Good afternoon, everyone. Thank you for participating in Porch Group's full year 2022 conference call. Today, we issued our Q4 earnings release and related Form 8-K to the SEC. The press release can be found on our investor relations website at ir.porchgroup.com. Joining me here today are Matt Ehrlichman, Porch Group's CEO, Chairman, and Founder, Shawn Tabak, Porch Group's CFO, Matthew Neagle, Porch Group's COO, and Adam Kornick, President of Porch Group's Insurance Division. Before we go further, I would 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, including responses to your questions, reflects management's views as of today, March 14, 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, and anticipated impacts from pending or completed acquisitions 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 a presentation shortly after this call on the company's website at ir.porchgroup.com.
With that, I'll turn the call over to Matt Ehrlichman, CEO, Chairman, and Founder of Porch Group. Over to you, Matt.
Thank you, Lois. Welcome aboard. Good afternoon, everybody. I founded Porch a decade ago now with a mission to simplify homeownership. Over the years, we have focused on building sustainable advantages that would allow us to win in key areas of focus. The most valuable services for the home, now with homeowners insurance at the center. First off, I wanna welcome Shawn, our new CFO. Fantastic to have you on board. I'll just start by saying that I am proud of the work and contributions from the entire Porch team in 2022 as we dealt with the impacts of inflation, challenging capital markets, unusual weather volatility, and a housing market that slowed substantially.
Many, if not all, home service and insurance businesses faced these same headwinds, we stayed focused on what we can control, and we took advantage of 2022 to move forward in our strategy and toward near-term profitability. We extended our market position and our software products in key verticals. We grew our insurance business with improved underwriting and increase in policies. We successfully integrated past acquisitions, we matured our financial systems, and we diversified our board by adding strong new members. Quickly looking at the financials, we ended 2022 with Q4 results of $64 million in revenue and $13 million in adjusted EBITDA loss. Q4 adjusted EBITDA would have been $7 million better if it hadn't been for Winter Storm Elliott, which occurred in the last week of the year. For the 2022 full year-over-year revenue growth was 43%.
Over the two years since we've been a public company, we've now grown revenue at a CAGR of 95%. Shawn's gonna share more details on the financial results here shortly. I'd like to reflect on 2022 as there were some key successes that really did move us forward. During the last year, our software division expanded its leadership position in the home inspection industry. We acquired Home Inspector Pro, an inspection software company that strengthened our SaaS offerings and residential warranty services, which has deepened our capabilities with home inspectors and home warranties. By selling software to now more than 30,000 home service companies, we have visibility into approximately 80% of all home buyers, as well as unique insights into the underlying properties. In 2022, we launched our well-received Porch app, which extends the experience we provide for consumers and continues to gain traction.
We made great progress accessing more unique demand and data, a core competitive advantage, which gives us the opportunity to build a delightful consumer experience and eventually the most effectively priced homeowners insurance. To accelerate our expansion into homeowners insurance, in 2021, we acquired Homeowners of America or HOA, a company that provided us with both a regional insurance carrier and a managing general agency or MGA. We've expanded that business both with new geographies and distribution, and I'm proud to share that in 2022, HOA was the fastest-growing homeowners insurance carrier in the US through the Q3 of the year.
We accomplished this while having 2022 gross loss ratios of 72% better than other carriers, despite unexpected severe weather in our largest regions during the year. One of the reasons we chose HOA as the company to acquire is that it uniquely had the characteristics that we liked, both an MGA and carrier business, a great leadership team, greater capital efficiency and less volatility than most by ceding much of the premiums to reinsurance companies, strong historic underwriting results, 15 years of historic claims data, and a healthy financial position. We have the ambition to become an insurance company with a higher margin commission and fee-based model, and to operate with limited seasonality and large swings in results from weather. All of which we believe would effectively create value for our shareholders long term.
While we continue to invest in strategic partnerships with reinsurance companies, we have been working for some time on the formation, structuring, and strategy, programming and pricing of a reciprocal exchange. We will imminently file an application with the Texas Department of Insurance to create this reciprocal. If approved on the terms proposed by Porch, the Porch Insurance Reciprocal Exchange would be formed in Texas as an association owned by its policyholder members and not by Porch Group and our shareholders. This new entity would purchase our HOA insurance carrier and would hold ongoing premiums and ordinary course claims costs. Initially, Porch Group would provide the required capital to operate the reciprocal, and Adam's gonna discuss the expected benefits and key considerations related to this strategy shortly in our deep dive.
We have been looking forward to sharing more today as we believe this is a key time for our company and an attractive structure which allows us to better leverage our advantages and improve profitability over time. We'll now hand it over to Adam Kornick, President of our Insurance Division, who will kick off with this deep dive into this launch and to provide further context before Shawn takes over to cover results and guidance. Adam, over to you.
Thanks, Matt. By way of background, I've been in the insurance industry for two decades. 2022 was one of the most difficult years in my experience. We saw inflation increasing claims costs along with storms, with Hurricane Ian in Q3 and Winter Storm Elliott in Q4, plus increases in reinsurance pricing. We'll share updates today on how we are positioned for growth and profitability and our plans to mitigate volatility. First, let me take a step back and provide clarity on five different ways one could operate in the home insurance industry, so you can better understand how we operate today and how that compares to a reciprocal. One, selling leads. It is a simpler business, less regulated, but it lacks annuity revenue streams and the ability to deliver a great consumer experience. Two, as a retail insurance agency.
Agency's commissions are limited, and they also rely on carriers for underwriting risk. three, the third is a managing general agency or MGA. Here, companies underwrite and price their own insurance products and use the capacity of insurers and reinsurers. Commissions increase, but there's exposure to reinsurance cyclings. four, the fourth is a carrier. Insurance carriers write their own products and hold all or some of the premiums and risk, depending on what is ceded to reinsurers. Carriers have more upside if claims are low, but they require capital to grow and carry volatility. Today, we operate under models two, three, and four. Finally, a reciprocal exchange. As mentioned, we believe this is an attractive model for our business and strategy that we'll explain over the next few slides. A reciprocal exchange structure has been utilized by successful insurance businesses such as Farmers Insurance.
As an example, Zurich owns the day-to-day operator behind Farmers and creates substantial and consistent value from that relationship. What is a reciprocal? Here's how the structure will work, assuming the Texas Department of Insurance, also known as the TDI, approves the application as we will file. The Porch Insurance Reciprocal Exchange will be an association owned by its policyholder members and not by Porch Group. The reciprocal would issue the policies, hold the premiums and capital requirements, and pay claims from its balance sheet. Porch Group will continue to manage pricing and claims on behalf of the reciprocal, leveraging our data and consumer access. For these services, we expect to be paid fees comparable to the fees we've received in the past from reinsurance companies. Distribution is available through a variety of channels, including both Porch's B to B to C relationships as well as third-party agencies.
We expect to launch in Texas, as part of this, we would transfer our HOA carrier entity, including the carrier's assets and liabilities, to the reciprocal in exchange for a coupon-bearing note. That means on day one of that transaction, all HOA carrier premiums from all of its current states will be moved into this newly formed entity. Although separate, the success and capitalization of the reciprocal will of course be important to Porch, as we will be financially responsible for the success of the reciprocal initially, and we'll also be earning significant fee income from that entity. To recap, we'll soon file the application with the TDI and work through the approval process. We will transfer the HOA carrier and premium from all states into the reciprocal in exchange for a coupon-bearing note.
We expect to launch the new Porch Insurance brand first in Texas. Lastly, Porch will provide operating services to the reciprocal for which it will receive a fee. For the next slide, to bring all this together, I will highlight the long-term benefits of this reciprocal structure for stakeholders. First, policyholder members are expected to benefit from new value propositions Porch can provide, such as a ninety-day home warranty product and more. Also, in this structure, policyholders are the owners of the reciprocal, allowing them to benefit from any future dividends or distributions. For Porch, as we have mentioned, this structure will help us move towards our ambition to reduce direct exposure to seasonality and large swings in results due to weather and have higher margin, more predictable profitability.
In the future, Porch financing will be replaced with third-party capital, and this, we believe, will create long-term value for our shareholders. We go one more. Before turning over to Shawn, I'll echo what Matt had said. This is an exciting time for Porch Group and should have us positioned well for growing profits in a more predictable way in the long term. We expect 2023 to be a transition year as we shift towards this reciprocal model, assuming it is approved by the TDI, which we now expect before Q3 of this year. In the interim, we expect to manage the business, the current HOA business with an eye on profitability. Let me share the key things we will do this year to facilitate a smooth transition and launch of the reciprocal. Two key initiatives on this one.
We expect to decrease the amount of quota share reinsurance in 2023 to approximately 50% of the market broadly and in support of the transition to the reciprocal, which we would expect to see less and operate its reinsurance purchasing more efficiently. This means we'll have some additional exposure versus historical periods, in particular, weather-related risks, which are typically more pronounced in the first half of the year. Given the increased cost of reinsurance, we expect to non-renew approximately 37,000 higher risk policies. This will obviously temper the near-term growth of our insurance business in 2023, but is expected to increase profitability and help ensure the reciprocal is appropriately capitalized at launch if approved by the TDI on terms that we propose. To summarize, it's an exciting year and a long time coming.
We are actively working towards filing and approval and therefore you'll be positioned to drive more consistent, profitable growth with less direct exposure to labor inflation and quota share reinsurance. Shawn, over to you.
Thanks, Adam, good afternoon, everyone. Before I dive into the Q4 results, I just wanted to express how excited I am to be here at Porch, working with Matt, Matthew, Adam, and the rest of the wonderful team. We have a tremendous opportunity to create value for our customers, our shareholders, and our employees by simplifying homeownership with insurance at the center. Taking a step back, 2022 presented a challenging macro environment for Porch with increases in weather-related events as well as rising inflation, a decline in home sales, tightening and price increases with reinsurance, and challenging capital markets. Each of these impacted short-term business results like many other home service and insurance businesses. The key takeaway for the Q4 of 2022 is that despite all of this, we grew revenue 24% year-over-year, driven by our insurance segment.
Adjusted EBITDA was also impacted by a large ice storm weather event at the end of the year, which drove higher than average claims. Winter Storm Elliott impacted much of the country and Texas in particular. In total, cat weather impacted our adjusted EBITDA loss by approximately $7 million in the Q4 . Starting now with our key financial metrics. Q4 2022 revenue was $64.1 million, with the insurance segment growth partially offset by the vertical software segment. Q4 revenue growth, excluding recent acquisitions of Floify Residential Warranty Services and Home Inspector Pro, was 19%. Revenue less cost of revenue was $43.9 million, resulting in a 69% revenue less cost of revenue margin, lower than prior year, driven by higher cat weather-related insurance claims.
Normalizing for the cat weather, revenue less cost of revenue would have grown 36% rather than 17%. Adjusted EBITDA loss was $13.3 million, with cat weather accounting for approximately $7 million of that loss and otherwise driven by strong performance in our warranty business and strong expense control. Gross written premium for our Insurance segment was $131 million, a 30% increase over the prior year, driven by continued growth in policies and higher premium per policy starting to flow through. Moving on to revenue by segment. Revenue in our Insurance segment was $31.2 million, a 94% increase over the prior year, driven by growth in policies, premium per policy, and strong growth in home warranty.
Insurance segment revenue increased from 31% of total revenue in the Q4 of 2021 to 49% of revenue in the Q4 of 2022. Revenue in our software segment was $33 million, which was a 7% decrease over the prior year. Due to our moving services group, which was directly impacted by a soft housing market that continued to face headwinds. Q4 home sales declined 34% year-over-year industry-wide. Our software and services subscription groups were relatively flat year-over-year. As for adjusted EBITDA, our insurance segment adjusted EBITDA was $700,000, a decrease from the prior year, driven by cat weather-related insurance claims. Software segment adjusted EBITDA was $1.1 million, a decrease from the prior year, driven by the housing market, as mentioned.
Corporate expenses were $15.1 million, reducing to 24% of total revenue from 28% in 2021. We invested in our data platform and app, which was offset by strong expense control. Shifting now to our full year results. Revenue for the full year 2022 was $276 million, 43% growth over the prior year. Revenue growth, excluding acquisitions from the prior year, was approximately 21%. Insurance segment revenue grew 119% in 2022, driven by growth in policies, increased premium per policy, and strong execution in our warranty business, including improvement in retention rates due to an improved value proposition for consumers. Revenue in our vertical software segment grew 13% in 2022 despite the housing market.
Revenue less cost of revenue was $168 million, a 61% revenue less cost of revenue margin, down from the prior year, primarily driven by cat weather-related insurance claims, as mentioned. The adjusted EBITDA loss of $49.6 million was similarly impacted by these cat weather-related insurance claims. Finally, gross written premiums in our insurance segment was $536 million, growing 75% year-over-year. Shifting now to the balance sheet. We ended the year with unrestricted cash plus investments of $307 million, versus $320 million as of the end of the Q4 . We hold convertible debt on our balance sheet of $425 million due in September 2026.
In the Q4 of 2022, we repurchased approximately 2.4 million shares at an average price of $1.82 per share. Additionally, I want to provide that we do not currently hold any deposits with SVB. As a reminder, our HOA insurance carrier must hold a certain amount of capital that can vary based on premium, growth, and other factors. Historically, we have offset some of this capital requirement through effectively transferring the amount of premiums and losses to reinsurance partners, either on a quota share or excess of loss basis. HOA has been and continues to be rated A, Exceptional by its rating agency.
To maintain that rating and to ensure the entity is appropriately capitalized, Porch Group transferred $34 million to HOA in the Q4 , bringing HOA's unrestricted cash balance to $78 million at the end of the year and its investment balance to $92 million. We expect to transfer HOA to the reciprocal in exchange for a coupon-bearing note. These cash and investment balances would transfer with the reciprocal. Shifting now to our outlook for 2023. We expect many of the headwinds faced in 2022 could continue into 2023, such as inflation, potential weather volatility, and declines in the housing market. Given additional weather exposure as we prepare for the reciprocal launch, we are providing a range for performance, which assumes no catastrophic weather event.
With that, our guidance for 2023 is revenue of $330 million-$350 million, increasing at least 20% year-on-year. This assumes strong revenue growth expected in our insurance segment, with relatively flat year-over-year revenues in our vertical software segment. Until we see the housing market turn, our starting assumption is for an 18% decline in industry-wide home sales in 2023 versus 2022. Revenue less cost of revenue of $170 million-$180 million. In the first half of the year, our exposure to weather is the highest, given this is historically when our largest states have seen the highest claims volumes. Therefore, we've assumed a 62% gross loss ratio for the year, excluding any cat weather higher than the historical average.
Given the pricing increases that have gone into effect, this loss ratio would equate to approximately a 24% increase in claims costs per policy compared to 2022. Certainly, we hope for better weather and a slowing of inflationary costs, which could create upside to this range, but we believe this is the appropriate assumption at this time. We have not assumed major losses for cat weather events, which would create downside outside of this range until the reciprocal is formed. Adjusted EBITDA loss of $30 million-$40 million. We are managing costs carefully and we remain on track for positive adjusted EBITDA for the second half of 2023 and beyond. Finally, gross written premium of approximately $500 million. We anticipate that TDI will review our reciprocal application in the latter part of 2023.
If approved, we will revise our guidance to present the new structure of the business, which we believe to be more attractive. Until this time, we continue to be directly exposed to potential catastrophic weather events. Note that under US GAAP, we expect to consolidate the financial results of the reciprocal with Porch Group for a period of time. As I mentioned, we continue to expect adjusted EBITDA profitability for the second half of 2023 and beyond, even with the continued expected housing market downturn in 2023 and substantial increase in reinsurance breakin-pricing. Here's a bridge to demonstrate how we would achieve this. Comparing the adjusted EBITDA loss of $24 million in the second half of 2022 to the positive adjusted EBITDA expectation in the second half of 2023, driven...
is driven by a number of factors. We are modeling a $10 million improvement between approved premium per policy increases in insurance that are rolling out already and lower distribution costs. Our previously stated price increases of insurance policies in Texas and South Carolina are being rolled out at each customer renewal, and the impact by the second half of the year is substantial. Second, a decrease of expenses by $5 million from a variety of G&A savings initiatives already in flight. Finally, given the underwriting actions we are taking and given the severe weather we saw in 2022, we expect more than $10 million improvement in claims costs between the second half of 2023 compared to 2022.
Finally, before I hand it over to Matthew, a few housekeeping items I wanted to cover. First, as I enter my first full calendar year as Porch CFO, I plan to look at our KPIs in additional or alternative metrics to share. You'll notice that in this presentation we have added certain disclosures such as the gross loss ratio for our insurance business. We expect to continue to provide this disclosure until we potentially transition to the reciprocal, and it becomes less applicable. Secondly, we plan to transition from reporting policy retention to a premium retention rate, which we believe is more meaningful as it also considers price increases and is more directly comparable to peers.
Additionally, you'll note in our press release issued today that we are restating our unaudited financial statements for Q1 to Q3 of 2022, primarily due to the accounting related to reinsurance contracts. The net impact of the restatement for the nine months ended September 30, 2022, is additional revenue of $3.1 million and additional adjusted EBITDA loss of $2.3 million. Finally, we have remediated the three material weaknesses that we had from 2021, and we want to thank the team for their significant efforts on that front. Separate from the progress we've made there, we have identified a new material weakness for our HOA subsidiary. As a reminder, we acquired HOA in 2021 and was subject to SOX for the first time in 2022.
We'll work towards remediating this weakness in 2023. With that, I'll turn it over to Matthew Neagle, our Chief Operating Officer, to discuss our key performance indicators for the Q4 . Matthew.
Hello, everyone. Great to be with you today. I wanna make sure it's understood that despite macro pressures and unusual weather impacts seen throughout 2022, the fundamentals of the business are strong, the team is performing well. Looking to 2023, our strategic priorities remain clear and largely unchanged. First, we'll sell vertical software to more companies where we become deeply embedded, such as increasing the % of customers we can access and upsell. Two, we will extend our online experiences, our digital tools, and our consumer app with the aim to be their partner for their home and increase our B2B2C transactions. We will further build out our data platform and leverage Porch's unique insights to improve premium per policy for our insurance and warranty products.
We will launch Porch Insurance via Reciprocal as a key step towards reducing Porch Group's direct exposure to claims, weather events, and reinsurance. In terms of quarterly KPIs, I'll start with the average number of companies and average revenue per company per month. As a reminder, these metrics, when taken together, provide additional information on our total revenue for the quarter. Definitions of these KPIs are in the appendix. Beginning with companies on the left, the average number of companies in Q4 was approximately 30,860, up 25% from the prior year, showcasing that our teams are selling our software to more companies and increasing our penetration even in a difficult environment. As we have mentioned, growth in the number of companies is and will slow, especially until the housing market rebounds.
We have seen home inspection companies start to go out of business or retire in Q4, and certain mortgage and moving companies either close or compress spend. We recognized $693 in revenue per company per month in Q4, a decrease of roughly 11% from the prior year. This KPI was impacted by lower home purchase volumes. We expect this to continue in the short term, but in the medium term, we believe there is opportunity for growth in this metric by expanding software modules offered to companies, gaining access to more consumers, and helping more with more services like insurance and warranty. Shifting now to monetized services and average revenue per monetized service. Monetized services include insurance policies, home warranty, movers, home automation and security, internet and TV, and other home services.
Said differently, this includes all revenue other than our B2B software and services subscription revenue. We saw 213,000 monetized services in the Q4 of 2022, a decrease of 18% from the prior year. This shift was driven primarily by fewer home buyers, given the downturn in the housing market, which had a 34% decline, was substantially worse than prior quarters. Revenue per monetized service increased 46% to $219, up from $150. The growth in revenue per monetized service is driven by the key services we are focused on, such as insurance and warranty, which may produce even higher revenue per service going forward.
Looking at insurance on slide 27, the segment continues to grow and ended the Q4 with gross written premiums of $132 million, with 389,000 policies, while generating an average of $347 of revenue per policy per year. On a rolling 12-month basis, as of December 31, 2022, we had approximately 86% retention rate at our Homeowners of America business. As mentioned, policy growth has and will continue to slow in 2023 as we non-renew certain higher-risk policies. Finally, diving a little deeper into the gross loss ratio for our insurance segment. Here you can see the gross loss ratio in the Q4 of 2022 was 56%, which included an approximately 25 percentage point impact from atypical weather events.
As was mentioned, Winter Storm Elliott hit in a period when we typically see less major weather events. The average gross loss ratio over the prior three years in Q4 was 31%, which was broadly in line with the 32% in Q4 2022 if you exclude these CAT events. This means we had approximately $7 million of additional expense in the Q4 of 2022 due to this higher than expected gross loss ratio. Thanks, everyone. I'll pass things back to Matt to wrap us up.
Thanks, Matthew. Thanks, guys. As we turn to 2023, look, I couldn't be more excited, given what's coming up this year. First, our strategic initiatives are continuing to progress nicely. We're now approved with 9 states where we can use our property data in insurance pricing. Our insurance price increases are rolling out to policyholders at renewal and expected, as expected. Our consumer app, as I mentioned before, is getting broadly distributed to home buyers, but now it's across approximately half of our inspection companies using our ISN software. Home warranty is integrated into our experiences through a variety of channels with excellent growth. We're seeing good price increases in some of our vertical software products tied to rolling out new software modules.
Second, despite the internal cautious expectations of the housing market, and despite prioritizing profitability over growth for our insurance business, because of the strong execution by our team, we still expect to grow revenue north of 20% in 2023. Lastly, we continue to be on track, as Sean mentioned, to become adjusted EBITDA profitable in the second half of this year and beyond, which is an important milestone for the company. For the potential launch of the reciprocal and the momentum across the business, we are very excited about what the next several years will produce. Thanks much for the time and interest. With that, we will open up the call for Q&A.
Great. Thank you, Matt. The lines are now open for Q&A. To ask a question, please raise your hand. We will do our best to get through all your questions in the remaining time today. Question one comes from Jason at Oppenheimer. Over to you, Jason.
Hey, guys, a few questions. Just to help people understand, if you had been a reciprocal exchange in 22, how would that have impacted gross profit and EBITDA? I'll just ask them in order, so we'll just take one at a time. Just how should we think about, like how would it impacted the business had you already been a reciprocal exchange?
Yeah, Jason, thanks for the question. Let me just take the high level and then, Sean, if you wanna provide any other details, please do so. We obviously are not guiding right now, Jason, to what the numbers would be looking forward with the reciprocal. You know, we're gonna wait to get it approved. We have to go through that process with the TDI first. At that point in time, we'd expect to both update our guidance as well as to go deep with analysts so that the models can be appropriately updated. Like we noted in the call, it does have materially positive impact to, you know, margins overall, both gross margins and then EBITDA, you know, margins.
The claims costs that are typically incurred are borne by that reciprocal, you know, entity. Obviously, looking at 2022, the impact would have been material, to the margin line because in particular of the amount of weather, unusual weather that occurred, you know, last year. So without going into too much detail, you know, I'll certainly, comment that way. Anything else, Sean or Adam, that you guys would like to add?
I can just give a little bit of perspective on how we were impacted by some of the atypical weather that we saw in the year. In the Q4 , we had mentioned Hurricane Ian as approximately a $10 million impact. Now in the Q4 , we had mentioned $7 million from all the catastrophic weather, primarily Winter Storm Elliott in Q4. Just those two items, that adds up to $17 million, which would have taken our $49 EBITDA loss down to $32. Just doing the math there. You know, there are other things that impacted us in the year, like inflation, et cetera, other events, but just taking those two big ones that we've disclosed, may give a little perspective also.
Just, you know, I'll just say a second one, I'll take you to the third one offline. Is the idea that for you to have kept going under the current model for the economics of reinsurance, given all the recent weather, we're gonna become unattractive and going in this direction ends up being, in your opinion, kind of the, you know, the more effective way? Is that ultimately the catalyst? Multiple quarters of kind of bad weather and the industries had to deal with and kind of how that's impacted reinsurance along with like higher rates? Specifically the catalyst?
Yeah, that's great. It's actually, Jason, something that we have been talking about for quite a while. In fact, Adam and I, it's a conversation we had almost immediately after acquiring HOA. We just looked forward over a long period of time to talk about strategically, you know, how would we best structure or how do we believe an insurance company would best be structured to scale into the level of scale that we think we can grow, you know, this business into. Again, one of the things that was attractive about HOA is that it was, you know, capital light, lower volatility, and that it would cede at the time of acquisition, approximately 90%, you know, of its premiums to third-party reinsurers. Well, as you get to larger and larger scale, ceding at that level is, you know, more difficult.
Certainly, to your point, with the changes in the reinsurance landscape, you know, that also, you know, becomes more difficult or more expensive. I feel very fortunate that those conversations for us had started, you know, that long ago, so we can kinda get out ahead, start the work, because it's a material amount of work that goes into getting to this point, you know, ready to make these filings, and moving forward, you know, with this structure. At the end of the day, and it's our belief, Jason, that this structure positions us in the optimal way to be able to do what we wanna do, which is to scale a very large leading homeowners insurance company, and to do so without having to with essentially being able to essentially cede 100% of premiums in some respect.
You know, where we aren't the direct, you know, bearer of that, the claims, you know, cost and weather volatility. That's a big change, you know, for us that can be, we believe, very impactful both to margins and valuation, you know, over time.
Thanks.
Great. Thank you. Next we'll go to Dan from Benchmark. Go to you, Dan.
Great, thanks. Matt, you're gonna have to forgive a little bit of my ignorance on this. You know, if you go through this process, A, you know, obviously you believe there's a high likelihood of it getting approved, and it sounds like this is sort of the future path to getting, you know, call it, let's call it 100% asset light or, you know, limit your claims downside. When you go through this, how do you maintain your ability to transfer the data advantage you have to the exchange? Do you charge them for that, but effectively? You know, help me think through kind of that process because, you know, you have almost a totally different go-to-market strategy as you kind of go through this. You're somewhat reliant on them.
You can still be a lead driver, obviously, through your own platform, but they own the exchange. Just help me think through a couple of those things.
Yeah, happy to. Adam, I'll take the first crack and then layer in if you have anything to add. You're exactly right, Dan, that we would not announce and share, you know, this news today if, you know, we weren't confident in it being approved by the TDI. We've had discussions with the TDI already. We believe that, yes, we'll be able to work through that process to get it approved. I'll also note that, again, there's many other examples of reciprocals out in the industry. Farmers is one that we gave with Zurich as the operator behind, and a very attractive model from Zurich. Others as well. USAA, folks might not know, but they are members/owners of USAA, if that's who they were used for insurance. You know, Erie or PURE, a variety of others.
It's a structure that's been used, you know, before. In terms of how we get credit essentially for our data, you know, advantage. Well, yes, by being able to create better underwriting results. And being able to use our data to be able to price more effectively, we benefit in two ways. One, we can help premiums grow faster, right? Being able to provide lower pricing to the right consumers, we can go and be able to win more consumers to grow premiums even more quickly. The faster premiums grow, the higher our fees are, right? Because we get fees as a percentage of the premiums. We are very incented to help premiums grow quickly. Our data gives us an advantage to be able to do so.
Secondly, we can pay fees appropriately based on having a healthy, sustainable, reciprocal, you know, exchange. By being able to have the right customers priced correctly, you know, that affords this entity to be able to, you know, pay those fees and have potentially growing fees, you know, over time. Adam, anything else that you would add?
I think you did great. I would just make it more complicated.
You know, obviously, you know, you're reducing both ceding levels and also, you know, I guess the GWP is sort of reflective of your plan to move to reciprocal exchange this year in the guide. Does this kind of change the TAM at all in your minds and who you can go after? Obviously, you can go after a smaller TAM, but have it be substantially higher margin, right? Just can you help us think through that a little bit?
I'll take this last one, and then get the team involved. I think the TAM is interesting in two ways. One, like we noted in the call. Our fees are largely similar to the types of fees we would get when we would cede premiums to reinsurance companies, and they would pay us. Our take, our opportunity, is not materially different.
One thing that I do think is interesting, just in terms of the TAM of homeowners insurance, just general, you know, the category in general, is that, unlike, you know, categories like auto insurance that have risk of being a smaller market over time as cars become safer, homeowners insurance, you know, we get questions like, "Okay, is this, you know, a good industry to play in because of the weather, right, that's out there and the weather that should increase over time?" In our view, it actually becomes a very attractive, you know, dynamic long term because insurance companies are going to price to be able to generate profit. That's just the reality of it. You know, prices will go up as there is more weather, which means the TAM is going to grow.
We believe that the homeowners insurance TAM is gonna grow substantially. You know, if you look forward over the next, you know, five years, would I be surprised if it's a-- if the TAM is 2x as large as it is now? Not at all. Not only are we gonna be able to benefit from just executing our plan, growing our business, but we would expect prices in the TAM to continue to go up, and we would be the direct beneficiary, you know, of that through the, this fee-based model.
Got it. That's helpful. I'd ask you my standard app question, but something tells me it's gonna be a long call and not the focus tonight, Matt, so I'll move along.
Thanks, Dan. Good to see you.
Thanks, Sam. Next up is Corey from JP Morgan. Over to you, Corey.
Hey. Thanks for the questions. Just a couple sticking on the reciprocal. In terms of financial impact, just to make sure we understand, like when a weather does happen under this new format, does that basically just pull from the HOA cash reserves, then it essentially has no impact on your P&L? Is that the right way to think about it? Does this impact the bundling opportunity, like with Porch Home Plan at all? Are there limitations around what you can do from that perspective? I have one more, I'll stop there if you're not.
Sure. From a labor standpoint, as Sean mentioned on an adjusted EBITDA standpoint, we would report for the entity that Porch shareholders own. That would not be moved with labor. The claims paid by the exchange would be shown on the exchange's balance sheet and PL, profit and loss statement, and not on the Porch owned P&L. That's the intent is we want to create a reliable source of capital, right? That we can tell consumers, be there, pay their claims, but they can own the entity that's actually experiencing the labor volatility and make it more efficient. Your second question was about the Porch Home Plan. I think in many ways, this lets us do more there.
We want to find ways to make the value proposition for the reciprocal exchange, the Porch Insurance Reciprocal Exchange, such that people get these kinds of offers with us. We wanna make it easy through the app or through the phone for them to get a moving concierge. We're looking at value propositions we can offer around warranties through the reciprocal exchange or a recall check. We think it actually makes it easier from a branding and a ability to offer products what we do. That's something actually there, as we launch it, we want to make sure happens. Matt or Matthew, anything you wanna add anything to that?
Sorry, I muted. I'll try one more too. Just for the first half of the year where this is not effective yet, and you're essentially only reinsuring 50-- I think 50% if I heard correctly. Like, will you pull back at all in terms of your insurance Oh, sorry. Somebody just opened my window. Will you pull back at all in terms of, like, your, growth and insurance policy to be less aggressive during that time period, given I think you said it's the most variable weather part of the year, and you'll have a little more exposure? Just how are you kinda thinking about that?
I can answer that. First of all, if I talk about reinsurance, remember there are two kinds of reinsurance primarily that we use. One is quota share, where we receive essentially a % of premium and a % of losses, and the other is excessive loss or CAT excessive loss that only pays for an event, like a single event, a catastrophe, like a hurricane. The 50% refers to quota share. There are really a couple things about that structure is that we're down to 50%. It's an appropriate way for us to manage the economics around the current reinsurance market. It's also a way for us to position HOA to be sold as a subsidiary of the Reciprocal Exchange as part of our application for our filing to do.
If the TDI approves that, it puts that structure in better footing to be more efficient. It doesn't change our use of catastrophe XoL, which is if there is a large event, it would pay for the amount in excess of some retention of the deductible. That's those two factors are why we've intentionally changed the quota share this year as we've worked through the markets. That's something we've worked on for a long time, getting ready and then the transition upon filing and approval. The second question was around policies. Yeah, I think, you know, there are a range of things we do there. The team has great science around when we see an application, how we price it, how we underwrite it, how we understand if it's a policy that's profitable.
At the macro level, there are 37,000 policies that we plan to non-renew this year. About half of those are already done. That's fundamentally because in the current market, those were good policies in the past, but there's a lag. Reinsurers are not regulated. They can charge us the price they feel is appropriate. We are regulated, those are just policies that it doesn't make sense for us to hold right now, so we will non-renew those, and it's an example of a tactic that we're taking, in part because we see that reinsurance cost and that leverage.
A related note, just for understanding. There's a question on, you know, not being profitable in the first half of the year and then profitable in the second half of the year. It really comes down to, you know, you non-renew policies at the point of renewal, you know, for those customers. For the customers that we continue forward with, the vast majority we continue forward with, you also get the price increase from those customers, you know, at the renewal. What happens is, you know, over the course of the first half of the year, you know, we are in the process of non-renewing those unprofitable policies, but you do have to carry some of that lack of profit, you know, during the first half of the year.
You also, at the point of renewal, you know, we now get the benefit in the second half of the year from all those price increases that have been going into effect over the course of the last quarter or two and will go into the quarter in the place over the course of this next quarter or two. That really does make a substantial impact, you know, to the, to the P&L and helps us drive to profitability in the second half of the year and ongoing.
Thank you.
Thank you. Over to Josh from Cantor.
Yes. Hi, everyone. Good afternoon. Thanks for taking my question. Matt, you actually just touched on it, I'd love if we could dive a little bit deeper on providing some more color on the actual rollouts of these rate increases, or if you can talk about specific markets. When do you expect these to start fully earning into the book?
Adam, do you wanna provide a little detail and a little more color in addition to what I just provided?
Yeah. The simplest way to think about it is they take 12 months. Once we have them approved and programmed and in market, at the next renew, any new customer that comes in will pay that price, and any renewal consumer will see that price at their renewal. That's by state. In some states like Texas, we had 3 price changes. South Carolina, for example, we had one. There are some ins and outs, but essentially, it's over the 12 months from when we file the increases. We're seeing some benefit of them already, but it really takes a full 12 months to see 100%.
Understood. On the software side, can you elaborate a little more on how you plan on expanding your go-to-market strategy in 2023 to capture some more software customers?
Sure. We are still very focused on growing our vertical software business. One of the things that I would highlight is we've had some success rolling out some new modules, particularly in the inspection space and in the title space, and those give us new opportunities to go back to customers. It also gives us opportunities to drive more value per customer. We continue to stay focused. There's a little bit of headwind just because a lot of our businesses are impacted by the slowdown in the housing market, and that is something, you know, that we continue to work with them every day on. I would say the main focus is rolling out new modules and continuing to go after, you know, the core verticals we're focused on.
Understood. Thank you very much.
Thanks, Josh.
Great. Thank you. Next, we have John from Stephens.
Hey, guys. Thanks. Congrats on getting the Wills in motion on the Reciprocal Exchange. That's an exciting development. Sean, I know it's gonna make life a lot easier for you, at least on the, on the guidance side, when that's all said and done. It does sound like you guys are gonna have to kinda operate the business, you know, business as usual next couple quarters. I wanted to get a update on the reinsurance arrangements. I know you guys are in the heart of the renewal season. There's probably a still degree of uncertainty there, but just like to get your take on that. If pricing goes against you guys, just how much you're willing to kinda lean on the incremental premiums.
I don't know if you're willing to go into this level of depth for the guidance, but what that range is that you have factored in guidance right now.
The renewals are April first. We will know a lot more. Obviously, just starting to get those quotes in from the providers. We've seen, though, in the market, there's just really good data out in the market in terms of what the pricing, you know, increases are. We've built that fully, you know, into guidance and expectations. Have been, we, in our view, appropriately conservative, just given some of the unknown there. Obviously, we'll get more information here, you know, here shortly. We feel good about how we've set up guidance given what's happening out there.
Okay. Thanks, Matt. These insurance filings can be a little tricky to read. I'm thinking I'm seeing that, HOA in Texas premiums are maybe up 30%, close to 30% for the year. That was a pretty big driver for the business, but obviously you're getting a lot of help elsewhere. Maybe if you could unpack and maybe just talk broadly to, the impact of, you know, your larger incumbent states or larger legacy states, maybe Texas, South Carolina, versus the newer states you've opened, how much growth you're seeing out of that side.
I can answer that. I'll say at a high level, we are very focused on profitability. When we enter a new state, we use existing partners we have, existing agents in our own agency. We tend to price in a way where we know that we're competitive with some companies in that state that have a history of being profitable, and we believe are profitable. What that tends to mean is a lot of our growth really comes from the states we've been in for several years, like Texas, like South Carolina, like North Carolina. That's what I would point you to is, you know, when you're reading the filings, you're looking at the increases, those states are really the states we continue to be most successful in.
Changes there have been most impactful to our business.
The only thing I would add, John, is when you're looking at those filings and you're seeing that kind of a price increase, remember that price increases have not been yet pushed through for many customers that have not yet hit their renewal. The price increases would actually be more as we get all of the customers going through that renewal and getting the benefit of that price, you know, increase. Like I noted, it is a substantial impact, you know, to the second half of that year, given the approvals we've gotten.
Okay. Thanks, guys. Appreciate it.
Thanks.
Next, we have Ryan from KBW.
Hi, everyone. Thanks for taking the questions. Just to drill a bit further into the transition, post the reciprocal conversion. You know, do these conversions tend to drive a material amount of churn or attrition in the policyholder base near-term? Second, will your ability to grow that business post-conversion, be dependent on launching the new Porch brand into more markets? Can you continue to grow kind of status quo based on the existing licenses? Just finally, I think you touched on this earlier, Matt, are there any limitations that this puts on your ability to cross-sell broader B2B2C services across the newer structure here?
I think that was several questions, but I'll see if I can, I'll see if I can get them. The application we're making is in the state of Texas, so the insurance or reciprocal exchange is licensed state by state, just like HOA. To your first two points, we would, in the application, apply to sell the insurance carrier in return for a coupon-bearing note to the reciprocal exchange entity. What that means is that we would have strong value propositions that we want consumers to switch from one entity to the other. Even a consumer that stays in the existing HOA company would be in a subsidiary of the exchange.
That's one key way that we manage both the licensing risk of we will apply for licenses state by state and filings, but we'll be able to use inside the reciprocal the fact that HOA is a subsidiary of that entity. It also means that if a consumer chooses not to move for some reason, that they'll still be underneath that exchange umbrella, which is part of how we've managed that risk of churn. I'd focus on those. Matt, I don't know if maybe you wanna talk about how you think about it more broadly across categories that we're helping consumers with.
Yeah. In terms of how this transition can help us just with our broad strategy, Ryan, in selling more B2B2C services, I mean, we're excited about introducing the Porch Insurance brand, you know, first off. This will be the launch we've kind of hinted at or talked about in the past. As soon as it's approved, we'd be able to start selling to new customers, Porch Insurance, as well as transitioning existing customers into that brand. We noted in the prepared remarks that we will be bringing in, you know, an expanded value proposition set for these Porch Insurance customers to be able to help that product really stand out in the market. One of those examples is our existing 90-day warranty product we'll be able to provide to those customers.
There's a variety of things that Porch can do, and it's very different than others. You know, moving concierge, the app to help them manage their home, free recall check that's built in to monitor their appliances for any potential recalls, and more. You know, that's a lot of what Porch has built over time, are these unique capabilities for consumers that we can be able to bundle into that insurance product to really help people holistically, you know, more than just insurance, and to be able to differentiate there. What that means is it does give us opportunities to not just help with insurance, but to help them again, with a variety of other services, you know, around their home, that we think can create a lot of value.
Thanks for that. Then can you help us understand how the fair value of the transfer is determined? Is that dictated by HOA's book value? If so, can you tell us where that's currently carried? Secondly, how long do you think it will take to get repaid on that kind of bridge note that you're providing as you recapitalize the reciprocal with third-party capital?
I'm happy to take the first. Yes, it's market value, book value. When you have a transaction like this, you know, we use the market price, look at comps, and then, yes, set the, set the appropriate book value, for that purchase. That's exactly right. The second question...
How long do you think it will take to recapitalize the new entity with third-party capital and take out, you know, what you're contributing?
It's actually a choice for us, Ryan, in terms of when the capital will be priced right, you know, more than our ability to go and get that capital. It's also a question of just the capital needs of the entity. One of the elements of reciprocal is the consumers, in addition to their premiums, pay a surplus contribution, so a slight additional amount that goes into building surplus. It's a more efficient way to build surplus over time. We would expect over the course of the first year or so, assuming the cost of capital was right, to be able to go out and look to bring third-party, you know, capital in.
Great. Thank you, everyone. I'm afraid that's all we have time for today. Thank you very much for joining, and we look forward to speaking to you soon.
Thank you all for the, for the time and the interest. We do appreciate it. Have a great day. We'll see you, see you soon.