Q3 2022 Hagerty Inc Earnings Call
Greetings and welcome to Haggerty third quarter 'twenty to 'twenty two earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now.
Pleasure to introduce your host Jay Koval head of Investor Relations. Thank you you may begin thank you operator.
Good afternoon, ladies and gentlemen, and thank you for joining us for aggregate third quarter 2022 earnings conference call.
Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at Investor <unk> Haggerty Dot com.
Our earnings release, the accompanying slides and quarterly letter to stockholders covering this period are also posted on the IR website.
Okay.
Joining the call today are mckeel, Haggerty, Chief Executive Officer, and Patrick Climate, Chief Financial Officer.
Before we start I'd like to remind you that the discussion today may contain statements related to our business that can be considered forward looking including statements concerning our expected future business and financial performance, our ability to maintain existing and acquire new members, our plans to expand market share including investments in partnership.
<unk>.
<unk> regarding key operational metrics and other statements regarding our plans and prospects.
Forward looking statements are often identified with words, such as we expect we anticipate we believe or similar expressions.
These statements reflect our view as of today November 10th and should not be considered our views as of any subsequent date.
We do not undertake any obligation to update or revise any forward looking statements.
Forward looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.
For a discussion of material risks and other important factors that could affect our actual results. Please refer to those contained in our filings with the SEC, which are available on <unk> Investor Relations website and SEC Gov.
Finally during today's call, we will refer to certain non-GAAP financial measures a discussion of these non-GAAP financial measures along with a reconciliation to the most directly comparable GAAP measure is included in our press release investor deck and Form 10-Q copies of which can be found on the investor Relations section of our website and on the FCC.
Website at SEC Gov, unless otherwise noted in todays call all comparisons are on a year over year basis and.
And with that I'd like to turn the call over to Mikael Haggerty, our founder and CEO .
Thanks, Jay and good morning, everyone and thank you for joining us to discuss our third quarter results.
Before we get into the quarter I want to welcome Patrick to his first Haggerty earnings call as our new CFO .
I also want to thank Fred Turcotte for a decade, and a half of outstanding service and collaboration.
We announce Fred's planned retirement two months ago are there and are excited for him as he moves into a strategic advisory role, helping the company with special projects.
Overall, we are very pleased with our third quarter results, which reflect the strength and resiliency of our highly differentiated business model addressing the auto enthusiast market.
Let's start with slide three of our investor deck, which shares some of the key year to date highlights through September 32022. This includes.
Written premium growth accelerated during the third quarter to 16%, resulting in 15% growth during the first nine months.
Written premium growth is the key metric that underpins hagrid is total revenue growth today.
The Henry brand is winning in the marketplace pulling new customers into our ecosystem and supporting rate increases to offset inflationary pressures.
In the third quarter, New business count contributed eight percentage points of the 16% premium growth while rate actions and evolving mix to include more modern enthusiast vehicles drove the other eight points.
Total revenue grew an impressive 29% in the third quarter and year to date revenue jumped 27%.
In addition to the continued strong revenue growth of Haggerty re our membership business as well as our garage and social locations.
Q3 was our first quarter fully consolidating broad arrow group into haggerty marketplace.
During the quarter under our ownership Haggerty marketplace contributed solid revenue and profits, including the very successful motor Lux auction in Monterey, California.
Total active members grew 7% year over year to $2 6 million.
And our team continued to invest in the state farm integration on both the technology and people side as we anticipate rolling out the partnership during the first half of 2020 three.
We expect the initial 10 year contract to drive meaningful scale and growth for Haggerty.
As we help state farm grow their new Haggerty powered classic plus program as well as offering Haggerty drivers club memberships for these customers.
We are very encouraged by our 27% year to date revenue growth, which keeps us on track to deliver full year 2022 revenue toward the high end of our previous outlook, despite a challenging economic environment and heightened volatility across the broader property and casualty space.
We believe this strong growth trajectory positions us well for 2023, including continued double digit gains in written premium.
80% quota share on Haggerty re I'll move to a single tier pricing of $70 on Haggerty drivers club as well as a full year contribution from marketplaces live and online auctions will share more specific details on our outlook for 2023 at our fourth quarter call.
We also love the time tested defensive characteristics of a recurring business model as most auto enthusiasts continue to spend on their passion through economic downturns as my mother loved to say at the dinner table people take good care of their toys and collector cars occupy rarefied air and the.
Prioritization of constrained resources.
Everything we do is done to make it easier for auto enthusiasts to enjoy their special vehicles offering the products and services that improve their experience, resulting in high retention and an excellent net promoter score.
Slide four highlights the consistent compounding written premium growth our model has delivered over the last decade.
Our outperformance compared to the industry expanded over the last nine months with written premium growth of 15% coming in at roughly five times the industry's estimated growth.
After four decades of collecting data we consistently underwrite these special vehicles had significantly lower loss ratios than the industry average.
Even with the disastrous impact from Hurricane Sandy a decade ago, our 2012 loss ratio remained under 50% and we were able to bring our loss ratios back down through rate increases over the following year.
Our loss ratio in the third quarter increased to 56%, resulting in year to date loss ratios up 47%, while our underlying business performance remained solid over the first nine months the higher loss ratio was driven by 3.4 percentage points of losses from hurricane in and two two percentage points due to increases in U S liable.
<unk> reserves.
And net exposure was limited to $10 million due to our successful approach to risk and reinsurance management and given the higher severity losses in our liability lines, we strengthened haggerty read by $6 5 million to maintain a prudent level of reserves compared to estimated ultimate reserve needs.
We expect our loss ratio to return to the 41% range next year based on recently implemented rate increases.
Even with the higher than normal loss ratio or combined ratio of 95% compares favorably to the industry average the.
The strength and stability of our business model allows us to reinvest in our platform year after year and to deliver new products and experiences to consumers, which paves the way for future growth.
Retention remained stable around 88%, which is slightly below expectations due to the robust resale market for single vehicle policies roughly two thirds of our 12 percentage points of attrition. So far this year has been driven by vehicle sales highlighting the strength in la.
<unk> for haggerty through our retention rate closer to 96% excluding the impact from these sales importantly, we are still growing our net vehicle count in the high single digit range, a testament to the strength of our brand and value proposition.
Which leads me to an update on agri marketplace and why we are so excited about our future potential as a high trust platform for members to browse by sell in finance collectible cars.
As a reminder, we acquired broad Arrow group in August of this year and conducted our first live auction with motor locks in Monterey shown on slide five in Monterey, we sold over $55 million in vehicles generating $5 million in commission revenue with 88% of lots sold ox.
Auctions of this size can generate 30% EBITDA margins, so with two more auctions in the fourth quarter, including the recent cars or Jim Taylor with $21 million in vehicle sales. We are encouraged as we plan our 2023 auctions.
Equally exciting is the recent launch of our online time based auction platform, where haggerty conserve consumers as the trusted brand for both buyers and sellers of vehicles offering certification services title and escrow as well as financing options. These.
These higher value added services differentiate our product from competitors.
The opportunity is substantial with a total collector vehicle value in the U S of over one trillion dollars. If you were to assume in a typical year that 5% of vehicles trade hands. It implies a transaction value of $50 billion, which at a 10% Commission would result in $5 billion in total net revenue.
When consumers decide to sell their vehicles today, they typically rely on small and regional markets, including local classified ads dealer sales Facebook market versus gaining access to a nationwide network of potential buyers. Our team is focused on making sure haggerty captures more than its fair share of the opportunity as these sales move.
Online for context, our largest competitor in the space is on track for well over $1 billion in vehicle sales. This year and is growing annual transaction valued at close to 60%.
As we mentioned last quarter, the haggerty marketplace is expected to be immediately accretive in 2022.
We underwrote the investment abroad Arrow group on its standalone merits, but we see a clear path recapture the policy on the buyer side by introducing new consumers to the products services and entertainment options that make up our automotive lifestyle ecosystem, including aggregate insurance and drivers club.
Our partnership with State farm is progressing well as Youll see on slide six and the teams continue to work hard integrating our system seeking regulatory approvals and progressing through the testing phase.
As we work towards providing the high quality and agent experience that our customers expect we anticipate that we will begin activating state farm's 19200 agents on a state by state basis. During the first half of 2023, including beginning to convert the existing 460000 policies to the new program.
We believe that this partnership with state farm will help unlock significant growth in their classic auto business, creating a win win for both companies and we are excited to stand up the platform next year and create value for shareholders through the scaled up revenue and normalization of digital investments post 2023.
Yeah.
And slide seven highlights several of the key year to date milestones across our ecosystem, including our continued progress with state farm marketplaces successful launch increasing quota share of Haggerty re solid growth in membership and strong delivery of content and experiences to customers through our media and entertainment platform.
At Haggerty, our purpose is to save driving and car culture for future generations to that end, we have been building an ecosystem of products and services and entertainment for car lovers that honors and catalyzes the passion for cars and driving them.
And we will continue to facilitate access to our automotive communities around the world that meet the human need for social interaction and connectivity with others.
As we think about the next decade, we remain committed to improving an already great business model. This includes continuing to execute on our long term growth strategy by delivering best in class experiences for members, but most importantly, we will take a disciplined approach to resource allocation and cost containment to improve our margins and cash flow and returned.
The profitability on the other side of these elevated investments.
With that I will turn the call over to Patrick to discuss our financial results in more detail, including our early thoughts on the financial strategy into 2023.
Patrick Thank you Mikael and good morning, everyone. It's great to be here today as part of one team hagrid.
I'd like to thank the keel on the board for this opportunity and also thank Fred for the tremendous effort. He has put into making this a smooth transition.
Before digging into the quarterly financials, let me start by sharing some of my early thoughts on Haggerty two months into the job first the auto enthusiast base is large and highly fragmented and the market opportunity for haggerty is compelling.
Just 4% share of the insured market today, we see a long runway ahead as we use our powerful brand trusted relationships and unique customer value proposition to take share in a growing space.
This will be powered by double digit organic growth as well as new incremental partnerships such as state farm.
Second the ongoing evolution and haggerty re to assume more of the risk that we underwrite through Marc held essentially a platform should allow us to build our capital base and create a high quality fast growing profit stream for the company.
Third Hercules marketplace platform is just getting going in the transactional market for enthusiast vehicles.
It's a large and profitable market and our team can leverage hagrid east trusted brand status and $2 6 million member community to quickly drive scale and profitability in.
And fourth well, we may be opportunistic when it comes to small bolt on transactions, we can deliver our strategic growth ambitions without the need for additional sizable deals parodies made significant investments during the last several years and our job now is to weave. These together to drive synergies across our ecosystem of offerings for auto enthusiasts and <unk>.
Strong profit growth over the coming years, starting in 2023.
Put simply we are fortunate to have winded our back when it comes through our revenue drivers today.
As a newly arrived CFO one area I believe we can improve is our expense management and prioritization of resources you.
You can see this in our year to date results where expense growth outpaced our topline.
Much of this is due to the heightened investment in technology to support large scale partnerships, such as state farm and the rollout of marketplace.
Some is due to our decision to go public which comes with considerable new costs. Additionally, we've added people to support growth in our traditional insurance and membership businesses and also in new areas, such as events and marketplace. It.
It is imperative that we know not just deliver the revenue growth, we anticipated, but carefully manage our costs. So we can achieve profitability and positive cash generation in short order for.
For historical context, our EBITDA margins from 2012 to 2017 exceeded 10%. So there is significant upside from improving our financial discipline.
We are deep in budgeting season for 2023, and currently taking the necessary steps to slow the growth in our expenses to a rate meaningfully below the growth in our revenues.
During the past few years, we've relied heavily on high priced contractors to do digital product development software engineering and other projects, we were winding down many of these contracts and in sourcing the remaining work at a lower total cost.
We are carefully looking at all of our third party expenses and working to reduce scope price or both we also recently announced the voluntary retirement program.
We're taking a fresh look at all expenses. Additionally, we're reviewing our various initiatives and prioritizing the ones that had the most value to our core insurance membership and marketplace businesses and deemphasizing the ones that are a drag on profitability during the last few years.
Haggerty as a high growth company with a right sized infrastructure, we will generate the profits and cash flow necessary to fund our long term growth strategies reward our shareholders.
Allow us to save driving and car culture for future generations.
Now, let's dig into some of the numbers from the third quarter shown on slides eight and nine.
We delivered solid growth across all revenue streams on a year to date basis for the third quarter total revenue grew 29% to $217 million.
Total written premium grew 16% to $222 million. This represents a two point acceleration from the second quarter rate of growth.
Commission and fee revenue grew 12% to $85 million driven by solid contribution from new business written premium and policy in force retention for 88%.
While base commissions grew 16% total commissions in the quarter were negatively impacted by an elevated loss ratio, including hurricane in that reduce the contingent underwriting commission, where so you see by $4 million.
Membership marketplace and other revenue increased 80% to $24 million benefiting from an increase in total paid members and the addition of $6 million in marketplace revenue, primarily from our very successful motor Lux auction in Monterrey.
Earned premium grew 37% to $107 million driven by new written premium growth policy retention and a 10 point increase in our U S contractual reinsurance quota share to 70%.
Revenue per paid member increased 25% to $164.
This growth was fueled by higher premiums commissions and underwriting revenue as well as revenue from marketplace owned events and garage and social.
Turning to profitability on slide 10 for the third quarter of 2022, we reported an operating loss of $21 million compared to an operating profit of $2 million in the prior year period.
This decline includes $10 million, we are reserving for net claims costs for Ian.
$1 million to reinstate our reinsurance strategy following in.
And a $6 $5 million increase in our reserves for U S Auto insurance claims driven by higher liability costs.
Let me provide some color on this last item.
The majority of our premium goes towards physical damage, but recently, we have seen liability severity increase on our U S business as a result, we strengthened our reserves in the third quarter, allowing us to maintain a prudent level of reserves compared to the estimated ultimate needs were.
We are implementing rate increases that should drive our loss ratios back down to the 41% area.
Our reduced profitability also reflects the significant investments in technology and people across the organization, but primarily related to the state farm partnership and accelerated investments integrity marketplace. I would note that marketplace investments are both on budget and on time, including last week's launch of our online auctions.
Net income for the quarter was $24 million versus net loss of $1 million a year earlier.
In the third quarter of 2022, we recorded a fair value adjustment of $12 million related to our private and public warrants as well as a $35 million revaluation gain related to our equity stake in broad Arrow group.
GAAP earnings per share was <unk> 18 based on our weighted average shares of class a common stock outstanding.
The decrease in warrant liability and the gain on brought Arrow makes our EPS look out this quarter. So you will see in the 10-Q, we added a simple calculation stripping both of these items out of the numerator and using the total shares outstanding including the class B shares held by Hagrid holding Corp, and Markel is the denominator on that.
Basis, adjusted EPS was a loss of six cents per share which is more in line with what you would expect given the operating losses discussed above.
Our adjusted EBITDA was a loss of $10 million for the third quarter compared to 8 million in the prior year period, driven by the same cost items I've already picked through.
Now, let's turn to our revised 2022 outlook shown on slide 11 as.
As <unk> mentioned, our revenue has been outstanding and we're tracking towards the high end of the full year outlook for 24% to 28% growth.
Keep in mind that our mid teens organic growth in written premium was augmented by the increase in quota share with essentially <unk> and revenue from acquisitions.
Written premium growth is well balanced including high single digit growth in net new business count and rate increases that should help us offset inflationary pressures in 2023. These higher rates combined with the increased quota share will continue to drive revenue for <unk>.
And marketplace, we expect to build on our current momentum during the fourth quarter and into 2023 through both digital auctions on haggerty marketplace and broader arrows live auctions move.
Moving down the P&L, we now expect full year adjusted EBITDA to be a loss of $5 million to $10 million.
This lower range is almost entirely driven by the previously mentioned costs related to an increase reserves for U S auto and the lower CPUC.
Full year 2020 to GAAP net income and EPS are similarly impacted by these items.
In summary, haggerty is delivering top tier revenue growth consistent with our expectations in 2022 remains a year of significant investment, which will position us for sustained growth and operating leverage going forward.
We are taking the necessary steps to improve profitability and cash flow in 2023, including cost containment initiatives and prioritization of resources. Meanwhile, we will invest in the long term strength of the Haggerty brand to continue compounding our top and bottom line growth in the years ahead.
With that let me turn the call back to Mchugh for closing comments. Thanks, Patrick as we approach our first anniversary as a public company I want to reflect on the great work that our amazing teams have accomplished this includes managing through all of the potential challenges that come as a public company without missing a beat on executing against the sizable growth opportunities.
<unk> for the Haggerty brand as a leader in the auto enthusiast space.
The addressable market is large growing and highly fragmented and we have never been better positioned to profitably grow our business and to fund our future growth ambitions. This pivot towards more profitable growth will require discipline hard work and intense focus but we've assembled great teams that are up to the task and are committed to our mission.
In 2023, we expect to begin leveraging these high rates of top line growth into even faster bottom line growth and to drive outsized returns for shareholders.
Thank you for joining us today, and we'd like to open up the call to your questions.
Thank you ladies and gentlemen at this time, we will get back to your question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star J R.
Our first question comes from the line of Mark Hughes with Truest. Please proceed with your question.
Yeah. Thank you good morning.
Welcome penetrate work.
Hey, Mark its Patrick before you meet you.
Yeah, Likewise like why.
The eight.
8% New business increase you said the balance of the growth I think this has been written premium was rate and evolving mix how much of that was rate and.
And could you give us kind of some thoughts on what.
What the rate increases should be.
What you may be a.
Filing now relative to your increase in the losses, you describe a little higher liability costs, you know what what's the rate going to be what do you see the loss trend.
So it's a few things but.
If you could give us a few ideas there that would be great.
Sure happy to so the way to think about rates we've.
Filed in I think 35 states. So that's starting to flow through now and will continue to flow through in the fourth quarter and into 2023.
And then we're planning on a subsequent rate filing as we get deeper into next year and so we will see increased rates filtering in over the course of the year and you should think about that is high single digits, you know call it 8% something like that.
In terms of the impact between valuation and right. It's a mix between the two right now its more rate than it is valuation that's contributing to the overall kind of mid teens growth in written premium.
And how do you see the trend in loss costs have you take frequency and severity given the new liability severity that you're seeing.
Your pricing was up eight what's the loss cost trends.
Yeah.
Hey markets, it's mckeel I'll kind of take that because it's near and Dear to my heart.
Saying that we're focused on as is.
Elevated liability.
Experience that we're seeing and that's really where we kind of wanted to make that prudent adjustment on the integrity. Reed said. This is I guess I would describe it as social inflation, often things kind of out of the direct underwriting control of the business are right.
Billings are really focused in the liability area and Thats whats starting to wash through the books and will for the next cut.
A couple of quarters.
So you know really manageable the underlying business and the way. The premiums are constructed for us are really heavily weighted on the physical damage side, which.
You know remains really really positive for us.
Yes, if you look at what's happening.
I was just going to go ahead and add a little bit and I will go back to your question, but if you look at what happened during the quarter.
The reserve strengthening that we took and where we ended up in terms of loss ratio of 46, 8% on a year to date basis.
If you put off to the side Ian that's about three four points and the increase in the U S reserves that we're talking about is about 2.2 points and so when you think about those.
You get right back down to the kind of 41% and then as the right filters through we think we'll be in that 41% area on a go forward basis.
Okay.
The a.
$10 million hit from Ian was that your retention was the gross loss higher.
Yes, that's our retention so the gross loss was higher and then we've got a $10 million cap in the program and so that's our total exposure and then the.
The cost to reinstate the reinsurance program.
Those two are pretty much at no reinstatement cost was around a million bucks.
Yeah.
Any change in those state farm timing I think you said it was on cost, but on schedules or any any change over the last three months.
Mark Mckeel again, though.
We're tracking really well for that first half of the year next year. It's a you know we're making our way through the complex testing. It's all it's all technology and just wiring at this point and the teams are working really really well towards it so.
Hmm.
Positive outlook there.
Did you break out a dollar amount for the.
Are you spending so to speak or the ramp up costs associated with state farm I think you've done the past do you have any updates for this quarter.
It's in the queue.
I'm not sure if the earnings material I know its in the queue.
It is.
I cannot follow up with you after the call to run through the numbers.
Okay.
I'll get up there.
And then just final question.
The paid aggregate drivers club I think your target was up 6% in that range now.
The trending.
Any.
Nuance here related to the economy or inflation, maybe inflation's going away we can al.
Feel better about that.
But any.
Update on where you think that growth is going to trend.
Well, if we're talking about just kind of our underlying parity drivers club.
Of rate of uptake because typically you get a kind of a new customer through the front door, which is typically an insurance quote and we we have this percentage of uptake it's actually trended very positively. This year. We've added some real we think value to the Heidrick drivers club program, we continue to merchandise it well so.
It's a it's it's kind of a low cost high value package that works well for both our insureds as well for non owners. So that's actually tried it very well so holding well in there.
Yeah.
Great. Thank you very much.
Mark just on your questions on page 10 of the earnings slides on the right hand side underneath adjusted EBITDA.
We're at.
$24 million on a year to date basis for those items that you talked about so the pre revenue costs related to state farm.
Okay I appreciate that thank you you bet.
Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.
Hey, Thanks. Good morning, this is actually sit on for Greg.
First just wanted to touch on the contingent commissions.
What kind of trends with the loss ratio and so.
Just if you can remind us is there a point with the with the loss ratio, where it is zero out the contingents and.
If so is that based on full calendar year loss ratio results or is it more on a quarterly basis.
Hey, Thank you said its mckeel here.
No. It definitely does track with the overall calendar year loss ratio. So it's a.
Kind of a complex fully loaded year thing. So we but we have we've been at this a long time and so we were able to be very predictive of how things work and definitely when you have some flattening of the loss ratio. It can take a little bit off of the top of the of the contingency underwriting Commission, but is there a scenario where it could.
Zero out, yes, but it would be.
Far beyond the scope of anything that I could imagine it would require just like a catastrophic change to the lost mix of the business. So yes, while there will be a slight change in the contingency underwriting commission for this year, we're anticipating it.
It's fairly minimal relative to the fact that it's at.
It's like a percentage point off of what.
It could be so if fully loaded skus. He is 10% based upon how it's tracking right now we're sort of in the eight 5% area and we'll see how that shakes out for the balance of the fourth quarter. So it's a very modest impact.
And then you are.
The impact of an event for COC purposes is capped at $1 million and so there would have to be materials point multiple individual events before we'd really it into that.
Okay, Yeah that makes sense. Thanks.
And then maybe just pivoting back to the state farm partnership I know it is expected to start rolling out state by state early next year and so.
Just curious is there a target date or time period.
<unk>, Florida have the rollout completed in all states or I'm, just trying to get a sense of maybe.
We should start to see the full benefits of the partnership at the beginning of two.
2020 for.
So any insight there would be helpful.
Yes, it's it's a it's a great question and.
One that we described this way.
One difference between the state farm program at our kind of underlying program, which by the way that the product and pricing mirror each other but the one key difference is that state farms programs are always six month policies that we are we write one year policies. So typically if you were to do a book roll, which is really this is kind of perform like a book roll.
It would take 18 to 24 months to get the full benefit of getting all of those people on board. The event that the benefit of the state farm relationship and what we hope is this very once we get it up and running very accelerated turning now to the rest of the states.
Is that you you should start getting further benefit of getting the full as we've talked about that kind of 460000 plus.
Policies roll on to the books.
During the latter half of 2023, and then into 2024, so shorter than shorter than if it were a normal book role for us.
But.
It will definitely blend into 2024.
Okay got it thanks.
You bet. Thanks, Ed.
Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Hi, good morning, and thanks for the call.
Maybe just to step back.
Obviously, you're getting great.
Great.
How do you think it sort of.
Pip count respectively, and do you think you are.
Relative to what you think the market's too do you think youre actually.
Are you gaining.
<unk> customer discount over what you think the market is growing or is that.
And any sort of view on what do you think you are versus.
Let's go to the overall size of the <unk>.
Martin.
Yeah, well, that's nice to hear from you. Thank you yeah definitely as we look at it its about an 8% kind of pill count for us which.
We don't spend a lot of time focused on let's say regular auto insurance market, but we know from this year that.
With many of the very very large insurers, who are our partners slowing down their advertising spend and kind of the earlier part of the year that a lot of those companies are seeing pretty low Pip counts if any at all in some cases, so 8% this year for us.
We feel.
We feel really strongly about it given the kind of uncertainty of the overall environment our experience in previous economic slowdowns, both all going all the way back to even the dotcom crisis, and then the financial crisis and other kind of hiccups in the economy is that youll see a little bit of a dip in the <unk>.
Topline pip growth, but not like a complete.
Complete shutting down of it when we reflect on for example, the financial crisis, it's kind of a confidence thing people just aren't as focused in it.
Our world as they might be during a normal time and thats a little bit what we've seen this year. So we're quite happy with the 8%.
And are the key for US is retention rate so the 88% retention in a few.
Peel that back.
Main reason, we lose people is because they have sold the vehicle, it's not that they've decided to move to another provider. So if you strip out selling the vehicle our retention is like 96% and so we're growing and we're keeping people.
And so it's an incredibly stable book of business.
I was hoping you could return to the.
The change.
And this quarter, we saw a number of auto insurers talk about.
Essentially increased severity due to.
Margin.
Expenses.
Accidents as well as bundling injury claims.
Curious as to if you saw any of that.
It sounds like.
The answer is no.
But maybe you could talk to that as well.
It seems to be your.
She is maybe coming from different sources.
The standard auto insurance.
Yeah. Thank you and it's interesting when you look at the kind of long term results of our program. When we see things that almost tends to be the exact opposite of what happens in the regular auto insurance world. So we know that what's driving a lot of the changes.
And you have challenges I think the regular auto insurance industry has as those are costs related to physical damage claims.
And especially with used car vehicle prices being up the way they are in parts in.
Supply chain stuff, that's what they're seeing for us, it's almost purely liability settlements and things related to liability claims and in some cases because of on and underinsured motorist. These can be settlements that have nothing to do with the vehicle that we even ensure it's just the nature of the legal system as it stands today and we get dragged into that.
Stuff and that's where that kind of six $5 billion came from and why we were topping up our reserves and taking extra probably the extra part of our rate taking right. Now is focused on that liability area if that makes sense.
And Paul just the numbers behind that so for us in a typical year.
The 70% of our losses are a physical value and just 30% or our liability.
And if you look at the industry, it's not quite the opposite but pretty close right at the industry is more like 40% when it comes to liability and 60% on physical damage. So we just have a very different profile.
The bodily injury.
Liability.
Or you can do that.
Yeah.
Yes, and the way that the way that our rates are constructed kind of any kind of bodily injury like like med pay or that's our pip depending on the state how you kind of look at that.
That's a piece of it but a lot of what we are challenged with and why that getting the rates right for us going forward.
That's why we're pretty confident in the year ahead is it's that on an under insured motorist and again its on a state by state basis, but that's where you get the.
It's unfortunate from a.
The customer perspective, but that's where you get the kind of jury trials and we just kind of get dragged into this extra insured and the person's household.
Okay, and then the last topic I wanted to talk about.
Lots of excitement and insurance industry, but higher reinsurance costs.
Your structure is a little bit different than others could you talk about how.
Higher reinsurance costs.
Got.
Thank you business, respectively, we do see that.
Thanks Joelle.
Thank you and I know, it's certainly talking to a lot of other insurers and gone to insurance conferences and things like this it's like everybody's holding their breath about what's going to happen to reinsurance costs next year.
And we also know that cheap reinsurance is not a business model. It's a maybe a benefit of running a good underlying business, but how we're thinking about it is this this is the first year, where we've actually actually penetrated our reinsurance layer.
But I guess, what I would say without.
Being too specific because we're still working through the losses related to and is that even with that $10 million retention in the actual losses being a little bit higher than that it was well below what our model had for us. So even then.
We feel pretty confident in being able to go forward with while this was our first reinsurance.
Hit that our ability to go forward into next year for a renewal confidently renegotiating for a favorable rate based on how we underwrite how we price and how we control losses.
We feel pretty good about what we'll be able to do next year.
Yes.
And you'll see in the Q. The the gross that flows through is about $18 million.
And so and then we're getting our retention on that is just the $10 million.
And that 18 is just what closer to essentially if theres other risks in our book, but sitting on other papers. So the total for us was $27 million or so before salvage.
That's a fraction of what the models said it should have been with this event and it speaks to the nature of the risks that we're underwriting and we've done a lot of work. So our team is in the field before these events.
Helping people move their vehicles and we've got stories, where one member is offering to store vehicles are another member. So it's just a very different than daily drivers.
No.
Just actually go into sort of cost structure.
Just in that.
Lawson.
Herculean losses.
It is what it is.
Fix it that too hard.
With respect to the company.
Yes.
We're actually feeling.
Pretty good about what that renewal will look like in the in the spring.
Thank you very much.
No.
Thanks, Paul Thanks, Paul.
Our next question comes from the line of Pablo <unk> with Jpmorgan. Please proceed with your question.
Hi, Good morning, just one for me I wanted to follow up on your comments regarding expense management was curious if you could frame for us given that you do provide a breakout of fixed operating expenses. This was contribution margin.
Where should we see that expense benefits filtering through and any comment on the magnitude and pace of improvement there. Thank you.
Yes.
We're right in the budgeting process now and the approach that we took was really to look up and down the P&L across all different businesses and so we've we've challenged people really to look at it with a fresh set of eyes and me being new I think is helpful with that and so the areas that we're focused on.
One would just be the cost of labor and so there are opportunities for us to automate and make sure that we're building and operating leverage and so on a go forward basis.
We won't have to increase head count at the same rate that we're increasing revenue and so there'll be a fair bit around the labor side of things, where we think we can do things better I think G&A is another area.
As I mentioned on the call, but some of the some of these are unavoidable and they come with the structure of being a public company, but I do think there's other opportunities, where we could be a bit more efficient and a bit more lean and so we'll be really looking at that.
And then even on the sales cost side Theres. Some sales costs that are going to increase and we feel great about that writes a broker expense and the things that are driving the topline, but there is others, where there may be an opportune or there is an opportunity for us to do things a little differently, so that could be advertising events sponsorships.
So, we're really going up and down and.
The main framework is we've got this incredibly robust business on the written premium side that can grow in the mid teens and then we've added things like marketplace that are small, but theyre going to grow much faster than that so that's going to pull our overall growth rate up from the mid teens.
And we've just got to make sure that the underlying resources grow at a discount to that right and over the last couple of years they've been growing at the same rate and so we're just we're going to bend that curve on the cost side cost side to make sure that we get to profitability pretty quickly.
Got it thank you for your answers.
Thanks Pablo.
There are no further questions in the queue I would like to hand, the call back over to <unk> for closing remarks.
Well, Thanks, again, I love, having the questions here today really appreciate the time and attention and.
Please reach out if you have any other further questions for us in our rest assured we're going to keep focusing on the future and our mission to save and driving a car culture for future generations.
You see that we think we have a highly differentiated business model that.
Really taps into that automotive passion, but also taps into a pretty special.
If part of the insurance and other parts of the.
The business model that will allow us to both build and a business that that's more efficient, but also enhanced profitability over time. So we're excited about this work.
And to be able to build this plan with our team and deliver for our shareholders. We appreciate all of your support so keep on driving.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.