Porch Group Completes Formation of Porch Insurance Reciprocal Exchange and Corresponding Sale of Homeowners of America Insurance Company

Rhea-AI Summary

Porch Group (NASDAQ: PRCH) has completed the formation of Porch Insurance Reciprocal Exchange (PIRE) and the sale of Homeowners of America Insurance Company (HOA) to PIRE. The transaction terms include selling HOA to PIRE for approximately $105 million (HOA's expected December 2024 surplus), minus a $49 million existing 2023 surplus note and $9 million in outstanding interest due in 2025. This results in Porch holding total surplus notes of approximately $106 million.

Following this transaction, PIRE will own all insurance policies, premium, claims, assets, and liabilities previously held by HOA. Porch Group will generate revenue through commissions and fees for providing operational services to PIRE, which is expected to result in more predictable and higher-margin financial outcomes for shareholders. The company plans to leverage its property data for more accurate pricing and scale insurance written premiums through PIRE.

Positive

• Transaction provides Porch with $106 million in surplus notes
• Expected to deliver more predictable and higher-margin financial results
• Company maintains revenue stream through commissions and fees from PIRE operations

Negative

• Sale price reduced by $58 million due to existing surplus note and outstanding interest

Insights

Insurance Industry Expert

This strategic restructuring represents a significant shift in Porch Group's insurance business model. The formation of PIRE and sale of HOA for $105 million transforms Porch from a direct insurance carrier to a service provider, substantially reducing capital requirements and risk exposure while maintaining revenue streams through commissions and fees. The $106 million in surplus notes provides Porch with a significant financial instrument that generates interest from PIRE's excess surplus.

The reciprocal exchange structure is particularly advantageous as it allows PIRE to operate as a member-owned entity, potentially improving cost efficiency and alignment with policyholder interests. This model has proven successful for other insurance organizations like USAA and Erie Insurance Exchange. The transaction's structure, maintaining service relationships while transferring risk, should result in more stable earnings with higher margins through fee-based income rather than volatile underwriting results.

The strategic value lies in Porch's ability to leverage its property data and homebuyer relationships while reducing exposure to catastrophic losses and regulatory capital requirements. This positions them to scale premium growth more efficiently, as capital constraints shift to PIRE while Porch captures upside through service fees and surplus note interest.

Financial Analyst

The financial engineering of this transaction is sophisticated and materially positive for Porch's risk-adjusted returns. The deal effectively monetizes HOA's $105 million surplus while retaining economic interest through $106 million in surplus notes. The structure eliminates direct insurance risk from Porch's balance sheet while maintaining revenue streams through service agreements.

The transition to a fee-based model should lead to multiple expansion as investors typically assign higher valuations to predictable service revenues versus volatile insurance underwriting income. The surplus notes provide an additional benefit - they're subordinated instruments that can generate attractive yields from PIRE's excess surplus without requiring Porch to maintain regulatory capital.

This restructuring optimizes capital efficiency and could accelerate growth by removing regulatory constraints. The reduced risk profile and improved earnings visibility should positively impact Porch's cost of capital and strategic flexibility. For a company with a $548 million market cap, this transaction represents a material strategic pivot that could reshape investor perception and valuation metrics.

SEATTLE--(BUSINESS WIRE)-- Porch Group, Inc. (“Porch” or “the Company”) (NASDAQ: PRCH), a homeowners insurance and vertical software platform, today announced the completed formation of the Porch Insurance Reciprocal Exchange (“PIRE”) and sale of Homeowners of America Insurance Company (“HOA”) to PIRE.

The final terms of the transaction were consistent with expectations, with Porch selling HOA to PIRE for a purchase price equal to HOA’s December 31, 2024 expected surplus¹ of approximately $105 million, less the existing 2023 surplus note of $49 million and less $9 million of outstanding interest expected to be paid in 2025. This brings the total surplus notes² held by Porch to approximately $106 million. With this transaction now complete, going forward all insurance policies, premium and related claims, as well as all HOA assets and liabilities will be owned by PIRE. Porch Group will receive commissions and fees for providing operating and other services to PIRE, which is expected to deliver more predictable and higher-margin financial results for Porch Group Shareholders.

The upcoming launch marks a pivotal milestone in Porch’s journey to build a large, highly profitable homeowners insurance company that makes the home simple. Porch differentiates by leveraging its unique property data to provide more accurate pricing and by utilizing Porch’s unique capabilities to tailor solutions for homebuyers. With PIRE now in place, Porch plans to scale insurance written premiums.

“We are thrilled to announce the formation of the Porch Insurance Reciprocal Exchange, a transformative step in our journey to redefine the homeowner experience while enhancing profitability for Porch shareholders,” said Matt Ehrlichman, Chief Executive Officer. “This is just the beginning of an exciting new chapter. We look forward to delivering exceptional value to our stakeholders and continuing to innovate in the homeowners insurance industry.”

1. HOA’s expected surplus of $105 million as at December 31, 2024 is based on Company’s best estimate to facilitate the transaction closing.
2. A surplus note is a subordinated financial instrument that pays an interest-bearing coupon with excess surplus generated by the Reciprocal.

About Porch Group

Porch Group, Inc., (“Porch”) is a new kind of homeowners insurance company. Porch’s strategy to win in homeowners insurance is to deploy leading vertical software solutions in select home-related industries, provide the best services for homebuyers including important moving services, leverage unique data for advantaged underwriting, and provide more protection for policyholders.

To learn more about Porch, visit ir.porchgroup.com.

Forward-Looking Statements

Certain statements in this release may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although we believe that our plans, intentions, and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions, or expectations. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions. Generally, statements that are not historical facts, including statements concerning our financial outlook, guidance, and targets possible or assumed future actions, business strategies, events, or results of operations, are forward-looking statements. Forward-looking statements in this presentation include expectations regarding whether the reciprocal will deliver more predictable and higher-margin financials for Porch and plans to scale insurance operations. These statements may be preceded by, followed by, or include the words “believe,” “estimate,” “expect,” “project,” “forecast,” “may,” “will,” “should,” “seek,” “plan,” “scheduled,” “anticipate,” “intend,” or similar expressions.

Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. Unless specifically indicated otherwise, the forward-looking statements in this release do not reflect the potential impact of any future transactions that have not been completed as of the date of this filing, including the licensure and formation of the reciprocal, the sale of our insurance carrier subsidiary, Homeowners of America Insurance Company (“HOA”), to the reciprocal, and the commencement of the reciprocal’s operations. You should understand that the following important factors, among others, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

(1) expansion plans and opportunities, and managing growth, to build a consumer brand;

(2) the incidence, frequency, and severity of weather events, extensive wildfires, and other catastrophes;

(3) economic conditions, especially those affecting the housing, insurance, and financial markets;

(4) expectations regarding revenue, cost of revenue, operating expenses, and the ability to achieve and maintain future profitability;

(5) existing and developing federal and state laws and regulations, including with respect to insurance, warranty, privacy, information security, data protection, and taxation, and management’s interpretation of and compliance with such laws and regulations;

(6) our reinsurance program, which includes the use of a captive reinsurer, the success of which is dependent on a number of factors outside management’s control, along with reliance on reinsurance to protect against loss;

(7) the possibility that a decline in our share price would result in a negative impact to our insurance carrier subsidiary’s, Homeowners of America Insurance Company (“HOA”), surplus position and may require further financial support to enable HOA to meet applicable regulatory requirements and maintain financial stability rating;

(8) the uncertainty and significance of the known and unknown effects on our insurance carrier subsidiary, Homeowners of America Insurance Company (“HOA”), and us due to the termination of a reinsurance contract following the fraud committed by Vesttoo Ltd. (“Vesttoo”), including, but not limited to, the outcome of Vesttoo’s Chapter 11 bankruptcy proceedings; our ability to successfully pursue claims arising out of the fraud, the costs associated with pursuing the claims, and the timeframe associated with any recoveries; HOA's ability to obtain and maintain adequate reinsurance coverage against excess losses; HOA’s ability to stay out of regulatory supervision and maintain its financial stability rating; and HOA’s ability to maintain a healthy surplus

(9) uncertainties related to regulatory approval of insurance rates, policy forms, insurance products, license applications, acquisitions of businesses, or strategic initiatives, including the reciprocal restructuring, and other matters within the purview of insurance regulators (including the discount associated with the shares contributed to HOA);

(10) our ability to successfully operate its businesses alongside a reciprocal exchange;

(11) our ability to implement our plans, forecasts and other expectations with respect to the reciprocal exchange business after the completion of the formation and to realize expected synergies and/or convert policyholders from its existing insurance carrier business into policyholders of the reciprocal exchange;

(12) potential business disruption following the formation of the reciprocal exchange;

(13) reliance on strategic, proprietary relationships to provide us with access to personal data and product information, and the ability to use such data and information to increase transaction volume and attract and retain customers;

(14) the ability to develop new, or enhance existing, products, services, and features and bring them to market in a timely manner;

(15) changes in capital requirements, and the ability to access capital when needed to provide statutory surplus;

(16) our ability to timely repay our outstanding indebtedness;

(17) the increased costs and initiatives required to address new legal and regulatory requirements arising from developments related to cybersecurity, privacy, and data governance and the increased costs and initiatives to protect against data breaches, cyber-attacks, virus or malware attacks, or other infiltrations or incidents affecting system integrity, availability, and performance;

(18) retaining and attracting skilled and experienced employees;

(19) costs related to being a public company; and

(20) other risks and uncertainties discussed in Part II, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as well as those discussed in Part II, Item 1A, “Risk Factors,” in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 and in subsequent reports filed with the Securities and Exchange Commission (“SEC”), all of which are available on the SEC’s website at www.sec.gov.

We caution you that the foregoing list may not contain all the risks to forward-looking statements made in this release.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this release primarily on our current expectations and projections about future events and trends we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described above and elsewhere in this release. We disclaim any obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

View source version on businesswire.com: https://www.businesswire.com/news/home/20250107440222/en/

Investor Relations Contact:

Lois Perkins, Head of Investor Relations

Porch Group, Inc.

Loisperkins@porch.com

Source: Porch Group, Inc.

FAQ

What is the total value of surplus notes Porch Group (PRCH) holds after the PIRE transaction?

After the PIRE transaction, Porch Group holds approximately $106 million in total surplus notes.

How much was HOA's expected surplus value for December 31, 2024 in the PIRE transaction?

HOA's expected surplus value for December 31, 2024 was approximately $105 million.

What will be Porch Group's (PRCH) revenue source from PIRE going forward?

Porch Group will receive commissions and fees for providing operating and other services to PIRE.

What assets will PIRE own following the HOA acquisition?

PIRE will own all insurance policies, premium and related claims, as well as all HOA assets and liabilities.

How much outstanding interest is expected to be paid by HOA in 2025?

HOA has $9 million in outstanding interest expected to be paid in 2025.