Hagerty, Inc.

Greetings and welcome to the Hagerty second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Kaval, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. And thank you for joining us to discuss Hagerty's results for the second quarter of 2024. I'm joined this morning by Michiel Hagerty, Chief Executive Officer and Chairman, and Patrick McClima, 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 slides and letter to stockholders covering this period are also posted on the IR website, as well as our 8K filing. Today's discussion contains forward-looking statements and non-GAAP financial metrics, as described further on 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're subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For 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 8K filing. And with that, I'll turn the call over to McKeel.

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's second quarter 2024 earnings call. As most car lovers know, summer is our golden time. The breezes are warm and curvy roads beckon. There are car shows and auctions in abundance, including our Greenwich Concours in June and Car Week in Monterey, California, starting next week. Hagerty is built for these moments with our entire business model carefully curated around a shared passion for cars. This singular focus, executed by our amazing team of professionals, has allowed us to deliver high rates of compounding growth in revenue and profit. The rate and durability of that growth is powered by a great value proposition with excellent customer service from our team of 1700 Hagerty employees. This team's strong execution allowed us to exceed expectations for the sixth straight time this quarter and to upgrade our full year outlook as our business model begins to hit its stride, delivering written premium growth of 18% in the first half of 2024. This increase is on top of the prior year's first half gains of 17%, which was on top of 2022's first half growth of 15%. Sustained mid-teens growth positions us to double our revenue every four to five years. Business process improvements, cost discipline, and smart technology investments should allow us to efficiently convert incremental revenue into increasing profits, driving margin expansion in the quarters and years to come. One Team Hagerty has never been better aligned and is only getting stronger, including the recent hiring of Jeff Brillia as our President of Insurance. Jeff has a proven track record of strategic change management across a variety of business areas, including insurance product development, claims, distribution, marketing, sales, and customer service. His 22 years of experience and leadership will help us to identify additional opportunities to further improve our value proposition for auto enthusiasts by leveraging Hagerty's decades of data. We also announced last week that we have hired Sean McMullen from Amazon to become the SVP of our digital marketplace and valuation. Hagerty's online marketplace has enormous potential and Sean will help us to create an industry leading user experience for customers and to scale critical elements of the business. Let me share a few key highlights from our first half results shown on slide three. This includes commission and fee revenue gains of 18% during the first six months in line with written premium growth and fueled by 8% growth in vehicle count. Earned premium for a risk taking entity, Hagerty Reinsurance, jumped 26% due to written premium growth and last year's increase in quota share. Membership Marketplace and other revenue grew 16% powered by 41% growth in Marketplace due to higher revenue from live auctions and financing streams and the methodical ramp of Hagerty's online Marketplace. First half profitability improved significantly over the prior year period with operating margins up 840 basis points. This margin improvement resulted in a $50 million improvement in net income and a $39 million jump in adjusted EBITDA. First half, G&A declined 3% and salaries and benefits grew only 5% as we maintain a strong focus on cost discipline and driving operational efficiencies. Slide four is a reminder of our 2024 priorities, including, first, improving loyalty to drive renewals and referrals, a highly profitable way for Hagerty to grow. Second, Enhancing the member experience in a cost-effective and efficient way, leveraging technology to reduce variable costs as we scale up. Third, building Hagerty Marketplace in the most trusted and preferred place to buy, sell, and finance collectible vehicles. And fourth, increasing our flexibility and control over our underwriting profits, including the CNIC insurance company acquisition. We are proud of the great results we are delivering so far this year. and would point out that this growth and margin expansion is on top of the gains we delivered in the first half of 2023. On a two-year basis since 2022, we have increased first half net income by $41 million and adjusted EBITDA by $70 million. Slide five shares some examples of how we are positioning Hagerty for sustained multi-year operating leverage and high rates of flow through beyond 2024. First, Continue to utilize our marketing team to efficiently acquire new customers. Second, evolve our member service center to serve our members more effectively, reducing handle times and freeing up resources for high rates of member growth. And third, identify potential savings within our claims organization to maintain our historically low combined ratio. Given the excellent results during the first six months and strong business momentum that has carried over into the third quarter, We have increased our full year outlook for revenue and profit growth. We now expect revenue to come in between 1.16 and 1.18 billion with net income of 76 to 84 million and adjusted EBITDA of 130 to 140 million. Improved margins and cash flow generation will enable us to continue reinvesting in our members and to create value for shareholders over the coming years. Let me now turn the call over to Patrick to go through the second quarter results and 2024 financial outlook in more detail.

Thank you and good morning, everyone. Let me walk you through our results for the three months ended June 30th, 2024, shown on slide six and seven. In the second quarter, we delivered 20% growth in total revenue to $313 million. Written premium grew 16% due to robust new business count and retention that improved to 89%. Commission and fee revenue jumped 17% to $129 million, slightly higher than written premium growth on strong underwriting results. Membership, marketplace, and other revenue increased 14% to $27 million. Our Broad Arrow team of automotive specialists is delivering strong and growing revenue across our live and private party sales, as well as higher financing revenue from our dedicated collateralized facilities. Membership revenue grew in the mid-teens, offset by lower garage and social revenue due to the fewer locations post-dissolution of the joint venture last fall. Earned premium grew 24% to $158 million, and loss ratio came in at 41%, a point below last year's second quarter. We produced stable and highly predictable underwriting results thanks to decades of experience ensuring customers' special vehicles. Turning now to profitability, shown on slides 8 and 9, we reported a second quarter operating profit of $38 million, an improvement of $21 million versus the prior year period of 121%. Operating margins expanded by 550 basis points to more than 12%. We held G&A flat in the quarter. Salaries and benefits grew 8% as merit increases took hold in the second quarter, along with higher accruals for incentive comp given strong year-to-date results. Adjusted EBITDA increased $19 million year-over-year to $53 million. This is on top of the $18 million improvement in EBITDA delivered in the second quarter of 2023, resulting in a two-year stacked improvement of $37 million. On the bottom line, we delivered second quarter net income of $43 million compared to $16 million a year earlier. significantly improved operating margins drove the $27 million improvement in net income, along with higher interest income and the absence of last year's $3 million restructuring charge. The change in fair value of our private and public warrants in the quarter was minimal and will no longer be an issue going forward following our successful exchange offer. Net income attributable to Class A common shareholders was $9 million after attribution of earnings to the non-controlling interest and accretion on the preferred stock. GAAP basic and diluted earnings per share was 9 cents based on 86 million weighted average shares of Class A common stock outstanding. Adjusted earnings per share defined as consolidated net income before the change in fair value of warrants divided by fully diluted shares of 360 million came in at 12 cents for the quarter and 16 cents for the first half of 2024. Operating cash flow in the first half of the year jumped from $71 million to $122 million, resulting in an end-of-June unrestricted cash balance of $121 million versus long-term debt of $98 million, $41 million of which is back leverage for Broad Arrow Capital's portfolio of loans collateralized by collector cars. We took some additional actions during the last few months to further simplify our business and focus precious resources on their highest and best use. First, in July, we successfully exchanged the 19.5 million outstanding warrants for 3.9 million shares of Class A common stock. This should help remove the noise in our net income and EPS going forward and eliminate the cost of valuing and accounting for the warrants. Given the warrant exchange, our fully diluted share count including preferred shares and unvested equity awards is now 360 million. Second, we also expanded the borrowing capacity of our credit facility by $75 million with the addition of a new bank, Wells Fargo. Finally, we sold Motorsport Reg, our motorsport event calendar and online management platform, and created a long-term marketing partnership with the strategic buyer, Corella Motorsports, who owns and operates motorsports events such as the Sports Car Vintage Racing Association, the Trans Am Series, Formula Regional Americas, and Formula 4 in the U.S. Let me wrap up with our 2024 outlook shown on slide 10. As Michiel mentioned, we increased our outlook for total revenue growth to a range of 16 to 18 percent, powered by 14 to 15 percent growth in written premium. High rates of top-line growth combined with operational efficiencies and the benefits of scale should continue to drive operating leverage. We now expect net income of $76 to $84 million, up roughly $15 million from the outlook we shared on our first quarter call, and equating to year-over-year growth of 170 to 198%. Adjusted EBITDA is now expected to be $130 to $140 million, representing growth of 47 to 59%. In summary, we are executing well on our plan to deliver high rates of compounding revenue growth margin expansion, and cash flow production. And we are on track for 11 to 12% adjusted EBITDA margins in 2024. But we believe the best is yet to come as the investments in our people and technology should result in 30 plus percent incremental margins from 2022 to 2024 and position us to drive margins significantly higher over the ensuing years. With that, let us now open the call to your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Mark Hughes with Truist Securities. Please go ahead.

Thank you. Good morning. The hiring of Sean McMullen to run the digital marketplace, anything you can say about his early priorities, what you envision there as he takes over?

Well, hey, thanks. It's a great question. We're really excited to have Sean join the team. His experience at Amazon, he was responsible for a lot of different areas in Amazon. Most recently, the Amazon Music Division has been to knit together a lot of the complexities of a big platform like Amazon. And one of the things we're excited about is we know digital marketplace in and of itself is an important thing for us. We think it has a lot of promise and we're looking forward to it continuing to expand. But the secret sauce for us is going to be how it knits together with all the other tools in our toolbox. So valuation, our speed digital acquisition, those types of things. So he's going to be looking at both of those things. How do we continue the march of the core underlying growth? And then how do we knit the pieces together?

Understood. Thinking about the, you just said this very strong, consistent growth and written premium As you think about it now versus 12, 24 months ago, just kind of pricing impact in the market, your strategic relationships with other carriers, is that evolving and changing? What have you observed over the last 12, 24 months?

Hey, Mark, it's Patrick. I'll handle the price one, and then Mikhail can talk about where things stand with our partners. You know, overall market pricing, we think this year is going to end up something, for daily drivers, something like up 10% or so as companies continue to take rate. And that compares to us at, we think it'll end up being something like up 3%. So we are taking rate, and that is a benefit for us, and that continues in 2024. But we're just doing it at a much lower rate. And we think that, you know, that's part of why we're able to grow so quickly. The value prop for our customers, because we understand the risk and how to price it, is really compelling.

And I guess I would add to that what we're hearing from our partners is we all know it's a regulated business. Everybody has to get their pricing right. We're really required to make sure that we're delivering profitably. And a lot of that action is working its way through the industry, although early indications are that it's starting to level off maybe on an industry-wide basis. The benefit we've had over the last year or 18 months or whatever it is is Just the rate increases in general push people out there to shop. And we've definitely benefited from that. And, you know, so because we're and when it comes to, well, you know, gee, somebody might have three, four or five cars. And one of those is a special car that maybe is better insured by us. We get that. We get a benefit from that when there's a lot of rate taking going on out in the market. So as it levels off, you know, for us, it's sort of back to business as usual. Do what we do well, communicate about the value proposition, and keep celebrating the cool cars that people own and the agents who need to bring them to us.

Patrick, you talk about the 30% incremental margin. You've had tremendous expense leverage. Is that kind of a good target on a go-forward basis? You said you think your position to drive significantly higher profitability is 30% a good ratio.

I think what we've communicated so far is we'll be at that kind of level, we think, for full year 2024, and that's consistent with the guidance. We do expect there to be continued margin expansion on a go-forward basis. In terms of where that shakes out, next year you know that we'll communicate that early next year when we give guidance um but as we've talked about on these calls we we've turned the corner and we've gotten to profitability in the aggregate a little bit last year and more meaningful this year and but we're not where we need to be right we think that the overall business should end up being you know something in the high teens maybe getting close to 20 overall operating profit margin and that'll take us another couple of years um two three years to get there so We do expect there'll be continued expansion. Thank you very much. Thanks, Mark. Thanks, Mark.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Next question comes from Pablo Sigzon with J.P. Morgan. Please go ahead.

Hi. Good morning. The next question came in a Good morning. The tax rate came a bit below what we were expecting. Was there anything unusual this quarter, and how should we think about the go-forward tax rate?

No, nothing unusual this quarter. And I think on a go-forward basis, it should be consistent with where we've been. I don't... Yeah, there's nothing quirky that I could point to.

Okay. And then on... interest and other income, right? So I think there it's interest expense and then there's actually invested income. The deadline, you know, improved pretty strongly in a sequential basis, right, from about $7 to $12 million sequential. What drove that and, you know, how should we think about that contribution to the P&L going forward?

So, you know, we have started producing a lot more cash. A lot of that is just the expansion of the margins. A lot of it is the renegotiation of our arrangement with Markel, where we now get paid our CUC, and we shifted it from being all paid sort of in arrears the following year to now it's paid for the most part on a monthly basis. So that's been a big positive cash flow swing. So the amount of cash we have to invest within the MGA and within Hagerty Re continues to build. And so a big driver is we just We're talking about more invested cash. And then the other is just the right environment. And so, you know, relative to where we were in previous years, we've been able to get, you know, around five, sometimes north of 5% earnings on those cash balances. We did implement a new investment strategy, and that kicked off April 1st. So the results of that aren't really reflected much in the numbers yet. It will be going forward. And to put it simply, previously we were entirely invested in cash, and now we've moved to a strategy where We're invested overwhelmingly in investment-grade bonds. We have some exposure to other asset classes. But the simple way to think about it is before we were essentially entirely exposed to short-term interest rates because we were invested in cash, we've now pushed out our duration a bit. It's kind of two to three years versus being, you know, cash-like. So, we think that we've simply moved onto the efficient frontier, right, where we're actually taking less risk but should be able to produce better returns going forward.

That makes sense. And just a quick follow-up on that point, Patrick. So Tukey was $12 billion of income. Would it be fair to assume that you don't back off that level, right? You're thinking about cash balances and where rates are, right? There shouldn't be any reason why you should go back from that $12 billion baseline in Tukey, right?

No. As we sit right now, obviously, the interest rate environment is pretty volatile right now. And so things may move around. but I think it's a reasonable assumption for the balance of the year. Gotcha. Thank you.

Thank you. I would like to turn the floor over to McKeel Haggerty for closing remarks.

Thank you, operator, and thanks to all of you for your continued support and interest in Haggerty. We have carefully curated the Haggerty brand over the last four decades for car lovers, and we have a long runway ahead of us as we help members to protect, buy, sell, and enjoy their prized vehicles. We have multiple legs to our profit growth, including high growth distribution business and evolution in our control over underwriting profits, a membership offering that drives engagement and retention with excellent net promoter scores, and a growing marketplace that is fast becoming the trusted and preferred platform for people to buy and sell collector cars. Bring them all together, and we have the recipe for success that positions us well to further penetrate the 46 million collector car opportunity in the United States. delivering durable, profitable growth year after year. Next week, we will be in Monterey, California, one of the largest automotive events in the world, where the stars and the cars all come together. For those that haven't yet been, it's an incredible opportunity to enjoy the auctions, including our own Broad Arrow two-day sale at the Monterey Jet Center, car racing at Laguna Seca, and, of course, the signature Pebble Beach Concours d'Elegance on August 18th. We hope to see you there, and until then... Never stop driving.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.