Hagerty, Inc. (NYSE:HGTY) Q4 2022 Earnings Call Transcript

Hagerty, Inc. (NYSE:HGTY) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Greetings, and welcome to Hagerty Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Koval, Senior Vice President of Investor Relations. Thank you. You may begin.

Jay Koval: Thank you, operator. Good morning everyone and thank you all for joining us to discuss Hagerty’s Results for the Fourth Quarter and Full-Year of 2022, as well as our outlook for 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 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 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 Hagerty, our Founder and CEO.

McKeel Hagerty: Thanks, Jay, and good morning, everyone. We appreciate you taking the time to learn more about Hagerty’s first year results as a public company. We have spent the last several decades building Hagerty into one of the most beloved consumer brands in the auto enthusiasts space. And we believe our affinity model uniquely positions us to provide our members with the products and services to help them enjoy their passion for fun cars and for driving. For 2022, our results are proof that the love of the automobile persists regardless of the economic backdrop. Slide 3 of our investor deck shares some of the key insights. They include, total revenue gains of 27% for the full-year towards the high-end of the outlook we shared with you a year ago.

This growth was powered by compounding mid-teens written premium growth strong contributions from Hagerty Re’s higher quota share, reinsurance arrangements, and 5 months of revenue our marketplace platform. Written Premium growth of 15% was in-line with our expectations and well-balanced between growth and increasing rate. Hagerty’s brand strength and value proposition is evident in the 235,000 new insurance policies issued during the year. Membership and marketplace revenue jumped 50%, due primarily to $14 million in incremental marketplace revenue, including 86 million in transacted vehicle value from three live auctions as seen on Slide 4. And our team continued to make steady progress with the State Farm integration shown on Slide 5 on both the technology and people side.

We anticipate all to be complete this spring and to begin writing new policies later in 2023. This 10-year initial arrangement will drive meaningful scale and growth for Hagerty as we move into 2024. Our highly differentiated business strategy results in a powerful recurring revenue model and we believe our top line growth reflects the solid execution by the Hagerty team during uncertain times. Net promoter score improved slightly in the year to , nearly double the industry average and retention of 88% remained solid, despite the elevated transactional market for vehicles. The Hagerty brand is revered by those that know it and we believe we can create meaningful value for shareholders through steadily chipping away at the 96% of the total addressable market that we don’t yet serve through our omnichannel distribution strategy.

This brings me to our key 2023 initiatives as we pivot to significantly improve our profitability shown on Slide 6. First, we look to continue our track record of strong total revenue growth powered by sustained double-digit written premium gains. Our teams are also highly focused on delivering an unmatched online and live marketplace experience, as well as driving loyalty referrals and incremental revenue from Hagerty Driver’s Club, our membership business. Second, we will continue Hagerty’s evolution into an integrated insurance business, including an increase in Hagerty Re’s quota share reinsurance agreements in the U.S. and UK to 80%. And third, we will do the above with significantly improved profitability through cost containment and operational efficiencies.

Let me expand on that final point because it reflects the single largest change we are making from 2022 to 2023 as we transition toward profitability. As you know, we have been investing heavily in our technology and people over the last 3 years to best position the company to capitalize on the opportunity within the auto enthusiast space. This includes making meaningful investments as we prepare for the State Farm launch later this year and build out , both of which have the potential to drive strong incremental profits for the company. But in 2023, we are adding heightened discipline around our costs and capital. So, we began to implement some major actions during the fourth quarter that we believe will allow us to return to profitability in short order.

This includes a reduction in force and voluntary retirement program, along with an overhaul of our IT teams, not to mention increased prioritization of resources against our 2023 initiatives, which leads me to Slide 7, a summary of the 2023 outlook. We expect 2023 to be another year of strong top line momentum up to 22% to 26% and fueled by 11% to 13% growth in written premiums. With our productivity initiatives well underway, we anticipate delivering $40 million to $60 million in adjusted EBITDA in 2023, equivalent to a $50 million year-over-year improvement at the midpoint. Let me now turn the call back over to Patrick to go through our financials in more detail.

Patrick McClymont: Thank you McKeel, and good morning, everyone. Let’s dig into some of the numbers from the fourth quarter and full-year 2022 shown on Slide 8. We delivered solid growth across all revenue streams. On a year-over-year basis for the fourth quarter, total revenue grew 28% to 197 million, powered by total written premium growth of 15% to 162 million. Commission and fee revenue grew 11% to 64 million. Membership marketplace and other revenue increased 56% to 21 million, benefiting from an increase in total paid members and an additional 6 million in marketplace revenue. Earned premium grew 35% to 112 million, driven by new written premium growth, policy retention of 88%, and a 10 point increase in our contractual reinsurance quota share to 70%, and our loss ratio returned to 41% in the quarter.

Turning to profitability on Slide 9, we reported a fourth quarter operating loss of 36 million, compared to a loss of 21 million in the prior year period. This operating loss includes an $18 million restructuring charge related to the actions we implemented in the fourth quarter to drive enhanced profitability. It’s worth noting that the operating loss before restructuring charges was $4 million better than the prior year’s fourth quarter. Net loss for the quarter was 33 million, compared to a net loss of 66 million a year earlier. Net loss includes a fair value adjustment of $4 million related to our private and public warrants. GAAP loss per share was $0.06 based on our weighted average shares of Class A Common Stock outstanding. Our adjusted EBITDA in the fourth quarter was a loss of 2 million, slightly better than the 3 million loss in the prior year period.

Slide 10 summarizes the full-year highlights McKeel shared at the beginning of the call. Despite the uncertain economic environment, our top line results were resilient. With total revenue growth of 27% to 788 million, driven by written premium growth of 15% to 777 million. Commission and fee revenue in 2022 grew 13%, slightly below written premium growth as our loss ratio of 45% was elevated due to Hurricane Ian and our decision to increase U.S. reserves, which reduced our contingent underwriting commission. To put this in context, our loss ratio increased by 4 percentage points in 2022, compared to 2021, while industry wide loss ratios increased by over 12 percentage points. This delta reinforces that we operate in a business with a fundamentally different risk profile than daily drivers.

Earned premium jumped 36%, thanks to the increased quota share. Membership, marketplace, and other revenue grew 50% in the full-year. Attach rates for HDC membership exceeded 75% and we are in the early days of building out our online auction business. Full year adjusted EBITDA came in at a loss of 2 million. This EBITDA includes the 16 million impact from Hurricane Ian and the increased reserves in the third quarter. Keep in mind, we also made pre-revenue investments of 30 million and supported State Farm, marketplace, and other initiatives. Let me now move on to the 2023 outlook and share some additional color. As McKeel mentioned, we expect total revenue growth of 22% to 26%. Written Premium growth of 11% to 13% will be powered by an already approved rate increase and continued market share gains.

We are encouraged by the strong start to the year with January and February written premium growth in the high teens and in-line with our expectations for a strong first quarter. We expect the State Farm Written Premium and revenue contribution in 2023 to be immaterial to our full-year outlook. We also focused on marketplace platform as we ramp up our online and live auctions such as our very successful Amelia event with $31 million in vehicles sold, as well as build financing streams from asset based lending. Hagerty is well-positioned to serve consumers as the trusted brand for both buyers and sellers of enthusiast vehicles, offering certification services, title and escrow, and financing options, and other high value services that differentiate our product from competitors.

In membership, we are driving higher average pricing to a single tier membership at $70 per year and we’ll look to better leverage the brand equity earned through decades of excellence in enthusiast insurance to drive more referrals and efficient growth. Hagerty Re’s earned premium loss of benefit from an increased quota share of 80% in 2023 as we evolve into a full staffing share. And Hagerty Re is just beginning to develop meaningful scale with 400 million in capital at year-end, with our loss ratios resulting in a combined ratio of roughly 90%, we have the potential to generate 10% margins and then leverage our per capital 3x to 4x for underwriting future business resulting in very compelling returns on equity. Moving down the P&L, we expect full-year adjusted EBITDA to be $40 million to $60 million.

As McKeel mentioned, this represents a more than $50 million year-over-year improvement at the midpoint as our productivity efforts take hold. Recently implemented pricing actions should drive our loss ratio back towards the 41% level and enhanced profitability. I would note that we expect similar seasonality in 2023 to our historical levels, meaning that the majority of the expected EBITDA will be generated during the second and third quarters. In summary, Hagerty is a growth company consistently delivering top tier revenue growth and we are pivoting the business in our second year as a public company towards the margin and profit structure you would expect from such a beloved brand in a large and fragmented market. Meanwhile, we invest in the long-term strength of the Hagerty brand to sustain these high growth rates in the years ahead.

2023 marks the beginning of this transition to a right size infrastructure that should allow us to return to historic double-digit EBITDA margins and in the process reward our shareholders and allow us to save driving in part culture or future generations. With that, let me open the call up to your questions.

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Q&A Session

Operator: Thank you. Our first question today is coming from Greg Peters of Raymond James. Please go ahead.

Sidney Schultz: Hey, good morning. This is Sid on for Greg. Just wanted to touch on the new business count first. It looks like it ticked down a bit year-over-year. So, maybe you can discuss what’s driving that if it’s just a function of higher pricing or if you’re seeing any behavior changes in the market?

Patrick McClymont: Hi, it’s Patrick. Sid, thanks for joining. Thanks for the question. You’re right. It did tick down a little bit. What we’re seeing in the marketplace, you continued very strong penetration performance with the traditional Hagerty vehicles. So, think of things that are pre-1981, and then we’re ramping up in newer vehicles. And so, our share is really quite low in that category, but we’re seeing more activity on that front. And last year, I’d say that there was probably a little bit more price competition than we’ve seen in previous years. And so, that was a little bit of an impact. We’re really pleased. We think that the 230,000 that we delivered in 2022 is a strong number. We’ll be in that same neighborhood this year. And so between rate growth, which is kind of locked and loaded and new customer growth, we’ll be able to achieve the 11% to 13% written premium growth that we’ve talked about as guidance for this year.

Sidney Schultz: Okay. Yes, great. That makes sense. And then, maybe just a pivot to the loss ratio. So, you’ve been able to pretty consistently deliver a loss ratio around the 41% range. So, hoping you can maybe remind us just how you run the underwriting side of the business and what might separate you from other more traditional auto insurers have seen more volatile underwriting results recently?

McKeel Hagerty: Well, Thank you. This is McKeel. The core of why the business performs differently is the nature of the customer. Our members are first and foremost and they take really good care of their cars and because of that, and disciplined underwriting, especially with the higher value concentrations, higher total insured value concentrations with large collections, we just have a very different risk profile than a traditional daily driving car. So, it starts with the members selecting the right, kind of place to be, the niche to be in and then discipline, especially around the higher values in concentrated areas, single car garages, storage buildings, that sort of thing. So, we’ve seen it through the years certainly not immune from catastrophes like Hurricane Ian, but even then we performed significantly better than the industry.

Sidney Schultz: Okay, yes. Thanks.

Operator: The next question is coming from Paul Newsome of Piper Sandler. Please go ahead. Paul, your line is live. Please make sure you’re not muted on your end.

Paul Newsome: Thanks for €“ hopefully you’re hearing me. I apologize for that. I was hoping you could talk a little bit more about the underlying claim frequency and severity trends that you’re seeing in your business, particularly the severity part that’s been a big topic for really anything that has metal and plastic in it?

McKeel Hagerty : Yes. Of course, Paul, nice to hear from you. Severity, still overall frequency remains in our traditional, sort of bands, but the severity areas kind of have come in two areas. One is, certainly there is a higher increase of repair costs that kind of when you have to send a car into a restoration shop, hourly rates are a little bit higher, they are on the physical damage side. But we also saw in 2022 and I think the industry as a whole has been talking about it is this, sort of compounding of higher liability losses in some cases due to the fact that during the COVID lockdowns, many of the courts were shut down for very large periods of time. So, we like a lot of the big insurers saw in some cases claims coming in from two years into one year.