10-Q: Hagerty Inc. Reports Q1 2024 Results: Revenue Growth and Improved Profitability

Hagerty Inc. saw a significant increase in revenue and a return to profitability in the first quarter of 2024, driven by growth in insurance premiums and marketplace activity.

Summary

• Hagerty Inc. reported a total revenue of $271.7 million for the first quarter of 2024, a 24.4% increase compared to $218.4 million in the same period last year.
• The company's operating income was $12.2 million, a substantial improvement from an operating loss of $16.5 million in Q1 2023.
• Net income for the quarter was $8.2 million, a significant turnaround from a net loss of $15.0 million in the prior year.
• Commission and fee revenue increased by 19.1% to $88.8 million, while earned premium rose by 29.3% to $151.6 million.
• Membership, marketplace, and other revenue also saw a 17.9% increase, reaching $31.2 million.
• The loss ratio for Hagerty Re was 41.1%, slightly lower than the 41.3% reported in Q1 2023.
• Adjusted EBITDA for the quarter was $27.3 million, compared to $6.7 million in the same period last year.
• The company had 1,420,660 policies in force as of March 31, 2024, with a policy retention rate of 88.7%.

Sentiment

Score: 8

Explanation: The document shows a strong positive trend with significant revenue growth and a return to profitability. While there are some risks and expenses, the overall tone is optimistic and indicates a positive outlook for the company.

Positives

• The company experienced strong revenue growth across all segments, including commission and fee revenue, earned premium, and membership and marketplace revenue.
• Hagerty achieved a significant improvement in profitability, moving from an operating loss to an operating income.
• The company's loss ratio remained stable, indicating effective risk management.
• Adjusted EBITDA showed a substantial increase, reflecting improved operational efficiency.
• The number of new insurance policies and HDC memberships continued to grow, demonstrating strong market demand.
• The company maintained a high policy retention rate of 88.7%, indicating customer loyalty.

Negatives

• The change in fair value of warrant liabilities resulted in a loss of $6.1 million, impacting overall profitability.
• Ceding commissions, net increased by 28.0%, consistent with the growth in earned premium, but still a significant expense.
• Losses and loss adjustment expenses increased by 28.8%, also consistent with the growth in earned premium.

Risks

• The company is exposed to fluctuations in the fair value of warrant liabilities, which can impact net income.
• The company's reinsurance business is subject to the risk of reinsurer defaults, although all reinsurers have a rating of Aor better.
• The company's lending activities through Broad Arrow Capital are subject to the risk of a decline in the collector car market.
• The company is subject to various legal proceedings and regulatory investigations, including a data security incident from 2021.
• The company's tax liabilities are subject to uncertainties in the application of complex tax laws and regulations.

Future Outlook

The company expects to complete the acquisition of Consolidated National Insurance Company during the second quarter of 2024. The company believes that its sources of liquidity will be sufficient to provide an adequate level of capital to support its anticipated short and long-term commitments, operating needs, and capital requirements.

Management Comments

• Management believes that the current estimates are reasonable in all material respects.
• Management considers the valuation of the underlying collateral and the LTV ratio as the two most critical credit quality indicators for the loans made by BAC.

Industry Context

Hagerty's performance reflects a broader trend of growth in the classic car and enthusiast vehicle market. The company's focus on providing insurance, membership, and marketplace services positions it well to capitalize on this trend. The company's strategic partnerships with State Farm and Markel also provide a competitive advantage.

Comparison to Industry Standards

• Hagerty's loss ratio of 41.1% is within the expected range for specialty insurance providers, indicating effective underwriting practices.
• The company's revenue growth of 24.4% is strong compared to the broader insurance industry, which typically sees single-digit growth.
• The company's adjusted EBITDA growth is significant, suggesting improved operational efficiency and cost management.
• Hagerty's policy retention rate of 88.7% is high, indicating strong customer loyalty and satisfaction, which is a key metric for insurance companies.
• The company's expansion into the marketplace segment is a unique offering compared to traditional insurance companies, providing a diversified revenue stream.

Management Changes

Legal Proceedings

• The company is involved in various claims and legal actions that arise in the ordinary course of business.
• The company could be subject to litigation, fines and/or penalties related to a 2021 data security incident.

Related Party Transactions

• The company has a master alliance agreement with State Farm, under which State Farm's customers can access Hagerty's features and services.
• Hagerty Re has a quota share agreement to cede 50% of the risk assumed from a subsidiary of Markel to Oglesby Reinsurance Company, a wholly owned subsidiary of State Farm.
• Hagerty Re entered into an unsecured term loan facility with State Farm in the aggregate principal amount of $25.0 million.
• The company and Markel have an alliance agreement and associated agency agreement pursuant to which policies sold by Hagerty's U.S. MGAs are underwritten by Essentia Insurance Company and reinsured with Evanston Insurance Company, both of which are wholly owned subsidiaries of Markel.

Stakeholder Impact

• Shareholders will benefit from the company's improved financial performance and profitability.
• Employees may benefit from the company's growth and success.
• Customers will continue to have access to Hagerty's insurance, membership, and marketplace services.
• Suppliers and partners will benefit from the company's continued growth and expansion.

Next Steps

• The company expects to complete the CNIC acquisition during the second quarter of 2024.
• The company will continue to monitor and manage its reinsurance programs.
• The company will continue to focus on driving efficiencies in order to achieve growth and profitability goals.

Key Dates

Keywords

insurance, classic cars, enthusiast vehicles, reinsurance, membership, marketplace, financial results, revenue growth, profitability, adjusted EBITDA, loss ratio, premiums, warrants, Hagerty Drivers Club