Q2 2023 Hagerty Inc Earnings Call
Greetings and welcome to the Haggerty second 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 Mr. Jay Koval head of Investor Relations. Thank you Sir you may begin.
Thank you operator, good morning, everyone and thank you for joining us to discuss hagrid. These results for the second quarter of 2023.
I'm joined this morning by Mckeel, Haggerty, Chief Executive Officer, and Patrick No climate, Chief Financial Officer.
During this mornings conference call, we will refer to an accompanying presentation that is available on haggerty its investor Relations section of the company's corporate website at Investor Dot Hagrid Dot com.
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 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 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 at SEC 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 will 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 second quarter 2023 earnings call.
Haggerty has a track record of delivering double digit written premium growth over the last two decades and one team Haggerty has been hard at work positioning the company to sustain these high rates of growth over the coming years.
We do this by solving problems for car lovers through providing the products and services that these enthusiasts need to enjoy their prized possessions.
So I'm proud to report that we continued to deliver robust top line momentum during the first half of 2023 fueled by high teens written premium growth and.
And we significantly grew profitability despite ramped up technology spend as we build out our buy and sell marketplace and prepare to launch the state farm commercial partnership over the coming months.
Let's dig into the first half results shown on slide three of our investor deck, including.
Total revenue jumped 28% during the first six months of 2000 $23 million to $480 million.
Written premiums and commission revenue both grew 17% during the first half.
The Henry brand is strong and our superior value proposition is resonating with consumers and in industry suffering from unprecedented inflationary pressures in fact in the first half of 2023, we added a record number of new policies, surpassing the very robust numbers, we delivered during 2021.
And our risk taking entity Haggerty reinsurance first half earned premium jumped 34% 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 premium associated with our strong and stable underwriting capabilities.
Membership marketplace and other revenue increased 53% during the first six months.
This growth was fueled by 20% membership growth $12 million of marketplace revenue described on slide four and a 12% increase in other revenue, including sponsorship and event admission revenue.
Finally regarding our commercial partnership with state farm shown on slide five we are excited to announce that we will soon begin writing new policies and for initial states under the 10 year agreement.
Good things take time, and we are confident that the state farm Classic plus program is the beginning of a very fruitful commercial partnership.
It will be a win win for both companies.
Now over the last several calls we have talked at length about our intense focus on managing expense growth. So that we can return to historic levels of double digit profitability in short order.
We are pleased to announce that our year over year margin improvement is running ahead of expectations.
First half adjusted EBITDA of $41 million increased $31 million and we also delivered positive operating income and net income during the six first six months of 2023.
Our team is executing well on our profitable growth ambitions and we are positioned to deliver on our 2023 key initiatives shown on slide six.
As a reminder, they include.
First <unk>.
Delivering high rates of revenue growth powered by a sustained double digit written premium games as well as incremental revenue from membership and marketplace.
Delivering high rates of revenue growth powered by a sustained double digit written premium games as well as incremental revenue from membership and marketplace.
Given the strong first half results and continued business momentum, we are increasing full year revenue growth expectations to 23% to 27% fueled.
Fueled by written premium growth of 13% to 15%.
Second.
Continuing our evolution into a vertically integrated insurance business.
We believe this will create meaningful value for consumers as we increase our control, while reducing the frictional costs inherent in our current structure.
And third significantly improving the profitability of our business through cost containment and operational efficiencies given.
Given the strength of our first half results, we are upgrading our full year outlook for adjusted EBITDA to a range of $60 million to $80 million, which implies over seven points of margin expansion from 2022.
In summary, we are on a path to becoming a leaner stronger and more profitable company that can self fund these high rates of growth are.
Productivity initiatives will drive cash flow generation over the coming years, which when combined with our recent capital raise of $105 million should position us to continue to invest and to execute on our long term growth ambitions.
And to allow us to save driving a car culture for future generations.
We believe this strategy will create value for our stakeholders, including members partners and investors.
Let me now turn the call over to Patrick to cover the financials in more detail.
Thank you Mikael and good morning, everyone Mckeel shared some of the first half figures. So let's dig into the second quarter results shown on slide seven and eight.
We delivered 27% growth in total revenue in the second quarter to $261 million with written premium growth of 16% and large gains in marketplace and membership.
<unk> brand strength can be seen in the 88% retention and quality of written premium growth with strong contributions from new business count and rate.
Commission and fee revenue grew 15% to $110 million due to the written premium games.
Membership marketplace and other revenue jumped 44% to $24 million.
Fitting from an increase in total paid members a transition to single tier pricing for membership at $70 per year, and an additional $5 million in marketplace revenue from the successful Porsche 75th anniversary auction in June .
And growing contribution from our online marketplace.
Earned premium grew 35% to $127 million driven by new written premium growth and another 10 point increase in our contractual reinsurance quota share in 2023 to roughly 80%.
Our loss ratio, including cats came in at a stable 42%.
Our book performs differently from daily drivers, because our customers take good care of their choice.
Now turning to profitability shown on slide nine we reported a second quarter operating profit of $17 million, an increase of $15 million over the prior year period.
Operating profit. This quarter also included a $3 million charge, primarily related to the impairment of leases where facilities. We are no longer using and are actively working to sublease.
In the aggregate, we delivered second quarter net income of $16 million compared to a net loss of $6 million a year earlier.
Year over year change in net income was primarily driven by the significantly improved operating margin as we successfully execute on our profitable growth ambitions.
Net income also includes the $4 million swing and fair value adjustment related to our private and public warrants.
GAAP earnings per share was <unk> <unk> based.
Based on our 84 million weighted average shares of class a common stock outstanding.
Our adjusted EBITDA during the second quarter was $34 million and $18 million improvement over the $16 million in the prior year period.
Okay.
Let me now move on to our upgraded 2023 outlook shown on slide 10.
As <unk> mentioned, given this consistently strong and visible topline momentum in our business.
We are increasing our outlook for total revenue growth to a range of 23% 27%.
Howard by written premium growth of 13% to 15%.
Two points higher than previously anticipated.
Our rate increases are locked and loaded and the Haggerty brand is on track to add a record quarter of 1 million new members in 2023, creating a powerful base of auto enthusiasts to provide our products and services.
Moving down the P&L, we have again increased our profit expectations for the full year.
We now expect net income in a range of negative $12 million to positive $8 million.
In full year, adjusted EBITDA of $60 million to $80 million 5 billion higher than prior EBITDA expectations of $55 million to $75 million.
Before I wrap up I wanted to highlight slide 11, which share some additional details related to the $105 million capital raise from strategic investors at the end of June .
We raised $80 million of convertible preferred equity at higher anything including $50 million from state farm to support our growth initiatives.
This includes our continued evolution into a lower cost full stack carrier with the products that allow us to widen the aperture of our underwriting while maintaining historical combined ratios.
We also have a $25 million commitment of long term debt financing from state farm for equity raise.
This capital tops off our cash and liquidity positioning us to progress to a self sustaining cash generating model and demonstrates the conviction of our strategic investors.
In summary, we are well on our way towards achieving our 2023 plan for strong revenue growth and margin expansion.
Accordingly, we are laying the groundwork that will power our results over the coming years as we look to sustain our commission growth add incremental profits from assuming more of the risks from our stable underwriting while also building out our marketplace platform.
With that let US now open the call to your questions.
Thank you, we'll 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 my question queue. You May press star two if you'd 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 keys.
One moment please poll for your questions.
Our first question comes from the line of Mark Hughes with <unk> Securities. Please proceed with your question.
Yeah. Thanks, good morning.
Good morning, Mark Patrick you mentioned the rate increases are locked and loaded kind of refresh me on what you are getting in terms of rate the average rate these days.
It's the way to think about 2023.
We're guiding to now in terms of total written premium growth sort of mid teens.
And of that kind of two thirds of it is coming from rate and the bond was from volume. So think about right. As you know I single touching double digit rate increase and then the balance is coming from growth in units.
How much.
Perhaps youre being helped in terms of unit or perhaps not by just the dislocation in the broader.
Personal lines market.
Maybe the appetite of some of your competitors is not what it used to be and so therefore youre seeing more.
As the holders migrate to your alternative.
Is that dynamic.
There is some evidence of that so the appetite is.
Reflected in rate, obviously, and so rates are going up across the board and that is causing some folks to shop and so.
One, we're winning new business and when we can track what's going on in the customers give us the information yes. Some of it is the fact that our rates are viewed as quite competitive right now based on what's going on more broadly in the market.
Yeah Yeah.
And then the.
Line marketplace, it's kind of give us the update.
Update of your.
Growth there.
Yes.
Mark Mchugh.
Mckeel here, where we're actually very very pleased.
Trying to do at that team is balanced this balance of.
Sell through rates and the amount of competitive bidding for a lot. So we started off with a steady drumbeat of sort of one car per day call. It and now we're touching three a week.
We've also started testing rolling through larger groups of cars that spill out over a period of days.
And the idea is to make sure for the Consignor is that we maintain that level of strong bidding and getting above their estimates when it comes to our reserving kind of practice so.
We're very very pleased with it and we look forward to seeing that kind of growth continuing ahead. So.
Good stuff and I guess I would say one more thing about.
The digital auction platform and this is being developed completely by our own digital product teams and we are rolling out new features new capabilities every two weeks and that kind of sort of traditional agile sprint methodology.
Understood. Thank you.
Thanks Mark.
Thank you. Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.
Hey, Good morning, this is Sid on for Greg.
I believe last quarter, you mentioned your book is skewed more towards physical damage and it.
It seems like physical damage has been more sticky for some of the larger more traditional auto carriers and understanding your target customer is different but with the loss ratio ticking up this quarter I'm just curious to hear your perspective on what Youre seeing there.
Okay.
When you say, it's sticky can you just clarify kind of what I wasn't quite sure. There said can you help me.
Yeah. It seems like from just some of the disclosures we've seen it seems like physical damage just continues to run a little bit higher from a severity perspective than some of the other components.
Look our mix at 75% is physical damage, 25% liability when you look at our losses over time, and so we do skew very differently.
We're experiencing right now is.
Our loss ratio, we think is in a very good spot.
We did see some liability pressure last year, we talked about that.
We strengthened our reserves for that earlier this year.
We're not seeing that now we're seeing liability with the rate increases we're getting are flowing through and so we're not seeing that same liability pressure right now and then on the severity side, yes inflation and things are more expensive.
But we're right back to that low <unk> loss ratio so in a good spot.
Alright, thank you.
Thanks, Ed I appreciate it.
Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment may be necessary to pick up your handset before passing excuse me before pressing the star Keys. Our next question comes from the line of Pablo <unk> with Jpmorgan. Please proceed with your question.
Hi, Good morning. So your investment income is picked up and I think youll incur incremental financing costs over the balance of the year just given the capital raise.
Can you talk through your expectations for those items and I suppose I was looking at your guidance I think net income went up by 1 million EBIT by five.
Is the gap there all financing.
Well then it becomes so tricky for us because there's so many different pieces to it and we've got to warrant liability we get the noncontrolling interest. So it's it's difficult to give sort of a quick reconciliation.
Do you do raise a good point, which is we're now earning.
On our cash balances both within <unk>.
The MGA business and Haggerty read where earnings pretty significant interest income right now just based on where interest rates are and where.
Very safely invested in very short term, but the rate increase is really benefiting us and so we will see that youll see that our net.
That net interest income line is it going to continue to be positive.
On the financing actually type of capital raise because its convertible preferred.
So there is a dividend associated with that but thats not hitting that interest income line alright. So we actually use that capital in the short term to pay off some revolver. So we're saving on interest income and then we've got the benefit of higher rates right now and so you'll continue to see a positive on that line for the balance of the year.
Pablo I'm happy to follow up you do after the call on some of the moving parts, but do you also see the restructuring line.
Is $3 million for the quarter, which would net income.
Adjusted EBITDA, so that accounts for the majority of that Delta.
Yes, yes that makes sense. Thanks, and then the second question I guess here Patrick.
Just on expenses right I think you've demonstrated good cost control here.
The question I had is how do you see the cost will be trending from here I guess in dollar terms right as the impact of your cost savings work their way through the P&L then.
Looking forward as you continue to invest for growth.
Our research with trough here and you know maybe expenses start going reasonably from here.
Well if you look if you look at the numbers.
The line items in 2023 that we really focused on are you trying to make to bend that cost curve would be salaries and benefits.
The year over year were up 0.6% right. So I.
I think really strong accomplishment there.
And then G&A, it's only up two 8% year over year. So.
All the steps that we took to take cost out of the business and try to bend that cost curve are really paying off.
And that's going to continue we're starting the budgeting process in the next month or so for 2024, and we will give guidance on how things come together. The early part of next year, but we're really focused on driving margin expansion.
We've turned the corner right. So we will produce a profit this year it'll be modest and we wanted to do is continue to expand margins in 2020 for some of that will be top line growth rate. This business incredibly gross written premium in the mid teens and you've got a marketplace business that's growing quite quickly.
So theres just operating leverage that comes from that that'll help with margin expansion, but we're going to keep focused on keeping the cost under control.
Okay, and then last for me Patrick you had mentioned.
Rick benefit contributing about two thirds of premium growth.
Great benefits, including the increase in the values for the vehicles.
Yeah that would be baked into that although theres not a lot of valuation change right now going on.
Okay. Thank you.
Thank you we have reached the end of our question and answer session I would like to turn the call back over to Mr. Hegarty for any closing remarks.
Thank you operator, and thanks to all of you for your continued support we are once again operating from a position of strength.
One team Haggerty is providing unparalleled customer service for auto enthusiasts. This results in an industry, leading net promoter score of 83, which helps fuel retention and new business. Our omnichannel distribution allows us to capitalize on this brand strength through haggerty as direct to consumer channel as well as cultivating new commercial partnerships.
Such as our state farm partnership.
And we are well on our way towards delivering the bottom line growth that will fund our growth ambitions and creating value for our shareholders. We hope to see as many of you as we can and Monterey next week for the car festivities that includes the Pebble Beach Concorde in Monterey historic races in our very own gathering called motor Lux, and if you're out that direction.
Please look us up but until then never stop driving.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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