Hagerty, Inc. Q4 FY2024 earnings call

• Business strategy, brand, and marketing initiatives drove excellent revenue gains in 2024, with 20% revenue growth and 279,000 new members added. Written premiums growth of 15% aligns with a 10-year CAGR of 15%.
• 2025 priorities include expanding specialty insurance offerings, simplifying and integrating membership experience, expanding marketplace business, leveraging car culture, and investing in technology transformation to transition to a modern cloud-based architecture (Apex project with Duck Creek).
• Over the last two years, the company added over half a million car lovers to the ecosystem, grew revenue by $412 million, increased operating income by $134 million, and tripled operating cash flow to $177 million.

In the fourth quarter, total revenue grew 19% to $292 million. Written premiums grew 13%. Commission and fee revenue jumped 15% to $89 million. Membership, marketplace, and other revenue increased 68% to $34 million. For the full year 2024, revenue was up 20%, written premiums grew 15%, operating income jumped sixfold to $66 million, investment income jumped 57% to $36 million, and operating cash flow jumped 32% to $177 million. Commission and fee revenue jumped 16%, membership, marketplace, and other revenue grew 30%, and earned premium for Hagerty Reinsurance increased 21%.

• Anticipate 2025 to be a year of strong results with 13%-14% growth in written premiums translating to total revenue gains of 12%-13%.
• Expect net income gains of 30%-40% equating to a range of $102 million to $110 million in 2025.
• Adjusted EBITDA should increase 21%-29% to a range of $150 million to $160 million in 2025.
• Incorporates $11 million of pre-tax losses from the Southern California wildfires resulting in an expected combined ratio in the risk-taking entity of 90%.

• Technology transformation is complex and expensive with multiyear implementations.
• Impact of hurricanes on operating income as seen in 2024 with $27 million impact from Hurricane Celine and Milton.
• Supply chain tariffs could have an inflationary effect, though impact is hard to quantify immediately and pricing changes require regulatory approval.

Q: Hey. Thanks. Good morning. First, I was hoping kind of a high-level question. You could give a little color, you just update me on kind of the trends that you're seeing in the business in terms of I'm thinking about, like, cross-sell or maybe cross-engagement is the right word. Between, like, insurance, membership, marketplace, kind of as you build those kind of legs of the stool, kind of what you see with kind of your insureds or your members kind of taking advantage or being engrossed in different parts of the business.

A: Yeah. Thank you, Matt. Thanks for the question. This is McKeel. You know, the main thing for us is that we sell membership as an additional offering to our insurance product. And the uptake on that historically has been about 80%. Of everybody buys the full HDC, Hagerty Drivers Club product that's $70 each. That tool is what is the main engagement lever. Right? So it's a revenue line in and of itself. It's a profitable line of business in and of itself, but it's where the bulk of our engagement happens. So newsletters, magazine, all the different points of contact that we have when somebody's fully a member of the business. It's through those vehicles that we cross-promote our marketplace offerings, both Broad Arrow and the digital marketplace business, which is just sort of beginning of the scale-up phase of its life. So it's gone really, really well. The main thinking around Hagerty Drivers Club though is to drive engagement, it's to drive retention, it's to drive word-of-mouth. It's not necessarily meant to be a top-of-funnel kind of product. You have been able historically to buy Hagerty Drivers Club just independently of buying insurance. But it's really insurance is the front door, and then we engage them from there. Hopefully, that answers your question.

Q: Just tariffs, what you might think might be the impact on the business. I'm thinking parts and things like that. At least that's what we think about with auto broadly, whether it be like Mexico or China. I'd imagine your supply chains might look a little different than kind of the industry at large. So just curious what impact you might expect at any.

A: Sure. It's Patrick, Matt. So, you know, obviously, our frequency is much, much lower than what you see in daily driver. And the types of parts that are used for our vehicles are it's a much more diverse and fragmented supply chain. So it's hard for us to quantify what the impact could be, just the nature of our business. Some of those parts are clearly coming from Canada, some are clearly coming from Mexico. So do expect there will be an inflationary effect from this over time. But similar to overall dynamics, we think it'll be less of an impact for us. It'll hit us more gradually. Don't have big players in the supply chain that send us letters saying, nature for our business. So it'll take longer for us for it to unfold. And it's just really hard for us to quantify the nature of the supply chain.

Q: Hi. Good morning. I'm calling in from Mark Hughes. Have you seen any slowdown in shopping behavior recently from consumers? And if not, do you expect this to continue to be a tailwind for you in 2025 assuming that you're currently a net beneficiary of this?

A: No. Thank you. It's a great question. McKeel, again here. You know, this time of year is the slower time of the year until it starts ramping up. For us. We're a big seasonal business in a lot of ways. There's a big bell curve of new business that comes in starting kind of late March and then rolling through kind of the end of October. But two things that can definitely affect the differences in shopping behavior. So we've talked about in the past how shopping behavior has been driven by rising interest rates and also rising values in cars. So when people who have held a car for a long time and suddenly realize it's appreciated significantly, they realize it's the time to sell. You know, we benefit from that if we can insure the car after they sell it or if they buy it and add it to a policy. And we saw over the last twelve months an increase in the volume of our customers and members buying cars and selling them. So the transactional volume is good. That's good for us. We get more sort of swings at the ball. But two things that, you know, maybe change that slightly is the California is a big market in the car world. The California wildfires had a dampening effect on a lot of people. Anytime you get those kind of big shocks, people just sort of sit tight. Doesn't mean they don't have cars that need to be insured. Doesn't mean they don't want to buy. But that, you know, that can have a sort of effect as well as cold weather. Because while the northern parts of the United States are kind of their cars are all asleep, slumbering, and waiting for spring to go out and be driven, in the south when it's still driving season, but yet it's colder in the south sometimes, that can actually sort of that can have some sort of effect. But, again, it all tends to ramp up in the next sort of thirty to sixty days.

Q: Yeah. That's helpful color. And then you had just mentioned tariffs shouldn't have too much of an immediate impact on the business. But are the possible effects implemented into current pricing or will those pricing actions be implemented as you see the effects come through?

A: The nature of the business is, you know, all pricing changes require regulatory approval. So we've worked through over the last two years most of the states. A lot of that was focused on changes on the liability side, and so we've been able to get price increases for that. There's nothing that we've contemplated for tariffs specifically. And it'll have to play out. Right? We'll have to figure out what the impact is, prove that impact, then we have to apply for price increases. So as you know in this industry, these things are measured in the long, long cycle times.

Q: Hi. Good morning. First question is for Patrick. So just thinking about how the expense savings or reduction will phase out over the coming years. Right? So $20 million drops out in 2026. But outside of normal course efficiency initiatives, are there more substantial expense savings to think about? As a result of the tech migration.

A: Yeah. And first thing to say is we're not suggesting that $20 million drops out after 2026. A fair bit of the elevated expenses we have right now are license costs related to the new platform. And so those will continue. And then a chunk of it is also depreciation in the money that we spent over the last couple of years building out the new platform. So that too will continue. And then some of these people costs, right, with the State Farm really ramping up the launching of the new Enthusiast Plus product. Sure. Staff costs associated with that growth. And so the message is not that that drops away. The message is we're making those investments now and the revenue associated with it starts to ramp up at the second half of this year, but really doesn't come into play until 2026, 2027. This is really investing smartly to create a scalable platform for growth. And once you have that scalable platform, see that those costs relative to the revenue growth, they decline as a percent. So we're creating scalability. It just happens to be that 2025 is a little bit of a pinch point where the expenses are here, and the revenue is not quite here yet. So, hopefully, that clarifies how we're thinking about it. We continue to look at continuous improvement throughout the business. We did a very good job in 2023 and very much held the line in 2024 on the cost structure. Because of these new initiatives, we are investing in 2025 but we have initiatives throughout the organization to look for ways to create efficiency. A lot of it is around the operating system. Creating that scalable system that when we talk about growing from a million and a half customers right now and two point four million vehicles, two point five, and doubling that over the next four or five years. That's a huge amount of growth, and we have to do a very scalable platform. And so that's what you should focus on on a go-forward basis is that we are creating operating leverage through this approach.

Q: Yep. Just to clarify, Patrick, are you assuming any new partnerships in the trajectory or is it completely just State Farm and no other things you mentioned?

A: I would say we're not explicitly saying there's a partner or two partners but implicitly to get to these kind of numbers, yeah, we've been very successful building these relationships. So, yes, over that long-range planning horizon, we assume there will be new partners.