Hagerty, Inc. (NYSE:HGTY) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Greetings, and welcome to the Hagerty 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Koval. Please go ahead.

Jason Koval: Thank you, operator, and good morning, everyone. Thank you for joining us to discuss Hagerty’s results for the first quarter of 2023. I’m joined this morning by McKeel Hagerty, Chief Executive Officer; and Patrick McClymont, Chief Financial Officer. During this morning’s conference call, we will refer to an accompanying presentation that is available on Hagerty’s Investor Relations section of the company’s corporate website at investor.hagerty.com. Our earnings release, accompanying slides and letter to stockholders covering this period are also posted on the IR website. 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 2 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 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’ll turn the call over to McKeel, our Founder and CEO.

McKeel Hagerty: Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join our first quarter 2023 earnings call. Over the last 6 months, we have been working diligently to reengineer our business processes with the goal of delivering high rates of 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 couldn’t be prouder of the Hagerty team and what we have accomplished over the first three months of 2023. Slide 3 of our investor deck shares 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 the full year’s revenue, we are encouraged by the solid consumer interest in Hagerty suite of products.

In our risk-taking entity, Hagerty Reinsurance, premiums jumped 32% due to the growth in written premium and our increased level of quota share of 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, $7 million of marketplace revenue, as seen on Slide 4, and a 32% increase in other revenue, including sponsorships. And our team continues to make steady progress with the State Farm integrating, shown on Slide 5, on both the technology side and the people side as the teams prepare to begin writing new policies under the 10-year agreement later in 2023. In short, we have a powerful growth story, and our top-line 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’s period of $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 6; including, first, delivering high rates of revenue growth powered by sustained double-digit written premium gains and incremental revenue from membership and marketplace.

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

Patrick McClymont: Thanks, McKeel, and good morning, everyone. Let’s dig into the strong results from the first quarter shown on Slides 7 and 8. As McKeel mentioned, we delivered 30% growth in total revenue, including strong gains in core insurance, marketplace and membership. Written premium increased 18%, in line with our expectations for a very strong start to the year. Hagerty’s 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. Commission and 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, a transition to a single-tier membership at $70 and 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 9, we reported a fourth quarter operating loss of $16 million, compared to a loss of $13 million in the prior period. This operating loss included a $6 million restructuring charge related to the reduction in force that we implemented in the quarter, which 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 6 months ago to drive significantly improved profitability during the coming years and should result in additional annualized cost savings of $20 million to $25 million, of which we expect to realize roughly $15 million over the balance of 2023. 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 Hagerty Media, we will continue to leverage this high-quality content as an effective way to bring in new customers and drive engagement across the Hagerty ecosystem. Net loss for the quarter was $17 million (sic) [$15 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 $0.06 based on our 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. The year-over-year improvement in adjusted EBITDA is a result of continued growth, compared 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 on to our 2023 outlook shown on Slide 10. As McKeel 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 Hagerty brand is on track to add another 0.25 million members in 2023, creating a growing base of auto enthusiast to provide products and services. Moving down the P&L. We now expect full year adjusted EBITDA of $55 million 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 have judiciously removed back-of-the-house costs 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.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Mark Hughes with Truist. Please go ahead.

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

Operator: Next question, [Edward Riley] [ph] with [indiscernible]. Please go ahead.

Operator: [Operator Instructions] Next question comes from Pablo Singzon with JPMorgan. Please go ahead.

Operator: Thank you. There are no further questions. I would like to turn the floor over to McKeel for closing remarks.

McKeel Hagerty: Thank you, operator, and thank you to One Team Hagerty for your hard work and dedication. Well, we’ve had to make some tough decisions over the last 6 months, including the recently announced restructuring. I believe we have never been better positioned to capitalize on the latent growth from Hagerty’s 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 enthusiast enjoy their passion for fun cars and for driving. And importantly, we’re executing with the discipline that will create the profits needed to reinvest and 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 and our Concours d’Elegance is fast approaching, and we plan on hosting an event for investor on the afternoon of Friday June 2 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 stop driving.

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