Yahoo Finance Hagerty, Inc. (NYSE:HGTY) Q1 2024 Earnings Call Transcript
Hagerty, Inc. (NYSE:HGTY) Q1 2024 Earnings Call Transcript May 9, 2024
Hagerty, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Hagerty First Quarter 2024 Earnings Call. This time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator instructions] Please note this conference is being recorded. At this time, I'll now turn the conference over to Jay Koval with Investor Relations. Mr. Koval, you may now begin.
Jay Koval: Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Hagerty results for the first quarter of 2024. I'm joined this morning by McKeel Hagerty, Chief Executive Officer and Chairman and Patrick McClymont, Chief Financial Officer. During this morning's conference call, we will refer to an accompanying presentation that is available on Hercules 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 8K 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 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.
McKeel Hagerty: Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's first quarter of 2024 earnings call. The winter chill in Northern Michigan and across much of North America is behind us. Plants are blooming and cars are firing up as we begin the 2024 driving season. To us, it is the best time of the year. Hagerty may be a leading provider of insurance for collectible vehicles in North America, but insurance does not define us. A lot of cars does, and that is the key competitive advantage we have utilized to differentiate our approach and to position us to deliver high rates of compounding profitable growth in the years to come. So let me start by thanking our 1,700 Hagerty employees.
This team of highly engaged car people has never been better aligned around our strategic growth ambitions and is well-positioned to deliver great results for stockholders. Let us dig into the key highlights for our first quarter results shown on Slide 3. This includes commission revenue jumped 19%, fuelled by written premium gains and strong underwriting results. Our brand and value proposition fuelled consistent mid-to-high single digit growth in new business counts. Insurance rates also increased by 3%. This is well below the 10% average rate increase we are seeing from most of the major national insurance carriers as they look to pull down their loss ratios following a period of elevated losses. Those higher average rates out there are causing more people to shop than ever.
This is a good thing for us as it helps us power our direct-to-consumer business. Earned premium for our risk-taking entity, Hagerty reinsurance jumped 29% due to written premium gains and last year's increase in quota share to 80%. Membership, marketplace and other revenue grew 18%. This was powered by 58% growth in marketplace as we steadily increased the number of cars listed on our online marketplace and we more than doubled sales at our Amelia live auction. Marketplaces off to a great start to the second quarter with over $15 million in sales at the ports of sale with air water in Costa Mesa last week. Moving to profitability; during the first three months of this year, our operating margins jumped to 1,200 basis points, resulting in a $23 million improvement in net income and a $21 million jump in adjusted EBITDA.
You may recall that in 2023, we grew total revenue by 27%, while significantly improving profitability, delivering a year-over-year increase in net income of $26 million and adjusted EBITDA of $90 million. The first quarter of 2024 marked the continuation of Hagerty's margin expansion story as we have thoughtfully reengineered our business processes. Slide 4, shares a few examples of how this work positions Hagerty for sustained multiyear operating leverage. First, we are better leveraging our performance marketing team to efficiently acquire new customers, activating our increasingly strong data assets, we have reallocated funds into the traditionally slower shoulder seasons to effectively deliver search and social ads to the surge of insurance shoppers.
We are also investing in additional television advertising around our 40 anniversary campaign; Keepers of the Flame. Early data from this campaign suggests that consumer response is outperforming our expectations. With unaided brand awareness of 16%, we have a long runway to build our fan base far beyond the current 1.4 million policyholders. Second, we have been making changes to our member service center process to serve our members more effectively, reducing handle times and freeing up resources for continued member growth. There are ample opportunities to increase straight through processing and automation, in addition to leveraging AI tools to improve speed and efficiency of service. We have also moved our MSC team to a quarterly bonus structure that increases our ability to incentivize and recognized top performers.
And third, we have identified potential savings within our claims organization. While we are extremely proud of Hagerty's consistently stable combined ratio of under 90%, losses and loss adjustments totalled $221 million last year, our second largest expense behind ceding commission. So we are adding resources to our in-house claims team to help deliver great claims experiences for customers with minimal leakage. Simply put, these initiatives complement our cost containment efforts and position Hagerty for high rates of flow through of incremental revenue into profits over the coming years. Slide 5 is a reminder of our 2024 priorities, including; first, we are improving loyalty to drive renewals and referrals. This represents a highly profitable way we can grow Hagerty, given the lower loss ratios of seasoned policies and lower acquisition costs from referrals.
Second, we are enhancing the member experience in a cost effective and efficient way, leveraging technology to fuel margin expansion as we scale up. Third, we will continue building Hagerty marketplace into the most trusted and preferred place to buy, sell and finance collectible vehicles. This includes ramping up our online marketplace, which is now selling five cars per day with industry-leading views per vehicle and bids per vehicle and sell-through rate of 70% to 80%. And fourth, we are increasing our flexibility and control over our underwriting profits, including the CNIC. insurance company acquisition and launch of an enthusiast plus product to better serve the post 1980s vehicle cohort. We are off to a great start in 2024 and are confident in our ability to grow revenue in the mid-teens with even stronger rates of profit growth.
Improved margins and cash flow generation will allow us to invest in the competitive advantage that lengthen our leadership position and create substantial value for shareholders over the coming years. Let me now turn the call over to Patrick to run through the first quarter results and 2024 financial outlook in more detail.
Patrick McClymont: Thank you and good morning, everyone. Let us dig into the first quarter results, which are on Slides 6 and 7. In the first quarter, we delivered 24% growth in total revenue to $272 million. Robust new business count and improved retention of 89% compared to 88% in the prior year produced written premium gains of 19%. Commission and fee revenue jumped 19% to $89 million, in line with written premium gains on stable underwriting results. Membership, marketplace and other revenue, increased 18% to $31 million. Our broad aero team delivered excellent results at Amelia with sales of $63 million and a 92% sell-through rate, lower garage and social results partially offset the strong marketplace results. Recall we dissolved our garage and social joint venture during the third quarter of last year to refocus internal resources on more material profit drivers.
Earned premium grew 29% to $152 million, driven by the combined impact from written premium gains and a higher reinsurance quota share. Loss ratio came in at 41.1%, consistent with historical levels. We produce stable and highly predictable underwriting results, thanks to decades of experience, ensuring customers have special vehicles. Turning now to profitability, shown on Slide 8; we reported a first quarter operating profit of $12 million, an improvement of $29 million over the prior year period, as operating margins jumped 1,200 basis points. We decisively moved historically seasonally weak quarter into the black with a 4.5% operating margin. G&A declined 7% and salaries and benefits grew only 2% due to our cost reduction activities. Our margin expansion is even more impressive as we continue to invest in our long-term growth opportunities, including the rollout of the State Farm Classic Plus program and launch of the Enthusiast Plus product as we move into 2025.
Adjusted EBITDA increased $21 million year-over-year to $27 million. This is on top of the $13 million improvement in EBITDA delivered in the first quarter of 2023, resulting in a two year stacked improvement of $33 million. Adjusted EBITDA margins in the quarter surpassed 10%, and we believe there is much more to come as we continue to optimize our business model. This includes the initiatives McKeel mentioned in his remarks around our marketing efforts, member service center and claims. On a trailing 12-month basis, we delivered net income of $51 million and adjusted EBITDA of $109 million, also equating to a margin of 10%. Note that this EBITDA excludes the more than $24 million in net interest income generated from our growing capital base at Hagerty rate.
In the aggregate, we delivered first quarter net income of $8 million compared to a loss of $15 million a year earlier. Significantly improved operating margins drove the $23 million improvement in net income. An increase in the fair value of our private and public warrants reduced net income by $6 million. Net income attributable to Class A common shareholders was negative $3 million after attribution of earnings to the non-controlling interest and accretion on the preferred stock. GAAP basic and diluted earnings per share was minus $0.04 based on $85 million weighted average shares of Class A common stock outstanding. Dramatically improving cash flow has created a net positive cash position at the end of the quarter with $131 million of cash and only $91 million of long-term debt, $29 million of the $91 million debt is back leverage for our profitable portfolio of loans to customers that are collateralized by collectible cars.
Let me wrap up with our reaffirmed 2024 outlook shown on Slide 9. Given the excellent start to the year contemplated in our full year outlook, we reaffirm our 2024 guidance for top line revenue growth of 15% to 17% powered by 13% to 14% growth in written premium. Hagerty's best-in-class value proposition built around guaranteed value, automotive expertise and favourable relative rate increases in the low single digits, fuel high rates of member growth. We expect strong operating leverage to the bottom line with net income of $61 million to $70 million, up 116% to 148% and adjusted EBITDA of $124 million to $135 million, up 41% to 53%. In summary, we are executing well on our plan for high rates of revenue growth, margin expansion and cash flow production and we are on track for 11% to 12% adjusted EBITDA margins in 2024.
But the best is yet to come as investments in our people and technology positions to deliver 30% incremental margins from 2022 to 2024 as well as even higher rates of revenue growth into 2025 and 2026 as State Farm ramps up and we launch enthusiast plus. With that, let us now open the call to your questions.
Operator: [Operator instructions] And our first question is from the line of Mark Hughes with Truist Securities. Please proceed with your questions.
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