Porch Group Inc

NASDAQ:PRCH

Earnings Call Transcript 2023-Q1

[Lois Perkins, Investor Relations]

Good afternoon, everyone and thank you for participating in Porch Group’s First Quarter 2023 Conference Call. Today, we issued our first quarter earnings release and related Form 8-K to the SEC. The press release can be found on our Investor Relations website at ir.porchgroup.com today.

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 Nicole Pelley, SVP of Product and Technology.

Before we go further, I’d like to take a moment to read 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 include responses to your questions, reflects management’s views as of today, May 10, 2023. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans, including the pending application for the mix change. 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 described in our SEC filings as well as the risk factor information in these slides for additional information.

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. 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.

And with that, I will turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Over to you, Matt.

[Matt Ehrlichman, Chief Executive Officer]

Thanks, Lois. Good afternoon, everybody. It hasn’t been long since we last spoke in March. And in that time, the business has progressed nicely, which we look forward to discussing with you today.

Overall, the Q1 2023 operating environment is not dissimilar to what we experienced in Q4 2022. The home service and insurance industries faced home sales and weather headwinds. And as expected, we were impacted by them as well. As the insurance industry and weather trends evolve, it creates not only a growing homeowners insurance market, but the substantial opportunity and we are well-positioned to become a leader given our unique demand in data advantages. I am pleased to have Nicole join us today to talk through advancement from this last quarter in some of these areas.

So moving to Slide 6 to review the high level financials. In the first quarter, revenue grew 37% to $87 million, with solid revenue growth in our warranty and homeowners insurance businesses. Q1 2023 adjusted EBITDA loss was $22 million. The underlying business is performing well. However, as expected and built into our 2023 plan, the reinsurance market has hardened. While our April 2023 renewals were successful, given our strong relative past performance, excluding the impact of reinsurance market, Q1 profitability would have increased by approximately $15 million in our insurance segment. As a reminder, we rely on reinsurance to both mitigate weather risk and to offset a portion of the capital requirements associated with operating a homeowner’s insurance carrier.

So while our insurance business saw strong and profitable gross performance, in fact, a 97% gross combined ratio in 2022 by our carrier entity, the reinsurance costs weighs on our net results until our premium price increases have flowed through all policyholders. We believe the impact of reinsurance is transitory and the market dynamics will improve over time as it has in the past. And if not, Porch and really all other carriers will continue to raise prices and ensure these increased costs are fully loaded into what s offered to consumers.

Margins in the industry were challenged in 2022 because of weather and expected to be compressed in 2023 because of the reinsurance markets until price catches up. But to highlight capabilities and performance, we think it is helpful to note not only that our insurance business was profitable on a gross basis, but also show how our insurance business compared to the rest of the homeowners insurance carriers in 2022. I mentioned last quarter the HOA was the fastest growing homeowners carrier through the third quarter 2022 as measured by gross written premium. AM Best has now released our full year 2020 report ranking 50 different homeowners insurance peers based on direct written premium growth. I am happy to share that we ended the year ranked third.

Importantly though, in addition to growing rapidly, we demonstrated a leading gross combined ratio. And so as you can see in the bottom chart on the slide, the AM Best market share report shows gross combined ratio of HOA in 50 PURE Carriers in 2022. And here, HOA was also the third best performer. Although there are two insurers with better loss ratios, those companies had much slower growth. And this demonstrates our ability to use our unique capabilities to grow premium while also maintaining strong underlying performance. Again, as we mentioned, our strategy is to manage our premium growth carefully in 2023 to drive our business to profitability.

As I mentioned, we have made a number of successes in the quarter. First, the insurance strategic initiatives announced in the fourth quarter of 2022 are on track. So in March, we filed the application to form the Reciprocal Exchange with the Texas Department of Insurance, which I will touch on more shortly in which we believe is key to reducing the weather volatility within our earnings. To facilitate this transition to a more efficient reinsurance system for the Reciprocal Exchange, we moved our reinsurance seeding rates to approximately 50% in January, successfully placed our excess of loss reinsurance treaties in April, continuing to further leverage our captive reinsurer to fill any reinsurance needs where it makes sense and are in the process of non-renewing approximately 37,000 of our higher risk policies.

I am happy to share that we successfully launched Porch Warranty in February. This is our own whole home warranty product that covers systems and appliances within the home. Nicole will comment on this later in the presentation. I will note the home sales industry declined 26% in Q1 year-over-year and continues to impact our software and moving services businesses. Despite this ongoing lower demand environment, our software businesses continue to iterate launching new modules and capabilities to take more share and Nicole will touch on our progress also in today’s presentation.

Finally, after the quarter end, we secured a $333 million of new senior secured convertible notes that tied to a $200 million pay-down of our existing unsecured note, which is due in September 2026. It’s a great transaction for us as it increases Porch Group’s capital by more than $100 million replacing the capital which will transfer with the Reciprocal on approval. And it also provides a 2-year maturity extension for much of our debt while maintaining the same $25 per share conversion price at the cost of a 6.75% coupon rate on the new money.

Finally, I want to spend a moment to provide a reminder about our strategy to form a Reciprocal Exchange. We have been thinking through this since we first acquired HOA 2 years ago with the objective to move the insurance business to higher margins and without the volatility from direct exposure to weather. Provided we receive approval from the Texas Department of Insurance, the HOA carrier business including all its assets such as cash and investments as well as its liabilities will move to the new entity and be owned by its policyholder members. In exchange, Porch will receive a coupon-bearing note, the terms of which will be provided following approval.

We will continue to operate the insurance business such as selling the policies and managing claims processing in return for fees from the Reciprocal. This means once the Reciprocal Exchange is in place, we lose the potential upside profitability in good weather conditions. However, we do not have the same claims downside when there are frequent and severe weather events, and as a result, our revenue and profitability are steady and predictable. We are in active discussions now with the Texas Department of Insurance and still anticipate approval later in the second half of this year.

I will now hand the call over to Shawn to cover our financial performance and guidance. Over to you, Shawn?

[Shawn Tabak, Chief Financial Officer]

Thanks, Matt. Hello, everyone and good afternoon. Revenue was solid at $87.4 million in the first quarter of 2023, which is an increase of 37% over the prior year driven by growth in the insurance segment and partially offset by the software segment, which continues to be impacted by the soft housing market. As a reminder, quarter one and two typically have the highest claims costs for HOA with quarter two historically being the period with the most weather events.

In the first quarter of 2023, the gross loss ratio for HOA was 79% compared to 81% in the prior year. Revenue less cost of revenue was $36.1 million, which is 41% of revenue. As Matt mentioned, the reinsurance markets have hardened as expected, which resulted in a reduction in revenue less cost revenue by approximately $15 million in the first quarter of 2023 compared to the prior year. Our price increases, which we disclosed previously, are well underway and being rolled out, which will have a larger impact in the second half of this year given the timing of renewals for the underlying policies.

Adjusted EBITDA loss of $21.9 million was in line with our expectations, a decrease from the prior year, driven by reinsurance as noted in to a lesser extent, the soft housing market impact on the software segment. Excluding the reinsurance market dynamic compared to the first quarter in the prior year, adjusted EBITDA loss would have been approximately $7 million. And finally, gross written premium was $115 million, an increase of 12% over the prior year.

Moving on to revenue by segment, in the first quarter of 2023, revenue from our insurance segment was $58.7 million, growth of 101% over the prior year, driven by strong growth in our warranty business based on demand and renewals as well as HOA due to increases in premium per policy and lower reinsurance seeding. Approximately half of the revenue growth in the insurance segment was due to seeding less and the balance from the operational lens.

Insurance segment revenue increased from 46% of total Porch Group revenue in the first quarter of 2022 to 67% of total revenue in the first quarter of 2023. Vertical Software revenue was $28.6 million, a decrease of 17% over the prior year due to the housing market declining 26% industry-wide year-over-year. The biggest impact of the housing market decline was on our moving services group, which continues to have these macro headwinds directly impacts its revenue. Our B2B software revenue was relatively flat year-over-year with market share growth key initiatives in pricing offsetting the housing market impacts.

At a segment level, our insurance segment adjusted EBITDA loss was $7.2 million. As Matt mentioned, the underlying contribution margin in our HOA insurance carrier increased by 500 basis points compared to the prior year, when excluding the impacts of reinsurance. The Vertical Software adjusted EBITDA loss was $400,000. Corporate expenses were $14.3 million in the first quarter of 2023, reducing to 16% of total revenue from 21% in the prior year driven by strong expense control.

Now on to our outlook, today, we are reiterating the full year 2023 guidance provided 8 weeks ago. Revenue ranging from $330 million to $350 million, where we continue to expect an 18% decline in home sales for the full year 2023 with a greater impact on the difficult housing market in the first half of the year versus the second half of the year when the comps become easier. Revenue less cost of revenue ranging from $170 million to $180 million where we have assumed a 62% gross loss ratio for the year. This assumes cat weather events will be in line with our historical averages. Any unusual catastrophic weather events in excess of our historical norms are not included in our guidance and assumption. Adjusted EBITDA loss ranging from $30 million to $40 million, where we expect on a cumulative basis, adjusted EBITDA to be profitable in the second half of the year and beyond. And finally, gross written premiums of $500 million.

Shifting to the balance sheet, we ended the first quarter with $272 million of cash and investments. This includes $165 million of cash and investments in our insurance carrier HOA that we expect will transfer to the Reciprocal when approved and launched. Excluding HOA, Porch held $107 million of cash and investments at the end of the first quarter. In addition, we held $15 million of restricted cash in relation to our warranty and captive businesses. And as Matt mentioned earlier, we are increasing the amount of excessive loss reinsurance provided by Porch’s captive to HOA, where it makes sense and can provide strong returns. To support this, we expect to hold approximately $43 million of cash to collateralize this placement and it will therefore show us restricted cash in future quarters and remain as such for the next 12 months. And finally, in the first quarter of 2023, we repurchased 1.4 million shares for $3.1 million under the existing share repurchase program. We will continue to evaluate whether to repurchase or otherwise transact in shares or notes and will do so if and when we think it is in the best interest of shareholders.

And finally, a brief update related to the issuance of our new $330 million senior secured convertible notes, which we closed in April after the end of the quarter. We are pleased with the deal, which reduces our medium-term September 2026 debt maturity from $425 million to $225 million and bolsters the balance sheet by adding $102 million of cash. These new secured notes have a coupon of 6.75% and maintain the same conversion price of $25, which was important for us to minimize future dilution for shareholders. This increased coupon payment is partially offset by approximately 5% interest we are currently earning on interest bearing cash deposits. The $330 million of the new secured notes are due October 2028.

Thank you all for your time today. And I will now hand it over to Matthew to cover our KPIs.

[Matthew Neagle, Chief Operating Officer]

Thanks, Shawn. Right, turning to Slide 18, we have introduced a slightly different look to our KPI slide here. For reference, the original slides are in the appendix, which show the KPI trend over time. The average number of companies was 30,600 in the first quarter, similar to Q4 2022 and a 20% increase in the same quarter prior year. Average revenue per company per month increased to $951, an increase of 15% from the same quarter prior year. This was driven by higher insurance premiums, generating more revenue per insurance customer, the change in our reinsurance seeding and rapid growth in our warranty business. We have 214,000 monetized services in the quarter, a small increase from last quarter. Finally, average revenue per monetized service increased to $328, an increase of 88% versus the same quarter last year. We continue to focus on selling the highest value services to consumers such as insurance and warranty.

Let’s now look at our insurance business KPIs. Gross written premium was $115 million, an increase of 12% year-over-year. This was produced from 376,000 policies in force in the first quarter. Annualized revenue per policy was $612, increasing 82% from $330 in Q1 2022. This was driven by increased premium per policy, lower reinsurance seeding levels and rapid growth in our warranty business. As Shawn mentioned in March, we are introducing retention on a premium basis to help demonstrate the impact of pricing increases and align our disclosure with the peer group. Premium retention is on a 12-month basis and was 107% for Q1 2023, an increase from 100% in Q1 2022 driven by increased premium per policy. As a reminder, we have started to non-renew 37,000 high-risk policies, which will impact short-term retention rates.

Overall, the insurance business had a gross loss ratio of 79% in Q1, of which 39% related to cat events. This is a little worse than our historic average with usual hailstorms and tornadoes in March above historic trends. As Matt mentioned earlier, HOA’s gross loss ratio is significantly outperforming peers. Today, Shawn has reiterated our guidance, which includes a 62% gross loss ratio assumption for the full year. As weather improves in the second half of the year, the impact of increased premium per policy changes roll through.

Finally, on Slide 20, I want to quickly recap our 2023 strategic priorities. First, we will plan to continue to develop new software for the companies who use our Vertical Software and up-sell more software through bundled solutions, which Nicole will talk to shortly. We are extending our online experiences increasing revenue per homebuyer. Between our app, recall check monitoring and other services, we are finding ways to better engage consumers to be able to help them with more services. We are improving premium per policy in our insurance and warranty offerings. We have now launched the Porch Warranty brand and expect to launch the Porch Insurance brand later this year, creating differentiated offerings for consumers. And we are focused on getting the Reciprocal structure approved moving the insurance business to a lower risk, higher margin business.

Thank you all. I will now hand things over to Nicole to highlight a few key product updates.

[Nicole Pelley, Senior Vice President, Product and Technology]

Thanks, Matthew and hello everyone. I lead our product and technology teams and responsible for consumer experiences and data platform and work across our businesses to help them leverage the Porch platform and accelerate their product velocity and growth rate. I will highlight today some key successes from the first quarter. First, I would like to touch on our insurance pricing models. We take our insights into properties and homebuyers, where we have insights into approximately 90% of U.S. homebuyers. In addition, we have 15 years of claims history from HOA across various insurance categories, such as water, fire and theft. All of this data feeds our risk model that is generated using machine learning and advanced pricing techniques.

Successful insurance businesses rely on how accurate their models are at predicting risk. And while there will always be losses, improving prediction accuracy allows for effective pricing, which is key. While for competitive reasons, we will not provide details on what data creates the biggest impacts, we have been able to improve our risk accuracy in key insurance risk categories by approximately 15% to 20%. This is a common way to measure accuracy in segmenting risk through pricing in our team’s experience. Anything in the high single-digits is going to be a meaningful improvement. So we are all really excited to see double-digit improvement in model accuracy. And we are just getting started. What this means is that we can charge a lower price for low risk policies, increasing our conversion of low risk policies and more accurately price high-risk policies higher, leading to either appropriate pricing and margins or lower conversion on this subset. All of this is expected to lead to long-term profitable growth.

The unique insights we have about properties includes information such as short borrowers, appliance age and model and potential issues about specific homes. This information feeds the insurance pricing model I just mentioned. We have approval in 9 states to use information on the water heater location. This has now been expanded to include other insights such as the type of roof, age and quality, the type of flooring and the type of piping and characteristics. We are pleased to have approval to use this data in three states: Arizona, Virginia and Texas. We have also submitted filings in Illinois and Nevada to use all of our insights.

A key focus for the business is to continually develop new products for the companies using our Vertical Software. We want to launch a new module for each of the type of companies we work with at least once per year both to create more value for these companies and to increase revenue per company. I would like to call out three new developments across various Porch brands. First, within our flow five business unit, we are now able to offer an all-in-one solution for brokers that combines the great features of our mortgage point of sale with a mortgage loan origination system by integrated partners. In addition, we have launched two new products for mortgage companies, Closing Accelerator, which will help customers close loans faster and Customer Capture, which helps mortgage companies get more customers. With this powerful combination, we are able to provide a best in market solution.

Secondly, we have released a new report writer for inspectors. This new release provides a fully redesigned modern user interface and enhanced functionality that can serve as an all-in-one solution for small home inspection companies. Our new report writer allows inspectors to create reports faster with voice commands, media editing, and support for multiple inspectors on site. The new platform will also enable tighter integration with some of our other modules, such as payment processing and the Porch mobile app.

Lastly, we have rolled out price increases within our title business alongside launching new products for these customers. This includes RynohEscheat, escheatment is a complex process that title businesses need to follow to comply with state regulations on unclaimed funds. The module is an easy-to-use cloud based software that seamlessly integrates with bank accounts ensuring the title agents are notified of unclaimed funds and helps to facilitate the reporting process in accordance with each state’s escheatment reporting regulations.

I will now shift to our work for consumers. Our app has now been rolled out to nearly all eligible ISN inspection companies. This is key to engaging additional consumers who access their inspection report by the app, the home data that is generated from that report and our recall check monitoring functions for their appliances. We then use this opportunity to cross sell other services Porch provides. We also look at how we can continue to make the moving journey simpler for both moving companies and consumers.

In our moving business, we have launched a fixed price product called Plus. This allows consumers to lock in a fixed price for their move rather than an hourly rate. This gives them confidence that costs will not build up through an already expensive period and allow us to increase our margins per customer by including more services, the third-party movers offer, such as wrapping and packing or moving permits. ISN Flex Funds is our inspection pay close module first launched last year. This product gives consumers the flexibility to roll the cost of their home inspection into their mortgage payment. Giving consumers more time to pay often increases the number of services they sign up for, such as Radon Testing, Asbestos Jack and Sewer Scope, thereby giving them more confidence in the home they are purchasing and up-selling services for our inspection businesses. We are pleased with how this product has gained momentum and look forward to strong growth in 2023 and 2024.

As Matt mentioned earlier, we launched Porch Warranty in February. We are excited by this as it’s a high-value service for consumers and will help this high margin business of ours continue to grow rapidly. This branded warranty product is being launched across multiple channels such as utilities and real estate. In addition to the traditional channels, Porch Group has access to inspectors and others, which allows us to sell warranties at a lower customer acquisition cost. We also enhanced the coverage and value consumers receive by including a variety of our handyman maintenance services to provide differentiation.

Thanks, everyone. I will now hand it back to Matt.

[Matt Ehrlichman, Chief Executive Officer]

Thanks, Nicole. Thanks, guys. We will wrap up by saying first that we really are excited about the journey ahead. The team and I remain confident in our offerings and in our strategy, like many are facing market headwinds, but the team is staying focused and is executing well. We do not think the stock market accurately reflects what we are building, but that over time, they will. I am particularly looking forward to the second half of this year, during which we expect to both post positive adjusted EBITDA and launch the Reciprocal structure for our insurance businesses. These are both important moments for us and something we have been working on and looking forward to for some time. Thank you in advance for the Porch team for the great work. So with that, let’s wrap the prepared remarks. And Lois, if you go ahead, please open the call for Q&A.

[Lois Perkins, Investor Relations]

Great. Thanks, Matt. The line is now open for Q&A. [Operator Instructions] The question one comes from Daniel at Benchmark. Go ahead, Daniel.

[Dan Kurnos, Benchmark]

Hey, great. Thanks. Matt, I know we have spent a lot of time talking about insurance but maybe if we can just double click on sort of software for a second and just kind of talk through some of the trends there, what you are seeing, anticipating a little bit of a different mix than you originally forecast and obviously the housing market has been messy and some of the purchasing stuff has been challenged, but, given some of Nicole’s commentary and also some of the upsell that Matt talked about in his remarks, just kind of help us think through maybe some of the dynamics there and maybe even a little bit on the longer tail outlook once we get into more normalized in the group?

[Matt Ehrlichman, Chief Executive Officer]

Matthew, why don’t you take the first part of the question, and maybe I’ll give my thoughts in the longer term, what’s ahead.

[Matthew Neagle, Chief Operating Officer]

Yes. I mean, the first point that I’d say is, we have good market position in all of our categories and our product velocity is increasing, right. So we are bringing the market or teeing up things to bring to market that I think will just make our offer more compelling. And right now, we are in a soft market, which creates some headwinds to bring on new customers and so forth. But it’s also an opportunity for us to reposition. So when the market picks back up we will have a greater offering. So the teams are focused and we are excited about what we have planned in those categories. It is just a little soft, but we are not worried about long-term.

[Matt Ehrlichman, Chief Executive Officer]

Hey, I’d just add – I would use the moment to give kudos to that team. I mean, our software business is remaining flat in these quarters, ballpark flat in times when the market is down like it is, it just is a testament to adding the new products that they are bringing to market, but it is even the market is going to come back, there are going to be more housing transactions over time. Well, I will see how long that takes you before it really does start to ramp back up. But clearly, that’s going to happen. And because we are both increasing market share and generating more revenue, either per company or per transaction, in particular, per transaction. As transactions increase, obviously, we are well set up to get to have real wind at our backs. And the last thing is we are innovating and building some really new and unique things for these companies to become more important to these companies. And so I am excited about how that positions us here looking forward.

[Dan Kurnos, Benchmark]

That’s helpful. And then maybe just some more color on warranty expansion, you guys called it out? I know, it’s not huge component. I mean, I remember when you initially started that we were looking at quarterly policies and revenue per policy and some of the KPIs there and I am sure it’s too early, but now that you have kind of Porch branded with Porch branded insurance to come. I mean, we are super excited when you made the original entry into the market. So just kind of help us think about sort of the contribution maybe some of the puts and takes and how much you are investing, I guess at this point to kind of scale that business over the balance year and into next year?

[Shawn Tabak, Chief Financial Officer]

Yes, I can take that. We are excited about the warranty business. We mentioned today it’s growing rapidly. We mentioned today, it’s hot high margin. We mentioned today, we have a new Porch branded warranty product. One – a couple of things that are interesting about our opportunity in the warranty space. The first is we are going to be able to bring multiple products to market. So we already are in the market with 90 day warranties for inspectors, annual warranties, 3-year warranties. And we think there are other products we can bring to market. But we also have access to multiple channels. And so we are engaged with real estate inspectors, we think we have an opportunity in utilities. And we have direct-to-consumer channels that are working for us. In terms of investment, we are actively growing, seeking to grow the warranty business and investing in the warranty business and we see it as a key part of our strategy going forward.

[Matt Ehrlichman, Chief Executive Officer]

Yes, I will say, Dan, when we had first talked about warranty business however long ago that was, the thesis that we had out there is certainly working with, we get lots of opportunities ahead. We have not started to use in any kind of material way, our unique data into the pricing for warranties. And so clearly there are opportunities there over time. Right now, just through our channels, our demand access, we have big advantages there. And so the team is taking advantage of it.

[Dan Kurnos, Benchmark]

Yes, I was going to follow-up on the data angle, but you have just covered that. So appreciate it. Before I jump off, I am sure….

[Matt Ehrlichman, Chief Executive Officer]

You sort of asked like 16 questions.

[Dan Kurnos, Benchmark]

Okay. I was just going to ask you about literally, the convert, Matt, meaning just wanted to clarify, I think there was a carve-out for you guys to be able to buy the old convert. So, just your thoughts on repurchasing the legacy convert versus the stock at this point?

[Matt Ehrlichman, Chief Executive Officer]

Shawn, you want to take the convert question?

[Shawn Tabak, Chief Financial Officer]

Yes. So, I think the deal overall was very positive for the company. Obviously we were able to reduce our medium-term maturities while at the same time adding just over $100 million of cash to the balance sheet, which I think gives us some good flexibility, especially with the macro headwinds, etcetera, tough part is reinsurance markets. And I think there is a number of options that we have here over the coming months and years. And we will obviously do what’s in the best interest of our shareholders to create value for our shareholders there. So that’s where we’re at today.

[Dan Kurnos, Benchmark]

Awesome. Thanks for the color and I guess apologies for the quick rude and professional interruption.

[Matt Ehrlichman, Chief Executive Officer]

Thanks, Dan. Appreciate it.

[Operator]

Next, we have Jason from Oppenheimer. Go ahead, Jason.

[Jason Helfstein, Oppenheimer]

Hi there. How are you?

[Matt Ehrlichman, Chief Executive Officer]

Hi, Jason.

[Jason Helfstein, Oppenheimer]

I’ll ask two questions. So just, what’s driving your competence in the full year ratio loss getting the 62% versus 73% in this quarter? And within the context of that review the milestones and expected timing to go-live with the Reciprocal Exchange. I’ll call that one question and two just pick one, any tailwinds from housing improvement in your guidance? Thank you.

[Matt Ehrlichman, Chief Executive Officer]

I’ll take the Reciprocal, Shawn why don’t you take the gross loss ratio question that you want to tack on housing. That’s great in the assumptions there. We are making progress as I would expect, Jason with the Texas Department of Insurance as it relates to the Reciprocal, I would say on track with the timing that we would expect kind of in the process. No changes in terms of our expected timing for the finish line, we still expect the second half of this year, but nothing surprising coming out of that process this far.

[Shawn Tabak, Chief Financial Officer]

With respect to the gross loss ratio, we mentioned on the call today, Q1 was relatively in-line with what we expected the 62% assumption that we know that that’s for the full year, Q1 the way that seasonality works in our HOA insurance carrier business. Q1 and Q2 typically have the worst quarter. And so the guidance that we reiterated today was, again, we actually expecting that 62% gross loss ratio for the year. The other thing I’ll know is, we also mentioned the 37,000, higher risk policies that will continue to roll off as the year progresses along with pricing increases as we go here through the year. So those will have more of an impact as we get through the year. So that’s the first question on gross loss ratio. The second one, I think, was on industry-wide home sales. And a couple of things I’ll point out there, we do also see some seasonality in our housing market and in our business throughout the year. As you expect Q2 and Q3 around the summer months, it starts to pick up a little bit more. And then from a comp perspective, there is a relevant thing to point out which was Q1 of last year was a relatively I’ll call it, normal this quarter. And so we do expect the year-over-year declined to tighten as we go in the year. Basically, we expect the comp to get easier, as we progress throughout the rest of the year. But again, we’re reiterated our 18% assumption for the full year, and Q1 as we said was relatively in line.

[Jason Helfstein, Oppenheimer]

Thank you.

[Matt Ehrlichman, Chief Executive Officer]

Thank you.

[Operator]

Next, we go to John from Stephens.

[John Campbell, Stephens]

Hi, guys, good afternoon. Yes, earnings season can be a bit of a drag that having hot mics and Zoom since is spice things up a little bit. But my question here is on the guidance, obviously a big revenue beat for you guys this quarter, you reiterated the full year guidance. I’m just trying to square up those moving pieces at a high level. I am thinking that’s conservatism. But if I take the insurance revenue from 1Q, it’s pretty stable revenue base, you’ve got some attrition coming as your shutting off some policies which you still have the growth dynamic and you have the pricing that comes on more impactful. So I wouldn’t think that comes down much, right? So if I annualized that, take that as a total revenue, it’s implying the rest of the business so maybe vertical software down, maybe 25%, 26% year-over-year $115 million. I saw on the guidance for you guys said that you expect that to be relatively flattish year-over-year. So am I missing something here is insurance taking a larger stepped down from the 1Q level, what am I missing here?

[Matt Ehrlichman, Chief Executive Officer]

Yes, I thinks these are handful of thoughts, I’ll take this. So one, we feel good about how we’re set up for the year. And we still feel like we’re early in the year, we only provided that annual guidance 8 weeks ago. And so we’re early in the year, we want to see how this [indiscernible] out there. There are a number of moving pieces, to your point. So there are the 37,000 policies that we roll off over the course of the year. Obviously, we have price increases going through to consumers. And so we’re going to be naturally conservative with what we expect to see in terms the attrition from those consumers as they see a higher price, but we have to let that play its way through as it gets rolled out to consumers. I also just say, the housing market, last year, year ago – 18 months ago, we were surprised by what the housing market did when we first had provided 2022 guidance. And while we feel like we’ve got a good handle on it, and we’re conservative with our estimates, and in terms of what we expect this year. Naturally, we’re just – I think there is uncertainty with the housing market right now. And so we’re going to naturally build that, I don’t think, just give ourselves a little more time, to let this let this all play out. We don’t guide quarterly, obviously and so just reiterating the full year right now. But I will say that we are hopeful and confident about how we’re set up for this year – year early.

[John Campbell, Stephens]

Okay, that’s a hopeful rundown. Next question on the Reciprocal Exchange. Matt, I think initially last quarter, you said by the end of Q3. I don’t know if I’m splitting hairs here. But it sounds like you said later this year. So I don’t know if the timeline still on if you’re still on path there. And then secondly, just directionally are we expecting a modest revenue haircut? I know, it’s probably too early for you guys to tell, but just generally speaking, as you’ve seen from past examples of a carrier or MGA converting over to Reciprocal Exchange, typically what that kind of leakage looks like?

[Matt Ehrlichman, Chief Executive Officer]

Yes. So I would say no change in what our expectations is in terms of timing. But as we communicated last quarter, it’s something that we are not fully in control, obviously, working with the Texas Department of Insurance. And so in the second half of the year we would expect it to be approved. The third benefit quarter is not an unreasonable assumption. But clearly, we’re not putting a hard pin on that after provide a little bit of flexibility for the team to kind of work through that process with the TDI. In terms of the Reciprocal revenue will be a bit lower, we’re not obviously guiding right now for 2024. But like we did last quarter, we announced the Reciprocal. It will impact revenue some. It obviously, also impacts our gross margins in a positive way, meaningfully, and just the overall margin levels of the business to improve. When that is approved, John, our plan would be to do a presentation to kind of really fully walk through that. And the reason we won’t do that ahead of time is that some of the degree of those changes depends on where everything lands with the Texas Department of Insurance, through that process. So once approved, we would kind of walk focus through that and let everybody know how that settling out.

[John Campbell, Stephens]

Okay, very helpful. Thanks, Matt.

[Operator]

Thanks. Next, we go to Josh from Cantor

[Josh Siegler, Cantor]

Yes, hi, guys. Good afternoon. And thank you for taking my question. I’d love to dive deeper first into your ability to maintain those that flattish revenue on vertical software despite the ongoing housing headwinds. So given the rollout of all these products, and the expansion of existing products, how are you thinking about the current cross sell opportunity that still exists, potentially untapped in the vertical?

[Matt Ehrlichman, Chief Executive Officer]

I’ll take that. So there are a couple of dynamics. So one is, as I mentioned earlier, we’re seeing an increase in product velocity, which creates opportunities for cross sell. We gave one example today of [indiscernible] which gives us an opportunity to bring a new module out to title completes. The other dynamic is partly due to market conditions with inflation partly due to roll-out some new products. We have pricing opportunities, and we’ve been able to do that in a variety of places, we see a couple more opportunities. And so that will help that business from a revenue perspective. And then we’re still investing in sales and marketing, because we think it’s the right long-term opportunity for the company. And so we’re still out there, getting people excited about what we’re doing in those verticals.

[Josh Siegler, Cantor]

That’s helpful. Thank you. And then I’d like to turn attention over to profitability. So as you mentioned, as we progress throughout the year, you continue to roll off these higher risk insurance policies start to see the benefit of pricing. Can you walk us through how you expect the seasonality on your profitability play out throughout the year?

[Matt Ehrlichman, Chief Executive Officer]

Shawn, you want to take it?

[Shawn Tabak, Chief Financial Officer]

Yes. So today, I mentioned earlier that the seasonality we see in the first half of the year on EBITDA is largely driven by the claims that we see at HOA, which is largely driven by weather in the first half of the year. And that’s also where we see, frankly, the most variability as well, because obviously, is weather. So as I said today, Q1 was relatively in line with our expectations. And so, we are largely comparable and on track with our previous guidance that we talked about, which is $30 million to $40 million EBITDA loss for the year. And then that assumes obviously that key assumption that as expected weather and claims are in line with our 62% gross loss ratio for the year. And then as we look to the second half of the year, we would expect – continue to expect to be profitable on an adjusted EBITDA basis. You noted some of the things that were – that we had talked about previously the underwriting changes that we have made, including the policies that were on renewing, the increased pricing that we have done as well as the third one I will mention that the some of the G&A savings that we expect to see as the year goes on.

[Josh Siegler, Cantor]

Great. Thank you, Shawn.

[Shawn Tabak, Chief Financial Officer]

Thanks, Josh.

[Operator]

Right. Next, we go to Ryan from KBW.

[Ryan Tomasello, KBW]

Hey, guys. Thanks for taking the questions. Just going back to the Reciprocal Exchange, from P&L and margin standpoint, can you talk about how the GAAP P&L or balance sheet may or may not change Day 1 post the transaction? And in terms of the capital structure, how are you thinking about the timeline for bringing in third-party capital there to either supplement or replace Porch’s initial capitalization of the company? Do you feel like that is kind of necessary to ultimately effectuate the capital light lower underwriting risk that you are drawn to here with this new structure?

[Matt Ehrlichman, Chief Executive Officer]

Shawn, I’ll take the third-party capital comment, why don’t you take the first part of that in terms of how we’ll be able to display the P&L going forward post-approval? So let me take the second part first. It is a choice, Ryan, on what we do with third-party capital. So the insurance business, there is certain calculations you have to meet and those calculations factor in a variety of things, how much capital do you have, the level of reinsurance that you use, growth. And so we expect and we believe we have the ability to continue to grow premiums rapidly as we have demonstrated in the past. So part of the capital choice will be dependent on how fast we choose to grow premiums and also what the state is of the reinsurance market. Again, we think what we are in now is a unique moment in time. It doesn’t last for 1 years, 2 years, 3 years like we will see how long pricing is, I would say very – and availability is very abnormal, because as the expected returns for insurers right now is very high and you’d expect more capital to come in the system, thereby normalizing that system. So part of that decision will depend on what happens with that portion of the market. We do think it is not unlikely that we would go out and be able to pursue third-party surplus note investments, whether that be late this year or sometime in 2024. That certainly could help just to make sure the capital base is there for the Reciprocal entity to grow as fast as we’d like to. So Shawn, over to you for the first part of that question.

[Shawn Tabak, Chief Financial Officer]

Yes. So, as we have talked about, we think the Reciprocal is an attractive structure for our business. I think it gives us an ability to generate cash flow for our Porch shareholders and we talked about higher margin mitigating direct exposure to weather. Initially when we launched the Reciprocal, we do expect to consolidate from a GAAP perspective, the Reciprocal, as currently structured today into our results. But as we get closer, obviously, we will be able to share more information on what that reporting would look like, because I think it is important that we understand the cash generation capabilities of the business and what the Reciprocal provides in that regard to Porch shareholders, which may end up looking different than our GAAP consolidated results, so…

[Matt Ehrlichman, Chief Executive Officer]

Yes. Let me just layer one more thing on there, Ryan, just to make sure that it’s clear. At the time of the approval and the Reciprocal’s created, we will be selling HOA, I see our insurance carrier into that entity. And like Shawn said in the presentation all of the capital in the balance sheet, liabilities from that entity move over. Just to be clear, they are two separate balance sheets. So, Porch Group shareholders cash is separate from the cash in the Reciprocal, right. And so we will want to show as Shawn is saying here is what Porch Group is producing both from our balance sheet perspective and a P&L perspective. And then because of the surplus as soon as because Reciprocal owes us, money via that Reciprocal’s note, we sell the entity, that creates a link between those entities, which has the standard report, from a GAAP perspective in a consolidated way. Over time, we would expect that to be paid off, we would be able to separate those entities, but we will make sure even right out of the gate, it’s clear what is Porch Group, what we are doing as a as a company.

[Ryan Tomasello, KBW]

Okay. Great. Yes. That’s helpful. And obviously, this is just a newer transaction for some of us. So, just kind of walking through a bit more the mechanics here, how are you thinking about the timeline for transitioning legacy each of policyholders to the new Porch brand, post the Reciprocal transaction? Does that – is that timeline and any churn there impact, how capital intensive or the loss exposure that the parent company could have at all post the transaction occurring?

[Matt Ehrlichman, Chief Executive Officer]

So, right out of the gate, I will call approval, the Porch Insurance, Reciprocal exchange would be available to sell Porch Insurance in the State of Texas. And then we would start to make it available and roll out for approval in other states as well. So, right out of the gate, consumers, policyholders renewal, we will be able to present them the opportunity to be able to move to that Porch Insurance product. And there is a variety of unique value props that we are including in that product to make that attractive for consumers. If the consumer didn’t want to move, they certainly don’t need to. Again, at the close of the transaction, all premium, whether it’s a consumer that moved to Porch Insurance, or remains in HOA, either way, all of that premium resides in that whole Reciprocal entity, and we get paid our clean fee and commission model from all of that premium, right. So, from a Porch Group perspective, the migration from HOA to Porch Insurance actually doesn’t matter that much will help facilitate that, because there are good reasons to. But it doesn’t really impact how the commissions and fees show up to the Porch Group’s P&L.

[Ryan Tomasello, KBW]

Got it. Thanks guys.

[Matt Ehrlichman, Chief Executive Officer]

Thanks Ryan.

[Operator]

Next up, we have Jason from Craig-Hallum.

[Unidentified Analyst]

Hey. This is Kyle, I am here for Jason. Thanks for taking my questions. First one from me, I was just wondering if I mean you mentioned some weather events, Q1, things like that. Could you give us a snapshot of maybe what fundamentals would look like if the Reciprocal is already in place?

[Matt Ehrlichman, Chief Executive Officer]

We will, but we aren’t right now. And the reason is, is that the Reciprocal, the terms of the Reciprocal agreement, you are appending, the discussions and approval of the Texas Department of Insurance. So, it’s similar to the answer I had provided before where as soon as the Reciprocal is approved, and we have clarity and certainty in terms of all the final terms, we will sit down and be able to provide all of that detail. And then yes, I would expect us to be able to provide both a backward looking view as well as a forward looking view. But we are not able to do that quite yet. I would say just generally though, like I have mentioned before, to John. Revenue, generally will be a little bit lower post Reciprocal, and then the margins, both gross margin and EBITDA margins will be a bit higher.

[Unidentified Analyst]

Perfect. That’s helpful. And then last one, can you just kind of drill down on some of the growth of insurance? And how much of it came from new policy adds, new geographies, price increases, just maybe what you saw in the quarter?

[Matt Ehrlichman, Chief Executive Officer]

Yes. The biggest driver would be price increases. That obviously has a big impact as those roll through. We have mentioned in the past that, in Texas and South Carolina, there are material price increases that we have taken. Now, fortunately for us, we took those really, I would say ahead of the industry, our team, had the foresight to kind of see what would likely happen with the reinsurance changes. And so we are ahead of the industry and now we see lots of other carriers scrambling to also increase prices and try to catch up through the changes in the reinsurance market, but that would be the biggest of the impacts.

[Matthew Neagle, Chief Operating Officer]

Yes. So, if I just take a step back, the entire Insurance segment grew about 100%. So, it was just under $59 million, with 100% growth and a couple of things we call, I don’t exactly as Matt mentioned, the pricing, the warranty business doing really well. And then we also said, about half of the growth, overall half of that, 100% growth was from the changes to the reinsurance program and the seeding percentages there. And then the other half was these operational wins, and the momentum that the business is seeing on that front.

[Unidentified Analyst]

Thank you guys very much.

[Operator]

Alright. Next, we have Daniel from JPM.

[Daniel Wolle, JPM]

Hey, guys. Thanks for the question. I am on for Cory Carpenter. So, on the rate hikes, can you maybe talk about if you are still applying for more rate hikes in the states like Texas and North Carolina and totally Reciprocal is launched? And then for the second one, I believe it was launched last quarter, but can you maybe talk about the progress made with the Porch Group media launch and some of the demand you are seeing there? Thanks.

[Matt Ehrlichman, Chief Executive Officer]

I will take the first, Matthew, why don’t you take the second? Yes, we are continuing to just like other carriers take more rate, obviously, you work through the states for those rate approvals. We will share more as certain things become approved and start getting rolled out. But that just generally is something I think you will see across the homeowners insurance market this year and perhaps ongoing is that more rate will flow through into that system. We view the homeowners insurance market as a growing TAM, given how rates are going to increase, which again it might – you might face a little headwinds in the short-term, but longer term that does create meaningful opportunity in terms of how that’s going to grow. Matthew?

[Matthew Neagle, Chief Operating Officer]

Sure. Yes, last, I think it was last quarter we highlighted Porch Group Media, which is our solution to brands who want to reach the properties and movers where we have unique data and unique insights, where it’s a business we are excited about. I would say the team, we are early, but we are optimistic. So the team is actively in discussion, with a number of brands. I would say there is excitement about the differentiation of what we can do. And then its meter by just market slowing down a little bit, and people being a little more cautious about how much they want to invest into marketing. But certainly, I can say we have active, in interesting discussions with a large number of brands because of the unique things that only we can do.

[Daniel Wolle, JPM]

Thanks.

[Matt Ehrlichman, Chief Executive Officer]

Thank you.

[Lois Perkins, Investor Relations]

Great. Thank you, everyone. We have some pre-submitted questions, which I’ll read out. First up, what is a 20% improvement in the insurance pricing model performance translate into conversion? And what is the impact on the gross loss ratio and P&L?

[Matt Ehrlichman, Chief Executive Officer]

Nicole, do you want to take that one?

[Nicole Pelley, Senior Vice President, Product and Technology]

Yes, sure, I’ll take that one. There’s many factors that impact pricing and conversion. But overall, as we improve our models, we are able to better understand accuracy in our risk modeling. And then that feeds into our pricing. So what that means is we can better convert lower risk policies with lower prices, and then more appropriately priced higher risk policies higher, and that leads to more profitable growth. We have choices as we think about gross loss ratio, versus growth, right, as we price, we can price however we want. And so but overall, we’d expect improvements in model accuracy allow us to continue to drive profitable growth for the Insurance segment.

[Lois Perkins, Investor Relations]

Thank you. And the second question is, why do you think the shares are priced like they are today?

[Matt Ehrlichman, Chief Executive Officer]

The quarterly question. So I would give you a similar answer in terms of what I’ve given in the past, which is, first of all, we don’t think the valuation reflects that we’ve built I mentioned that in our remarks, prepared remarks. We don’t think it reflects our view of the intrinsic value of the business. Like I’ve told my team, I do believe there will continue to be volatility and pressure on our stock, just given all the markets that we play in kind of the macro uncertainty of the markets, we plan until we are profitable, and really prove value to the market, we can start to build sustained momentum. So that will happen in time. But given just again, the fear and the uncertainty, and housing and reinsurance etcetera, what we’re doing is just keeping our heads down, taking advantage of this time to expand our long-term competitive notes. And I think we’re doing a nice job of that. We aren’t so far away at this point of having some really important milestones for the business. And I’ll use this opportunity just to say that I do express your appreciation for the support from our consistent shareholders, long-term oriented shareholders who know what we are building here over time and what’s ahead, no I am really see the value creation opportunity that’s ahead. And I certainly understand it. [indiscernible], it could be a bit rocky here, just seeing where the stock prices has done over this last year plus, but certainly better times on our ahead and I’m excited, this – it don’t too far away.

[Lois Perkins, Investor Relations]

Great, thanks. Thank you, everyone. That concludes our time for today. We look forward to speaking you soon. You may now disconnect. Thank you.

[Matt Ehrlichman, Chief Executive Officer]

Thanks, everybody. Take care.