Good afternoon, and welcome to Open Lending's Third Quarter 2023 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. Earlier today, the Company posted its third quarter 2023 earnings release and supplemental slides 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 views as of today, November 7, 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. And now, I'll pass the call over to Mr. Keith Jezek. Please go ahead, sir.

Well, thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's third quarter 2023 earnings conference call. It was another quarter of positive results and execution by our team. Through our Lenders Protection program, we continue to execute on our mission to serve the underserved consumer and provide unmatched loan analytics, risk-based pricing, risk modeling, and default insurance to our lender customers. I am proud of our team's focus and accomplishments, specifically our recent launch of an enhanced scorecard, our continued improvements in technology, thoughtful underwriting changes and strengthening our marketing and sales capabilities to further capture market share. For the third quarter of 2023, we generated approximately 30,000 certified loans, which was near the high-end of our guidance range, and excluding the impact of the non-cash profit share change in estimate that Chuck will discuss in more detail. We exceeded the high-end of our guidance range for both revenue and adjusted EBITDA. I would like to thank all our team members in Open Lending who executed and delivered these positive results in a challenging environment. I'd like to turn to the specific market conditions that are impacting our lender customers the most and ultimately impacting our performance at Open Lending. First, let's review the automotive sector, which continues to navigate through multiple challenges. New vehicle inventory levels in the third quarter of 2023 grew over 65% year-over-year, and the new SAAR increased by nearly 10% in the same period. The increase in inventory levels has begun to drive down average transaction prices and is slightly improving consumer affordability. However, the used auto market remains depressed due to low inventory levels, which declined 8% year-over-year and remains over 20% below pre-pandemic levels. Even though used auto list prices in the Manheim Used Vehicle Value…

Thanks, Keith. During the third quarter of 2023, we facilitated 29,959 certified loans, compared to 42,186 certified loans in the third quarter of 2022. Total revenue for the third quarter of 2023 was $26 million compared to $50.7 million in the third quarter of 2022. To break down total revenues in the third quarter of 2023, profit share revenue represented $8 million, program fees were $15.4 million and claims administration fees and other totaled $2.6 million. Total revenue for the third quarter of 2023 includes a negative profit share change in estimate of $8.1 million, excluding the impact of this change in estimate, total revenue for the third quarter of 2023 was $34.1 million and at the high-end of our guidance range. Now let's turn to profit share. As a reminder, 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 shared to us is 72% and the monthly receipts from our insurance carriers reduced our contract asset each period. Profit share revenue in the third quarter of 2023 associated with new originations was $16.1 million or $537 per certified loan as compared to $24.9 million or $589 per certified loan in the third quarter of 2022. Recall, we increased our insurance premiums by an additional 5% earlier this year, with the full impact realized in the third quarter of 2023, profit share unit economics. With this adjustment, we now have increased our insurance premiums by nearly 20% since the second quarter of 2022 to appropriately price for the continued risk in the current macroeconomic environment. U.S. GAAP revenue recognition rules related to variable consideration require that we reevaluate our cumulatively reported prior period profit share revenue estimate…

[Operator Instructions] And our first question comes from the line of Joseph Vafi with Canaccord Genuity. Please proceed.

Hey, guys. Good afternoon. I thought maybe we just kind of dig down a little bit into the change of estimate in the profit share. I know you did cite that there was rising delinquencies, and could you maybe kind of provide a little more color on the $8.1 million change of estimate? Is this -- how far does that go in terms of creating a little more conservatism relative to the forward look and how much delinquency activity is kind of captured in that $8.1 million not just what we've seen so far, but on a prospective basis? And then I'll have a quick follow-up.

Hey, Joe, it's Chuck. Good to talk to you. If you think about just even from Q2 to Q3 is what we've seen in the rising delinquencies in that 30 plus and 60 plus in our prepared comments and just higher claim submissions in this challenging economic backdrop that we have. The 60 plus day delinquent, it Open Lending about 4.7% at Q3. And that's sequentially compared to Q2 was 3.9%. So an 80 basis point uptick just sequential quarter as well as year-over-year about 140 basis points as compared to Q3 of ‘22. So, as we kind of think about the back book and the disclosure or the transparency in the script, if you think about that $8 million, it's on 400,000 plus insured loans in our recognition of about $370 million of prior profit share. So, that 2% of that income booked and the stress going forward on claim frequency is historically, the benchmarks about 15% or 15 of 100 would default in a normal environment. We've stressed that even greater to call it about an additional 24% to between 19% and 20% ultimate default stress in the portfolio. And we've carry that through Q4 into ‘24, the second half of ‘24.

Alright. So just to understand, you've stressed the underwriting estimates like kind of well above where delinquencies are right now. Is that the right way to look at it?

Yes, sorry. That is right. And our delinquencies are in-line with the industry and actually slightly below on the 60 plus category, and if you think about, and severity of loss, the components of the change in estimate aren't just default frequency it’s severity of loss as well as prepay speeds and those were positive impacts in the quarter in the net $8.1 million. So, yes, but we stress that out on the default frequency into the future, and we'll continue in each quarter as new information comes to us.

Got it. Great. Thanks guys.

Hey, Joe, and one other thing I'll add is on our Q3 originations, because it's important to note what the $8.1 million was 100% on the back book of business of the 400,000 what we call it 380,000 loans in the portfolio. On the Q3 profit share unit economics, we booked a little under $5.40 per loan. And that's at a loss ratio of about almost 64%. So, we've stressed that call it an additional 27% from our benchmark about 50% loss ratio. So, not only did we right-sized the back book based on this information, we've stressed the new originations as well. And we've maintained over four quarters about between $5.40 and $5.50 profit share unit economics. And, the defensive moves that we've taken to preserve those unit economic but with our price increase -- insurance premium increases of 5% recently and fully ramped in Q3 and then call it 13%, 14% last year. So, we're protecting our unit economics.

Got it. Thanks for that extra color, Chuck. Much appreciated.

Yes, sir.

Our next question comes from the line of Vincent Caintic with Stephens. Please proceed.

Hey, good afternoon. Thanks for taking my questions. Just to, actually follow-up on the profit share. So I appreciate all the detail of what you're assuming now. It sounds like it's putting more stress on your assumptions. So, I appreciate that. I was wondering if there was anything in the quarter specifically that drove that, given that you gave the guidance in the mid-quarter, in the second quarter earnings call. And then does that have the assumptions that you're making now have an impact in your underwriting and what you're pricing the loans to be, just sort of wondering how that maybe has an impact on pricing and volume? Thank you.

Yes. Hi, Vincent. Yes, I mean, we'll start maybe with the pricing and the premiums. My last comment there to, Joe on the call it 537 per Cert unit economics, that's after the price increase we took in the second quarter of about 5% and also the premium increase last year. So, that's baked into our underwriting. And that's a stressed unit economics. I think it's important to note that we put roughly 27% stress on that, the new originations. And the profit share unstressed would be call it 800 plus per unit. And by the way, the new book, since we put the price increases in, call it second quarter of '22, are performing better than those older vintages that were put on the books at the peak of the MUVVI or the Manheim. So, yes, the price is baked in.

Okay. I appreciate it. Thank you. And then second question, so good to hear about eight new lenders this quarter. I think in the past, you've talked about ramping your sales force. I'm just wondering what we should be expecting in terms of sales productivity and that pipeline. So, should we be expecting more new lender growth? Thank you.

Yes, I'll address that, and this is Keith. Certainly, I'd like to remind ourselves of the opportunity in front of us. There's approximately 4,500 credit unions in the U.S, we serve 450, so I'll call it 10%. And that means we have a massive runway and opportunity in front of us. And then even after the strict segmentation that we've accomplished that we've talked about on prior calls, around segmentation, around the asset sizes around LOSs, around their loan-to-share, around their need to serve the underserved and things like that. The pipeline is larger and stronger than it's ever been before. And, and roughly two-thirds of those were in a really, really favorable LTS position. So, we feel really good about future prospects. Many of those that are in the pipeline right now and are bottom of the sales funnel. So, we feel good about the performance coming into Q4 and heading into 2024.

Okay, great. Thanks very much.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Lance Jessurun with BTIG. Please proceed.

Hey guys, thanks for taking my question today. Just a super quick one on the UAW strike. Can you talk about impact to you guys, any outlook there? Any color you've heard in terms of industry and how that's affecting, supply, etcetera?

Yes, happy to take that one. And this is Keith. Glad to see that that is behind us for sure. Really no impact for us, as you'll recall, we're roughly 85%, maybe even 87% use, so no direct impact. And also on the new side, interesting to note that the Detroit III had the largest day supply of any manufacturers out there. And in fact, their average day supply was 2x the day supply of most other vehicle manufacturers here in the U.S. So, they were positioned to handle the strike better than other manufacturers. And I think the swift resolution of that is not going to lead to much impacts at all. I hope that helps.

Got it. That's great. Thanks. And then talking about OEMs as well, obviously, you did a very good job of talking about the demand side on the credit union side and their cost of deposits. But, I’d be interested in hearing some of the color you're hearing from OEMs in terms of their demand for your product, how talks are going there, given a tougher backdrop, that'd be great? Thanks.

Yes. And again, Keith, happy to take that one. As we mentioned, credit unions moving from number one to number three, the segment of the market of auto lenders that has moved to number one is the OEM captives. And we actually see that in our volumes. We see year-to-date volumes of our captive customers up 19% strong growth there. And our share of that growth is continuing to improve. The pipeline is as strong as it's ever been. I think in past calls, I've talked about the fact that that pipeline is the highest count it's been. Happy to report that that count is even higher. Our value proposition is as strong as it's ever been and our offering to this the segment. And, then I would finally just say that with multiple of the large accounts in the pipeline, we've achieved really important milestones on the way to a path to a sale. All that to be caveated, of course, by the fact that these are very large enterprises many of them global and approvals and launches can take some time.

Got it. Thanks so much.

Thank you.

And our next question comes again from the line of Vincent Caintic with Stephens. Please proceed.

Hey, thanks for the follow-up. Just one more question. Just your thoughts about share repurchases the stop has been under pressure. It seems like aftermarket, it's also looking like it's under pressure. And understanding that maybe there's some macro industry difficulties, but you're, sounds very optimistic in terms of the long-term trajectory of the Company, you've had low leverage and good cash balances. So, just wanted to get your updated thoughts about share repurchases and how do you think about the value of the Company?

Thank you. Yes, thanks, Vincent. Yes, I mean, we currently have a Board authorized $75 million plan that's out there. And we acquired about $10 million of our stock at $8.32 a share in the third quarter and we still have about $26 million under our current authorization that was going to expire here in a couple of weeks and our Board extended it to the end of the first quarter. So obviously, we see that as a good investment and a good use of capital to buy our stock.

Okay. Great. Thanks again.

Thank you.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to turn the call back to management for closing remarks.

Well, thank you. Let me just conclude, and this is Keith speaking by saying that the opportunity to lead this Company, as I have said, from day one, remains compelling as ever as Open Lending exhibits all the attributes I look for in a great Company. We have a large and growing total addressable market, and importantly, our penetration into this market remains low. We have a profound competitive advantage and significant barriers to entry and a business model that leverages both one and two. With that, I'd like to thank everybody for joining the call today.

This concludes today's conference. You may now disconnect your lines at this time, and thank you for your participation.