Porch Group - Q4 2023

Transcript

Lois Perkins (Head of Investor Relations)

Good afternoon, everyone, and thank you for participating in Porch Group's Q4 2023 Conference Call. Today, we issued our Q4 earnings release and related Form 8-K to the SEC. The press release can be found on our investor relations website at ir.porchgroup.com. Joining me here today are Matt Ehrlichman, Porch Group's CEO, Chairman, and Founder; Shawn Tabak, Porch Group's CFO; Matthew Neagle, Porch Group's COO; and Jim Weld, GM of Rynoh, Porch's title software company. Before we go further, I would like to take a moment to review the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements. Today's discussion, including responses to your questions, reflects management's views as of today, 7 March, 2024. We do not undertake any obligations to update or revise this information.

Additionally, we'll make forward-looking statements about our expected future financial or business performance or conditions, business strategy, and plans, including the application for the reciprocal exchange, based on current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We encourage you to consider the risk factors and other risks and uncertainties described in our SEC filings, as well as the risk factor information in these slides for additional information, including factors that could cause our results to differ materially from current expectations. We will reference both GAAP and non-GAAP financial measures on today's call. Please refer to today's press release for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call, which are available on our website.

The financial information provided today is preliminary, unaudited, and subject to revision upon completion of the closing and audit processes. As a reminder, this webcast will be available for replay, along with the presentation shortly after this call on the company's website at ir.porchgroup.com. I'll now turn the call over to Matt Ehrlichman, CEO, Chairman, and Founder of Porch Group. Over to you, Matt.

Matthew Ehrlichman (CEO)

Thanks, Lois. Good afternoon, everybody. Thanks very much for joining. I couldn't be more proud of the achievements and execution of the Porch team over the last year. Despite a sharp increase in interest rates over the last couple of years, higher cost of reinsurance and claims, contraction in the real estate market, and historically challenging weather events, the team stuck together, stayed focused, and performed. We implemented our insurance profitability actions, which you'll hear throughout today's presentation. This includes enhancing underwriting activities, increasing premium per policy, and non-renewing higher risk policies. We launched Porch Warranty and new products for our software customers, increasing pricing while maintaining our high customer retention. As a result of the work we've done, financial results were strong and exceeded expectations.

Revenue in the Q4 grew 79% to $115 million, $15 million above our prior guidance. Revenue, less cost of revenue, grew 82% to $80 million, $20 million above guidance. Q4 adjusted EBITDA profit was $12 million, an increase of $25 million compared to the Q4 of 2022, and $8 million above guidance. In every measure here, it was a great quarter. A few other key updates for the Q4 before we dive into the presentation. One, we handily beat the second half 2023 profitability target we set two years ago, with second half adjusted EBITDA of $21 million. Next, we had no material weaknesses. Huge thanks to Shawn and the team for the expertise and leadership. This was a top priority for us as we completed system implementations and improved our control environment.

A truly great achievement, and well done, team. Next, our business continues to make meaningful progress across many areas. In Q4 alone, we launched a new Rynoh product for title companies. We landed a new utilities partnership, released a new HVAC micro warranty, and a CRM product for smaller inspectors. Our moving business is executing a local full service offering, expanding on our leadership position, and providing moving labor to consumers. This product increases the size of our market opportunity and provides a higher margin offering. Next, we released our first ESG report, which is available on our IR website. We look forward to sharing more on this in the future. And finally, we were admitted into Deloitte Technology's Fast 500 for 2023. Now over to you, Shawn, on the financials.

Shawn Tabak (CFO)

Thanks, Matt, and good afternoon, everyone. As Matt mentioned, we are extremely pleased to accomplish our second half 2023 Adjusted EBITDA target despite market headwinds. I wanted to thank our teams for their contribution and hard work to achieve this critical milestone. Moving to slide 9 here to get into the financials. Revenue was $114.6 million in the Q4 of 2023. Growth of 79% over the prior year, driven by our insurance sector, which grew 179%, partially offset by the vertical software sector.... Revenue less cost of revenue was $79.9 million, resulting in a margin of 70% of revenue, which is a 120 basis point increase over the prior year, driven by the insurance profitability actions and software price increases.

Adjusted EBITDA was $11.7 million, a 10% margin, and a $25 million increase over the prior year, driven by the insurance segment and strong cost control. Gross written premium was $112 million, a decrease compared to prior year, as we focus on profitability and reducing risk through non-renewals and new business restrictions in higher risk zip codes. This is partially offset by an increase in premium per policy. The insurance segment was 76% of total revenue in the Q4, an increase from 49% in the prior year. Revenue from our insurance segment was $86.9 million, growth of 179% over the prior year, driven by a 34% increase in premium per policy and lower reinsurance ceding.

Approximately one-third of the growth was from increases in premium per policy and two-thirds from the lower ceding, partially offset by attrition with the non-renewals. Vertical software revenue was $27.7 million, a decline compared to the prior year, driven by the housing market headwinds, which particularly impacts moving services along with lower demand in corporate relocations. SaaS revenue remained resilient. Moving to adjusted EBITDA by segment, insurance segment adjusted EBITDA was $31.6 million in the Q4 of 2023, a 36% margin, driven by insurance profitability actions, which drove a lower gross loss ratio compared to the prior year. Vertical software adjusted EBITDA loss was $300,000, with continued market pressure in moving services.

Corporate expenses were $19.7 million, or 17% of total revenue, a 600 basis point improvement compared to the prior year. Moving now to the balance sheet. We are proud to have generated $34 million of operating cash flow in fiscal year 2023. We generated $43 million of operating cash flow in the second half of the year. You can see here that we ended the year with $398 million of cash, cash equivalents, and investments. And excluding the $310 million at HOA, Porch held $87 million. In addition, Porch Group held $39 million of restricted cash, primarily for our captive and warranty businesses, as well as a $49 million surplus note from HOA.

HOA surplus at December 31 was a healthy $52 million. In the Q1 of 2024, there have been four items that I would like to bring to your attention. First of all, we signed a strategic business agreement with Aon, who will support us in securing reinsurance and other services in 2024 and the next several years. We released them from any Vesttoo related claims, although we'll continue to pursue other non-Aon parties. We received approximately $25 million upfront cash in January 2024, and expect to receive approximately $5 million over the next four years. Second, as previously discussed, we tested connecting home buyers with third-party insurance agencies to compare conversion and profitability versus EIG, our in-house agency. Our unit economics and profitability improved substantially in these tests, given the costs associated with running the agency.

Therefore, we sold EIG for $12 million cash in January of this year. EIG was a small business for us, with annual commissions from third-party carriers of approximately $5 million and an Adjusted EBITDA loss of approximately $3 million in 2023. While we'll continue to prioritize selling our own insurance products, like HOA and eventually Porch Insurance, to relevant home buyers, when we do connect consumers to agency partners and they sell a third-party carrier product, we'll receive back high margin revenue. Overall, this divestiture increases profitability in 2024 and ongoing and improves our balance sheet. And importantly, as part of the strategy around forming a reciprocal exchange, we want as much premium as possible sold into our own insurance products, and for Porch Group to be the operator of the reciprocal with lower volatility and higher margins.

Tighter alignment with third-party agencies can incent them to drive more of their customers to our carrier. Third, in February, we repurchased $8 million par value of our unsecured notes for $3 million cash at 37.5% of par, reducing our 2026 debt maturity to $217 million. And finally, we expect to file a Form S-3 shelf registration statement with the SEC soon around the timing of our 10-K, which gives us the flexibility to raise various forms of capital over the next three years. We do not currently have any imminent plans to raise capital, however, this is a good corporate practice and provides several options to reduce our 2026 notes over the next two years.

Shifting now to our full year, 2023 revenue was $430 million, a 56% growth over the prior year, driven by 152% growth in our insurance segment. Revenue less cost of revenue was $210 million, a 25% increase over the prior year. There was a change to margins year-over-year due to mix shift between insurance and vertical software segments, and a change in our reinsurance programs within insurance. The adjusted EBITDA loss was $44.5 million, a $5 million improvement over the prior year, driven by improvements in insurance profitability actions we discussed, and offset by higher reinsurance costs in 2023, and historically challenging hail events in Texas in the Q2.

Gross written premiums were $525 million, relatively flat compared to the prior year, with non-renewal of higher risk policies offset by increases in premiums for policy. These changes drove notable improvement in profitability, building momentum in the second half of the year. And with that backdrop, now let's take a look at our 2024 guidance. Today, we are providing our full year of 2024 guidance. For 2024, we expect revenue of $450 million-$490 million. Growth of 5%-14%, driven by the insurance segment, with relatively flat revenue in the software segment. We expect revenue less cost of revenue of $225 million-$240 million.

We expect overall margins to be relatively flat with 2023, as increases in vertical software margins are offset by mix shift toward higher growth, but lower margin insurance segment. We've assumed a 63% gross loss ratio for the full year, in line with our 5-year weighted average. Overall, we expect adjusted EBITDA profit of $1 million-$10 million. The year-on-year improvement is predominantly driven by continued execution against our insurance profitability actions we discussed today, price increases in our SaaS businesses, and ongoing cost management efforts. We expect operating expenses to decrease more than 10% compared to 2023. We expect gross written premiums of $460 million-$480 million. For reference, EIG's written premium from third-party carriers was approximately $45 million in 2023.

So our guidance implies managing to roughly flat on an apples-to-apples basis, as third-party carrier written premium will be excluded under the new agency model. This includes executing further non-renewals of higher risk policies, exiting the state of Georgia, where we're unable to get the rate needed to achieve our profit targets, and being selective around bringing in attractive new business. Overall, at approximately flat premium, we are reducing our projected risk exposure by approximately 22% in 2024, which follows the approximately 26% reduction between 2022 and 2023. This drives lower expected reinsurance and loss costs. We believe our insurance profitability actions in 2022, 2023 and 2024 set us up well for sustainable, profitable growth in 2025 and beyond.

It's going to be an exciting time for the company. Now to Adjusted EBITDA seasonality. We've historically experienced higher insurance claims in the first and Q2s. Therefore, as this illustrated chart shows, in 2024, we expect Adjusted EBITDA to be negative in Q1, more negative in Q2, followed by profitability in Q3 and Q4. Overall, the midpoint of our 2024 Adjusted EBITDA guidance is a $50 million increase compared to 2023. In 2024, we expect Adjusted EBITDA to improve approximately $10 million-$15 million in each quarter compared to the same quarters in the prior year. We are continuing to roll out additional price and deductible increases over the first half of 2024, which benefits the second half.

Finally, given our progress and strong results, we secured an additional kind of reinsurance product to protect the balance sheet and reduce our exposure to weather. Earlier in 2024, we purchased $30 million of aggregate Severe Convective Storm Coverage, which includes hail protection. This means if we see a series of smaller storm or hail-related losses, similar to what we saw in Q1 and Q2 of 2023, we would have coverage, adding to what we already have for larger events. Generally, if hail events were to drive worse than expected claims volumes in 2024, we are now much better protected, increasing our confidence in the upcoming year. Our typical reinsurance renewals will occur on 1 April . Thank you all for your time today, and I'll now hand over to Matthew to cover our KPIs and other business updates.

Matthew Neagle (COO)

Thank you, Shawn. Hello, everyone. I will start with our KPIs. The average number of companies was 30,000 in the Q4, broadly similar to last quarter and prior year, with continued housing market headwinds. Average revenue per company per month increased 84% to $1,277, versus $693 in Q4 2022, as we continue to monetize the insurance opportunity more effectively. We had 220,000 monetized services in the quarter, an increase of 3% despite the headwinds in the housing market and decline in corporate relocations. Finally, average revenue per monetized service was $448, up 105% versus prior year, due to the growth in our higher value services, such as insurance and warranty.

I want to take a moment to highlight our SaaS revenue within the vertical software segment. Industry home sales declined 18% in 2022, an additional 19% in 2023. Despite this, our software and subscription revenue have remained broadly consistent over that period. While we are not assuming any improvement in the housing market in 2024, when the housing market recovers, it will be a tailwind for our businesses. Looking now at the insurance segment KPIs, which includes HOA, our insurance carrier, our warranty business, and as of December 31st, it also included EIG. Gross Written Premium was $112 million, from 310,000 policies in force in the Q4. Policies in force declined 20% compared to prior year, while GWP decreased 14%. This is due to non-renewals of higher risk policies being partially offset by increased premium per policy.

Annualized revenue per policy increased to $1,120, driven by premium per policy increases and lower seeding. Focusing now on HOA, our insurance carrier, annualized premium per policy increased 34% to $1,861. Premium retention was 96%, approximately 10 percentage points lower than prior year, driven by the non-renewals we discussed. Our gross loss ratio was 36% in the Q4, and I'll provide more insight on that on the next slide. We welcome comparisons of our gross loss and combined ratios to all other property-centric carriers. As I said, the gross loss ratio for Q4 was 36%, and for the full year 2023, it was 69%, and that's even with a tough weather environment. Our combined ratio in the Q4 was 49%, and for the full year 2023, it was 88%.

Here on slide 21, you can see the detail from the last two years, including the split between catastrophic weather and non-cat perils. You can see seasonality in the cat gross loss ratio, with the first and Q2s being the worst weather quarters, as well as the non-cat gross loss ratio improving throughout the 2023 year to 30% in the Q4. This clearly demonstrates our ability to identify and price risk. You can see the year-over-year improvement of our gross combined ratio from 77% in Q4 2022 to 49% in Q4 2023. The point to highlight here is our unique data improves our ability to underwrite policies effectively as we focus on profit. We provide discounts to lower-risk policies and surcharges to higher-risk ones.

Over time, the mix shift of our book will lean towards lower-risk customers as we incentivize those customers to come to us and as we avoid loss-making customers. We continue to make great progress in leveraging this competitive advantage across the 22 states we write in and across different factors and perils. We are not done yet with key underwriting changes. In 2024, we have already filed an 18% increase in Texas. We will implement additional increases in states where appropriate and are further increasing our deductibles. Overall, the rate changes we have made, that you can see on the left-hand side of this slide, have delivered a 30% CAGR in premium per policy between 2021 and 2023, you can see on the right. Given the 2024 rate increases, we expect premium per policy to continue to grow.

As we have said before, we believe the homeowners' insurance space is highly attractive, given how significantly we expect the TAM to grow for many years ahead. Now onto deep dives. Malcolm Conner, our warranty business GM, shared insights into how we are well-positioned to become a leader at our last earnings in Q2. We have lower costs of customer acquisition, offer a variety of products which are distributed through unique partners, and have unique advantages that the Porch platform provides. Our warranty strategy is producing strong results. We entered into the warranty space, the acquisition of American Home Protect, in 2021, when it had $12 million of revenue. We achieved our 2023 revenue target, delivering $37 million in revenue and $7 million Adjusted EBITDA. Noting, 2023 Adjusted EBITDA would have been even better but included certain remaining acquisition costs.

We expect warranty revenues to continue to grow as we expand distribution, with a 2024 revenue target of approximately $46 million. The business improved its profitability substantially and anticipates approximately $16 million in adjusted EBITDA at 35% adjusted EBITDA margin. Looking ahead, we target 2028 revenue of approximately $100 million, which equates to a 22% CAGR, with a 40% adjusted EBITDA margin as we invest in growth with attractive unit economics. Thank you, everyone. I'll now hand over to Jim.

Jim Weld (General Manager of Rynoh)

Thanks, Matthew, and hello, everyone. I'm Jim Weld, General Manager of Rynoh, and I have 15 years of title industry leadership experience. Prior to leading Rynoh, I spent more than three years as president of Zillow's title and escrow business. I've been a client of Rynoh and got to experience firsthand how important and impactful this software is. Rynoh was built over many years around a single product called RynohLive that is very popular in the title industry. After the 2021 acquisition by Porch, Rynoh successfully transitioned from a one-hit wonder to a platform. Rynoh is a leading provider of SaaS solutions for our clients, who are title and escrow agents, who collect and disburse funds during a real estate closing. Rynoh's clients operate in a highly complex and regulated environment, therefore, Rynoh is critical to their control environment.

Since inception, Rynoh has protected 24 million closings, having disbursements of about $8 trillion. Back in 2021, more than 30% of all U.S. residential purchases and home refinances were protected by Rynoh software. Today, that number is approaching 40%. Our priorities are to build products that add value, save time, drive cost savings and efficiencies, and reduce the potential for errors. Our four core modules on this one platform support this streamlined workflow and are outlined here on slide 27. Rynoh Live is a module that automates bank transactions daily and alerts if payments fail to clear or do not reconcile to the accounting system. RynohEscheat was launched last year, which identifies funds that remain in escrow after closing and streamlines processes to either return or escheat funds to maintain regulatory compliance.

Rynoh OpX integrates with many accounting systems and platforms and performs daily account reconciliation and alerts for a more expansive group of clients. We recently released a major new product called Rynoh Verify, which helps protect clients from fraudulent payment schemes. The real estate industry experienced almost $400 million in losses from various forms of fraud in 2022, and we can help reduce this risk. In 2023, our client retention was 93%, with a net promoter score of 85 and an LTV to CAC of 10.6x. All metrics we are very proud of and highlights our opportunity ahead. Rynoh charges a transaction fee for every home and refinance closing that our clients perform. Overall, industry transaction volumes declined 62% since 2021, with refinance volumes reducing more than 85% and home purchase volumes declining around 30%.

Being primarily transaction-driven, you might think Rynoh's revenues would have similarly decreased 62%. But during these last two and a half years, we've grown revenue and profits with a very bright future. You can see the overall declines in transaction volume through the Rynoh platform over the last few years, from 4.3 million transactions in 2021 to 2.2 million transactions in 2023, a decline of 50%, even as our percentage of industry volumes has improved. As we roll out new products, we increase prices commensurate with the improved value we are providing. For example, the 2024 price increase of almost 30% was implemented with the launch of Rynoh Verify in January this year. As you can see on the graph, as we delivered more value, prices have increased by 97% between 2021 and 2023, more than offsetting transaction volume declines.

Back in 2021, Rynoh was acquired for $36 million, and we'd announced and noted an expectation of it being a break-even business after investments in product and marketing. We were able to greatly exceed that expectation, even as the market transactions were cut in half. In 2023, we delivered $ 11 million in revenue and almost $6 million of Adjusted EBITDA, a 52% Adjusted EBITDA margin. Given the new product launch and impact on pricing, we expect Rynoh to deliver $14 million of revenue and a 60% Adjusted EBITDA margin, or $8 million in 2024. And this assumes 2024 has flat home sales and refinance volumes compared to 2023.

We target medium-term revenue of approximately $60 million and approximately $35 million in adjusted EBITDA, which assumes industry transactions should broadly double, while we double pricing through the continued execution against our product roadmap. Thanks, everyone. I'll hand it back over to Matt to wrap up.

Matthew Ehrlichman (CEO)

Thanks, Jim. Appreciate it. We do hope that today's one-off targets and disclosures on our Rynoh and warranty businesses, business units are helpful. Just note that these are just 2 of our many successful businesses at Porch that leverage our platform to differentiate and grow, and then contribute back to expanding Porch Group's advantages. Before wrapping, I want to take a step back and share our financial progress since we became a public company in December of 2020. Our business has grown more than six times over the last four years. We've increased revenue at a 60% CAGR, and guidance is approaching $500 million in revenue in 2024.

This is driven by our insurance segment, which has grown from virtually nothing to over $300 million of revenue in 2023, and what was then a central part of our vision has certainly become a reality. Similarly, revenue less cost of revenue is expected to grow to $233 million in 2024, a 44% year-over-year CAGR. And finally, as we've said before, our adjusted EBITDA guidance for the full year is $6 million at the midpoint, a key milestone for the company to be profitable on a full year basis. And the $21 million of the second half of 2023 adjusted EBITDA, which it was a $45 million improvement from the same six months in the prior year, shows that we are well-positioned for significant profit growth potential ahead.

I'll remind you, this amount of progress has been made during a time when the housing market contracted significantly. So just to the team, sincerely, well done, and as you know, we are just getting started. Finally, after looking back at the last four years, I want to take a moment here to look ahead and provide an update on our strategy, and why we're so bullish about the opportunity to build a truly great and enduring company. As you know, Porch powers software platforms, which a large portion of the home inspectors, title agents, and loan officers use to run their businesses, which provides us valuable introductions to consumers and insights into properties, creating long-term competitive moats. We believe we can build a large homeowners insurance company structured optimally to have lower volatility and higher margins.

We'll update on the reciprocal exchange later this year, but today, we'll share our three differentiators you can see here in yellow. First is advantaged underwriting. So it was about years years ago, our insurance business, HOA, started using our unique property data to create a pricing advantage for well-maintained homes and increase prices for higher-risk homes. We've made steady progress unlocking data and rolling out price increases across states to create value and improve our risk accuracy. We've seen measurable results with much opportunity ahead. Second, we want to be the best insurance partner for home buyers. We offer insurance customers and home buyers more than just insurance. Consumers can use our app or moving concierge service to make their move easy, including coordinating movers, utility setup, security, home warranty, and TV and internet, with the ability to compare reviews and prices.

It all adds up into a game-changing experience for a consumer to make what's typically a stressful time easier. We want to become known as the clear and best choice for home buyers needing insurance. And third, we provide consumers with whole home protection. This means offering homeowners insurance, home warranty for everyday breakdowns, and a home app to provide appliance recall check monitoring. We can be there for the whole home journey, from move-in to move-out, with a variety of products designed to make sure our consumers' largest asset is protected. We're excited about the fantastic second half of 2023. We expect 2024 to be a very successful and fun year. We have a clear and differentiated strategy... the right team, strong culture, and a proven ability to execute consistently. With that, we'll wrap the prepared remarks and pass the call to the operator.

Please go ahead and open up the call for Q&A.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Dan Kurnos from The Benchmark Company. Your line is open.

Daniel Kurnos (Equity Research Analyst)

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

Matthew Ehrlichman (CEO)

Shawn, you can update on, you know, some of the filings and on, but just let me quickly on reciprocal. Happy to talk about it, actually, Dan. It's just we don't yet have timing. You know, as we talked about previously, we will update here as we go through the year, but we continue to have close working relationship with our friends at the TDI, who just continue to do a really nice job. And we're excited about it. We continue to be very confident, you know, that that's the right structure for the business, and that, you know, that that'll happen here in due course.

Shawn Tabak (CFO)

Yeah, with respect to Dan, I think your question's about the financials for the insurance entity, which is kind of part of that. That, that's on track. We're on top of it. And you know, we'll do that in due course here in the month of March, which is when we typically do it.

Daniel Kurnos (Equity Research Analyst)

Got it. Thanks. So Matt, just kind of I mean, Sean gave some really good numbers about risk reduction. And now that you've got the additional convective storm coverage and incremental, what looks like data expansion, I know you've guided to, let's call it flat XCIG gross written premium this year. But, you know, what's kind of your thought process now that you've de-risked the model so much on, you know, maybe getting understanding, you know, you're waiting for the reciprocal, but just thinking about getting a little bit more aggressive on adding policy, especially with the rate you're getting right now?

Matthew Ehrlichman (CEO)

Yeah, I mean, it's, you know, it's an exciting time. As you know, as folks that have followed us know, and our, you know, our long-term investors know, the certainly, the focus for the second half of last year, focus for 2024 is profitability, right? We wanted to be able to make sure that we really demonstrated, you know, profits. You know, obviously, for 2024, we wanna make sure that we're it's clearly seen that we are profitable, you know, as a company on a full year basis. And so, you know, we've made the moves that we need to make.

Now, clearly, you can see, you know, in the insurance underwriting results, that, you know, that we are positioned, you know, to be able to grow, you know, with, with, with, we believe, very strong ongoing profitability. You know, we think we've made the moves. And so while we've been in this period where we've been, you know, very specifically restricting our growth in certain geographies, you know, certainly as... And we noted this in the, in the prepared remarks, you know, we, we do expect to start unlocking, you know, some of those, some of those restrictions, you know, over the course of 2024, really to set up 2025 to be, to be growing at a, at a nice clip, you know, again. So that is in front of us.

And then, Dan, on the first part of your question, on the risk reduction, just to make sure I emphasize a couple of points. You know, it is an important part of this because, we have, been able to, you know, even while maintaining, you know, we've been managing a roughly flat, you know, premium. You know, year-over-year is kind of what we've been targeting. And we've been able to significantly reduce, you know, the pool of risks that we have and, and just, you know, overall, the total amount of risks. And so, you know, 23% is actually, I think, the, the final and precise number on what we reduced risk, you know, here in, in 2024 versus 2023, and 27%, you know. So that's a, that's a big shift in total risk.

And that doesn't include, you know, the aggregate purchase that we made, of additional reinsurance around severe convective storms and hail, you know, that new $30 million purchase. And so our business just becomes much more, you know, much more predictable, you know, much better protected, much lower risk, even as we have these, you know, these what we think are, you know, clear and strong goals in front of us.

Daniel Kurnos (Equity Research Analyst)

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

Shawn Tabak (CFO)

Yeah, so we were pleased to deliver for the full year $34 million of operating cash flow in 2023. We ended the year with around $400 million of cash, cash equivalents, and investments, which is a very strong position. You know, HOA, our carrier, had $52 million of surplus. To Matt's point, that's a great basis for that business to be at with future profitability and the strong momentum we mentioned in the second half of the year. With respect to cash flow in 2024, the way to think about that is first and foremost, most importantly, we guided to positive Adjusted EBITDA for the full year around $6 million at the midpoint.

From there, the other bits to think about, for us, we, we don't have a lot of CapEx. Historically, it's been, you know, less than $10 million. Taxes are very, you know, little for us. And, you know, we do have around, just over $20 million of interest expense, on the coupon. So those are the other factors that kind of play into it. You know, we have seen a big driver of that cash flow in 2023 is we've ceded less. And so that drives better working capital, when you cede less, and we're able to cede less, obviously, because the book is that much more profitable.

So that provides a lot of that working capital benefit because we're hanging on to the cash from the policyholders instead of, you know, giving it to the reinsurance partner. So, you know, I think we're starting 2024 in a really strong position.

Daniel Kurnos (Equity Research Analyst)

Got it. Yeah, we see the springboard, I guess, is what I'm getting at here. So all right, thanks, guys.

Matthew Ehrlichman (CEO)

Yep.

Daniel Kurnos (Equity Research Analyst)

I appreciate it. I'll step off.

Matthew Ehrlichman (CEO)

Thank you, Dan. Appreciate it.

Operator (participant)

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

John Campbell (Managing Director of Equity Research)

Hey, guys. Good afternoon. Congrats on a great quarter.

Matthew Ehrlichman (CEO)

Thanks, John.

John Campbell (Managing Director of Equity Research)

So on the extra-- yeah, for sure. On the extra disclosures around warranty and Rynoh, that was great. Those are solid businesses. If you guys hit the 2024 targets for warranty and Rynoh, and then obviously, you just sold EIG, so that's gonna add back another $3 million of losses. That's $27 million in EBITDA. Obviously, you've got the corporate segment. If you take that out, I mean, you're gonna basically need about $40 million outside of warranty and Rynoh. So a few questions here. First, on, just bigger picture, are you largely done with the cost actions within corporate and how we, how we should maybe think about that this year? And then secondly, if you can help us unpack that remaining $40 million, is that mostly just HOA and improved gross loss ratio versus last year?

Shawn Tabak (CFO)

Yeah, I can take that one. Some good questions in there. First, I'll say on the corporate cost actions, those have already... Those are done. But, you know, the benefit to the P&L will show in 2024 as those- as it annualizes. As opposed to, you know, 2023 was partial year, but the actions themselves are done. You know, with respect to insurance profitability, one of the things I think Matt mentioned in his prepared remarks is in the second half of the year, which is really when, you know, the insurance profitability actions we talked about really kicked in, we were $45 million better this year, EBITDA, than we were in the second half of 2022.

And there's, you know, more, more of that, that have already been, to come in 2024. So that just kind of maybe sets the tone a little bit. And then, you know, the other, the other, you know, some other drivers of profitability in our, software businesses, we continue to roll out products and increase prices, as we, you know, create more value for our customers there. That'll, that'll benefit profitability, and a lot of those have already been launched, is the other thing. It's just now we need to see it kind of roll through. The second thing I'll mention is, you know, we are also, continuing to increase his premium per policy. I think we mentioned today, some Texas, filings that we have done there.

Those are, those are the main drivers that get us to the profitability improvement year over year.

John Campbell (Managing Director of Equity Research)

Okay, that's very helpful. Then kind of staying on that line of questioning, you mentioned the 63% gross loss ratio for this year. That's gonna be based on the past five-year, I think you said, weighted average. I'm guessing 2020 was lower than normal, but, you know, the last two years have been pretty tough. It seems like been way outside of the, the norm. And then you've also got the new storm coverage. But the question here is: how does that 63% gross loss ratio compare to, like, the historical average beyond the past five-year look?

Matthew Ehrlichman (CEO)

So the couple of things on the gross loss ratio. One is that we are, we've been set up quite well, actually, with that, given what we've done with reinsurance. So, for example, last year, John, you know, it was a you know, tough weather year in terms of hail, particularly, Q2, some weather in Q1. If that same year happened again this year, again, what this new pool of reinsurance provides us is an aggregate cover. So while we typically, and continue to get reinsurance for large event protection, we now have protection against a series of small events. So we actually would have gotten the $30 million backup of additional cover, you know, if last year were to happen again.

And so that certainly just lowers our risk for a similar type, you know, of weather. As we look further back in time, you know, weather you know more than five years ago, and the gross loss ratio was you know consistently around this type of a level, but I would note that things have changed quite a bit. So when we put in place higher deductibles, so this last year there was a 2% wind and hail deductible that's been raised to 3% wind and hail deductible. That's important in terms of what impact it makes on a gross loss ratio and perhaps underappreciated. And so, you know, that certainly is a driver that helps us this year.

Shawn Tabak (CFO)

Yeah, and I think the other thing that we're-

John Campbell (Managing Director of Equity Research)

Okay. Oh, very helpful.

Shawn Tabak (CFO)

Oh, I was just gonna add to that. Yeah, the other thing that we're seeing in the book here is, you know, improvements in underwriting, right, and risk selection. And so, I think as, you know, you know, five years ago, obviously, HOA wasn't using Porch data, at that point in time, and so... And then, you know, as well as some of the other things that Matt mentioned there. So, you know, really the combination of the things we talked about, increases in premiums, you know, underwriting actions, deductible, you know, various exclusions, you know, non-renewing certain policies, I think have set us up really well, for this year on that front.

John Campbell (Managing Director of Equity Research)

... Okay, thank you, guys.

Matthew Ehrlichman (CEO)

Thanks, John.

Operator (participant)

Your next, your next question comes from the line of Josh Siegel from Cantor Fitzgerald. Your line is open.

Joshua Siegel (Equity Research Analyst)

Yeah. Hi, guys. Good afternoon. Thanks for taking my question, and congrats on a really strong quarter here. First, I just wanted to dive into, you know, with near-term profitability on the horizon, how are you really thinking about future capital allocation? And could M&A really be on the table as we progress through 2024 and 2025?

Matthew Ehrlichman (CEO)

I'll take the M&A one first. I would not expect any, any, you know, M&A or material amount of M&A, you know, here in the 2024 year. We, we have, you know, one more year in front of us of just really being heads down, focused, you know, making sure we, we just execute flawlessly and produce a really solid, clean year. So that's where we're at now. Does M&A open up back up, you know, for us ahead? We do think that's a, a capability that we have as a company, and we're looking forward to, to the right time to be able to turn that engine back on.

Shawn Tabak (CFO)

Yeah, with respect to capital allocation, you know, I think the good news is I think we have a lot of great places to deploy capital and earn a very attractive risk-adjusted return. First and foremost, you know, the growth of the business, in and of itself, I think is, you know, is driving very strong returns. And then, we also have, you know, the unsecured debt, which is due in a couple of years. I think we have a number of options for that one in particular, and plenty of time to take care of it. But... And then, you know, other opportunities as well, I won't go into it further today.

But, from a capital allocation perspective, I think we do have a number of very attractive investments that we are looking through.

Joshua Siegel (Equity Research Analyst)

Got it. Appreciate the color there. Then I also wanted to dive a little bit deeper into the cross-sell opportunity between, you know, the software side and the insurance side, and kind of how you're thinking about that evolving, especially as the macro starts to ease a bit.

Matthew Neagle (COO)

Sure, I can, I can take that. We, you know, we're excited about the access that our software businesses give to us to help homebuyers. We're also excited about the focus of our insurance strategy around helping homebuyers. We're also excited about the app and the way the app can bring together a really nice experience. And so that's, that's all core to, to what we're doing. We continue to see year-over-year improvements and kind of the things that we measure around that strategy. And then, as, as was mentioned here, you know, the, the market has declined, and that does impact our ability to cross-sell because there's fewer people who are, who are buying homes. As of now, we're not anticipating growth this next year, but we do expect growth to come, and that's gonna be a tailwind for our business.

Joshua Siegel (Equity Research Analyst)

Okay. Thanks, guys. Congrats again on the results.

Matthew Neagle (COO)

Thank you.

Operator (participant)

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

Jason Helfstein (Managing Director and Head of Internet Research)

Hey, this is Steve on for Jason. So we just have two questions. One, can you give us anything on, January in terms of improving house trends and kind of how much that would help the software business? Maybe there's a data point you can give. And then secondly, on rate increases, I know you talked about them with Texas, for example. Is there any metric you can give on how many users, or written premium or geographies, you've increased on prices this year or thus far? Thank you.

Matthew Neagle (COO)

Sure.

Matthew Ehrlichman (CEO)

Josh-

Matthew Neagle (COO)

Sorry, can we repeat the first question?

Matthew Ehrlichman (CEO)

Yeah, I'll, I'll take it.

Jason Helfstein (Managing Director and Head of Internet Research)

Sure.

Matthew Ehrlichman (CEO)

I got it.

Jason Helfstein (Managing Director and Head of Internet Research)

So we were just wondering... Sorry.

Matthew Ehrlichman (CEO)

I got it. I got it. It's, it's good. So on January, specifically, you know, obviously, anytime there's more, you know, housing sales, it's gonna help our, our business. But again, just to reiterate, what we are expecting and what our guidance represents is we expect flat year-over-year. We think that it'll, it'll bounce around a little bit from month to month. The market's still kind of, you know, settling in. We're not obviously seeing deterioration at, at a market level, you know, year-over-year at this point. But, but certainly it helps whenever we have months that, that, where home sales picks up.

I would note just one other January macro question I'm sure people are curious about, just, you know, here more recently, just around the Texas-related wildfires and tied to your Texas, you know, question. Texas, obviously, our hearts go out to the people in Texas and Oklahoma by the recent wildfires. I would want to note that we have not seen any claims, actually zero claims to date, and we'd not expect that will be a meaningful event for us. I think it continues to demonstrate our ability to select risks effectively. As we think about Texas broadly, you know, Texas is our largest state, so when we have an 18% rate increase, we've mentioned before that it's actually meaningfully, you know, our largest state.

That does, that does show up in the overall results.

Operator (participant)

Your next question comes from a line of Danny Pfeiffer from JP Morgan. Your line is open.

Daniel Pfeiffer (VP)

Hey, guys. Thanks for the questions. For the first, the sale of EIG, do you maybe see any further opportunity with pruning other non-core assets within the Porch portfolio, and, or maybe was this more of a one-off transaction? And then I have a follow-up. Thank you.

Matthew Ehrlichman (CEO)

... I think about it as more of a one-off transaction. We'll always be pragmatic, you know, and thoughtful, you know, in our strategy, both, you know, on acquisitions or divestitures, I suppose. I don't expect to see, you know, many divestitures 'cause we really like our businesses and, you know, are excited about where they're at. EIG was a special case where we could, you know, sell a business, you know, and it being very aligned with our strategy. So, in terms of divestitures, that's how I would see that. In terms of the second-

Daniel Pfeiffer (VP)

Gotcha. And then on the second committee on... Oh, sorry about that.

Matthew Ehrlichman (CEO)

No, no, please go ahead.

Daniel Pfeiffer (VP)

Yeah, so for the second, can you maybe unpack the seasonal first half 2024, just to give it a loss guidance? And maybe how, how much is the Aon reinsurance agreement and the severe storm coverage you purchased is kind of helping there?

Shawn Tabak (CFO)

Yeah, I can cover that. So I, in the presentation today, in the prepared remarks, I think I showed a slide which shows the typical seasonality of our Adjusted EBITDA, and that's mainly driven by, you know, historically higher claims in the Q2. We talked about some of the things we did this year to further protect that with, you know, different types of reinsurance cover that would've protected the in particular, the hailstorms we saw in 2023.

And then I think, and I also mentioned the prepared remarks, on a year-over-year basis, if you were just compare, for example, you know, Q1 last year to what we're expecting for Q1 this year, same thing for Q2 and each of the quarters, we're expecting between a $10-$15 million improvement year-over-year. And most of that is driven by the, you know, the things we talked about today, which are, you know, profitability actions and insurance, which is driving really strong run rate profitability in that insurance business. Again, that's the $45 million year-over-year that we saw in the second half of 2023, as well as the price increases and, you know, more of the cost, you know, management items rolling through in 2024.

You know, so those are the main drivers of those, as opposed to, like, the Aon, or other things like that. The Aon just is a, it'll be over a period of time, because that's a long-term agreement we have with our partners at Aon.

Daniel Pfeiffer (VP)

Gotcha. Thanks.

Matthew Ehrlichman (CEO)

Thank you.

Operator (participant)

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

Ryan Tomasello (VP of Equity Research)

Hi, everyone. Thanks for taking the questions. Just following up on the capital structure, Shawn, maybe if you could just discuss some of the paths you have to efficiently addressing the 2026 convert maturity. You know, obviously, you bought back a little bit here at a discount, if that's something that you'll continue to opportunistically chip away at. And also just remind us from a corporate structure perspective, if you would have any access to a sizable chunk of liquidity at HOA to help with those maturities, depending on how the reciprocal evolves. Just trying to understand all the moving pieces here.

Shawn Tabak (CFO)

Yeah

Ryan Tomasello (VP of Equity Research)

... for the capital structure. Thanks.

Shawn Tabak (CFO)

Yeah. Yeah, thanks for the question. So I would say, first of all, as I mentioned, we ended the year in a strong position with about $400 million of cash, cash equivalents and investments. Within that, there was also a roughly $50 million surplus note between HOA and Porch Group that provides a coupon and an intercompany payable back to Porch Group. The other thing, obviously, we just talked about, Aon and EIG. Those deals collectively contributed an additional $35 million of cash in January of 2024 that we'll see on the, you know, Q1 2024 balance sheet. So I think...

And then finally, I guess the last point there is that, HOA is in a really healthy position with $52 million of surplus at the end of 2023. So, and then, you know, we talked about generating Adjusted EBITDA and profitability actions in 2024. So, you know, that, that's also driving it north, you know, going forward. With respect to taking care of the debt, I'm not gonna get into, you know, any specifics. I think what I would just say is I'll leave it at, you know, we have a number of options in, how to take care of that. And, you know, we-- sitting here today, we have, you know, over two years to, to do that, so, plenty of time on our side there as well. Yeah.

Ryan Tomasello (VP of Equity Research)

Okay, great. Thanks for that color. And then, in terms of the 2024 guide, you know, just given all the noise this year, this past year from Vesttoo and lower ceding on revenue in the back half, you have the resale of the insurance—the sale of the insurance agency this year. Just trying to understand, like, what level of organic revenue growth the 2024 guidance implies as we kind of normalize for those different factors, if that makes sense.

Shawn Tabak (CFO)

Yeah, I mean, it's all organic. I would label it as all organic. I mean, I think, with what we're doing with our insurance book, where we're ceding less quota share in particular. Quota share is the element of reinsurance that we've cut back on, and we're able to do that because we have significantly increased the profitability of the book. So I mentioned the, you know, risk, which is, you know, the probable maximal loss, the insurance term for it, will have increased, will have gotten better by 50% collectively, almost between 2022 and 2024.

And that, along with the profitability actions, go hand in hand, and that's what, you know, puts us in a position, where we could, have less quota share reinsurance in the book. And that will continue, to some extent in, 2024, as well as the price increases that we mentioned, the premium per policy increases. So that, that's how I would think about it. I think it's all, all the levers kind of come together when we're thinking about the insurance business and the profitability and, you know, what that means in terms of, of reinsurance, as well.

Daniel Pfeiffer (VP)

Got it. Thanks for taking the question.

Matthew Neagle (COO)

Thank you.

Operator (participant)

Your next question comes from the line of Jason Cryer from Craig-Hallum. Your line is open.

Jason Kreyer (Senior Research Analyst)

Great. Thank you, guys. I just wanted to ask on property data. I know you've been using that for the last two years now. Just wondering if you can give an overview of where you've seen that data provide more of a pricing edge or any numbers around how frequently that data is being used in quoting, and then if you can give any indications of where you plan to use that more going forward. Thank you.

Matthew Neagle (COO)

Sure, I can take that. You know, we're excited about the advantages that the data can provide, and we're already seeing measurable results in our own underwriting. It's gonna be a key ongoing opportunity for us. There's a variety, actually, of ways that we can use the data. We have actually done a number of filings in multiple states using the data. You know, and it's things that you would expect if you were to start to imagine what would you want to know, right? So it's things tied to the age and condition of the roof. It's tied to the type of plumbing. It's tied to, you know, where is the water heater located, so that in the event something happened, what type of damage is going to take place?

We think we're early in our ability to take advantage of this data. There's still a lot of data points that we think we can get about the interior of the home, and we're excited about them.

Operator (participant)

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

Matthew Ehrlichman (CEO)

Well, first, thanks, everybody, for the questions and the time. Thanks, everybody, for being here. Mostly, I just want to thank the Porch team for their efforts and for the truly significant progress that's been delivered. Also, to our long-term investors, you know, who do see the vision and where we are and all that's ahead, you know, for us. We look forward to speaking with you all again in our Q1 earnings in May. Until then.