Porch Group, Inc. (NASDAQ:PRCH) is a leading homeowners insurance and vertical software platform that is positioning itself to be the best partner to help homebuyers move, maintain, and fully protect their homes. The company has two reportable segments: Vertical Software and Insurance.

Business Overview

Porch Group has built deep relationships with approximately 30,000 companies that are key to the home-buying transaction, such as home inspectors, mortgage companies, and title companies. These relationships provide the company with early insights into a majority of U.S. homebuyers. Through its vertical software products, Porch Group has unique insights into the majority of U.S. properties, which helps feed its insurance underwriting models, better understand risk, and create competitive differentiation in underwriting.

The Vertical Software segment provides software and services to inspection, mortgage, and title companies on a subscription and transactional basis, as well as move and post-move services. The Insurance segment provides consumers with insurance and warranty products to protect their homes, earning revenue through premiums collected on policies, policy fees, and commissions.

Financials

For the full year 2023, Porch Group reported annual revenue of $430.3 million and a net loss of $133.9 million. The company's annual operating cash flow was $33.9 million, and its annual free cash flow was $23.8 million.

In the first quarter of 2024, Porch Group's revenue grew 32% year-over-year to $115.4 million, driven by a 50% increase in the Insurance segment revenue. The company's revenue less cost of revenue was $39.6 million, with a margin of 34% of revenue. Adjusted EBITDA loss was $16.8 million, a $5.1 million improvement over the prior year, driven by the insurance profitability actions.

Underwriting Expertise and Unique Data Advantage

Porch Group's insurance carrier, Homeowners of America (HOA), has a history of ensuring profitability through effective underwriting and pricing. The company leverages its unique data, which it calls "Home Factors," to improve its risk segmentation and evaluation. This data includes insights into a property's water heater location, pipe type, presence of wood flooring, and much more. Porch Group has verified insights into a large number of properties and can effectively model and predict home factors on virtually all properties across the U.S.

The company's underwriting actions, which it refers to as the "3Ps" (product, price, and portfolio), have been instrumental in driving profitability. Porch Group has taken significant rate increases, where possible, to optimize profitability in each state. It has also taken action against higher-risk policies and those it expects to be unprofitable, while reopening certain geographies and growing its portfolio as it refines its advantaged underwriting and pricing.

Reinsurance Program and Catastrophe Risk Management

Porch Group's insurance carrier, HOA, has a successful reinsurance program that helps manage its exposure to catastrophic events. The company's 2024 reinsurance program has a simplified structure and improved year-over-year terms, which is a testament to its industry-leading underwriting results. The company's probable maximum loss (PML) has reduced by 50% compared to 2022, and its third-party quota share prospective ceding is approximately 27.5%, which is a little higher than anticipated due to more favorable terms.

The reinsurance program provides HOA with reduced weather risk, more stable results, and surplus support, reducing the capital required by the carrier. Even after the planned reciprocal exchange is launched, Porch Group will continue to manage the reinsurance purchases of the reciprocal to ensure it is well protected and has long-term stability.

Vertical Software Segment Performance

Porch Group's Vertical Software segment revenue was $27.5 million in the first quarter of 2024, a slight decline compared to the prior year, driven by a 3.5% reduction in year-over-year industry home sales, which adversely affected the company's moving business. However, the segment's revenue less cost of revenue margin increased by approximately 600 basis points to 82% due to price increases and strong cost control.

The company's software businesses, such as Rynoh and ISN, have been able to maintain relatively stable revenue despite the market declines, thanks to product innovations and price increases. Rynoh, for example, is expected to generate around $8 million in adjusted EBITDA in 2023, and the company has a multi-year roadmap of additional major products that it plans to launch across its core software businesses, coupled with price increases.

Recent Developments

Porch Group has been focusing on improving its insurance profitability through underwriting actions and leveraging its unique data advantage. The company has also been working on launching a reciprocal exchange, which is expected to provide more stability and long-term growth opportunities.

Outlook

For the full year 2024, Porch Group is now expecting revenue of $450 million to $470 million, with revenue less cost of revenue of $230 million to $240 million. The company has increased its adjusted EBITDA guidance to $2.5 million to $12.5 million, reflecting the strong business execution and increased confidence in the full-year performance.

Porch Group's gross written premiums are expected to be $460 million to $480 million for the full year 2024, with the company managing premiums roughly flat on an apples-to-apples basis, excluding the impact of the sale of its in-house agency, Elite Insurance Group (EIG).

Liquidity

As of March 31, 2024, Porch Group had $413 million in cash, cash equivalents, and investments, with $301 million held at its insurance carrier, HOA. The company also holds a $49 million surplus note from HOA, and HOA's surplus at March 31 was $36 million.

Porch Group's management believes the company's current cash and cash equivalents are sufficient to finance its operations, planned capital expenditures, working capital requirements, and debt service obligations for at least the next 12 months. The company may explore alternative sources of capital, such as equity or debt financing, to support its growth strategy and future acquisitions.

Risks and Challenges

Porch Group faces several risks and challenges, including the incidence, frequency, and severity of weather events and other catastrophes, economic conditions affecting the housing, insurance, and financial markets, and the uncertainty and significance of the known and unknown effects on its insurance carrier, HOA, due to the termination of a reinsurance contract following fraud committed by a third-party reinsurer.

The company also faces risks related to existing and developing federal and state laws and regulations, including those pertaining to insurance, warranty, privacy, information security, data protection, and taxation. Porch Group's ability to obtain and maintain adequate reinsurance coverage against excess losses, as well as its ability to stay out of regulatory supervision and maintain its financial stability rating, are also critical to its success.

Conclusion

Porch Group's unique data and underwriting expertise, combined with its successful reinsurance program and profitability actions, position the company well to drive long-term growth and profitability. The company's vertical software businesses continue to demonstrate resilience, and its insurance segment is expected to benefit from the company's strategic initiatives. With the planned reciprocal exchange and the continued expansion of its Home Factors data, Porch Group is poised to become a less volatile and higher-margin business in the homeowners insurance and home services market.