Good afternoon, and welcome to the Open Lending's Q4 and full year 2022 earnings conference call. As a reminder, today's conference call is being recorded. On the call today are Keith Jezek, CEO, and Chuck Jehl, CFO. Early today, the company posted its Q4 and fiscal year 2022 earnings release and investor supplement to its investor relations website. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I'd like to remind you that this call may contain estimated and other forward-looking statements that represent the company's view as of today, February 23rd, 2023. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances.
Please refer to today's earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ from those expressed or implied with such statements. Now, I'll pass the call over to Mr. Keith Jezek. Please go ahead.
Thank you, operator. Good afternoon, everyone. We appreciate you joining us today for Open Lending's Q4 and full year 2022 earnings conference call. Before we begin, I would like to express my continued confidence in the long-term opportunities before us. The actions and behaviors of consumers, auto lenders, OEMs and dealerships, and the corresponding pricing dynamics we have experienced are not without precedent. However, what's notably different in this cycle is the impact of the velocity and the magnitude of the Federal Reserve rate increases to the auto industry, and more specifically, to consumer affordability and lender liquidity. Having managed scaled businesses in the auto sector through the Great Recession, as well as serving on the Open Lending board during this time, I'm encouraged by the response of our team, and I'm confident in our ability to manage through the current challenges.
I'll speak more about how we are positioning the company to continue to gain share given our financial strength, our value proposition, and our competitive position after reviewing our results. For the year, we certified over 165,000 loans, a slight decrease from the previous year. Total revenue for the year was $180 million, down 17% and at the lower end of our guidance. Adjusted operating cash flow for the year was $143 million, which was near the high end of our guidance. Now to spend a few minutes on recent industry trends and expectations for 2023. First, on inventory. As many of you know, used vehicle sales in 2022 tumbled to their lowest levels in nearly a decade.
Supply chain and chip shortage constraints have improved year-over-year, sales for new autos remain well below historical levels as well. Second, on affordability. We believe this will remain the most significant challenge for us in the near term. The intended consequences of the Federal Reserve's rate increases in 2022 and 2023 are impacting the auto sector and our current addressable market. Near and non-prime consumers are being hit disproportionately by rising rates, resulting in lower disposable income. As the Fed continues the path to reduce inflation, a more expensive auto payment driven by higher rates is dampening demand. For example, the weighted average auto loan rate for both new and used vehicles in some segments is up 200 to 300 basis points. Next on loan originations.
In speaking with the treasury teams at credit unions and other financial institutions, they currently have alternatives for balance sheet capital in short-term duration instruments, as well as risk-free bills, notes, and bonds in the treasury market. To the extent these alternatives are more attractive, liquidity within the auto origination pool of capital is reduced. Callahan data shows total loan originations were about $160 billion in the Q4 of 2022, down 21% from a year earlier and down 19% sequentially from the Q3 of 2022. In the peak of the pandemic, when liquidity was high and federal stimulus relief was running rampant, credit unions held about 12%-13% of their assets as cash, which was easily available to fund new loan demand. Now, credit unions on average are down to approximately 6% of their total assets in cash.
Some of our largest credit unions have a loan-to-share ratio in excess of 100%. This reduction in liquidity has impacted the borrowers who are most in need and have been hit hardest by inflationary pressures to their rent, food, energy, and transportation. Our refinance business made up 43% of our certified loan volume at its peak in February 2022, but has declined to 11% in December 2022. This business has been severely impacted by the unprecedented Federal Reserve actions throughout 2022 and now into 2023. This constitutes a significant impact on affordability of our near and non-prime borrowers. Based on prior cycles, it's our sense that when rates begin to stabilize, we should begin to see improvement in this part of our business. The industry backdrop for the auto loan sector is experiencing historic challenges.
That said, we believe these challenges will be temporary. We remain committed to our goal of gaining market share. We expect to be well-positioned to meet pent-up demand as the industry recovers. With that in mind, I want to discuss our areas of focus as we move throughout 2023 to position us well for this year and beyond, areas which I believe will support and strengthen our long-term competitive advantages. First, we look to further refine and optimize our sales channels. Second, we will continue to enhance our technology offering. Equally as important, we are laser-focused on attracting and retaining talent. Now to go into each area in a little bit more detail.
First, sales, operations, and marketing. To power our go-to-market efforts, we increased our sales, marketing, and account management teams by nearly 30% in 2022, and we plan to continue to thoughtfully invest in these areas throughout 2023. We will keep a watchful eye on these investments, measure performance, and ensure that they deliver the expected returns. To strengthen our team's future success, we organized our team into one group dedicated purely to selling, while the other focuses solely on account management. In short, we've aligned our efforts to maximize our sales efficiency. Our experienced sales team will continue to work primarily on closing new accounts. Their efforts will be aided by our expanded marketing team, which is supporting sales with a robust lead generation program to help secure new business.
We are early in this initiative. You may have already seen our earned media coverage in The Wall Street Journal, Automotive News, Auto Remarketing, Auto Finance News, Credit Union Times, and PYMNTS.com. These are publications that decision-makers read daily. We believe this will further support our sales team. To lead these efforts, we've added a new senior vice president of marketing to our leadership team. We are encouraged by our strong December sales as well as other recent wins, including the addition of Crescent Bank, a top 50 bank auto lender in the U.S. Our account management team will center their attention on continued engagement and collaboration with our customers with the simple priority of building our base of business from existing customers by expanding their use of our program.
We've launched various targeted customer promotions via multiple channels, and we have produced a number of thought leadership pieces, including a highly attended National Association of Federally-Insured Credit Unions webinar on loan securitization. We have improved our implementation process and shortened the time to go live for a new institution. We've also added a senior vice president of operations to improve client retention and drive operational best practices. While still early, we have seen significant progress from these investments. For the full year of 2022, our non-OEM business, primarily credit unions, was up 16%, driven by strong refinance volumes earlier in the year, while in contrast, the large universal banks reported auto loan originations down 25% to 30% year-on-year. Let me turn to our technology.
We continue to have a distinct competitive advantage with significant barriers to entry, given our 20+ years of proprietary data, sophisticated technology, including 5-second underwriting decisions, exclusive relationships with A-rated insurance partners, deep lender relationships, and regulatory know-how. We will continue to strategically invest in our Lenders Protection technology to remain a best-in-class risk-based solution for lenders seeking to serve non-prime customers. To make car ownership more accessible for those in near and non-prime credit segments, we increased our allowable vehicle age from 9-11 years. One of the criteria we set forth in conjunction with this modification was very specific mileage caps as determined by our proprietary data set of auto evaluations.
With the average age of financed vehicles jumping from 5.4 to 6.4 years for FICO scores below 640, this change allows financial institutions to grow their portfolios while minimizing risk through Open Lending's default insurance and risk management program. Equally as important, vehicles ten years and older comprise some 8% of all used car purchases. We've also expanded our loan approval expiration window from 30 days to 45 days for our direct and refinance channels. This change offers our customers and refinance partners sufficient time needed to complete their respective funding processes. To support our go-to-market strategy enhancements and streamline onboarding of new customers, we recently expanded our integration to 3 new technology partners. Lastly, as we strive to lower delivery costs and improve integration timelines, we continue to modernize our infrastructure with cloud computing technologies.
We welcomed our new chief information officer in November to focus on our migration to the cloud, as well as on driving security, data integrity, DevOps, and IT operations. He joins us from AmeriFirst Home Mortgage and brings a wealth of industry and technical experience. We are confident that our technology investments allow us to improve our time to market for developing, testing, and developing secure applications that enhance customer satisfaction. Lastly, we are also committed to attracting and retaining talent, creating a best-in-class organization. To lead these efforts, late last year, we announced the appointment of a chief human resources officer focused on building a strong people strategy to support and expedite Open Lending's mission. We expect to continue driving company culture centered on creating a diverse and collaborative environment to unlock value and foster growth for individuals, teams, and the business.
To wrap up, I couldn't be more excited about our opportunity now having almost five full months in the CEO seat. This is driven by the fact that we continue to have a large and growing total addressable market, a profound competitive advantage, and significant barriers to entry with our people and technology, as well as a business model that leverages both of these points. We are focused on areas that we are confident will position the company for success for years to come. I would like to turn the call over to Chuck to review Q4 and the full year in further detail, as well as to provide our thoughts on 2023 outlook. Chuck?
Thanks, Keith. During the Q4 of 2022, we facilitated 34,550 certified loans, compared to 42,639 certified loans in the Q4 of 2021, and 42,186 certified loans in the Q3 of 2022. Total revenue for the Q4 of 2022 was $26.8 million, which includes an ASC 606 negative change in estimate of $12.8 million associated with our profit share, compared to $51.6 million in the Q4 of 2021.
When excluding the impacts of ASC 606 change in estimate from both periods, revenue during the Q4 of 2022 was only down $5.5 million or 12% year-over-year. Break down total revenues in the Q4 of 2022, profit share revenue represented $6.1 million, program fees were $18.3 million, and claims administration fees and other were $2.4 million. It is important to note that while our certified loan volume was down in the Q4 of 2022 from the Q4 of 2021, our program fee revenue only decreased slightly due to mix of business certified, which resulted in higher unit economics.
Turning to profit share, I want to remind everyone that profit share revenue is comprised of the expected earned premiums, less the expected claims to be paid over the life of the contracts, less expenses attributable to the program. The net profit share to us is 72%. The monthly receipts from our insurance carriers reduce our contract asset each period. To further discuss the $6.1 million in profit share revenue in Q4, the profit share associated with new originations in the Q4 of 2022 was $18.9 million or $546 per certified loan, as compared to $24.7 million or $580 per certified loan in the Q4 of 2021.
As mentioned previously, we recorded a negative $12.8 million change in estimate as a result of an expected decrease of profit share in future periods due to higher than anticipated claims frequency and severity of losses. Notably, this was partially offset by lower anticipated prepaids due to the elevated interest rate environment. The Manheim Used Vehicle Value Index, which tracks the prices car dealers pay wholesale at auction for used cars, is one of the macroeconomic factors we consider in evaluating our change in estimate each period end. This index fell nearly 15% year-over-year. That's the largest one year decline in the history of the index. However, it's worth noting that it remains highly elevated compared to prior ten year trailing levels, and therefore, continues to impact auto affordability.
In comparison, during the Q4 of 2021, revenue included a + $6.5 million change in estimated future revenues on certified loans originated in historical periods. This was primarily due to a positive realized portfolio performance attributable to lower frequency and severity of claims. Gross profit was $21.9 million and gross margin was approximately 82% in the Q4 of 2022, as compared to $46.9 million and gross margin of approximately 91% in the Q4 of 2021. For the quarter, gross margin excluding ASC 606 negative change in estimate would have been 88%. Selling general and administrative expenses were $17.2 million in the Q4 of 2022 compared to $11.7 million in the Q4 of last year.
The increase year-over-year is primarily due to additional employees to support our growth with a focus on our go-to-market sales strategy and investment in our technology, as previously discussed by Keith. Operating income was $4.8 million in the Q4 of 2022 compared to $35.2 million in the Q4 of 2021. Net loss for the Q4 of 2022 was $4.2 million, which was driven by the $12.8 million negative adjustment to our profit share contract asset compared to net income of $27.8 million in the Q4 of 2021. Basic and diluted earnings per share was a loss of $0.03 in the Q4 of 2022 as compared to $0.23 in the previous year quarter.
Adjusted EBITDA for the Q4 of 2022 was $8.5 million as compared to $36.6 million in the Q4 of 2021. There's a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. Adjusted operating cash flow for the quarter was $33 million as compared to $38 million in the Q4 of 2021. We exited the quarter with $380 million in total assets, of which $205 million was in unrestricted cash, $75 million was in contract assets, and $65 million in net deferred tax assets. We had $167 million in total liabilities, of which $147 million was outstanding debt.
During the Q4 , we announced the authorization by our board of directors to repurchase $75 million of our common stock through November of this year. This program reflects the confidence of our board and the management team in our business model, free cash flow profile, and the overall strength of our balance sheet. During the quarter, we repurchased 2.6 million shares for approximately $18 million at an average price of $6.80 per share. We expect to continue to be opportunistic in open market purchases under the current authorization throughout the year. Before I touch on guidance, I would like to update you on a change within our insurance partner relationships.
CNA, a partner of ours since 2017, has decided not to renew their agreement with Lenders Protection when their term concludes on December 31, 2023, due to a shift in CNA's capital allocation priorities. We would like to thank them for their partnership over the years and their support as we work through and manage the runoff of existing policies over the coming years. As a reminder, one of our key initiatives over the past few years has been to minimize concentration risk by bringing additional A-rated insurance carriers into our program. We have successfully executed on this initiative as we have strong relationships with our three other insurance carriers to provide credit default insurance coverage to our auto lender customers.
AmTrust, which is under contract through Q4 of 2028, American National Insurance Company under contract through Q2 of 2026, Arch Insurance North America under contract through Q2 of 2027. We are working with all three of these carriers to transition our lender customers who had been insured with CNA to them, all of whom are interested in absorbing additional business from the Lenders Protection program. Moving on to guidance. If inflation were to persist through 2023, it appears the Federal Reserve will stay the course and keep rates higher for a longer period. While the bond market at times has appeared to be indicating a more favorable rate environment later in 2023, recent forecasts from the Federal Reserve are more conservative, with current indications that the terminal fed funds rate will be in the 6% range.
These factors, as well as other macro and auto industry lending-specific indicators, are ever-changing. More specifically, it is difficult to have visibility into financial institutions' future liquidity and the corresponding pace of auto originations. For these reasons, at this time, we feel it is prudent to take a more measured approach by providing only a quarterly outlook. Guidance for the Q1 of 2023 is as follows: We expect certified loans to be between 28,000 and 32,000, total revenue to be between $30 million and $34 million, and adjusted EBITDA to be between $13 million and $17 million. In our guidance, we have taken the following factors into consideration: the affordability index of our target credit score borrower due to the continued inflated used car values, inflation, rising interest rates, and overall consumer sentiment.
An important driver in estimated profit share is the Manheim Used Vehicle Value Index, which we expect will continue a path of moderate declines over the next year. As Keith outlined earlier, we will continue to invest this year. While this impacts our margins, we have a strong balance sheet and will be well-positioned as the overall macro and auto retail industry challenges subside. We would like to thank everyone for joining us today, and we will now take your questions. Joining us on the call will be John Flynn, Open Lending Chairman of the Board.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.
Hi. Good afternoon. Thanks for taking my questions. You know, I wanted to dig in a little bit about profit sharing going forward as it relates to your carrier relationships. Can you kind of remind us, the 72%, you know, portion that you keep has always been very generous, and my understanding has been is because the carriers like the product on their end because you provide all the customer acquisition costs and underwriting and ultimately, the default insurance they're underwriting is very high ROE. You know, given CNA's decisions, should we be thinking about whether your other three partners, given, you know, the credit performance of the portfolio now, whether they're rethinking that 72 to 28 mix? I mean, are they?
Are there any discussions about, you know, the kind of returns that they require and whether they want those modified at all?
Yeah. Hi, David. It's Chuck. Good to visit with you. It's a great question. You know, we've got, you know, the three carriers that remain. One, you know, CNA has been a great partner for a long time, and I'd tell you the business has been very profitable for them. You know, this is more of a capital allocation change for them and an underwriting decision, you know, for different products and not everybody can do everything. It's been very profitable to them and very profitable for our other three carriers. We are, you know, strong relationships with the other three. You know, Keith and I have met with them.
You know, John and Ross had a great handoff to us of those relationships, and I've built them over the last couple of years as well. The appetite is very strong for our business at the current terms in or economics.
Got it. Maybe just as a follow-up, kind of the same topic. You know, obviously, kind of not surprised to see the contract asset, you know, perspectively be written down a bit. You know, in that non-prime auto, it's probably deteriorated more than most other consumer credit asset classes. After the writedown, how should we think about maybe a more kind of normalized level of profit share per loan, you know, throughout 2023, you know, given all the affordability issues that are going to persist?
No, another great question. You know, David, what I'd tell you is, you know, as we analyze that, you know, the contract asset and our profit share, you know, every quarter, you know, the biggest driver for obviously the 12.8 negative, you know, change in the quarter, and I'll tell you year-to-date, you know, that's like 5.7 for the year negative. You know, it basically, the Manheim went down 15%, you know, in 2022, which is the largest single decline in the history of the index. As we thought about this at Q3, you know, just give you a little bit more history, you know, we anticipated that it would be down about 11% full year 2022. The accelerated decline in the Q4 .
You know, as we put the Q4 originations on the books at the $546, you know, we took that into consideration as long as well as stress into 2023 on defaults increasing as well as, you know, the severity of loss due to the Manheim coming down. As we put that on, you know, we booked that $546 per loan at about a 62% loss ratio. I'll tell you, as we think about that, at a baseline of about 50% loss ratio, which is kind of historical averages that we will, you know, book to, we put about 23% stress on the Q4 originations, which got it down to the $546. Which it started at about, call it a $788 profit share per cert.
We feel good about the $546 per cert. Obviously, as we kind of navigate through, you know, these volatile times in the economy and the auto industry specific and delinquencies, you know, we'll continue to review that. We feel good about our book at 12/31/2022, and we'll continue to monitor that.
Got it. Got it. It sounds like the Manheim actually more than consumer payments. Thank you.
Yes, sir. Yes. Go ahead, John.
Chuck, I have one more comment to the insurance carriers.
Yes, sir.
Just worth noting, keep in mind that because this is written as a surplus lines policy and that every loan is, you know, targeting a 60% loss ratio, if it ever got out of whack and if it started to climb way beyond that, the 72% is, you know, percentage of X of the premium. We can adjust the premium going forward to maintain the loss ratio that the carriers are looking for. It's not, I don't think they'd be negotiating if our percentage is down. It's a matter of as rates are rising everywhere in the country, the only thing a rate increase would do is increase the rate to the consumer, which would be, you know, easy to cover.
Understood. Very helpful. Thanks so much, John.
Thanks, David. Thanks, John.
Our next question comes from the line of Joseph Vafi with Canaccord. Please proceed with your question.
Hey, guys. Good afternoon. Thanks for taking our questions. I know, Keith, you mentioned, you know, a lot of hires and a lot of investment in the business. Were there some other moving parts in the G&A line that drove it up so materially here in Q4? Another follow-up on that.
Hey, Joe. I'll tell you. I'll start. This is Chuck. Good to visit with you. If you think about, you know, the SG&A throughout, you know, 2022, you know, we hired, you know, several folks in 2022 to help as we grow our, you know, go-to-market sales strategy and enhance our technology. That's kind of been throughout the year. You know, the year-over-year, you know, Q4 to Q4, you know, $11 million to $12 million to call it $17 million, that $5 million has progressed throughout the year. Sequentially from Q3, you know, we're actually down slightly from Q3 about $500,000.
I wouldn't say it's up sequentially, but year-over-year, it's just the headcount adds to kind of support our investment in the business as we wait for this pent-up demand that will be there as we know the industry recovers.
Sure. Fair enough. On the adds, I know you mentioned Crescent being added here in the quarter. Maybe we could get a higher level view of appetite, you know, from new logos now. I mean, obviously there's a lot of headwinds and everything from, you know, the credit unions having lower cash balances to just inventories being down across, you know, the board. How are prospective clients moving forward now versus maybe six months ago? If you could mention what those new tech partner integrations might mean to the business, that would be helpful. Thanks, guys.
Yeah, sure. As we, you know, mentioned in the comments, this is Keith, Joe was mentioning in the comments, you know, December was a really strong sales month for us, so that's very encouraging, especially, you know, kind of given the end of the year. As we step off into 2023, just encouraged with the pipeline. You know, a lot of the efforts of the new and expanded go-to-market, you know, strategies have been around segmentation and prioritization of the pipeline. We really wanna go after, you know, lending, you know, partners, you know, in a number of various segments. First and foremost, just to kind of categorize them by, first and foremost, their potential for volume.
Second, whether or not they open all three channels, so that'd be that indirect, direct or refinance, their current, you know, loan to share or their liquidity balance. For most of them, the type of LOS that they have, the loan origination system, to make sure that we're already integrated with it. Finally, most importantly, you know, do they have the appetite to lend to this segment? What I'll tell you is that the pipeline is robust for 2023 as we start the year, and the value proposition is still the same as it's ever been. There's the need to serve the folks that perhaps they haven't historically served.
Fair enough. On those integrations?
Yeah, Joe, this is Chuck. You know, from a tech partners perspective, you know, integrating with additional LOSs that make, you know, our time to first revenue quicker. Integrated, for example, with XLOS, a project with defi SOLUTIONS, as well as, you know, adding a new refi partner with GetJerry. A lot, you know, things, you know, that we're working on there to be ready and also, you know, grow certs as we can and control what we can.
Great. Thanks a lot, guys.
Yeah. Thank you, Joe.
Thank you, Joe.
Our next question comes from the line of Peter Heckmann with D.A. Davidson. Please proceed with your question.
Good afternoon. The cash flows for the company were very strong, and I assume that is a reflection of the slowing of the business and just cash collections on the existing loan book of business. I guess when you think about that, I mean, the volatility that we've seen and acknowledging this has been a very, very unique and dynamic environment for auto sales, auto pricing, interest rates, but the dynamic around, you know, these really significant changes in profit sharing under ASC 606 are, you know, really just make it very, very difficult, you know, for a public company and the expectations for a public company. You know, given the underlying cash flow, you know, is.
I guess, do you feel that Open Lending needs to remain a public company and or would this business be more appropriately held within either a larger business or held as a private company, where the quarter-to-quarter volatility in earnings, you know, wasn't really gonna be this big of an issue?
Well, maybe I'll Pete, on that last question, you know, I definitely don't want to speculate on that. You know, we are a public company today and, you know, working very hard for our shareholders to maximize, you know, value. You know, your question around, you know, ASC 606 and the volatility, I mean, you know, yes, we had a lot of positive performance in 2021 and, you know, a good ways into 2022. You know, the changes in the industry and the macro, you know, obviously impact us. You know, we provide transparency there and good disclosures, we feel. I'll tell you that from a cash perspective, you know, obviously the cash flow statement, we generate about $90 million in cash in 2022.
You know, we've got a healthy cash balance at year-end at $200 million. You know, that's obviously, we started the share buyback program and invested there. You know, you know, which is, you know, and the volatility, you know, that's out there and which is why we thought it was prudent to, you know, go to quarterly guidance this time just 'cause of the, you know, the precision and visibility into our, you know, customers' liquidity as well as, you know, auto loan originations. You know, that's, you know. We will continue to generate a lot of free cash flow in this business. It's a great cash business.
If you think about maybe, instead of an adjusted operating cash flow metric, maybe even a free cash flow metric at about, call it 85% to 90% of adjusted EBITDA, you know, that's kind of what we target.
Yeah. No, I hear what you're saying, and I sympathize. It just, you know, if you're having a hard time forecasting it, then it's just that much more difficult for us. I guess I'll continue to listen in and think about some of those factors driving the reversal here this quarter.
Okay, Pete. Thank you.
Our next question comes from the line of Vincent Caintic with Stephens. Please proceed with your question.
Hi, thanks for taking my question. Good afternoon. Wanted to go back to the profit share. Wondering if you could kind of go into more detail about in the Q4 , kind of what the big changes in assumptions were. Plus, what gives you comfort that what you built into the expectations for profit share now are where they should be? Or could you give a sensitivity around if used car prices or different things move around, what could profit share do? Thank you.
Yeah. No, hi, Vincent. You know, as I think I said, you know, earlier when David asked the question around profit share, you know, maybe I start with, you know, what changed in the Q4 . You know, it was an accelerated decline of the Manheim, you know, unprecedented, you know, 15% for the year. You know, when we were at Q3, you know, we projected the Manheim to be down about 11%. Used car values is a direct drive of our estimate of, you know, future claims and severity of loss. It had a significant impact on us in the quarter. As you may recall, you know, earlier in the year, Cox was forecasting the Manheim to be down in Q1 and Q2 only 3% for the year.
It was a significant change here in the later part of the year. You know, as we think about, you know, sensitivities around it, you know, the, the $546 that, you know, we discussed earlier where we put the Q4 originations on the books. You know, we stressed that, you know, call it about 23% from what we call the baseline, which is a 50% loss ratio. That's stress on defaults increasing as well as severity of loss. You know, that's our estimate at this point in time.
If you think about it, that $546, you know, if you think about sensitivity around it, you know, for an example of every 5%, maybe an incremental loss ratio or claims going up, you know, that could be about $100 in unit economics, in our profit share, just from just an average unit, you know, sensitivity.
Okay, that's helpful. Thank you. On the insurance companies, I appreciate you gave us the, guess how long each company's contract, goes up into. I'm sort of wondering if, you know, before, a contract ends, can an insurance company change anything? Can they slow down approvals or change, otherwise change things that might affect the volume, all else being equal? Thank you.
I mean, I mean, we have great relationships, as we said earlier, and it's a partnership with our carriers. You know, we review all, you know, changes, underwriting changes, together with, you know, our approval as well as theirs. I mean, again, it's a strong appetite for our business, and it's been very profitable, you know, for AmTrust, you know, in particular, as well as, you know, Arch and American National going forward. You know, they're excited to get more flow of our business, you know, as CNA exits and changes their priorities. We continue. You know, origination volume, you know, it is, you know, this year was $4.7 billion for us.
You know, obviously, with our, you know, going into 2023, it's, you know, volume's gonna be down. There's plenty of capacity not only for 2023, a lot of growth into the future with our three carriers.
Okay, that's helpful. Thank you.
Yeah. Thank you.
Chuck, it's also worth noting not one carrier can make a change. All three have to agree to it. It's not like one can decide they want to slow down by changing an underwriting rule.
Yeah, a great point, John. Thank you.
Our next question comes from the line of John Davis with Raymond James. Please proceed with your question.
Good afternoon, this is Madison on for JD. I wanted to start on OpEx. I think it will step down again in 1Q based on the guide. Is there a way you can help us, you know, think about the right OpEx run rate, just given the current macro backdrop and some of your comments around retention and investments throughout the year?
Yeah. I mean, Madison, you know, as you pointed out, you know, with the midpoint of the guide for Q1, since we just went to a Q1 outlook, you know, I think, you know, slight downtick there from obviously Q4 levels. You know, again, as we think about our investments in 2023, as we invest in the business, you know, these are measured, thoughtful investments and, you know, we can slow those down if we need to, the pace of those investments in our business. I'd just say, you know, in that range of Q4, but probably slightly down a bit just on the Q1 guide on OpEx.
Okay, that's helpful. Then, you know, I understand near-term margins are under pressure a lot given the macro headwinds. Just as we think about the longer-term model, is there anything structurally that's changed that would limit your ability to get back to that 60% + EBITDA margin over time?
You know, if we, if we think about margins, you know, we want to grow our business, you know, there's headwinds today and challenges that, as we invest, you know, if you think about the Q1 outlook, you know, the margins are so, you know, 43% EBITDA margins to 50%, you know, from the low to the high. You know, we think that's temporary as we invest in the business now. As, you know, as others are retrenching and not, we look at this as an opportunity to really be positioned well for the pent-up demand as the industry and the auto specific recovers. We believe our margins will improve as our revenues, you know, go up, and we can leverage the SG&A that's on the books today.
Madison, this is Keith. Thanks, Chuck. I'll just add on those investments and why we feel it's the right time. You know, as Chuck mentioned, you know, these are all measured and prudent investments that are, you know, based on, you know, through the lens of data and analytics to make sure that they're the right investments at the right time. They fall into two very simple camps. The first is increasing, you know, our capacity and number of lender partners. As capacity per lender customer is down, it's important to grow overall capacity, so when the market comes back, you know, it'll rise, you know, together. The second one is in the technology investment and product.
That's simply to help, you know, our application volumes flow as best they can through, you know, through our funnel, especially when the time when applications are down. They're around, you know, increased market penetration, and they're around increasing volume of app flows given the current environment.
Okay. Got it. I appreciate the color, and thanks for taking the questions.
Thanks, Madison.
Thanks, Madison.
Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.
Yes. Hi, thank you. First I wanted to follow up on the point I think John made around premium increases to account for that ASC 606 or to offset some of those ASC 606 headwinds. Curious if there have been any premium increases to date, and if that's included within the adjustment this quarter. If not, sort of how quickly do you think those premium increases can happen?
John.
Do you want me to take that?
Yeah, you wanna start? I'll kind of jump in as well.
Faiza, at this point, we've never had a premium increase. In all the years we've been doing business, we've had one reduction in premium of 15%, and that was a significant time ago. If you remember in following us over the last few years, one of the things we have done which effectuates almost what would look like a premium increase is we have reduced the advance rate on a loan. If you remember how we price loans, you know, you've got 95% LTV, 100%, 105 and so on. If we were only doing an advance off of 90% of the value, that would appear to be a higher premium to insure that loan. We did that twice.
Yeah, I think it was a 5% back when COVID first happened, then 2.5% not that long ago. To answer the second part of your question, how quickly could it happen? If we feel the need to increase premiums, it's a 30-day notice to the insured. We could send 1 notice out to all of our insured credit unions, banks, funding sources, and within 30 days have that premium increase in place.
Got it. Thank you. Just a follow-up question broadly on the macro environment. You know, I'm curious in terms of what do you need for, you know, for a recovery or really for normalization in your business? 'Cause obviously there've been a number of headwinds over the last, you know, call it 3 years, and it seems like the headwinds have been shifting and coming from different angles. At this point it seems like, you know, there's obviously supply chain headwinds that have been continuing. There seem to be, you know, seem to be multiple headwinds as it relates to whether it's affordability, and then some of the issues that you're talking about as it relates to defaults, things like that. Then it seems like there's an issue with the credit union funding.
Sort of what do you need to happen from a macro perspective for things to normalize?
Faiza, this is Keith. I think you articulated it pretty well. I mean, it is the conundrum of our wonderful automotive retail industry that, you know, supply chain was buffeted and supply was hurt, you know, during COVID and right after COVID. Once, as an industry, we've started to figure that out a little bit, albeit manufacturer-specific. Now we have this demand shortage. You know, we kind of got supply figured out, and now we have this demand dynamic. It's captured, I think, best in the Cox Moody's Affordability Index, which as I'm sure everyone on the call is aware, is now at 44 weeks on average, to pay for the median used car. That's at an all-time high. That's the key factor.
What do we need to make that affordability go away? It's very straightforward. We've got to have, you know, used car prices come down, which, you know, we're forecasting that they are gonna happen in 2023. We need rates to stabilize and come down. That's one of the most important things for the business. I think one of your follow-on questions is just liquidity. You know, our thought and thinking and, you know, John or Chuck, you know, please jump in, is that especially as it relates to credit unions, that liquidity and the balance sheets are gonna get better in the H2 of the year for the very simple reason of, one, they have more deposits coming in as they've raised rates to attract those deposits.
Secondly, just as their current loan, auto loan portfolio, you know, starts to roll off. I mean, John or Chuck, anything to add?
It was great.
The one thing I would add to that too, Keith, and one of the things you'll find for these credit unions is because some of them got stuck with these low interest rate loans on longer-term loans, you know, that makes them gun-shy to go out there and do these seven-year, ten-year, 15-year mortgages. They'd rather. NCUA is a real proponent of a shorter duration, you know, average life, 2.5 to 3.5 years auto loan at a decent return. I think you're gonna see credit unions particularly get back to their core business, which is helping those near-prime consumers, the underserved people, get into an affordable car to get to work and back while being able to generate a decent yield with a short-duration loan.
Understood. Thank you so much.
Hey, Faiza, one thing I'll follow up. As John mentioned that we've not, you know, ever had a formal, you know, actually price increase, or I guess not many. When we put in the vehicle value discount, as John referenced in 2020 and then also again in 2022, that 2.5% vehicle value discount kind of equates to about a 10% to 11% effective pre-premium increase, and that's still in effect that we put in April of last year.
Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.
Hey, guys.
Hey, Mike.
Howdy, howdy. Any update on the two OEMs and any outlook on any future OEM customers?
Well, Mike, yeah. Hey, this is Keith. Happy to take that. Just on the future OEM customers, let me just say that, really encouraged currently by the frequency of our engagement with what's in the pipeline. Based on relationships that I've had just in the past throughout my career, you know, the introduction of two or multiple new logos into that sales pipeline. I'm further encouraged by just with the activity there is that a number of the prospects have passed through, you know, quantifiable stage gates and kind of the flow of, you know, from prospect to close. Now to be clear, these are very, very large accounts.
You know, their closing is unpredictable, but just to repeat, you know, very encouraged by the frequency of interaction and then the formal passing through of stage gates to get to the ultimate relationship.
Yeah, Mike, I'll jump in. You know, on OEM 1 and 2, you know, obviously you can look at our key performance indicators in our, you know, supplemental deck, you know, down, you know, year-over-year, you know, quarter as well as full year. We're encouraged that, you know, Q3 to Q4, you know, that's stabilized and that business is actually going up a bit. We're just good to see that momentum in OEM 1 and 2.
Got it. Good to hear on the future. Did you guys disclose like what % of your volume CNA was?
No, we haven't. You know, they've been with us, you know, over the years, since 2017, they're not, they're not our largest, you know, carrier.
Got it. Okay. Hey, thank you.
Yeah. Thanks, Mike.
Our next question comes from the line of Spencer James with William Blair. Please proceed with your question.
Hi. Thanks for taking the question. This is Spencer on for Bob Napoli. The core non-refi, non-OEM certs were a bit stronger seasonally than we anticipated. Could you talk about what customer activity is driving that and maybe how we should think of mix of certs between OEMs, refi, and core for your March quarter guide?
You know, you know, obviously, maybe start with, you know, the refi. You know, I think Keith, in a prepared comment, you know, our refi business is down, you know, obviously with the, you know, 7 rate hikes in 2022 and then, you know, one already in 2023. That's severely impact our refinance channel, you know, there. It was 43%, you know, Feb of 2022 and as low as, call it, 11% in December. If you think about, you know, year-over-year, you know, Spencer, you know, the core, you know, non-OEM business, if you will, is up 16%, which we, you know, pleased to see. You know, in Q4 it was down.
obviously the, you know, when we revised the guide for the year, you know, that was taken into consideration, in the liquidity constraints, you know, on our, you know, large customers, primarily. You know, as we think about, you know, going forward, you know, I think the OEMs are on track to continue to, you know, at the pace they are and we believe have hopefully troughed and are gonna be adding more to us as we go forward. You know, the mix of the business, you know, is hard to say, you know, right now with, you know, not giving a full year outlook. You know, we're learning each day on kind of where we're heading here.
You know, maybe Keith has something to add more about the kind of the non-core, versus core customers.
Yeah, I mean, we're encouraged by the growth of just the large majority of our customers and look forward to that, you know, continued participation in the program in 2023.
Right.
Okay. Thank you for the color. As a follow-up, average program fee per cert has continued to improve and it looks like the improvement in program fee per cert has somewhat lagged the increase in average loan size. Could you talk about what drives the lag in program fee versus loan size? Is it a lag or is there a mix-related component that I'm missing?
I think it's more of a mix related component 'cause it's, you know, our program fee is based on a % of the loan amount, there wouldn't be a lag there. Larger, you know, volume customers, you know, get a discount there on the program fee, Spencer. It's just really a mix and lower concentration in some of our, you know, larger customers that got, you know, did more volume in the past that brought that down a bit.
Okay. Appreciate it. There's been a ramp in program fee per cert over the course of the year. Should we expect that to be primarily correlated with loan size for 2023, or are there other factors to consider?
Yeah, I think so.
Appreciate it. Thank you.
Thanks, Spencer.
There are no further questions in the queue. I'd like to hand the call back to Keith Jezek for closing remarks.
Well, thank you, operator. Just as we close, if I may, I'd just like to share a thought or two on the industry. As many of you know, I've dedicated my entire career, the majority of my entire career, serving automotive retail for many reasons, but the most simple is the fact that at trillions of dollars, automotive retail is the single largest healthcare-related consumer retail on the planet. 93% of households in the U.S. have at least access to at least one car, that far outpaces the number of consumers who own a cellphone or a smartphone at 85%. What we're seeing now is an especially strong cyclicality. What I've observed throughout my career is that automotive and automotive finance in particular always comes back. The manufacturers, the OEMs will ramp up production.
They'll run multiple shifts. They'll produce cars and then follow those with wonderful incentives for consumers. Dealers are wildly resilient. They always find a way to put people in cars, whether it be new or used cars. Lenders especially will regain their appetite for auto loans, which are comparatively short duration and exhibit, you know, historically very, very low delinquencies. When the industry comes back, it's almost always led by used cars, which is good for us because as we all know, used cars is the primary source of our business. 85% of our volume comes from used, while 15 is from new, and it comes back quickly in used. The reason for that is very, very straightforward. Consumers can defer or delay the purchase of a new car, but they can't defer or delay the purchase of transportation.
With the average age of the car on the road approaching 13 years, we think there's phenomenal pent-up demand. I just wanted to share, you know, my perspective just over, you know, my career in the auto sector and couldn't be more enthused about the future of Open Lending. With that, I'd like to thank everybody for joining us today.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.