Q3 2023 Hagerty Inc Earnings Call
Greetings and welcome to the Haggerty third 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.
On your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jacob I'll Senior Vice President of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone and.
And thank you for joining us to discuss Haggard east results for the third 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 aggregates Investor Relations section of the company's corporate website.
At Investor aggregate Dot com.
Our earnings release and accompanying slides our 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.
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 FCC that got you.
The appendix of the presentation also contains reconciliations of our non-GAAP financial metrics to 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 third quarter 2023 earnings call for.
For classic and enthusiast car owners in November as they look back look forward kind of months. This is one we reminisced about the adventures and misadventures of the past driving season and dream about the spring driving season to come.
At Hanger T. We are deep into planning season, and how we can better serve our members in 2020 for products and services they need to enjoy their vehicles, but.
But I think it's really important for our heme, a 1700 people with aggregate to stop and to celebrate all that we've accomplished over the last 12 months simply put we are successfully executing on the strategy. We set forth at the end of 2022 to significantly improve our profitability without negatively impacting our.
High rates of organic growth.
From a topline perspective.
Twenty-three growth looks a lot like 2022 it better or.
Over the first nine months, we have grown in written premiums by 16% on top of last year's 15% gains.
And total revenue has jumped 28% compared to last year's 27% growth.
There is nothing more powerful thing sustained compounding growth.
The area, where 20 twenty-three looks dramatically different than 2022 is the bottom line.
Last year at this time, we had minimal adjusted EBITDA expense growth was too fast technology spend too great and we werent delivering the flow through you would expect from our rapidly scaling business model built around our great brand.
Fast forward to today during the first nine months of 2023, we have delivered adjusted EBITDA of $78 million a year over year improvement of $78 million. These.
These results would not have been possible without the excellent execution and commitment from our team.
Importantly, we have been taking the actions necessary to further improve margins over the coming years.
I would point out that we are on track to deliver an eight percentage point improvement in our adjusted EBITDA margins. This year. This is even more impressive as we have continued to thoughtfully invest in our long term growth opportunities.
This includes the technology and people necessary to support the rollout of the state Farm Classic program that we launched in September ramped.
Ramped up technology spend as we build out haggerty as online marketplace and additional tech investments, we are making and the insurance technology platform implementation that will position <unk> to drive strong flow through of incremental revenue into the incremental profits over the coming years.
Well, let's now dig into a few key highlights of our year to date results shown on slide three of our investor deck.
This concludes.
A total revenue jumped 28% during the first nine months of 2000 $23 million to $755 million.
Written premiums grew 16% in commission revenue grew 18% on strong underwriting results.
The Haggerty brand and value proposition is resonating with consumers, we're seeing double digit rate increases as the industry endorsed unprecedented inflationary pressures.
In our risk taking entity Haggerty reinsurance earned premium over the first nine months jumped 32% due to the growth in written premium and our increased level of quota share to 80% as we assume more of the risk and premium associated with our stable underwriting capabilities. We.
We're largely through what has thus far been an uneventful cat season in the Atlantic.
Membership marketplace and other revenue increased 47% during the first nine months. This high rate of growth was fueled by 20% growth in membership revenue, thanks, largely to new member growth and $25 million of marketplace revenue described on slide four.
We believe our membership business known as Haggerty drivers club is an extra gear for our insurance business are helping fuel high customer satisfaction and retention.
$70 annual fee gives members access to white glove flatbed, telling a subscription to our award winning magazine discounts on goods services and events full access to our evaluation tools built through decades of experience and a global membership community that fosters real life human interactions around members shared.
Passion for automobiles.
Finally regarding state farm, we are pleased to report that the program launched in four initial states in September.
State farm agents in these states are beginning to sell new policies, along with aggregate drivers club memberships and we will begin to convert their existing classic car program members. The new classic plus program administered by Haggerty as we move through 2020 four.
Let me now I'll move on to slide six where we have again increased our 'twenty twenty-three expectations for written premium growth now expected to be 15% to 16%.
Resulting in total revenue growth of 26% to 27%.
On the bottom line, we have driven 10 points of adjusted EBITDA margin expansion over the first nine months given the year to date performance and our trajectory as we head into the seasonally small fourth quarter. We are also increasing our EBITDA expectations for 2023.
For context, we began the year expecting $40 million to $60 million and adjusted EBITDA, and we now anticipate delivering $75 million to $85 million roughly 60% higher than our initial guidance.
We are also continuing our evolution towards becoming a fully integrated insurance business with a M. Best recent announcement that we have received a financial strength rating of a minus excellent for haggerty reinsurance. This is a great outcome right out of the gate.
We began this journey a decade ago, when we inked the original agreement with Markel and moved into a quota share arrangement, assuming more of the premium from our underwriting creating another profit stream for the company beyond the commission revenue.
In summary, we are creating a visible path to becoming a leaner stronger and more profitable company that can self fund our high rates of growth year after year.
Yeah.
Our productivity initiatives will drive strong cash flow generation over the coming years on top of the $132 million a year to date operating cash flow.
Cash flow combined with this summer's capital raise of $105 million positions us to continue to invest and to execute on our long term growth ambitions and to allow us to save driving end to fuel car culture for future generations.
Let me now turn the call over to Patrick to cover the third quarter financials in more detail.
Thank you Mikael and good morning, everyone Mckeel shared some of the highlights from the first nine months, so let's dig into the third quarter results shown on slide seven and eight.
In the third quarter, we delivered 27% growth in total revenue to 276 million with written premium growth of 15% powered by robust growth from the new business count any bump in retention.
Commission and fee revenue grew 21% to $103 million due to the written premium games and the normalization of contingent underwriting commissions.
Absence of Hurricanes in.
Membership marketplace, and other revenue jumped 37% to $33 million versus the third quarter of 2022.
<unk> full ownership with a broader group.
Marketplace revenue came in 6 million higher due in parts of the progressive ramp of our online marketplace.
Earned premium grew 30% to $140 million driven by new written premium growth and a 10 point increase in our contractual reinsurance quota share in 2023 to <unk> 80 per cent.
Our loss ratio came in at 41% consistent with historical levels, we deliver stable underwriting results in large part due to the passion and care that our members described their prized possessions.
Now turning to profitability shown on slide nine we reported a third quarter operating profit of $16 million, an increase of $37 million over the prior year period.
Operating profit included a $4 million loss and impairment related to the termination of the garage and social joint venture and failed drive share.
These actions resulted from the strategic review of our business and our decision to focus our people and resources on the clear opportunities to profitably grow our insurance membership and marketplace businesses.
In the aggregate, we delivered third quarter net income of $19 million compared to 24 million a year earlier in 2022 net income of 24 million benefited from a $35 million revaluation gain related to buying the rest of brought Arrow group as.
As well as an $11 million swing and fair value adjustment related to our private and public warrants.
So the underlying business produced meaningfully improved net income results, primarily driven by the significantly improved operating margins as we successfully execute on our profitable growth ambitions.
GAAP earnings per share was <unk> <unk> based on 84 million weighted average shares of class a stock outstanding.
Our adjusted EBITDA during the third quarter was 37 million a $47 million improvement over the $10 million loss in the prior year period.
And operating cash flow in the third quarter jumped 83% to $62 million.
Let me now move on to our revised 2023 outlook, which we've increased for the third straight quarter. This year shown on slide 10.
As <unk> mentioned, given the consistently strong and visible top line momentum in our business, we are increasing our outlook for total revenue growth to 26% to 27%.
Powered by written premium growth of 15% to 16%.
As we add around a quarter of a million new members in 2023.
Moving down the P&L, we have again increased our profit expectations for the full year.
Now expect positive net income of $2 million to $12 million in full year, adjusted EBITDA of $75 million to $85 million.
In summary, we are delivering exactly what we set out to do a year ago as we began planning for 2023.
We've been able to maintain our top line momentum while implementing actions that are driving a swift return towards historical double digit margins.
Importantly, we are taking the steps necessary to sustain these high rates of growth and flow through to the bottom line over the coming years 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 that the question queue. You May press star two if he 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 keys.
Your first question comes from Greg Peters with Raymond James. Please go ahead.
Hey, Good morning, this is Sid on for Greg.
First off I believe I read something from Haggerty insider on the strength of the collectible car market weakening a bit this year. So just curious on how the strength of the market may or may not affect the results of your marketplace.
Oh, Thank you and where we're really pleased to be able to continue publishing.
And our insights into the market place and and we think it's a it really helps people make informed decisions about buying and selling.
We definitely saw a softening at the top end of the car market starting back in Monterey in August.
There are virtually all of the live auctions Hum.
So, it's a little bit of softness as well as yeah.
I'm kind of weakening interest in the top top end of the market. However, the resilience around people continuing to hold on to their vehicles build their collections.
Remains so it might slow down a little bit of the volume at the top end.
But we're not really seeing a significant change in how we can go forward and build out a larger calendar of events for the future years that being said, we're going to be really careful to make sure that this new business that delivers exactly what we needed to do going forward.
Okay. Yeah. It makes sense and then just curious on the increased guidance for the year. When we go back to the original adjusted EBITDA guidance compared now can we or can you just discuss.
What has come in better than expected this year relative to the original expectations.
Well, its really kind of up and down the P&L. So from a revenue standpoint, our written premium growth is a bit higher than what we'd expected a new business count is a bit higher than what we'd expected. So the underlying strength in our core insurance businesses a key driver.
And then as you move down the P&L we.
We did take additional costs out so we we had a restructuring in the first quarter of this year that was not contemplated.
In the original guidance and then we kept pushing to make sure that we're being as disciplined as possible.
And making sure the benefits of that restructuring flowed through so a better topline performance.
Some changes on the cost structure, keeping discipline on the cost structure. We've had a good first three quarters of the year and the way the fourth quarter started October was another strong month consistent with what we saw.
Earlier in the year and we continue to feel good about the parents right now and that gave that put us in a position where we're confident to tighten up the top end of the range on some of the guidance and then increase the range on EBITDA.
Alright, thanks for the answers.
Next question, Dan, Let's put off with Dowling and partners. Please go ahead.
Hey, guys good morning.
It's good to hear the progress on the state farm partnership, but just curious can you discuss other similar opportunities that you see anything on the pipeline.
Oh. Thank you Yeah, we were very excited to after a lot of work getting state farm up and running and launched in and continuing to test that of all the wiring to make sure that it can work well going forward with a large large expected volume of business coming in.
We have a.
Number of.
Other discussions in the pipeline.
We're not announcing any of them yet, but we're we're definitely working on some of these where we're mindful of the fact that the larger industry is very very focused on their own sometimes challenged results, but you know.
Even with our existing partners and we work with many of the largest insurance distributors out. There is that you know haggerty is open for business. We're here to help take care of there.
Specialty vehicle needs and that's opening up new opportunities ways that we think we can expand our offerings for them to stay on the.
The types of vehicles.
That they previously would've thought of as being in our categories. So we're feeling quite good about it and look forward to talking about maybe some additional names on the list in the coming year.
Okay.
Thanks interesting Ed.
And they are not sure to which extent you guys track. This but just curious how your loss ratio profile of comparison between a classic cars and collectible cars. So enthusiastic cars, if you will and and I get that you you you probably try to price.
Price them, so they're a level but.
Maybe in terms of volatility do you see the loss ratio and collectibles for example, being more volatile than the classic portfolio.
Well thank you.
We are the main business the biggest part of our business is in that kind of classic collectible car real vintage cars and the beauty of it is the stability of it it's it's not volatile at all the underlying.
In physical damage loss ratios remain the you know really very steady and in fact this year a return to our historic levels.
And on the liability side, which we discussed in previous calls had some.
Worst results of last year largely due to.
Several years of liability claims coming through due to the pandemic in a one year period of time those two have been landing really right on expectations. So that's a steady steady book of business. When it comes to loss ratio and anything that would look like volatility and I think that's proving out this year very nicely.
Yeah, definitely, particularly given the severity trends that we've seen this year, but so it's I'm clear on the classics, but how about collectibles I know you have.
A small market share in an and and not segment, but just curious if if the loss ratio profile very similar to classics at all and how you do D. I just want to make sure I'm under understanding the question. So yes, I mean, the way we look at it and the way we thought we'd spend a lot of time talking about our total addressable market.
We make a differentiation between vehicles pre 1981, and all of those 1981 and earlier are.
You know, what we'd call classic or collectible cars kind of vintage collector cars and that's that's the big stable book the newest part of our business is in this post 1981 vehicle segment.
And you know, we're seeing more and more and more of that from a consumer demand standpoint.
A lot of our new business volumes are coming from that segment and while we have a lesser penetration there and that larger market. It's mostly because it's we've just we've been in business for almost 40 years and so the bulk of the business that big renewing book every year is the.
Is that older classic collectible we refer to this this newer segment generically as enthusiastic vehicles. So that is not a word that is used out in a car world to refer to anything we use it it doesn't yeah, no one will say hey, I have an enthusiast car.
No.
For us we referred to that as enthusiast vehicles and it too is it's performing very very well of course.
Now post 1981 these vehicles are our.
You know not as new as we might think sometimes so where we're.
We're happy with both of those segments I Hope I hope that's answering I'm just trying to clarify terms yeah. That's helpful. Thank you.
Thanks for the answer.
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 Jpmorgan. Please go ahead.
Hi, Thank you. So the first question is to what extent this hagrid feasibility Ricky this is influenced by a disruption in the boat or personal lines market right whether it's.
Customers seeing large increases under renewals or insurers not willing to write business in certain states.
Hey, Pablo it's Patrick who is doing well so I just want make sure I got it. So I think you're asking it's a it's a challenging broader market for standard auto and what implications that has for our bill rate right you bet.
It did extent that you partner with these institutions and you might use the same distributors right recognizing that you have a different book, but there is some there's still some interconnection.
Got it.
I'm still not sure I'm just.
I think what Paul was asking is disrupted market that has implications for standard auto we're in partnership with each of these does it have implications for our ability to grow with them is that fair Pablo.
That's exactly right.
Yeah, Okay. So yeah no. Thank you and it's a good question and the disruption has really been almost two years long so but you know, let's just be clear about it we definitely saw.
Changes in house.
How some of our Big partners you know, we're reacting to the market last year of 2022, they're very very focused on their own results in their own growth.
That being said.
We're we're we're talking about agency companies companies that work with agents that are there big the big hole Classic you know captive agency businesses those agents still need access to grow. There's you know they're trying to manage the loss ratios in their book, there, but worried about availability in certain markets like California, but we've still been open for business with them.
You know even in states like California, So in many cases, where some of the big companies and their agents are all kind of struggling to maintain their renewals, we'd been a kind of a bright spot for them and so we know where our growth. This year is.
It's even across all lives and works for all distribution points I referred to it as our omni channel direct agent and broker and then we kind of break out those big partnerships, where we get larger and larger flow through of the business. So it's.
It's.
We're open for business and it's going well for us.
Got it that's helpful Backroom Mchugh.
And then the second question is just on the CLO drive sharing a garage social.
What kind of go forward impact will that have on.
EBITDA right I'm, assuming you know these are not highly profitable businesses in their tiny but any perspective, you can provide on the impact of those sales going forward.
Yes, you'll see in the disclosure.
There was a restructuring charge that we took are domestic charge that we took related to those just north of $4 million and both garage in social and drive share were lossmaking. So it will be accretive to EBITDA.
Okay.
And then the last question I had.
Maybe for you Patrick just.
Hoping you can give some perspective on you know what run rate investment income looks for you. These days right. So maybe just talk about how much you know investable cash or do you have in the balance sheet and what sort of yields are you getting thank you.
Yes, the easiest way to think about it is just look at the cash with integrity re and focus on what.
It wasn't haggerty rates, both the restricted and unrestricted and it's in the neighborhood of $600 million worth of assets and right now where we're invested heavily in cash like instruments, but that means you're earning five five and a quarter per cent and so that'll give you a sense of what the current run rate is and then.
For now we're going to stick with things that are cash like so you know what you can earn cash bounces around you'll be able to calculate what our run rate earnings would be it's very simple and straightforward right now.
Alright, perfect. Thank you.
There are no further questions at this time I would like to turn the floor over to the keel for closing comments.
Thank you operator, and thank you for those who ask questions and thanks to all of you for your continued support and interest in aggregate are we.
We have a unique and highly differentiated that differentiated business model that is just beginning to hit its stride as we help consumers protect buy sell and enjoy their prized vehicles.
Commissioner Bowl revenue as our high growth insurance distributor is the backbone of haggerty supported by our membership proposition and we'll continue to be a primary profit driver given expectations for a sustained double digit growth through our omni channel distribution.
Our marketplace is in its infancy, but we're very encouraged by the first year results and ability to deliver profitable growth and our move towards controlling our destiny and reducing frictional costs as a full stack insurer will allow us to capture more of the profits from our strong and stable underwriting results.
We have delivered consistent low to mid teens written premium growth over the last decade, and the financial rigor we have implemented over the last year is allowing us to maintain these high rates of growth while delivering the bottom line results that will fund our growth ambitions and create value for shareholders over the coming years.
Thanks, again to our amazing team members at Haggerty, and we are excited to share more thoughts with you all on the good things to come in 2024 on our next earnings call until then never stopped driving.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
[music].