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Software provider plans to 'ladder up' insurance business with $100M acquisition

Geographic expansion represents one of the primary ways in which vertically integrated home software-as-a-service platform Porch Group Inc. intends to ramp up the growth rate of one of its latest acquisition targets.

Porch on Jan. 14 agreed to pay $100 million in cash and stock, plus a potential earnout, to acquire Homeowners of America Holding Corp., the Irving, Texas-based parent of Homeowners of America Insurance Co. The move broadens the scope of its insurance offerings beyond a year-old, nationally licensed brokerage operation and furthers its stated goal of disrupting the marketplace.

The acquirer intends to leverage its access to property-level data, through its role as the largest software provider to the home inspection industry, including items like the quality of roofs and the useful expected lives of hot water heaters, to realize a sustainable competitive advantage in pricing the homeowners business. Through a core strategy that provides for early access to two out of every three homebuyers, Porch also expects to benefit from a first-mover advantage in marketing insurance products to new business prospects.

"Setting all our other home services aside, we believe that just insurance on top of our vertical software platform and the corresponding [customer-acquisition-cost]-free homebuyer access, we can produce a massive company, well-positioned to disrupt the $1.4 trillion U.S. insurance industry," Porch Chairman and CEO Matthew Ehrlichman said during a Jan. 14 conference call.

Porch identified a $400 million potential revenue opportunity from its insurance expansion, something that Ehrlichman said the company is poised "to grow quickly into." The company plans to continue to operate the brokerage, Elite Insurance Group, along with Homeowners of America, which Ehrlichman described as a hybrid managing general agent and carrier.

The insurance company operates a capital-efficient business model, which makes extensive use of reinsurance. On a consolidated basis, according to materials filed by Porch with the SEC, earned premiums accounted for 25.8% of the holding company's $32.7 million in revenues during the first nine months of 2020. It produced most of its revenue from ceding commissions and various forms of fee income during that period.

Porch maintains a target for annual revenue growth of 30%-plus for its acquisitions, and the company expects Homeowners of America can hit that hurdle rate over time. The holding company produced revenue growth of 23.5% during the first nine months of 2020.

Growth beyond its Texas roots has been a primary focus for Homeowners of America as an independent entity. It will take on added emphasis under Porch's ownership as Ehrlichman pledged during a Jan. 19 investor conference to apply Porch's "aggressive" and "ambitious" approach to growing the insurance business.

Porch intends to expand Homeowners of America's presence on a nationwide basis, though Ehrlichman cautioned it would "take time" to "turn on all of the rest of the states."

Prior to entering Arizona in 2014, Homeowners of America generated the entirety of its direct premiums written from Texas. The company has since expanded into Virginia, the Carolinas, Georgia and Illinois. Porch said the insurer is poised to "soon" launch in four new markets. Homeowners of America filed for a new program in California in October 2020, and the company remains in a dialogue with regulators regarding certain aspects of the product. It holds licenses to operate in 31 states.

Texas accounted for 85.9% of Homeowners of America's direct premium volume during the first nine months of 2020, down from 90.1% in the year-earlier period. The company's year-over-year growth rate in Texas business of 18.3% significantly lagged its 77.5% expansion in the other states, which came off of a substantially smaller base. It ranked as the No. 12 writer of Texas homeowners business on a direct basis in 2019 in a market where a majority of the premium writings were produced by affiliates of the combination of large national carriers State Farm Mutual Automobile Insurance Co., Allstate Corp., USAA Insurance Group and Farmers Insurance Group of Cos.

According to the company's 2019 annual statement, it had been selectively pursuing growth in those parts of Texas with higher potential for positive underwriting results while limiting expansion in areas prone to severe convective thunderstorm activity.

Porch guided to more than $270 million of pro forma gross premiums written for full-year 2021 from the combination of premium sales between Elite Insurance Group and Homeowners of America. It expects the acquisition to close in the second quarter, pending regulatory approval.

"Insurance is the most valuable service in the home, and we'll be able to get a recurring annuity revenue stream that we'll continue to be able to ladder up," Ehrlichman said on Jan. 19.