Hagerty, Inc. (NYSE:HGTY) Q4 2023 Earnings Call Transcript
Hagerty, Inc. (NYSE:HGTY) Q4 2023 Earnings Call Transcript March 12, 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. Welcome to Hagerty's Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode, and question and answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jay Koval, Senior Vice President of Investor Relations. Thank you. You may begin.
Jay Koval: Thank you, operator, and good morning, everyone, and thank you for joining us to discuss Hagerty's results for the fourth 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 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 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 financial 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.
McKeel Hagerty: Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's fourth quarter 2023 earnings call. As the winter snow begins to melt and the days grow longer, 67 million auto enthusiasts in the United States are beginning to plan to driving adventures for 2024. And Hagerty is there to help car lovers protect, buy, sell and enjoy their collectible vehicles with our array of products and services. Today, we will share the excellent results from One Team Hagerty's hard work over the last year as well as our initial outlook for 2024. Let's start with Slide 3, which compares our initial 2023 outlook with the actual results. A year ago, we expected total revenue growth of 22% to 26%. Actual 2023 revenue grew 27% taking us past $1 billion for the first time ever and doubling 2020's revenue in just 3 years.
Revenue was powered by 17% growth in written premium again, well ahead of our initial guidance for 11% to 13% growth. Total revenue growth was further accelerated by our increased quota share and over $100 million in revenue from our rapidly growing membership and marketplace businesses, up 16% and 109%, respectively. More importantly, we improved full year operating margins by 960 basis points. We take enormous pride in being one of the very few high-growth companies that executed on delivering significantly improved margins and profitability without negative impacting our high rates of revenue growth. Adjusted EBITDA increased from negative $2 million in 2022 to positive $88 million this year, a $90 million improvement. Adjusted EBITDA of $88 million came in 76% higher than our initial outlook of $50 million as we move back toward and eventually past prior peak margins.
These are exceptional results just 1 year after restructuring our business processes to drive profitable growth. I want to thank our team of over 1,700 Hagerty colleagues for their hard work, commitment to our strategic objectives and passion to serve our customers and partners with excellence and expertise. Our team rose to the challenge in 2023 and allowed Hagerty to set expectations quarter after quarter and we have created a clear path to drive profitable growth over the coming years as we execute against our multiyear road map to deliver high rates of organic growth plus revenue from our new partnerships. Let's now dig into a few other key highlights from our full year 2023 results shown on Slide 4. This includes commission revenue growth of 19%, fueled by written premium increases and strong underwriting results as the Hagerty brand and value proposition is gaining share in an industry struggling with double-digit rate increases.
In our risk-taking entity, Hagerty Reinsurance, earned premium jumped 32% due to the growth in written premium and our increased level of quota share to 80%, as we continue our evolution towards assuming more of the risk and premium associated with our stable underwriting capabilities. Membership Marketplace and other revenue increased 33%, this high rate of growth was fueled by new member growth and single-tier pricing in Hagerty Drivers Club at $70 as well as $29 million of marketplace revenue described on Slide 5. State Farms, shown on Slide 6, launched in 4 states in September, and we saw the majority of agents in those states begin to sell new policies under the State Farm Classics+ program during the fourth quarter. We expect State Farm to become a meaningful incremental driver of written premium growth in 2025, as we add the other states and convert State Farms 0.5 million existing classic policies into the Classic+ program administered by Hagerty.
2024 marks our 40th year in business, and we are anticipating another banner year of growth and margin expansion. Slide 7 highlights our 2024 priorities, including: first, improving loyalty to drive renewals and referrals. This is one of our most profitable ways to grow Hagerty given the lower loss ratios of seasoned policies and lower acquisition costs from referrals. In 2024, we expect these initiatives to help us add well over 0.25 million new members and to drive higher rates of retention through recent initiatives, including Autopay. Second, we are enhancing the member experience in a cost-effective and efficient way, leveraging smart technology to reduce variable costs. This should help us fuel continued margin expansion as we grow. Third, we will continue building Hagerty Marketplace into the most trusted and preferred place to buy and sell collectible vehicles.
We are steadily growing the number of vehicles sold and our time-based options with the high closed rates that attract future sellers. Marketplace also benefits from our large established base of consumers. In 2023, over 300,000 vehicles were bought and sold across our books with a value of over $14 billion, representing a double-digit increase in total value from the prior year. The opportunity is large with very attractive margins as more and more transactions move online. And finally, we are increasing our flexibility and control over our underwriting profits, including the recently announced acquisition of the insurance company called CNIC. We intend to use this new carrier platform to launch new products and coverage offerings to fill an underserved segment of the classic and enthusiast market where our penetration is low today, particularly the post-1980s cohort.
The Enthusiast Plus program will be an expansion of our current Flex offering, which we launched in 2014 and will enable us to decline fewer inbound requests for Hagerty coverage on enthusiast vehicles. We are excited for 2024 to be another great year for stakeholders as we become a leaner, stronger and more profitable company that can self-fund our high rates of growth year after year and invest in our competitive advantages to lengthen our leadership position. Let me now turn the call over to Patrick to run through the fourth quarter as well as the financial outlook for 2024 in more detail.
Patrick McClymont: Thank you, and good morning, everyone. McKeel shared some of the highlights from the full year 2023. So let's dig into the fourth quarter results shown on Slides 8 and 9. In the fourth quarter, we delivered 24% growth in total revenue to $245 million, with written premium growth of 19% powered by robust new business count and a bump in retention as early initiatives began to take hold. Commission and fee revenue jumped 22% to $78 million due to the written premium gains and strong underwriting results. Membership, Marketplace and other revenue decreased 3% to $20 million compared to the fourth quarter of 2022. As a reminder, we hosted a live auction during last year's fourth quarter that we chose not to repeat this year, resulting in the year-over-year decline.
Our online marketplace is growing well as we steadily increased the volume and value of vehicles sold, at the same time, we build awareness for our differentiated approach that instills trust and confidence by offering certification services, title and escrow. To help build out our asset-based lending activities, we entered into a $75 million credit facility at the end of the quarter. Our earned premium grew 31% to $147 million, driven by new premium growth and the 10-point increase in our contractual reinsurance quota share. Our loss ratio came in at 41.5%, consistent with historical levels. We deliver stable and highly predictable underwriting results, thanks to decades of experience ensuring vehicles that are treated well by their owners.
Turning to profitability, shown on Slide 10, we reported a fourth quarter operating loss of $6 million, an improvement of $29 million over the prior year period as margins expanded by 1,550 basis points. Our margin expansion 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 State Farm Classic program, ramped up technology spend as we build out Hagerty's online marketplace, and additional tech investments we are making with the insurance technology platform implementation and launch of Enthusiast Plus later in 2024. In the aggregate, we delivered fourth quarter net income of $9 million compared to a loss of $32 million a year earlier.
The $41 million improvement in net income was primarily driven by the significantly improved operating margins as well as a $9 million swing in the fair value adjustment related to our private and public warrants. GAAP basic earnings per share was $0.14 based on 85 million weighted average shares of Class A common stock outstanding. Our adjusted EBITDA during the fourth quarter was $10 million, a $12 million improvement over the $2 million loss during the prior year period. Let me now turn to our full year 2023 margins, cash flow and balance sheet. Full year operating income came in at over $10 million as our efforts to drive profitable growth resulted in 960 basis points of margin expansion helped by a 4% decline in G&A. Operating cash flow in 2023 jumped 142% to $134 million and our productivity initiatives will drive even stronger cash flow generation over the coming years.
Cash and liquidity at the end of December was $250 million, with net of only $23 million. And after receiving the 2023 contingent underwriting commission payment from Markel in February, our unrestricted cash exceeded our long-term debt. Going forward, DUC payments will be made on a monthly basis. Let me wrap up with our 2024 outlook shown on Slide 11. Given the consistently strong and durable top line momentum in our business, we are sharing an initial outlook for top line revenue growth of 15% to 17%, cared by 13% to 14% growth in written premium as we expect yet another year of record additions to our membership base. Our full year outlook incorporates a strong start to the year as 2023 business momentum has carried into January and February.
Hagerty's value proposition has never been stronger, built around guaranteed value, automotive expertise and favorable increases in the low single digits versus the industry's double-digit growth. In 2024, we expect strong operating leverage to the bottom line, with net income more than doubling to a range of $61 million to $70 million, up 116% to 148% and adjusted EBITDA of $124 million to $135 million, growth of 41% to 53%. Combined ratio is anticipated to be similar to 2023 at under 90%. Our EBITDA range equates to incremental margins of over 30% since 2022 as we have refined our business model to deliver the excellent service for which we are known, but with the margins and turns you would expect from a great branded business model. Equally important, we are strategically investing to position the company for high rates of sustained growth over the coming years as we launch our Enthusiast Plus business in late 2024 and State Farm ramps up in 2025.
In summary, we are executing well on our plan for both growth and profitability and are on track to significantly grow cash flow over the coming years. This includes a return to low double-digit adjusted EBITDA margins in 2024. We just 2 years after setting ambitious targets to get back to these levels. But the best is yet to come as investments in our people and technology allows us to deliver 30% incremental margins for the foreseeable future creating value for shareholders. With that, let us now open the call to your questions.
Operator: [Operator Instructions] Our first question is from Greg Peters with Raymond James. Please proceed.
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