Hagerty, Inc. (NYSE:HGTY) Q4 2021 Earnings Conference Call March 24, 2022 5:00 PM ET
Company Participants
McKeel Hagerty – Chief Executive Officer
Fred Turcotte – Chief Financial Officer
Operator
Greetings. Welcome to the Hagerty Full Year 2021 Earnings Call. At this time all contributors are in a hear-solely mode. A query-and-reply session will observe the formal presentation. [Operator Instructions]
A brief video might be performed to the webcast adopted by ready remarks from Hagerty.
[Audio/Video Presentation]
Unidentified Company Representative
Good afternoon, girls and gents. Thank you for becoming a member of us on Hagerty Fourth Quarter and Full-Year 2021 Earnings Conference Call. Please notice that this name might be concurrently webcast on the Investor Relations part of the Company’s company web site at investor.hagerty.com. Our first Shareholder Letter masking this era can be posted on the IR web site.
Joining the decision in the present day are McKeel Hagerty, Chief Executive Officer; and Fred Turcotte, Chief Financial Officer. Before we begin, I wish to remind that the dialogue in the present day might include statements associated to our enterprise that could be thought-about ahead-wanting together with statements regarding our anticipated future enterprise and monetary efficiency; our capacity to keep up current and bought new members; our plans to broaden market share, together with deliberate investments and partnerships; expectations relating to key operational metrics and different statements relating to our plans and prospects. Forward-looking statements are sometimes recognized with phrases resembling we anticipate, we anticipate, we consider or comparable expressions. These statements mirror our view solely as of in the present day, March 24, 2022, and shouldn’t be thought-about or considered as of any subsequent date. We don’t undertake any obligation to replace or revise any ahead-wanting statements. Forward-looking statements don’t guarantees or assure the long run efficiency and are topic to a wide range of dangers and certainties that would trigger the precise outcomes to vary materially from our expectations. For a dialogue of fabric dangers and different necessary components that would have an effect on our precise outcomes, please confer with these contained in our Form 10-Okay file with the SEC this night, which is out there on the Investor Relations part of our web site and on the SEC’s web site at sec.gov.
Finally, throughout in the present day’s name, we’ll confer with sure non-GAAP monetary measures. A dialogue of those non-GAAP monetary measures together with reconciliations to essentially the most straight comparable GAAP measure is included in our earnings launch, stockholder letter, investor deck and Form 10-Okay. Copies of which may be discovered on our Investor Relations web site. Unless in any other case famous on in the present day’s name, all comparisons are on a yr-over-yr foundation.
And with that, I’d like to show the decision over to McKeel Hagerty. McKeel?
McKeel Hagerty
Hello, I’m McKeel Hagerty, CEO of Hagerty. This is our first earnings name as a public firm. So earlier than we dive into the financials, I need to inform you just a little bit about Hagerty and what we’re all about?
We’re greater than only a financially sturdy firm with a protracted observe report of sturdy annual returns and a core enterprise constructed on regular and sticky contractual income, sturdy branding, and a tradition that persistently delivers web promoter scores within the 80s. We’re additionally greater than only a firm with excellent development potential. We’re an organization concerning the enduring 130 yr outdated love affair between folks and vehicles. My dad and mom began Hagerty in 1984 as a result of they could not discover anybody prepared to make sure the classic wood boats they liked a lot. To them, it was all concerning the ardour and making it simpler for folks to take pleasure in their favourite pastime with out having to clarify how particular their boat was or how a lot it was value. We merely took that strategy and expanded it to fanatic vehicles. Then we took it loads farther.
Yes, our core enterprise, insurance coverage is 92% of our income proper now. That’s an enormous energy. It’s the bedrock beneath our monetary energy, steady development, and our recurring income. We already guarantee greater than 2 million automobiles and there is much more room to develop as you may see on our deck.
Over 500 million folks across the globe categorical an curiosity in vehicles. 69 million folks within the United States alone declare themselves automotive fans, 43 million automobiles in North America alone that fall in for our insurance coverage goal, 72% of all automobiles went up in worth in 2021 and that is an 8% to 9% historic annual appreciation. But we’ve got additionally been making investments to capitalize on the eagerness aspect of the enterprise, automotive occasions and driving experiences, vendor media content material, a sturdy membership group and extra, all centered or round serving to folks dive deeper in what they like to do. We are already seeing the advantages of our investments with rising persistence, and regular will increase in lifetime worth. The extra branded merchandise we provide, the extra worth we create and the extra share of pockets we earn. Why? Because driving is an enriching human expertise on many ranges. People develop connected to those objects known as vehicles, freedom, self-expression, enjoyable, competitors, standing, neighborhood, mates and teams. Why is that necessary to you as an investor? Because the straightforward truth is that automotive folks, our folks, get up within the morning asking, what do I have to do to guard my beloved car? How do I improve my automotive expertise or data? How do I improve my automotive or assortment of vehicles? And how do I spend extra time with my automotive and different automotive fans? That’s extremely highly effective. People usually spend discretionary earnings on issues that carry them pleasure.
Especially since COVID, COVID taught us that folks double down on their pastimes and hobbies, commuting miles went down, pleasure miles went up. So, that is who we’re at Hagerty. We are the one firm constructing an ecosystem of automotive providers, information and intelligence choices, and leisure to assist automotive lovers get extra out of those mechanical gadgets they connect themselves to. It’s an enormous objective with a big and rising complete addressable market. We are constructed to faucet into and develop this marketplace for the lengthy-time period.
Lastly, one query that has been persistently raised since we began the method of changing into a publicly-listed firm, is that what we expect the way forward for vehicles and what driving will appear to be within the age of EVs and even autonomous automobiles? It’s a legitimate query that we have interaction with on various ranges. First, we love EVs and suppose they are going to be an necessary extension of the historical past of vehicles and driving sooner or later. This might be very true of the upper efficiency fashions and people constructed with aspirational designs. Our world of fanatic automobiles is giant and has many areas of curiosity, and we view our roles as stewards, stewards of driving an automotive competitors and the enjoyment of proudly owning one thing enjoyable to drive.
Therefore, our function as a corporation is to save lots of driving and automotive tradition for future generations. We know that this can occur steadily. So, this is the reason we set out on a mission to develop a worldwide group giant sufficient and worthwhile sufficient to assist serve this bigger function. This is why going public was so necessary to us.
Now, let’s transfer on to the financials. Fred?
Fred Turcotte
Thank you, McKeel. I wished to begin by sharing how honored I’m to welcome all of you to our first earnings name as a public firm. As you understand, Hagerty went public on December 2, 2021, and we couldn’t have executed it with out the help of 1 group Hagerty, all of our members, prospects and companions, each current and new to the corporate. I additionally wished to thank the traders and analysts who’ve proven curiosity and brought the time to get to know our firm, dig into the financials, and share their views on the enterprise.
As McKeel talked about earlier, we’ve got a big and rising complete addressable market, which supplies us a considerable runway for development throughout a number of product choices. There is large room forward that we consider will enable us to attain our acknowledged lengthy-time period function and mission.
We have faith in our capacity to monetize the real ardour and love for vehicles in our world and are working to earn extra of the discretionary spend in our markets, using our omni-channel distribution and built-in insurance coverage, membership and Marketplace platform throughout the automotive ecosystem we’ve got constructed over the past decade. Our 2021 outcomes proceed our lengthy-time period drive for persistent market-main high-line development, which has grown 27% on a compound annual development foundation over the past three years. This previous yr, we expanded our Hagerty neighborhood by 14% to 2.4 million members and we elevated the variety of insured automobiles by 13% to 2.1 million. We grew our checklist of distinctive automotive occasions by including The Amelia, McCall’s Motorworks and the Detroit Concours d’Elegance. We elevated our neighborhood facilities for the automotive fans by including 3 storage and social places in Delray Beach, Florida; Seattle, Washington; and Toronto, Ontario, Canada.
We effectively make the most of digital media to facilitate social interplay with the Hagerty model with 1.9 million YouTube subscribers, having fun with 7.2 million hours of Hagerty content material. And we offered greater than 5.4 million car values that had been researched on our Hagerty Valuation Tools.
Pivoting to our 2021 monetary outcomes, all of that are in contrast on a yr-over-yr foundation. Total income grew 24% to $619.1 million. Commission and price income grew 15% to $271.6 million, pushed by 245,000 new enterprise insurance policies and strong coverage retention above 89%. Membership and different income elevated 21% to $51.7 million benefiting from a rise in complete members of 14%, a pickup in HDC paid membership and a continued new membership adoption price of 75% of latest insureds.
Finally, earned premium grew 34% to $295.8 million pushed by new written premium development, coverage retention, and the continued broaden of our U.S. contractual quota share. We proceed to profit from our rising share of reinsurance underwriting income below our lengthy-time period contracts within the U.S., Canada and the UK. Importantly, that is incremental income we earn on high of the income we generate by promoting new insurance coverage insurance policies and renewing above 89% of current ones. Hagerty Re, our 100% owned Bermudian subsidiary was capitalized with $38 million and completed ’20 and ’21 with retained earnings of $44 million and $70 million respectively. In 2021, this enterprise earned $32 million in pre-tax earnings, implying a 34% pre-tax return on common fairness. We had been extraordinarily excited to see income per member enhance by 13% to $499, as members expanded their use of our price-primarily based product and repair choices, and we realized the influence of a better quota share share of underwriting earnings.
Written premium grew 17% yr-over-yr to $674.3 million with strong underwriting efficiency in all distribution channels. We are additionally more than happy to see that our coverage retention ranges remained very sturdy at above 89%. We stay extraordinarily happy with our nationwide insurance coverage companion technique, the highest 10 of which grew 17% on a compound annual development price foundation over the past three years. We consider deepening our penetration price with these companions, alongside the addition of latest companions, resembling State Farm, will proceed to supply a major stage of lengthy-time period recurring contractual income development. Importantly, our loss ratio remained steady yr-over-yr at 41%. We have been capable of implement pricing will increase to maintain loss prices as a share of earned premium at this stage. We are additionally delighted to see a rise in new members becoming a member of our neighborhood for automotive lovers via Hagerty Drivers Club, as paid member rely elevated 12% to 719,000. We suppose this can be a testomony to the quite a few worth-added providers HDC supplies our members. We anticipate to broaden our service choices in 2022.
Summarizing, we proceed to profit from greater contractual insurance coverage income from our rising quota share, natural premium development and new income sources from our distribution relationships, media partnerships, owned occasions and Hagerty Garage + Social, car storage and fans membership places.
Turning to profitability. For the complete yr of 2021, we reported an working lack of $10.1 million in comparison with working earnings of $15.8 million in 2020. Net loss was $61.4 million versus web earnings of $10.1 million a yr earlier. Earnings per share was adverse $0.56, primarily based on our weighted common shares of Class A standard inventory excellent, excluding shares attributable to redeemable Class V shares, that are required to be handled as a redeemable, non-controlling curiosity in our monetary statements.
Our 2021 full yr reported outcomes had been adversely affected by a number of distinctive and non-recurring bills related to our New York Stock Exchange itemizing and Up-C organizational construction. We recorded a good worth lack of $42.5 million associated to our personal and public warrants, that are required to be handled as liabilities versus fairness and marked to market below GAAP guidelines in our audited monetary statements. We additionally recorded a $9.3 million one-time cost for accelerated vesting in reference to willpower of our current lengthy-time period government incentive plan. In addition, in reference to our digital and system transformation mission, we retired a 3rd-celebration coverage administration system, recording a $1.7 million loss on disposal for capitalized software program. And we incurred sure different non-recurring losses of $2.2 million. These changes have been included in our adjusted EBITDA outcomes.
Importantly, not included in adjusted EBITDA, we incurred $31 million of further non-recurring bills in 2021 to scale operations to onboard the State Farm partnership and to launch the Hagerty Marketplace initiative. These bills embrace substantial pre-income prices for the design, growth, and integration of latest digital platforms with new and current inner and distribution companion legacy insurance coverage administration, and company reporting programs.
In order to accommodate the extent of scale that these new initiatives command, for instance, the State Farm partnership will increase our current insurance policies enforced by 37%. In order to accommodate that, investments had been made so as to add new group members within the gross sales, service and company distribution areas, get up a brand new member service middle in Dublin, Ohio, and elevated community and infrastructure capabilities. We consider the underlying efficiency of the enterprise in 2021 needs to be considered unique of those prices.
Our contribution margin or the quantity of complete income that exceeds variable prices and is out there to pay mounted prices and/or reinvesting development was 26% in 2021. We use contribution margin to investigate the connection between prices, quantity and revenue as income grows. Our adjusted EBITDA was $25.4 million in 2021. We consider adjusted EBITDA is a vital supplemental measure of working efficiency on a constant foundation because it removes the influence of things that are non-recurring and never a direct outcome from our core operations. We anticipate to make use of this measure in addition to contribution margin going ahead.
Looking forward, we consider we’re effectively positioned to take a position for lengthy-time period development with $275 million of unrestricted money on our stability sheet at 12/31/21 and elevated flexibility gained by our renegotiated syndicated credit score facility, which supplies an extra $145 million in further funds as of 12/31/21. We will proceed to spend money on all areas as we knit collectively our new insurance coverage, membership and market gross sales, service and experiential platforms. Our digital platform transformation in these areas is on plan to be considerably accomplished by late 2023.
We view the delays within the launch of our State Farm relationship and the Hagerty Drivers Club membership as timing associated, and we stay extraordinarily enthusiastic about each alternatives. State Farm provides vital scale, development and income alternative. We would anticipate new enterprise and renewal of 460,000 plus insurance policies to begin in late 2022, with premium written in all 50 states by the tip of 2023.
As it pertains to the underside-line, after 2022, we anticipate to understand elevated working leverage as $60 million to $70 million we’ve got spent to help these partnerships and Marketplace is operationalized and extra high-line income begins to movement via to earnings. We have offered steering for the complete yr 2022 throughout a number of key efficiency indicators. Going ahead, we intend to supply annual steering with quarterly updates on our progress. We have additionally offered further supplemental info in our investor complement, which we consider will help traders and the analyst neighborhood when growing their monetary thesis on Hagerty. We hope it helps.
We stay up for working with you all around the months and years forward. Thanks to your time and your help of Hagerty. And now, I’ll flip it again to McKeel.
McKeel Hagerty
Thank you, Fred. I’ll spend just some extra minutes describing some strategic development initiatives that can speed up within the months and years to return. With State Farm, Fred already described the numbers, I’ll put them in context. First, it is necessary to notice {that a} substantial portion of our development already comes from sticky partnerships with giant insurance coverage corporations. For years, lots of the largest corporations have labored with us to deal with the particular insurance coverage wants the automotive fans have, from offering valuations on these vehicles with our proprietary valuation instruments, to offering specialty protection and repair, to dealing with the distinctive claims that might be tough for a typical car claims division to handle. We worth all of those partnerships and we deal with them individually with no cross-promoting of services, in order that they know their core books of enterprise are effectively protected, whereas the fanatic vehicles are dealt with by a market chief in Hagerty.
State Farm is simply the newest of those partnerships, however it can even be our largest. Therefore, we’ve got taken our time to get it proper for launch. In addition to rolling over the preliminary e book of greater than 460,000 insurance policies, we may also be actively participating their 19,200 brokers to write down new insurance policies in this system. All the whereas, we’ll offer all State Farm purchasers entry to the Hagerty Drivers Club. It is meant to begin later this yr and can present the biggest single supply of development in our firm’s historical past. It is necessary to notice that State Farm additionally grew to become a major investor in Hagerty throughout our enterprise mixture in 2021. As a part of this, they’ve a Board seat, which is served by none apart from their CEO, Michael Tipsord. Our relationship with State Farm has a ten yr contract and we stay up for a few years of deep partnership.
The second initiative I wished to debate, as coated within the investor deck is our transfer into an automotive market. While we’ve got quietly been rolling out items of our market technique with issues like our Hagerty Valuation Tools and Automotive Intelligence group and our peer-to-peer rental enterprise, DriveShare, our subsequent transfer commenced in January with our funding within the Broad Arrow Group. A newly created firm stuffed with a group of extremely revered veterans from the automotive public sale world, Broad Arrow will anchor various our new initiatives going ahead via a three way partnership construction.
The market alternative for us may be very giant. In 2021 alone, our insurance coverage members purchased and bought an estimated $9.5 billion in automobiles. Our intention is to make use of our information benefits and our partnership with Broad Arrow to develop shopping for and promoting instruments and experiences that focus on belief, integrity, and transparency. Some of the actions contemplated are already indicated within the deck, whereas a number of others will roll out within the coming months and years. There are additionally many inner synergies that our market actions will draw upon and amplify. In addition to purchasing and promoting, Hagerty Marketplace additionally ties properly into our media actions, occasions, membership, choices, digital innovation, in addition to our influence and ESG actions.
Finally, we’ve got many different initiatives in flight that may also assist us drive development within the month and years forward. These embrace rising our reinsurance quota shares to realize extra of the economics in our underwriting relationships, rising our urge for food for extra sort of fanatic automobiles and car segments, increasing our membership choices, extra media and occasions, extra improvements like mileage-primarily based insurance coverage choices from our digital labs and so on. In an effort to create increasingly on-ramps to the automotive world and to have interaction the subsequent generations, we additionally not too long ago introduced a partnership with Polyphony Studios to be embedded within the newest model of one of the best-promoting online game on the Sony PlayStation platform Gran Turismo 7. This is thrilling due to the attain implied by the thousands and thousands of lively customers on such platforms, but in addition as a result of it’s our first foray into the interactive gaming world.
In closing, Hagerty is a development firm that’s constructed on a really giant ardour area within the economic system that was usually missed or underserved. Our historical past within the insurance coverage and membership area supplies a robust platform to develop and to broaden what we do and to spend money on a bigger ecosystem of choices. As a public firm, we’ve got the chance to speed up our plans and to make use of a better profile to our benefit. Hagerty went public for a easy motive, to higher serve the huge neighborhood of people that love vehicles. We purpose to do that for the lengthy haul and at a big scale. We are prepared for the drive. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] I’m not seeing any questions at the moment and I’ll flip the decision again over to administration.
Unidentified Company Representative
Thank you, operator. We truly did obtain just a few questions within the IR inbox for administration. The first query — the primary one is a 3 half query. Why was State Farm delayed? Can you guarantee that they are going to launch in late 2022? And have any of the economics modified?
McKeel Hagerty
Thank you. It’s an excellent query, and an necessary one for us. First of all, let me take the second. We’re very assured that we’ll launch the partnership in late 2022. Although there is a very giant set of labor streams to ship this product, that is necessary to us. But initially, we knew the dimensions of this partnership, we needed to get it proper. So lengthy-time period partnership. State Farm made a giant dedication to us. We made a giant dedication to them. And that is why we’re actually had been dedicated to creating positive that we ship the best attainable expertise for his or her prospects, who might be our future members.
The causes for the delay are a few main causes. One, this can be a model new insurance coverage firm inside the State Farm world that requires state filings and licenses, kinds, filings, all of that type of factor. Those take just a little bit longer than generally anticipated. We have executed loads of a majority of these partnerships, so we all know how this will occur. But it is actually the technical integrations round this program which are very, very advanced between billing, providing — the brand new providing Hagerty Drivers Club, which may be very distinctive with State Farm world and for us, in addition to all the information feeds going backwards and forwards.
So — however the last piece is, I suppose have any of the economics modified. The contract stays the identical. It’s a ten yr sticky, deep contract. We are dedicated to one another. They are enthusiastic about it. We are enthusiastic about it. And the economics haven’t modified. I believe the factor to notice as Fred talked about and I discussed as effectively is that the chance is definitely now just a little bit bigger, which is an effective factor. When we first began speaking about this final yr, it was 410,000 insurance policies changing, now it is 460,000 or extra. And we may also have the chance to supply new enterprise via State Farm’s 19,200 brokers, and once more, as all the time along with Hagerty Drivers Club. So very assured concerning the finish of 2022.
Unidentified Company Representative
There is second query, which is, what drove the Hagerty Drivers Club worth delays? And do you anticipate having the ability to implement the pricing enhance in 2022?
McKeel Hagerty
Another nice query. Hagerty Drivers Club is such a key a part of our general development technique. We are assured we’re going to have the ability to make pricing changes in 2022. The fundamental causes for not launching these earlier had been actually about desirous to be very delicate to the persistence of our members to keep up a really excessive Net Promoter Score, and to be sure that we might add extra worth. Hagerty Drivers Club is so distinctive within the automotive world that we simply don’t love so as to add worth to it until we add worth and the massive key for us that we had been ready to launch, we did not discuss final yr, which was our transfer within the market. So, the pricing adjustments, that are totally baked into our projections right here, our outlook, are largely due for us ready to create extra worth and to construct in a few of these market options.
Unidentified Company Representative
Another query that was obtained. 2022 outlook appears to be impacted on each the income and expense aspect. Can you give us a bit extra element on the outlook for income? And additionally, will loads of the bills that you’re incurring roll off by the tip of 2022 such that 2023 generally is a yr of sturdy working leverage?
Fred Turcotte
Thank you. I can take that one. We are usually not offering 2023 steering, however we are able to say {that a} majority of the spend to onboard State Farm, in addition to the Hagerty Marketplace ought to roll off by the tip of 2022. When you consider income, we had included State Farm and pricing will increase in our prior 2022 projections. And so, with the delay of every of these, we’re adjusting our 2022 outlook.
On the expense aspect, we see an enormous runway for development and we really feel that is the proper time to make investments that can generate incremental development longer-time period.
From an EPS steering per perspective, as you may see in our slide deck on slide quantity 20, we do present a variety of EPS development of enchancment of 35% to 75% for 2022.
Unidentified Company Representative
And the ultimate query that was obtained. What alternatives are you most enthusiastic about over the subsequent two to a few years?
McKeel Hagerty
Well, that is a enjoyable one. We’re excited concerning the future. We’re a development firm and we’re excited to be a public firm on the point of take benefit that every one of that brings and for positive the State Farm launch, getting that up and operating is necessary to us. It’s a giant, lengthy, sticky relationship, many, a few years within the making. So getting that up and operating and bringing them into partnership with us goes to be completely superior. So we’re enthusiastic about that from a development standpoint and we’re assured that we are able to make it that work very effectively.
Marketplace, as I’ve highlighted in my remarks is an important strategic initiative for us. And it is simply going to begin rolling out with new options, new ways in which we are able to begin approaching that very giant alternative, very giant complete addressable market of — on the transactional aspect. There are further partnerships not talked about which are within the pipeline and that we’re within the strategy of negotiating that have not been introduced, have been named. And so we’re working on these. So I’m enthusiastic about these over the approaching durations of time, extra media, extra occasions. That’s how we have interaction our members. It’s an automotive ardour area. And so we’ve got to maintain working to construct these audiences on the market, constructing and partnering in some circumstances with extra properties to create larger attain and extra contact and intimacy with our very passionate automotive loving members.
Unidentified Company Representative
Operator, we’ve got no additional questions. So, I’ll now flip it over to administration for closing remarks.
McKeel Hagerty
All proper, effectively, thanks very a lot. It’s been enjoyable for us to arrange for all of this. We are actually enthusiastic about the way forward for Hagerty. As I mentioned, we’re constructing and investing for the lengthy haul and for larger scale. And we hope you respect the supplies we put ahead to you and thanks very a lot to your time and a spotlight onward and upward.
Operator
This concludes in the present day’s convention, and it’s possible you’ll disconnect your strains at the moment. Thank you for participation.