Q1 2023 Hagerty Inc Earnings Call

Greetings and welcome to the Haggerty first quarter 2023 earnings call.

At this time all participants are in a listen only mode. A brief 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 my pleasure to introduce your host Jay Koval. Please go.

[noise] ahead.

Thank you operator, and good morning, everyone. Thank you for joining us to discuss aggregate results for the first quarter of 2023.

I'm joined this morning by Mckeel, Hangry, Chief Executive Officer, and Patrick My climate, Chief Financial Officer.

During this mornings conference call, we will refer to an accompanying presentation that is available on <unk> Investor Relations section of the company's corporate website at Investor day aggregate dotcom.

Our earnings release accompanying slides and letter to stockholders covering this period are also posted on the IR website.

Our 8-K 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 two of the earnings presentation.

Forward looking statements, including statements about our expected future business and financial performance.

Are not promises or guarantees of future performance.

They 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 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 FCC Dot Gov.

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-K filing.

And with that I'll turn the call over to mckeel, our founder and CEO .

Thanks, Jay and good morning, everyone. We appreciate you taking the time to join our first quarter 2023 earnings call.

Over the last six months, we have been working diligently to reengineer, our business processes with the goal of delivering high rates and bottom line growth fueled by the combination of sustained top line momentum and significantly improved margins Patrick will cover the steps we have taken in more detail.

But I couldnt be prouder of the Haggerty team and what we have accomplished over the first three months of 2023.

Slide three of our investor deck share some of the key first quarter highlights, including total revenue gains of 30% in the quarter powered by written premium growth of 18%.

We anticipated a strong start to the year and while the first quarter is our seasonally smallest contributing roughly 20% of our full year revenue. We are encouraged by the solid consumer interest in <unk> suite of products.

And our risk taking entity haggerty reinsurance premiums jumped 32% due to the growth in written premium and our increased level of quota share to 80%.

We have continued to assume more of the risk and premium associated with our strong and stable underwriting capabilities.

Membership marketplace and other revenue jumped 63% fueled by 22% membership growth $7 million of marketplace revenue seen on slide four and a 32% increase in other revenue including sponsorships.

And our team continues to make steady progress with the state farm integration shown on slide five I thought the technology side and the people side as the teams prepare to begin writing new policies under the 10 year agreement later in 2023 and.

In short we have a powerful growth story and our topline momentum has continued into 2023.

Now over the last two calls we have talked at length about our heightened focus on managing expenses in an uncertain economic environment.

This cost discipline will help us deliver the profitability necessary to invest in our future growth ambitions saving driving and fueling car culture for future generations.

These efforts resulted in a significant inflection in our profit trajectory during the first quarter as we delivered positive adjusted EBITDA of $7 million, a $13 million improvement over the prior year periods $6 million loss.

We also announced an organizational restructuring in early April that should drive additional cost savings over the coming quarters.

In short our team is executing well on our profitable growth ambitions and we are well positioned to deliver on our 2023 key initiatives shown on slide six including.

First delivering high rates of revenue growth powered by sustained double digit written premium gains and incremental revenue from membership in marketplace.

We are reconfirming total revenue growth of 22% to 26% for the year.

Second <unk>.

Continuing our evolution into a vertically integrated insurance business and third significantly improving the profitability of our business through cost containment and operational efficiencies.

We believe we are well on track to deliver the upgraded profit outlook for 2023, adjusted EBITDA of $55 million to $75 million. Our teams have mobilized around this short list of priorities that we feel confident about the pivot to profitability that we have begun to deliver in 2023.

Let me now turn the call over to Patrick to cover the financials in more detail.

Thank you Michelle and good morning, everyone, let's dig into the strong results from the first quarter shown on slide seven and eight as Mikael mentioned, we delivered 30% growth in total revenue, including strong gains in core insurance marketplace membership.

Written premium increased 18% in line with our expectations for a very strong start to the year.

<unk> brand strength can be seen in the 88% retention and quality of written premium growth with equal contributions from new business count and rate increases.

<unk> fee revenue grew 19% to $75 million due to the strong growth in written premiums.

Membership marketplace and other revenue increased 63% to $27 million benefiting from an increase in total paid members.

Transition to a single tier membership at $70 and then an additional $7 million in marketplace revenue.

Earned premium grew 32% to $117 million driven by new written premium growth and another 10 point increase in our contractual reinsurance quota share to 80%.

And our loss ratio remained stable in the quarter at 41%.

Turning to profitability shown on slide nine we reported a fourth quarter operating loss of $16 million compared to a loss of $13 million in the prior period.

This operating loss includes a $6 million restructuring charge related to the reduction in force that we implemented in the quarter to drive margins higher as well as reduced hiring plans and other cost containment initiatives.

Focus areas included reducing the total fixed cost to serve our customers, including the member service center underwriting and claims as well as refining the infrastructure behind our cost to acquire new customers through our direct and wholesale channels.

This restructuring is the continued evolution in our business model that we embarked on six months ago to drive significantly improved profitability during the coming years.

And should result in additional annualized cost savings of 20 to 25 billion of which we expect to realize roughly $15 million over the balance of 2023.

The operating loss also incorporates 4 million of accelerated amortization from the write down of the majority of our media assets in the quarter related to lower than anticipated advertising revenue.

While we expect less direct monetization from Hagrid media will continue to leverage this high quality content as an effective way to bring in new customers and drive engagement across the aggregate ecosystem.

Net loss for the quarter was $17 million compared to a net gain of $16 million a year earlier the year over year change in net loss was primarily driven by the $32 million swing in the fair value adjustment related to our private and public warrants.

GAAP loss per share was <unk> <unk> based on 83 million weighted average shares of class a stock outstanding.

Our adjusted EBITDA in the fourth quarter was positive $7 million, a $13 million improvement over the $6 million loss in the prior year period.

Year over year improvement in adjusted EBITDA as a result of continued growth paired with our disciplined approach to cost and focused initiatives and we expect to see this improved trajectory continue over the balance of 2023.

Let me now move onto our 2023 outlook shown on slide 10.

As <unk> mentioned, given the strong start to the year, we are reconfirming our outlook for total revenue growth of 22% to 26% powered by written premium growth of 11% to 13%.

Our rate increases are locked and loaded and haggerty brand is on track to add another quarter of 1 million members in 2023.

Creating a growing base of audio enthusiasts to provide our products and services.

Moving down the P&L, we now expect full year, adjusted EBITDA of $55 to $75 million equivalent to 6% to 8% margins.

This increased outlook incorporates the additional expected savings from the recent restructuring and should accelerate our return to double digit EBITDA margins.

In summary, we are well on our way toward achieving our 2023 plan for profitable growth.

We are judiciously removed back of the house cost that do not impact our brand strength and excellent customer service as seen in our net promoter score of 83% and retention of 88%.

This recipe should allow us to continue to gain share over the coming years and deliver significantly improved margins and profitability.

With that let's now open the call to your questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is 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 hand.

Before pressing the star keys.

Your first question comes from Mark Hughes with <unk>. Please go ahead.

Yes. Thank you good morning.

Any.

Jane.

Any change in the state farm timing or momentum this quarter compared to.

Well, what you might have discussed on the <unk> call.

Uh huh.

Yes, thanks markets.

Great question, then we're still feeling quite confident that we're going to be launching in our four states yet this year.

We were code complete answer on the integration between the technical teams in April and we're continuing down the path. So really no change, we're going to be up and running.

This.

This year in the second half of the year with those four states and then the attention between the teams which is to get going and keep the momentum.

Accelerating really but really the momentum question I think is the key piece state.

State farm continues to be very committed to the program. The teams are excited about it and then they continue growing their own business. So that will be good for us.

And then I see you're a loss ratios very steady.

Any impact here from inflation could you talk about the kind of the price versus inflation dynamic as as youre seeing it play out.

Mark as you know.

<unk> talked about before there is a.

Last year, we were seeing this this tricky combination of some increased costs in a few pieces of <unk>.

Loss cost, but we've really seen some nice stabilization this year some of it due to of course, our rates coming through but also.

The combination of valuations and managing expenses to the claim process seem to be working very effectively so we're feeling really quite good about our targets here.

Yeah.

And you gave a pretty good range of our EBITDA guidance $55 million to $75 million what needs to happen in order to hit the higher end of that range what are some of the variables that.

But.

You need to see play out in order to.

You know what to do against the high end of that range.

Sure Patrick.

Mark could talk to you again.

Yes, we feel good about the range, we feel confident you're sort of at the midpoint of the range right now I would say that we've started the year from a revenue standpoint, particularly written premium related revenue with a little bit of wind behind our sails. It was a good first quarter. So we feel good about that not enough that we're going to declare that we need to move the guidance, but it does give us call.

Since that we should be within that range.

So on a go forward basis. It continues to deliver written premium growth.

And to deliver new customers, both of which were off to a good start so far this year the first quarter seasonally slow.

The hay, making quarters are the second and third quarter. So we've got to keep pushing that advantage.

And then as you work down the P&L, we are doing everything possible to make sure that we're being very focused on cost right. So we did have a cost exercise at the end of last year. We did another one during the first quarter. So we're trying to insulate the P&L and increase the likelihood that we hit our plan, which would put US right in the midpoint of that range. So I think it is lining up pretty well right now.

It's just too early in the year to declare that we're going to be the top and the bottom of the range.

We will keep pushing.

I appreciate that thank you.

Next question, Greg Peters with Raymond James Please go ahead.

Hey, Good morning, this is Sid on for Greg.

Just wanted to go back to the underwriting results I just wanted to.

I guess clarify your comments to see if did you see any changes in severity or frequency in the first quarter compared to the end of the year last year.

I think the better way for us to talk about it would be relative to what we've seen in other first quarters right keep in mind that our business associates.

These wonderful cars are typically resting during the first quarter of the year in most places and so when we look at it relative to last year and the year before.

We're kind of right in the middle and so it's what we had predicted in terms of loss ratio.

Our mix is heavily skewed towards the property side of things physical damage as opposed to liability.

That's coming in line with what we'd expected so.

I think you should you should assume that we're off to a as expected start to the year consistent with historical results.

Okay understand thank you.

Okay.

Next question Edward Riley with EFI and please go ahead.

Hey, guys. Thanks for taking my question I'm, new to the story here.

Looks like marketplace is growing nicely just at a broad level could you maybe talk about customer acquisition strategy within this segment and how you can increase market share going forward.

No. Thank you and nice to talk to you. So our marketplace consists of of kind of three.

Three distinct groups of how we think of that so we have our our live auction strategy, which is really exciting and that launched mid year last year with a couple of really fun and exciting sales that deliver great.

Top and bottom line results and Thats very much a client based business. So the team that when we acquired the broad Arrow group.

There's a group that knows these clients so they're out there working with them to acquire cars, helping them sell cars, helping them find cars and very often those transactions take place at live auctions. There is also a robust.

Private sale aspect to that.

Customer wants something and they can just kind of get it done in between a live auction, whether it's buying or selling.

So yes that we're off to a great start there we're really excited that we're the official partner with portion of North America to do their 75th anniversary sale.

In June .

Atlanta at the portion of experience center. So that is a real marquee auction. We just had our Amelia Island auction a couple of months ago, and then we will have our Monterey shales and the idea here is that we may build out a couple of more events. During the course of the year again client focused maybe a large collection becomes available and thats, what we focus.

On their same thing with the private treaty side.

The digital auction strategy as most scalable piece of our of our marketplace strategy and that we're still I would describe us as just kind of coming out of the beta test mode. Yes, there are a number of.

Yes, great digital platforms out there you can buy and sell cars at these types. We believe ours is differentiated because we're gonna be really emphasizing the trust and transparency that we have with the Henry brand.

And really delivering on valuation, making sure information as much as available as possible and that people when they buy something that they really get what they are paying for.

So we're going to start seeing more scaling up of that business in the coming months and quarters and years ahead, and we've already started to.

Put more volume through the digital channel so for us that we have.

Just short of 800000 or so paid members. That's our main marketing group, where we're going to be working with them too.

It will help them buy and sell cars, whether it's at live auctions or on digital and we're also using our social channels and all of our other marketing channels to acquire.

Those new customers I remind one thing to you since you're kind of new to the story is that in a cool thing about our scale in this total addressable market is that.

Within the last year, our cost our members bought and sold over 300000 cars and over $12 billion worth of value value there from a transactional standpoint, and that's what we're targeting first we're less concerned about what's happening outside of our world Tomorrow with concern about what's happening inside of our member group.

Okay, great. Thanks for that.

And then just given the cost initiatives you've taken recently.

Do you see any challenges in maintaining that net promoter score going forward.

Well thank you.

Net promoter score while not a financial metric is something thats very important to us because we believe it's one of the.

Most important metrics to not only compare how your customers think of you. The fact that having this high net promoter score of 80 283, I think was where we are right now.

I mean that tells you that the vast majority of the interactions were having with our clients clients are members are leading to them telling their friends to come to us to buy from us or to use our services. So.

We've seen our net promoter score whole.

Really strong heading into this year, just like we're seeing with the tailwind of our growth.

And it's important to recognize that with our our cost saving initiatives are restructuring. We've this has not been one where we've gone in and limited our ability to serve frontline members on a day to day basis. It was much more than a supervisory positions and then new hiring strategies. So.

We're focused on the member and we need that net promoter score to help deliver our growth.

We've actually pulled the data and so this was a profitable company to the tune of kind of high single low double digit profit margins.

Eight 910 years ago and was still on the Ats from an NPS perspective and so.

There is a keen focus on delivering value for the customer and really celebrating.

That customer and that Hasnt changed what we've really focused on as you think of it as infrastructure right. When it comes to the frontline and delivering for the customer that doesn't change when it comes to how we do that behind the scenes back of house.

What we're going to we have focused on will continue to focus on to deliver efficiencies.

Okay, Great got it thank you very much.

Once again, if you would like to ask a question. Please press star one on your telephone keypad.

Next question comes from Pablo <unk> with JP Morgan. Please go ahead.

Hi, good morning.

Any reason why that 18% written premium growth should not carryover to the rest of the year.

Your guidance for the full years of buying a stepped down to about 11% for the subsequent quarters. This year.

It's the seasonality and also how rate increases flow through and so as I said earlier on the call. We we started the year with a little bit of wind behind our sails, so a little bit better than what we expected in terms of written premium growth, but not much its pretty much in line because we did think about exactly when the rate increases flow through in different states.

<unk> is obviously influenced how that flows through as influenced by renewables and so when you.

Planted out over the course of the year with the seasonality and with the rate increases, we still think that that 11% to 13% range makes sense.

Now I feel very comfortable the middle point of that range and hopefully will continue to have a little more wind behind our sails.

But it's a good it's a good estimate for now based on seasonality.

Got it.

And then just moving to the loss ratio.

41% this quarter reflect the higher liability <unk> set up last year I think it was in the third quarter.

Just wanted to check that those specs are carrying through in the current loss ratio that you report.

Yes last year, we took a increase in reserves for liability that did reflect what was going on in terms of inflationary environment, the social inflation inflation.

And so that logic is baked into our setting the loss ratio accruals.

No.

Keep in mind, we did take rate increases as well and the rate increases were heavily weighted towards the liability side and so thats offsetting that increase and it gets us back to the low <unk> that we've talked about this the right loss ratio for the business.

Yep understood and then the last one for me in the press release, you provide a breakdown of the outlook, which is very helpful. I was curious about one line there other income where you're projecting I think about $10 million of income for the year.

Could you talk about what what's in that line. Thank you.

Essentially the earnings on our cash right. So we have both our own cash and then we've got restricted cash some of Thats integrity re some of thats within the MGA entity.

And for the most part it's invested at the very short end of the curve and what's happened with interest rates.

We've made sure that we've.

Adjusted our investments appropriately, but we're now earning significantly more than what we had previously just based on where the right purpose I think it's sort of in the mid fours right now in terms of what we're earning.

Alright, thank you so much.

Okay.

Thank you there are no further questions I would like to turn the floor over to Mikael for closing remarks.

Thank you operator, and thank you to one team Haggerty for your hard work and dedication while we've had to make some tough decisions over the last six months, including the recently announced restructuring I believe we have never been better positioned to capitalize on the latent growth from haggerty as affinity business model, our rapidly growing customer base creates.

The scale benefits that allows us to continue to invest in the products and services that help auto enthusiasts enjoy their passion for fun cars and for driving and importantly, we are executing with discipline that will create the profits needed to reinvest in sustaining these high rates of growth over the coming years and thank you our stakeholders for continuing to.

Support us one more item of note our Greenwich.

Connecticut, Concord Delek, Hans is fast approaching and we plan on hosting an event for investors on the afternoon Friday June 2nd in Greenwich.

We look forward to the opportunity to spend more time with you in person so be on the lookout for more details from US until then never stopped driving.

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

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