Hagerty Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 6 speakers on the call.

Operator

Greetings. Welcome to the Hagerty First Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll now turn the conference over to Jay Koval with Investor Relations. Mr. Koval, you may now begin.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Hagerty's results for the Q1 of 2024. I'm joined this morning by Mikael Hagerty, Chief Executive Officer and Chairman and Patrick McClymont, Chief Financial Officer. During this morning's conference call, we will refer to an accompanying presentation that is available on Hagerty's Investor Relations section of the company's corporate website at investor.hagerty.com. Our earnings release, accompanying slides and letter to stockholders covering this period are also posted on the IR website.

Speaker 1

Our 8 ks filing is also available there along with our earnings press release and other materials. Today's discussion contains forward looking statements and non GAAP financial metrics as described further on Slide 2 of the earnings presentation. Forward looking statements include statements about our expected future business and financial performance and are not promises or guarantees of future performance. They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. For a discussion of material risks and important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are also available on our Investor Relations website and the sec.gov.

Speaker 1

The appendix of the presentation also contains reconciliations of our non GAAP metrics to the most directly comparable GAAP measures that are further supplemented by this morning's 8 ks filing. And with that, I will turn the call over to Mikheel.

Speaker 2

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's Q1 2024 earnings call. The winter chill in Northern Michigan and across much of North America is behind us. Plants are blooming and cars are firing up as we begin the 2024 driving season. To us, it is the best time of the year.

Speaker 2

Hagerty may be a leading provider of insurance for collectible vehicles in North America, but insurance does not define us. The love of cars does and that is the key competitive advantage we have utilized to differentiate our approach and to position us to deliver high rates of compounding profitable growth in the years to come. So let me start by thanking our 1700 Hagerty employees. This team of highly engaged car people has never been better aligned around our strategic growth ambitions and is well positioned to deliver great results for stockholders. Let us dig into the key highlights for our Q1 results shown on Slide 3.

Speaker 2

This includes commission revenue jumped to 19% fueled by written premium gains and strong underwriting results. Our brand and value proposition fuel consistent mid to high single digit growth in new business count. Insurance rates also increased by 3%. This is well below the 10% average rate increase we are seeing from most of the major national insurance carriers as they look to pull down their loss ratios following a period of elevated losses. Those higher average rates out there are causing more people to shop than ever.

Speaker 2

This is a good thing for us as it helps us power our direct to consumer business. Earned premium for our risk taking entity, Hagerty Reinsurance, jumped 29% due to written premium gains and last year's increase in quota share to 80%. Membership, marketplace and other revenue grew 18%. This was powered by 58% growth in marketplace as we steadily increased the number of cars listed on our online marketplace and we more than doubled sales at our Amelia live auction. Marketplace is off to a great start to the Q2 with over $15,000,000 in sales at the Porsche sale with Air Water in Costa Mesa last week.

Speaker 2

Moving to profitability, during the 1st 3 months of this year, our operating margins jumped 1200 basis points resulting in a $23,000,000 improvement in net income and a $21,000,000 jump in adjusted EBITDA. You may recall that in 2023, we grew total revenue by 27%, while significantly improving profitability, delivering a year over year increase in net income of $26,000,000 and adjusted EBITDA of $90,000,000 The Q1 of 2024 marked the continuation of Hagerty's margin expansion story as we have thoughtfully reengineered our business processes. Slide 4 shares a few examples of how this work positions Hagerty for sustained multiyear operating leverage. First, we are better leveraging our performance marketing team to efficiently acquire new customers. Activating our increasingly strong data assets, we have reallocated funds into the traditionally slower shoulder seasons to effectively deliver search and social ads to the surge of insurance shoppers.

Speaker 2

We are also investing in additional television advertising around our 40th anniversary campaign, Keepers of the Flame. Early data from this campaign suggests that consumer response is outperforming our expectations. With unaided brand awareness of 16%, we have a long runway to build our fan base far beyond the current 1,400,000 policyholders. 2nd, we have been making changes to our member service center process to serve our members more effectively, reducing handle times and freeing up resources for continued member growth. There are ample opportunities to increase straight through processing and automation in addition to leveraging AI tools to improve speed and efficiency of service.

Speaker 2

We have also moved our MSC team to a quarterly bonus structure that increases our ability to incentivize and recognize top performers. And third, we have identified potential savings within our claims organization. While we are extremely proud of Hagerty's consistently stable combined ratio of under 90%, losses and loss adjustments totaled $221,000,000 last year, our 2nd largest expense behind ceding commission. So we are adding resources to our in house claims team to help deliver great claims experiences for customers with minimal leakage. Simply put, these initiatives complement our cost containment efforts and position Hagerty for high rates of flow through of incremental revenue into profits over the coming years.

Speaker 2

Slide 5 is a reminder of our 2024 priorities including: 1st, we are improving loyalty to drive renewals and referrals. This represents a highly profitable way we can grow Hagerty given the lower loss ratios of seasoned policies and lower acquisition costs from referrals. 2nd, we are enhancing the member experience in a cost effective and efficient way, leveraging technology to fuel margin expansion as we scale up. 3rd, we will continue building Hagerty Marketplace into the most trusted and preferred place to buy, sell and finance collectible vehicles. This includes ramping up our online marketplace, which is now selling 5 cars per day with industry leading views per vehicle and bids per vehicle and sell through rates of 70% to 80%.

Speaker 2

And 4th, we are increasing our flexibility and control over our underwriting profits, including the CNIC Insurance Company acquisition and launch of an Enthusiast plus product to better serve the post-1980s vehicle cohort. We are off to a great start in 2024 and are confident in our ability to grow revenue in the mid teens with even stronger rates of profit growth. Improved margins and cash flow generation will allow us to invest in the competitive advantage that lengthen our leadership position and create substantial value for shareholders over the coming years. Let me now turn the call over to Patrick to run through the Q1 results and 2024 financial outlook in more detail.

Speaker 3

Thank you, and good morning, everyone. Let us dig into the Q1 results shown on Slide 67. In the Q1, we delivered 24% growth in total revenue to $272,000,000 robust new business count and improved retention of 89% compared to 88% in the prior year produced written premium gains of 19%. Commission and fee revenue jumped 19 percent to $89,000,000 in line with written premium gains on stable underwriting results. Membership, marketplace and other revenue increased 18 percent to $31,000,000 Our Broad Arrow team delivered excellent results at Amelia sales of $63,000,000 and a 92% sell through rate.

Speaker 3

Lower Garage and Social results partially offset the strong marketplace results. Recall, we dissolved our Garage and Social joint venture during the Q3 of last year to refocus internal resources on more material profit drivers. Earned premium grew 29 percent to $152,000,000 driven by the combined impact from written premium gains and a higher reinsurance quota share. Loss ratio came at 41.1 percent consistent with historical levels. We produced stable and highly predictable underwriting results, thanks to decades of experience insuring customers special vehicles.

Speaker 3

Turning now to profitability shown on Slide 8. We reported a 1st quarter operating profit of $12,000,000 an improvement of $29,000,000 over the prior year period as operating margins jumped 1200 basis points. We decisively moved historically seasonally weak quarter into the black with a 4.5% operating margin. G and A declined 7% and salaries and benefits grew only 2% due to our cost reduction activities. Our margin expansion is even more impressive as we continue to invest in our long term growth opportunities, including the rollout of the State Farm Classic Plus program and launch of the Enthusiast Plus product as we move into 2025.

Speaker 3

Adjusted EBITDA increased $21,000,000 year over year to $27,000,000 This is on top of the $13,000,000 improvement in EBITDA delivered in the Q1 of 2023 resulting in a 2 year stacked improvement of $33,000,000 Adjusted EBITDA margins in the quarter surpassed 10% and we believe there is much more to come as we continue to optimize our business model. This includes the initiatives Mikheel mentioned in his remarks around our marketing efforts, member service center and claims. On a trailing 12 month basis, we delivered net income of $51,000,000 and adjusted EBITDA of 109,000,000 dollars also equating to a margin of 10%. Note that this EBITDA excludes the more than $24,000,000 in net interest income generated from our growing Sign Significantly improved operating margins drove the $23,000,000 improvement in net income. An increase in the fair value of our private and public warrants reduced net income by $6,000,000 Net income attributable to Class A common shareholders was negative $3,000,000 after attribution of earnings to the non controlling interest and accretion on the preferred stock.

Speaker 3

GAAP basic and diluted earnings per share was minus 0 point 0 $4 based on 85,000,000 weighted average shares of Class A common stock outstanding. Dramatically improving cash flow has created a net positive cash position at the end of the quarter with $131,000,000 of cash and only $91,000,000 of long term debt. Dollars 29,000,000 of the $91,000,000 in debt is back leverage for our profitable portfolio of loans to customers that are collateralized by collectible cars. Let me wrap up with our reaffirmed 2024 outlook shown on Slide 9. Given the excellent start to the year contemplated in our full year outlook, we reaffirm our 2024 guidance for top line revenue growth of 15% to 17%, powered by 13% to 14% growth in written premium.

Speaker 3

Hagerty's best in class value proposition built around guaranteed value, automotive expertise and favorable relative rate increases in the low single digits fuel high rates of member growth. We expect strong operating leverage to the bottom line with net income of $61,000,000 to $70,000,000 up 116% to 148% and adjusted EBITDA of $124,000,000 to $135,000,000 up 41% to 53%. In summary, we are executing well on our plan for high rates of revenue growth, margin expansion and cash flow production. And we are on track for 11% to 12% adjusted EBITDA margins in 2024. But the best is yet to come as investments in our people and technology position us to deliver 30% incremental margins from 2022 to 2024, as well as even higher rates of revenue growth into 20252026 as State Farm ramps up and we launch Enthusiast Plus.

Speaker 3

With that, let us now open the call to your questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. And our first question is from the line of Mark Hughes with Chua Securities. Please proceed with your questions.

Speaker 4

Yes. Thank you. Good morning. Good morning, Mark.

Speaker 2

Good morning, Mark.

Speaker 4

Could you talk about the PIP growth, the policy count growth? You talked a lot about your performance marketing initiatives and other strategies to grow policy count. It seems like your rate posture low single digits, pretty attractive relative to the broader market, as you say. How should we think about the prospects for policy count growth?

Speaker 3

I think you answered most of the question in asking it. Yes, we're pleased so far this year. Last year, we had north of a250,000 new customers. We expect this year to be something in that same neighborhood. We're a little bit ahead of that pace as we got through the Q1.

Speaker 3

What we're seeing in the marketplace right now is a pretty meaningful increase in daily driver insurance is driving a lot of shopping activity and we're benefiting from that. As you described, our prices are only up low single digits relative to a market that we think will be up about 10% this year. And so that's just putting more people at the top of our funnel. Then we're doing a really good job converting. And so we expect to have similar on an absolute basis similar growth this year to what we had last year.

Speaker 4

And then in the marketplace, you described the 5 cars per day. Is it something that is a steady build or is in the model, is there some point where there's a potential inflection where the maybe the network effect takes over and you have more of a step function in activity there?

Speaker 2

Well, thanks Mark, Mikael. Yes, for now, it's the steady build and it's this really delicate balance between supply and demand that we actually have quite a wait list of cars wanting to be listed and as part of the marketplace and to go on with place and to go on with one of the live auctions. But if you go if you dump too many cars into the mix and demand drops then your sell through rate lowers. And so it's this really steady build at this point. But yes, I mean the team sitting out there thinking, okay, out in the future once we get past this sort of first big phase of the steady build, you should start seeing greater acceleration there.

Speaker 2

And we're really pleased with is that the digital product teams that are out there building the marketplace, they're adding features to this every 2 weeks. And we just have this great steady supply kind of coming out of our customer base. So we're excited for the future, but it's a steady build for now.

Speaker 4

Yes. And then what's the latest update on State Farm?

Speaker 2

So latest update with State Farm is we're live in the 4 states which are we talked about before. And it's actually going very, very well in those 4 states, a little bit ahead of plan. Lots and lots of testing going on before we can add the additional states, but a lot of optimism on both sides and we're just continuing to work through this startup phase. So we're here. We wish it was a lot more states right now, but we're also happy that the tests in these first four are going so well.

Speaker 4

Thank you very much.

Speaker 3

Thanks, Mark.

Operator

Thank you. The next question is from the line of Pablo Cissino with JPMorgan. Please proceed with your question.

Speaker 5

Hi, good morning. Growth in insured values and price increases contributed more than 13 points of written premium growth this quarter, right? And I think that was up from last year. Do you think that this current level is sustainable? And what assumption is embedded in your premium growth outlook?

Speaker 3

Yes. For us, the key drivers are going to be new customer growth, rate growth and then changes in value. And all 3 have been contributing as we just answered the previous call with sort of low to mid single digits on premium. And then the balance is kind of split between changes in value and new customer growth. And right now after kind of 4 plus months into the year, momentum has remained strong.

Speaker 3

And so as we look for the balance of this year, we're very comfortable and we affirmed our guidance, we're very comfortable with that. As we get beyond and into 20252026, in the core business, right now, it looks as though that kind of growth will continue. And what will be accelerating our growth in 2025 and 2026 is the ramp up of State Farm, which begins in earnest in 2025. And then also the Enthusiast Plus product we talked about, which we're not going to start selling until early 2025. And so those 2 years should have even higher growth because of those 2 new programs.

Speaker 3

And then the underlying core business, we continue to see very attractive growth and nothing that leads us to believe that that's slowing down.

Speaker 5

Thank you. And then on the Enthusiast product, any way to size how that will ramp up beginning 2025? It's a new product obviously, it's a big part of the classic car market that you're not tapping to its full potential yet today. But sir, your thoughts on how that business might ramp in the next few years? Thank you.

Speaker 3

We're going to take a sort of an appropriate and deliberate pace to it because it is a new product. And so we'll be launching in 4 states initially in the early part of next year. We'll use that to do some learning and make sure that we've got the product right, make sure we've got the pricing right. And then we'll start to add incremental states over the course of 2025. My guess is it won't be until 2026 that we're kind of fully rolled out.

Speaker 3

We're excited about it, but it is new. It's an evolution of our existing product and so we want to make sure we do it thoughtfully.

Speaker 4

Got it. Thank you.

Operator

Thank you. You have reached the end of the question and answer session. Now, turn the call over to Mikhail Hagerty for closing remarks.

Speaker 2

All right. Thank you, operator, and thanks to all of you for your continued support and interest in Hagerty. We have carefully built a highly differentiated business model over the last 4 decades and that is just beginning to hit its stride as we help members protect, buy, sell and enjoy their prize vehicles. As I mentioned on our last call, our omnichannel distribution delivers high rates of commissionable revenue growth. Membership supports the profitability of our insurance business through excellent retention and net promoter scores from happy members.

Speaker 2

We are investing significant resources to build PagerDuty Marketplace into the trusted and preferred platform in this rapidly growing market and we also continue our multi year evolution towards increasing our flexibility and control over our underwriting profits. This allows us to maintain high rates of written premium growth as we further penetrate the 46,000,000 collectible cars in the United States. We will be hosting an in person event for investors on May 31 in Greenwich, Connecticut, where we will share more color on how we are positioning the company for long term growth and margin expansion. We hope to see you there as the entire weekend of the Greenwich Concours D'Elegance should be a lot of fun for all. Until then, never stop driving.

Operator

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

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