers with limited positive trade lines by increasing the minimum number of positive trade lines needed foreign approval.
Chuck: We anticipate that these actions will decrease the mix of borrowers with limited positive trade lines from 10% in 2024 to less than <unk>, 5% in 2025.
Chuck: While we have implemented targeted credit tightening and pricing actions throughout the last 24 months, we anticipate taking further actions to increase pricing and tightened credit.
Chuck: These actions are intended to help ensure the performance and profitability of our new originations in order to further optimize results for our lenders our insurance carrier partners and ultimately open lending.
Chuck: We believe based on the information we have available at this time that the changes that we've made to date are expected to result in improved performance and results for our new originations.
Chuck: Despite these disappointing financial results there are many positive areas of strength in our business. Our lenders protection program continues to see strong interest from the market highlighted by 58, new customers signed in 2024, including 13 in the fourth quarter of 2024.
Chuck: We believe that our value proposition is strong and we also believe that lenders truly value our platform to provide credit to the underserved near and non prime consumers.
Chuck: Next I wanted to address our outlook for the first quarter of 2025 currently we.
Chuck: We expect total certified loans to be between 27020 8000 in the first quarter of 2025.
We plan to provide additional outlook metrics as soon as reasonably practical.
Chuck: Finally, I wanted to address the change in leadership that was announced yesterday evening.
Speaker Change: The board of Directors has decided that open lending would be best served by making a change at the leadership level at this time.
Jessica Buss: With that in mind, Jessica Buss.
Jessica Buss: Who has been serving as the chairman of the board has been named Chief Executive Officer effective immediately.
Speaker Change: I will support Jessica as interim Chief financial officer during the transition period and will assist in identifying a permanent CFO.
Jessica Buss: Before moving on to our financials in more detail I'd like to pass the call to Jessica.
Speaker Change: Thank you Chuck for your many contributions to open lending.
Speaker Change: Since joining the company in 2020, Chuck has been a critical part of the management team, leading the company through a challenging and volatile period for open lending and the industry.
Speaker Change: I'm looking forward to continuing to work with you as a member of the board.
And thank you everyone for joining us here today I have served on the board of open lending for the past five years and most recently held the title of Chief Executive Officer of Argo Group.
Speaker Change: Subsidiary Brookfield well solution.
Speaker Change: I've spent my entire career in the insurance industry and I intend to bring that experience and expertise to bear on the current challenges and opportunities that open lending as we further our legacy of serving the underserved.
Speaker Change: In the coming days and weeks, we plan on taking concrete steps to reduce the overall operations of our business.
Speaker Change: High level, Michael as CEO of open lending will be to focus on profitable unit economics.
Speaker Change: Yes.
Speaker Change: The right rate for individual loans and the pricing approach is taken.
Speaker Change: To enhance the predictability and reduce volatility in for Bob.
Speaker Change: The unit economics, and our contract asset.
Speaker Change: We are moving to a complex macroeconomic environment.
Speaker Change: And we expect that tariffs and other developments may prolong or exacerbate this environment now.
Speaker Change: Now more than ever I believe we need a sophisticated segmented and real time data driven pricing model designed to enhance the predictability of the profit share component of revenue.
Speaker Change: In addition, we intend to continue to enhance and refine our tools and scorecards and an effort to predictive drivers of frequency and severity of default.
Speaker Change: Further we will be identifying potential cost efficiencies and process improvements throughout the lifecycle that may further streamline our business as well as plenty to focus our future investments on our core levers protection program.
Speaker Change: Together I believe this will drive value for our business and all our stakeholders.
Speaker Change: I look forward to providing more details in the coming weeks and months as well as getting to know each of you better in hearing your unique perspective.
Speaker Change: Thank you Jessica now I'd like to provide an update on our financial results for the fourth quarter 2024.
Speaker Change: During the fourth quarter of 2024, we facilitated 26065 certified loans compared to 26263 certified loans in fourth quarter of 2023.
Total revenue for the fourth quarter of 2024 was negative $56 9 million, which includes $81 3 million of the aforementioned ASC 606 negative change in estimate associated with our profit share.
Speaker Change: To break down total revenues in the fourth quarter of 2024 program fee revenues were $13 7 million.
Speaker Change: Profit share revenue was negative $73 2 million.
Speaker Change: Net of the negative change in estimate and claims administration fees and other revenue was $2 5 million.
Speaker Change: As a reminder, profit share revenues comprises the expected earned premiums less the expected claims to be paid over the life of the contracts and less the expenses attributable to the program.
Speaker Change: The net profit share to us is 72% and any losses in the net profit share are accrued and carried forward for future profit share calculations. The negative change in estimate during the fourth quarter of 2024 reduced our contract asset and for certain loans caused the cash consideration previously received to be in excess of the expected profit share revenue.
Speaker Change: The amount of excess funds in the fourth casted losses were recorded as an excess profit share receipts liability.
Speaker Change: Profit share revenue in the fourth quarter of 2024 associated with new originations was $8 2 million or $314 per certified loan.
Speaker Change: As compared to $13 2 million or $501 per certified loan in the fourth quarter of 2023.
Speaker Change: The $81 3 million negative profit share change in estimate recorded in the current quarter is associated with cumulative total profit share revenue previously recognized of approximately $410 million for periods dating back to January of 2019, the ASC 606 implementation date and and represents over 411000.
Speaker Change: Insured enforce loans in the portfolio.
Speaker Change: Operating expenses were $15 4 million in the fourth quarter of 2024 compared to $17 9 million in fourth quarter of 2023.
Speaker Change: Operating expenses decreased 14% year over year.
Speaker Change: Operating loss was $78 6 million in the fourth quarter of 2024 compared to operating loss of $8 3 million in fourth quarter of 2023.
Speaker Change: Net loss for the fourth quarter of 2024 was $144 4 million compared to a net loss of $4 8 million in the fourth quarter of 2023.
Speaker Change: Given the magnitude of the losses related to the profit share revenue change in estimate for the fourth quarter, we recorded a valuation allowance on all of our deferred tax assets of $86 1 million, which increased our income tax expense net loss per share was $1.21 in the fourth quarter of 2024 as compared to a net loss of four cents per share in the fourth.
Speaker Change: Quarter of 2023.
Speaker Change: Adjusted EBITDA for the fourth quarter of 2024 was negative $73 1 million as compared to negative $2 1 million in the fourth quarter of 2023.
Speaker Change: There's a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release.
Speaker Change: We exited the fourth quarter with $296 4 million and total assets of which $243 2 million was unrestricted cash and $15 million in contract assets, we had $218 3 million and total liabilities of which $139 7 million was in outstanding debt.
Speaker Change: Yeah.
Speaker Change: While we were disappointed with our results for the quarter and year. We believe we have taken actions that are necessary to better position open lending now and in the future.
Speaker Change: Against an increasing challenging macroeconomic backdrop. We are also taking concrete steps to tighten our credit standards and increased pricing where needed in an effort to drive revenue and reinvest in our core lenders protection program.
Speaker Change: While we continue to closely monitor our loan portfolio's performance, we have confidence in our model and believe we have an opportunity to re grow our certified loans in the future.
I want to personally thank our entire open lending team for their dedication to our company our customers and our partners.
Speaker Change: We are all grateful for your diligent work and dedication to our mission.
Speaker Change: I would also like to thank open lineage customers partners investors and analysts for your business and support over the last five years.
Speaker Change: We will now take your questions.
Speaker Change: Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Speaker Change: Formation tone will indicate that your line is in the question queue. You May press star two if he would like to turn with your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys.
Speaker Change: That is star one to register a question at this time.
Speaker Change: Today's first question is coming from Vincent can pick up P. T. I G. Please go ahead.
Vincent: Hi, Good morning, everyone. Thanks for taking my questions and Jessica welcome I look forward to working with you.
Speaker Change: Thank you.
Speaker Change: Maybe focusing.
Speaker Change: On Europe perspective, Jessica with your long insurance company background. If you can give us an overview of what what you think from the insurance perspective.
Speaker Change: No.
Speaker Change: He is going on with essentially with them, but Oakland, maybe broad question Dan.
Speaker Change: When we look at what's.
Speaker Change: And the stock price is down 60% free market.
Speaker Change: And so there's kind of a questions on what's structurally needs to change if anything and what the economics.
Speaker Change: Are going to be and so maybe you can talk about your perspective of what what happened and what needs to change in order to move the company going forward and if need be.
Speaker Change: Big structural changes need to happen economically.
Speaker Change: Yeah. Thanks, Vincent I appreciate the question. So maybe just to start if you don't mind talk a little bit about sort of why I decided to make the change and come here and a little bit about my background I've been on the board of directors for the last five years and have watched the company evolve over time and I think.
Speaker Change: That process. What we've learned is you know half of our unit economics really come from our profit share, which is truly an insurance product.
Speaker Change: So in my entire career in the insurance industry and really feel like an insurance type approach to both pricing claims operations would really be beneficial to the foundation that the company is already built and so that's you know my perspective that I'd like to bring in as it relates to be to focus on profitable yet.
Speaker Change: Can amex and does it enhance the predictability and reduce the volatility as I said in my comments around our profit share component and the way that we're going to do that is to build on the already good pricing work that's been done by the team but to do it in a more sophisticated segmented in a real time base.
Speaker Change: Says, bringing performance at a far worried segmenting our business looking at both how we can price on a real time basis, a meal like an insurance company would price a true insurance products. Yeah. We do rate reviews. Accordingly, we would implement rate increases, but it also includes implementing.
Speaker Change: Rate decreases for better performing loans, so we need to look at each individual loan price it appropriately drive in better risks Jive out poor performing risks or get the right adequate rate and I think that's sort of what we've seen also I believe that we can you.
Speaker Change: Use more feedback is that like a better feedback loop.
Speaker Change: Down the silos between sort of what we call 606, which in essence is like.
Speaker Change: It represents what we call in the insurance world like the reserving perspective to say, what actually happened and what could we have done from an underwriting and a pricing perspective to actually increase the performance of reduce again the volatility of the performance of.
Speaker Change: Of those individual alone likelihood you in in the insurance World and I think a good example of that really you know if we look backwards is as you know we relocate the 'twenty one 'twenty two vintages coming out of Covid and we saw the movie at the highest point until we had very high you used car prices.
Speaker Change: Today, we would have a forward looking perspective that you would probably likely need to raise rates right because what's going to happen is that where people are buying cars at the highest level and then when you know when the movie it moves down and people begin to default. The this the severity of those and the severity of those defaults I was going to be.
Speaker Change: Much larger than we would've priced firewalls today, we're starting to think about those things forward looking instead of just being reactive and I think that started when we ran into some of the problems.
The other of course I was out in the Super thin files, I'm, having very tight underwriting guidelines and again reviewing on a real time basis, bringing this performance in delinquency data quicker collecting the data that we're using on pricing measuring how we actually perform relative to what we expected on them.
Speaker Change: A more real time basis again, so we can implement those changes and if you think about sort of our targeted loss ratio and how we can sort of reduce that volatility. Yeah. We talk about we priced to a 60% loss ratio and you you'll see that we've actually confined our our current unit economics to us.
Speaker Change: $300, a profit share piece of that well within that 60% loss ratio. The distribution of results really is somewhere probably between 20% and then and 100% loss ratio right. So that every loan performs at a 60 well we wanted to do is drive more loan volume.
Speaker Change: I'm in the 20% to 60% loss ratio business and drive out the higher loss ratio business and we can do that not by just driving rate increases on the higher and the worst performing loans, but actually yeah.
Speaker Change: Reducing prices in the better performing loans. So again, we've got better better loans with less risk at the right rate, which is also better for credit unions and our customers as well.
Speaker Change: Okay. That's super helpful detail and I'm encouraged by that thank you Jessica and maybe just to give us some perspective, it sounds like Theres a lot of.
Speaker Change: Perhaps a lot of infrastructure a lot of things that need to be done just how how difficult or how much work and how much investment.
Speaker Change: Beach to be.
Speaker Change: Put in to achieve these things just to give us some perspective. Thank you.
Speaker Change: Yeah, I, you know I would say that you know the infrastructure and the piping and the tools are belt and me and the team has done a great job you know with scorecards L. P. Two point no.
Speaker Change: Matt, saying, who has joined US as chief underwriting officer that was that was a Big addition to the company last year really bringing in sort of the underwriting view, we now have I am actuaries on staff there, helping on the pricing side and then Josh has joined US on the product side and really what we need to do again is sort of bring that all together and.
Speaker Change: We will need to build probably you know more in depth data and we will need to accelerate as I mentioned are receiving performance in delinquency data into the system and ingesting that and then I think sort of the biggest AD will be this idea of predictive modeling. So how do we take that that'd be better predictors of her.
Speaker Change: Ultimate loss costs will perform over time, and then measuring whether we're right or not and then adjusting that on a real time basis again like in true insurance product. So I think it's not as much about true large infrastructure changes as it is about yeah. We were thinking how we can.
Speaker Change: Less data what data we retained from well how we price and then how we measure how we performed relative to that and then building predictive models, which again isn't infrastructure. It's more you know actuarial type predictive modeling I've done in an insurance company. So.
It will take time for that to earn through right. I mean, we've taken some corrective actions as as Chuck has mentioned in his comments with underwriting changes and Super fans and we've taken some rate increases.
Speaker Change: Poor performing files that we've taken some rate decreases and big files, where we've actually performed better.
Speaker Change: And again those are all good changes, we'll continue to get more and more granular in that approach and.
Speaker Change: And so it'll yeah ill you know everything earns out over multiple years right, but I think we would expect to see a pretty big lift from the changes that we've already made and that will continue to get better and better and we will see better performing results, but hopefully again less volatility around adjusted going forward.
Speaker Change: Okay. Thank you very much and last one for me and I'm, sorry, I'm, just getting a lot of this investment.
Speaker Change: Investor questions on it and it's kind of a separate topic, but just trying to understand.
Speaker Change: The remaining exposure from the profit share and the make hold agreements and so forth. So it was very helpful to get the data point that.
Speaker Change: 40% of your active certified loans are from that vintage of 'twenty 'twenty. One 'twenty two so if I just take the 40% tons to 411000 165000 starts, but if I can understand like what's the remaining principal balance and maybe insurance at risk just so I can understand how much.
Speaker Change: Make whole can be.
Speaker Change: So clawback and what other.
Speaker Change: The remaining exposure there might be thank you.
Speaker Change: Okay.
Speaker Change: Yeah Vincent this is Chuck.
Speaker Change: If you think about you're right on the 40% of the enforced loans in the amount of loans are still in the portfolio.
Speaker Change: Yes.
Speaker Change: There's adjustments we've taken on the change in estimate in the fourth quarter.
Speaker Change: In prior quarters, you know, we've virtually taken the unit economics that we had previously booked on those vintages are pretty much down all the way down to you know.
Speaker Change: Zero necessarily but written down pretty far and sits on a vintage by vintage basis.
Speaker Change: But you are asking about principal balance I mean, I don't have that number right in front of me that of what's left outstanding on that but but you know the loans as you know amortize more.
Speaker Change: More heavily to the front end of the loans.
Speaker Change: From an amortization perspective, so so I just again that would be something we'd have to get back to you on I don't have that in front of me, but with the amount of the write down.
Speaker Change: On those vintages has been pretty significant I mean, the prior adjustments in the you know call. It past seven quarters, and then of course with this adjustment in the in the fourth quarter, because you know 40% roughly of the $80 million that we took in the quarter was related to the 'twenty, one and 'twenty two vintages specifically.
Speaker Change: Okay got it I'll get back in the queue. Thank you Jessica Thank you.
Vincent: Yes, Thanks Vincent.
John Hecht: Thank you. The next question is coming from John Hecht of Jefferies. Please go ahead.
John Hecht: Good morning, guys. Thanks for taking my questions.
Speaker Change: Congratulations Jessica look forward to working together.
Speaker Change: The first question I have is the credit builder trade lines and kind of the modifications.
Speaker Change: Dealing with that customer base.
Speaker Change: How much does this affect your.
Speaker Change: Your dress addressable market and then where can you go to offset the loss of that that type of customer.
Speaker Change: Yeah.
Chuck: John This is Chuck I'll start and then Jessica can jump in but you know as we said in the prepared comments you know we was new information, obviously that we've sort of seen in call. It late third quarter and primarily in the fourth quarter as we did our analysis and it became a bigger piece of our book throughout 2024.
Chuck: But you know 30% of our 'twenty 'twenty four volume was you know these are you know at.
Chuck: At least you know fewer positive trade lines as we referred to him and then 15%.
Chuck: A.
Chuck: Thin files, and then 15% supercell roughly so this is just the ones that have fewer than three three positive trade lines.
Chuck: So we've adjusted for that and we took action in gosh.
Chuck: Late third quarter, and then again in the fourth quarter. It actually in Q1 to kind of minimize those you know when we put out an outlook for Q1 of you know call. It two and 27000 and search and 28000, so that's actually up sequentially from where we hit for Q4, and so the addressable market. It wasn't a huge piece of our business.
Chuck: We didn't like the performance of it.
We you know we took corrective action to prevent those loans coming into the portfolio. So don't see it as a huge impact of our go forward volume.
Chuck: Yeah, I mean, maybe the other thing that I would add is that yeah. Certainly we are looking to be able to scale the business across all market cycles, but we're looking at quality over quantity right now and I think when we get to a segmented pricing is that we start to attract and replace those super thin.
Chuck: And with better performing business from you know what it has historically been our base, you know customer or credit unions, and we'll be able to do that through the pricing mechanism itself, because while the super Super things will get priced out or even underwriting through underwriting rules will be able to write more.
Chuck: More of the better quality business by giving those policies again, a more appropriate rate, which could be rate decreases and we will be able to to actually target to that so we'll be asked them is in the portfolio yeah with a more targeted approach of what we want to write more like being hunters and gatherers of.
Chuck: The types of loans that we got in their portfolio.
Chuck: Okay and then.
Chuck: Second question I have is what do you guys think.
Chuck: It needs to happen in the market for the Oems to.
Chuck: I guess have more flow coming through there their channels.
Chuck: Okay.
Chuck: Yeah.
Chuck: Some of what we've seen in the Oems as you know, it's kind of across the portfolio, but you know John.
Chuck: Oems and to a lesser extent to some of our credit Union customers.
Chuck: These credit builder risks as well as these fewer positive trade lines. So.
Chuck: Some of that was impacted in the tightening actions that we took this year in parallel excuse me last year and 24.
But we are very excited about signing OEM, three which we put out a release gosh, a month or so ago now maybe two months ago and that is in.
Chuck: In pilot and excited about that new relationship and.
Chuck: And it's growing across their dealerships and as you know in the past we can't mention the name, but very excited about that so so I think that will definitely be helpful. In growing the combined OEM business throughout 'twenty five.
Chuck: Great. Thanks very much.
Chuck: John.
Speaker Change: Thank you. The next question is coming from Peter Heckmann of D. A Davidson. Please go ahead.
Speaker Change: Good morning, Thanks for taking the question as regard to your insurance carriers.
Speaker Change: Correct me, if I'm wrong, but I think you have three insurance carriers are active currently huggins their capacity compare to maybe the 110000 Marlins that you're certified and Ah in 2020 for a continued to have something that's well in excess of that.
Speaker Change: Oh, Yeah, I mean, the capacity from our three active carriers as you know has plenty of capacity to continue growing the company into the future.
Speaker Change: It's much larger certain levels.
Speaker Change: Yeah.
Speaker Change: Okay, maybe to add to that we've been having ongoing conversations with the carriers.
Speaker Change: They're very excited about the work that we're doing they're very pleased with the overall long term performance of the portfolio.
Speaker Change: And we have no restrictive caps on the amount of capacity they'd like to do more business with us.
Speaker Change: So I would say that you know.
Speaker Change: That piece of.
Speaker Change: The ecosystem is very healthy for us.
Speaker Change: Okay, Great and then how do you feel that.
Speaker Change: Some of the credit unions that historically participated in and direct mail for refinancing.
Speaker Change: Do you think they are positioning for 2025 do you think rates need to come down another 50 basis points or or is it more.
Speaker Change: Other dynamics that they're looking at.
Speaker Change: Yeah, I think I think it's more I mean, you know refi I think was about little less than 4% in 2024 of our business. So we were encouraged you know late last year thinking we'd have more rate reductions Pete, but we've all seen that that's kind of slowed and paused a bit but.
Speaker Change: As we've always said, we don't really need rates don't necessarily come down we just needed them to stabilize which we've seen that it's been more of the credit unions kind of working through their loan to share in their capacity issues that they had you know.
Speaker Change: Call It 23, and 'twenty four and we are seeing that improving.
Speaker Change: Loan to shares coming down a bit deposit growth I think it was up.
Speaker Change: Actually about four 6% across the credit Union business, which if you recall our deposit growth was got to a low of about 1% one 5%. So so that's encouraging their building deposits, which in turn follows with lending and in auto and they love the short term auto paper and so we ought to start seeing that benefit as well.
Speaker Change: And that will you know across all channels, including refi.
Speaker Change: Yeah.
Speaker Change: Okay. So no guarantees, but certainly the set up appears that refi could see a bit of a recovery in 'twenty.
Speaker Change: Yeah, I think the consumers and you know where some of these loans were priced in the past would definitely benefit from an affordability. So yes absolutely.
Speaker Change: Alright, thank you.
Pete: Thanks Pete.
Speaker Change: Once again that is star one if you would like to register any questions. At this time. The next question is coming from John Davis of Raymond James. Please go ahead.
John Davis: Hey, good morning, guys and I'll add my congrats Jessica and look forward to working with you just to touch on the insurance carriers, maybe from a little bit of a different angle.
Speaker Change: As our profitability Ben It sounds Jessica in response to last question. The relationship is good there, but just curious are they still making money are they seen losses and is there any potential risk to the 72% that you guys get to keep you know could there be any downward pressure on that too for the insurance companies to improve their profitability.
John Davis: Yeah.
John Davis: Long term profitability for the insurance companies has been very strong you know like all market cycles and I'll parse in insurance, you know theres going to be years, where certain products don't perform as well as expected and certainly in certain vintages, we have seen that but again across the board performance has been strong also remember that the insurance carriers.
John Davis: Get to keep 8% off the top so they are combined ratio of leverage is very stable as it relates to sort of changes in the loss ratio. They experienced their combined ratios have performed again, you know very well over time, there have been a few vintages of course, where they've been higher than expected.
John Davis: Certainly, but you know again those relationships.
John Davis: Our very strong there has been no discussions about changing the percentage the percentage of profit share participation.
John Davis: By the insurance carriers are also we would expect that to continue as it always has.
Speaker Change: Okay. No. That's helpful. And then if I look at the profit share per search ex kind of the change in estimate.
Speaker Change: I think it was roughly $300 in the fourth quarter has historically been closer to 500, and I guess, Jessica and so if there was a couple of thoughts there where you over earning at 500 is 300 and the right way to think about 2025, and what do you need to do to get that going.
Speaker Change: Closer to historical levels versus the fourth quarter.
Jessica Buss: Yeah. So the 300 represents a constrained profit share under 606 guidelines, which you know.
Jessica Buss: <unk> is that we have to book a book a constrained profit share, where we think that it's more likely than not that they will not be a reversal of the profit share. Historically, the 500 was booked based on a projected 60% loss ratio. If you sort of look at what we've booked in Cie adjustments over the past quarters that would have taken.
Jessica Buss: That $500 down closer to kind of a 300 dollar range and yeah. We have taken the corrective actions that we believe will over time bring that back to 500, which again is really based on a 60% loss ratio target. However, we're not going to reflect that until we see that those.
Jessica Buss: Actual constraints and underwriting changes I've taken effect in that we see an actual improvement in the lung compartment.
Jessica Buss: The only thing I'd add is John J D is is we've always under the 606 constrained just based on the recent performance and what we've seen in the in the in the back book and that further deterioration we've talked about and then some of these recent cohorts that are not performing just put some further constrained under the under this acceptable under the guidance. So it's Jessica.
Jessica Buss: Ed.
Jessica Buss: Those will perform better ultimately and we'll get back to those those unit economics, Yeah, and I guess the last part of your question is what do we need to do and I think that's what we talked about earlier is that we need to get this you know real time sophisticated pricing. So that we don't end up in situations, where we tried to reduce again the volatility around this.
Jessica Buss: So six so that we feel more confident in the 60% with less volatility around the performance around that number, but we would expect us to continue to price future vintages that would result in something closer to what you've seen is a historical $500.
Jessica Buss: You can ask for a profit share.
Speaker Change: Okay. It sounds like in the near term $300 plus or minus is the right way to think about it until you guys actually start seeing some improvement there I think that's fair, Okay, and then last one for me.
Speaker Change: But just last one for me on tariffs obviously liked.
Speaker Change: Likely helps credit as used car prices go up it hurts.
Speaker Change: Affordability, so maybe just talk a little bit about how you guys think about obviously a lot of moving pieces and we'll see but at a high level, maybe just give us some some comments there.
Speaker Change: Yeah, I think what we said and I think I mentioned in my comments is that we would expect tariffs to be you know positive answer to the back book as it increases.
Speaker Change: <unk> prices and then therefore reduced severity on sort of.
Speaker Change: And default.
Speaker Change: I think the question is if tariffs stay in place what does that do to the movie going forward in terms of you know he used car prices in the long term as it will likely increase those as sort of new cars become more expensive than used cars become more expensive in and become less affordable. We don't want to end up in the same position that we ended up in 'twenty one 'twenty two.
Speaker Change: <unk>, where we had the height of used car prices and we were pricing. It appropriately. So I think our viewpoint would be if we believe that it's been a long term effect you know used car prices being over inflated all are being at an all time high and we will need to adjust pricing to reflect that and a potential severity calculations going forward.
Speaker Change: Okay appreciate the color.
Speaker Change: Did you find the basketball it would be positive on the back book.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thanks Judy.
Jessica Buss: Thank you, ladies and gentlemen, as there are no further questions I will now hand, the conference over to Jessica for her closing comments.
Jessica Buss: Thank you we appreciate your interest and support and I'd like to again. Thank the team members at the open lending for your hard work and dedication to our company, Thanks and have a great day.
Thank you.
Speaker Change: Ladies and gentlemen. This concludes today's event you may disconnect your lines or block off the webcast at this time and enjoy the rest of your day.
Jessica Buss: Yeah.
Jessica Buss: [music].
Jessica Buss:
Jessica Buss: Okay.
Jessica Buss: [music].