Unusually Underwater: A Deep Dive into Porch Group's ($PRCH) Distressed Convertible Bonds
Assessing Whether Porch Can Stay Afloat Amid Macro Headwinds and Extreme Weather Events
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Situation Overview:
Founded in 2013 and headquartered in Seattle, Washington, Porch Group, Inc. (“PRCH”) is a vertical software platform for the home services industry that also operates a growing homeowners insurance business. The company went public via SPAC in December 2020, capitalizing on the growing interest in tech-driven “disruptors” within traditional sectors. PRCH currently provides software and services to ~29,000 home services companies across the US, monetizing its access to homebuyers and homeowners through insurance offerings and related services.
Macro and Weather-Related Headwinds:
PRCH has faced a perfect storm of macro headwinds and company-specific challenges over the past two years. The rapid rise in interest rates significantly dampened housing market activity, with annualized existing home sales declining ~40% from the peak. This has put pressure on PRCH’s vertical software segment, which saw revenues decline 19% in 2023, driven by a 35% peak-to-trough decline in transaction revenue.
In addition, the company’s insurance business, while growing rapidly, has been plagued by extreme weather events, particularly in Texas where PRCH has significant exposure. In FY’23, PRCH experienced a series of catastrophic losses, including an $18 million hit in Q2’23 due to unprecedented storm activity and additional losses from Hurricane Idalia in Q3’23. These events forced multiple revisions to the company’s financial guidance throughout the year. The challenging weather continued into FY’24, with a significant catastrophic event in Houston during Q2’24 causing $23 million in claims cost. Furthermore, Hurricane Beryl in early July is expected to result in an additional $30 million in claims cost in Q3’24.
These recurring weather-related losses have not only impacted PRCH’s financial performance but have also necessitated a strategic shift in its insurance operations, including more stringent underwriting practices and significant rate increases. Additionally, these events have highlighted the importance of PRCH’s ongoing efforts to transition to a reciprocal exchange model, which management believes will help mitigate the impact of such events on the company’s financial results.