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spk05: over to Jay Koval with Investor Relations. Mr. Koval, you may now begin.
spk02: Thank you, Operator. Good morning, everyone, and thank you for joining us to discuss Hagerty's 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 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 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 in slide two 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 for 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 8K filing. And with that, I will turn the call over to McKeel.
spk03: Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's first quarter 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. The love 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 three. This includes commission revenue jumped to 19% fueled by written premium gains and strong underwriting results. Our brand and value proposition fuel consistent mid to high single-digit growth in new business count. 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. Marketplace is off to a great start to the second quarter with over $15 million in sales at the Porsche sale with Air Water in Costa Mesa last week. Moving to profitability, during the first three months of this year, our operating margins jumped 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 re-engineered our business processes. Slide 4 shares a few examples of how this work positions Hagerty for sustained multi-year 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 40th 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 recognize 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 totaled $221 million last year, our second largest expense behind Seeding 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 five 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 season 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 rates 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 will 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.
spk00: Thank you and good morning, everyone. Let us dig into the first quarter results shown on slide six and seven. 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 rent and premium gains of 19%. Commission and fee revenue jumped 19% to $89 million in line with rent and premium gains on stable underwriting results. Membership, marketplace, and other revenue increased 18% to $31 million. Our Broad Arrow 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 at 41.1%, consistent with historical levels. We produced stable and highly predictable underwriting results, thanks to decades of experience insuring customers' special vehicles. Turning now to profitability, shown on slide 8, We reported a first quarter operating profit of $12 million and improvement of $29 million over the prior year period, as operating margins jumped 1,200 basis points. We decisively moved a 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 Re. 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 in 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 premiums. Hagerty's best-in-class value proposition, built around guaranteed value, automotive expertise, and favorable relative rate increases in the low single digits, fuel high rates of member growth. We expect strong operating leverage at the bottom line, with net income of $61 to $70 million, up 116 to 148%, and adjusted EBITDA of $124 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 position us 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.
spk05: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 from your telephone keypad and a confirmation tone will indicate your lines in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Thank you, and our first question is from the line of Mark Hughes with Truist Securities. Please proceed with your questions.
spk01: Yeah, thank you. Good morning. Good morning, Mark. Good morning, Mark. Could you talk about the PIF growth, the policy count growth? You talked a lot about your performance marketing initiatives and other strategies to grow policy count. It seems like your rate posture, low single digits, pretty attractive relative to the broader market, as you say. How should we think about the prospects for policy count growth?
spk00: I think you answered most of the question in asking it. Yeah, we're pleased so far this year. Last year we had north of a quarter of a million new customers. We expect this year to be something in that same neighborhood. We're a little bit ahead of that pace as we got through the first quarter. What we're seeing in the marketplace right now is a pretty meaningful increase in daily driver insurance prices is driving a lot of shopping activity. And we're benefiting from that. As you described, our prices are only up kind of low single digits relative to a market that we think will be up about 10% this year. And so that's just putting more people at the top of our funnel. And then we're doing a really good job converting. And so we expect to have similar, on an absolute basis, similar growth this year to what we had last year.
spk01: And then in the marketplace, you described the five cars per day. Is that something that is a steady build or is in the model, is there some point where there's a potential inflection where the, maybe the network effect takes over and you have more of a step function in activity there?
spk03: Well, thanks, Mark McKeel. Yeah, for now, it's the steady build, and it's this really delicate balance between supply and demand. We actually have quite a wait list of cars wanting to be listed as part of the marketplace and to go on with one of the live auctions. But if you dump too many cars into the mix and demand drops, then your sell-through rate lowers. And so it's this really steady build at this point. But yes, I mean, the team, you know, sitting out there thinking, okay, out in the future, once we get past this sort of first big phase of the steady build, you should start seeing, you know, greater acceleration there. And, you know, what we're really pleased with is that, you know, the digital product teams that are out there building the marketplace are adding features to this every two weeks. And we just have this great steady supply kind of coming out of our customer base. So we're excited for the future, but it's a steady build for now. Yeah.
spk01: And then what's the latest update on State Farm?
spk03: So latest update with State Farm is we're live in the four states, which we've talked about before. And it's actually going very, very well in those four states, a little bit ahead of plan. Lots and lots of testing going on before we can add the additional states, but a lot of optimism on both sides, and we're just continuing to work through this startup phase. So we're here. We wish it was a lot more states right now, but we're also happy that the tests in these first four are going so well.
spk01: Thank you very much.
spk00: Thanks, Mark.
spk05: Thank you. As a reminder, if you'd like to ask a question, you may press star 1 from your telephone keypad. The next question is from the line of Pablo Cizzo with JP Morgan. Please proceed with your question.
spk04: Hi. Good morning. Growth in insured values and price increases contributed more than 13 points of return premium growth this quarter, right? Anything that was up from last year. Do you think this current level is sustainable and what assumption is embedded in your premium growth outlook?
spk00: Yes. For us, the key drivers are going to be new customer growth, rate growth, and then changes in value. And all three have been contributing as we just answered the previous call with sort of low to mid-single digits on premium. And then the balance is kind of split between changes in value and new customer growth. And right now, after kind of four-plus months into the year, momentum has remained strong. And so, as we look for the balance of this year, we're very comfortable. We've affirmed our guidance. We're very comfortable with that. As we get beyond and into 2025 and 2026, In the core business, right now, it looks as though that kind of growth will continue. And what will be accelerating our growth in 25 and 26 is the ramp-up of State Farm, which begins in earnest in 2025. And then also the Enthusiast Plus product we talked about, which we're not going to start selling until early 2025. And so those two years should have even higher growth because of those two new programs. And then the airline core business, we continue to see very attractive growth and Nothing that leads us to believe that that's slowing down.
spk04: Thank you. And then on the enthusiast product, any way to size how that will ramp up beginning 25? It's, you know, a new product. Obviously, it's a big part of the classic car market that you're not tapping its full potential yet today. But sort of your thoughts on how that this might ramp, you know, in the next few years. Thank you.
spk00: We're going to take a sort of an appropriate and deliberate pace to it because it is a new product. And so we'll be launching in four states initially in the early part of next year. We'll use that to do some learning and make sure that we've got the product right, make sure we've got the pricing right. And then we'll start to add incremental states over the course of 2025. And my guess is it won't be until 2026 that we're kind of fully rolled out. We're excited about it, but it is new. It's an evolution of our existing product, and so we want to make sure we do it thoughtfully.
spk04: Got it. Thank you. Thank you.
spk05: We've reached the end of the question and answer session, and I'll turn the call over to McKeel Haggerty for closing remarks.
spk03: All right. Thank you, operator, and thanks to all of you for your continued support and interest in Haggerty. We have carefully built a highly differentiated business model over the last four decades, and that is just beginning to hit its stride, as we help members protect, buy, sell, and enjoy their prized vehicles. As I mentioned on our last call, our omnichannel distribution delivers high rates of commissionable revenue growth. Membership supports the profitability of our insurance business through excellent retention and net promoter scores from happy members. We are investing significant resources to build Paggerty Marketplace into the trusted and preferred platform in this rapidly growing market, And we also continue our multi-year evolution towards increasing our flexibility and control over our underwriting profits. This allows us to maintain high rates of written premium growth as we further penetrate the 46 million collectible cars in the United States. We will be hosting an in-person event for investors on May 31st in Greenwich, Connecticut, where we will share more color on how we are positioning the company for long-term growth and margin expansion. We hope to see you there. as the entire weekend of the Greenwich Concours d'Elegance should be a lot of fun for all. Until then, never stop driving.
spk05: This will conclude today's conference. We'll disconnect your lines at this time. Thank you for your participation.
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