Greetings and welcome to Hagerty Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jay Koval, Investor Relations. Thank you, sir. You may begin your presentation at this time.

Thank you and good afternoon, ladies and gentlemen, and thanks for joining us for Hagerty’s second quarter 2022 earnings conference call. My name is Jay Koval, and I recently joined Hagerty to lead their Investor Relations function, and I look forward to working with all of you. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website at investor.hagerty.com. Our earnings release, accompanying slides and quarterly letter to stockholders covering this period are also posted on Hagerty’s IR site. Joining the call today are McKeel Hagerty, Chief Executive Officer; and Fred Turcotte, Chief Financial Officer. Before we start, I would like to remind you that the discussion today may contain statements related to our business that may be considered forward-looking, including statements concerning our expected future business and financial performance, our ability to maintain existing and to acquire new members, our plans to expand market share, including planned investments and partnerships, expectations regarding key operational metrics, and other statements regarding our plans and prospects. Forward-looking statements are often identified with words such as we expect, we anticipate, we believe, or similar expressions. These statements reflect only our view as of today, August 10th, 2022, and should not be considered our views as of any subsequent date. We do not undertake any obligation to update or revise any forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and 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 other important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are available on Hagerty Investor Relations website and sec.gov. Finally, during today’s call, we will refer to certain non-GAAP financial measures. A discussion of these non-GAAP financial measures, along with a reconciliation to the most directly comparable GAAP measure is included in our Stockholder Letter, Investor Deck and Form 10-Q, copies of which can be found on the Investor Relations section of our website and on the SEC’s website at sec.gov. Unless otherwise noted in today’s call, all comparisons are on a year-over-year basis. And with that, I’d like to turn the call over to McKeel Hagerty, the CEO of Hagerty.

Thanks, Jay, and good afternoon, everyone. We appreciate your interest in Hagerty. I’m pleased to report that we continue to deliver solid results during the second quarter, despite the increasingly challenging macroeconomic backdrop. Before Fred and I dig into the numbers, we wanted to say thank you to our 1,700 plus One Team Hagerty members who worked tirelessly to deliver high rates of consistent growth, including 26% revenue growth so far this year. This team is comprised of long tenured Hagerty employees as well as the newly hired who are excited to join the company that is just beginning to hit its stride. Their hard work combined with our ongoing investments in people, technology, and infrastructure will help power our results in the years to come, as we continue to tap into the growing and resilient passion for the fun side of the automotive world. Slide 3 of the investor deck that we posted on our website shares some of the key year-to-date highlights. This includes total revenue growing 23% in the second quarter and 26% during the first half compared to the prior year periods. Total active members grew 9% year-over-year to 2.5 million. Written premiums grew 14% in the second quarter and 15% during the first half. We also entered into a definitive agreement to acquire the remaining 60% of the Broad Arrow Group for $64.8 million. We expect the deal to be immediately accretive to 2022 revenue and EBITDA as the business ramps quickly, leveraging the strength of the Hagerty ecosystem. Integration continues for the long-term in contractual State Farm partnership. The digital and technology teams have moved into the testing phase and the regulatory approval process with State Farm. We now expect to begin activating State Farm’s 19,200 agents to sell classic car policies during the first half of 2023. Our strong revenue growth of 26% during the first six months of 2022 keeps us well on track to deliver our full year top line outlook of 24% to 28%. This excellent growth is the result of strong execution by the team and managing through an increasingly challenging economic environment, and we are encouraged by the strength of this trajectory as we approach 2023. The enthusiast vehicle universe tends to be a safe haven during economic downturns, as people have historically allocated their available discretionary funds and free time to their areas of true interest. And everything we do is done to make it easier for auto enthusiasts to enjoy their cool cars. With this perspective, during the first half of 2022, written premiums grew 15%. This growth is slightly ahead of the last decade’s highly consistent annual growth of 13% shown on Slide 4. Over a decade, that delta compounds into an aggregate growth nearly 5 times the industry’s rate of growth. Despite our greater size today, we are delivering even faster rates of growth as we begin to capture the latent potential of Hagerty’s brand and ecosystem. The bar chart on the right side of Slide 4 highlights the significant difference in loss ratio for Hagerty versus the standard auto industry over the last decade. While the industry average loss ratio for daily drivers is 66%, our loss ratio in the US has consistently been under 40%, allowing us to reinvest in our platform and to deliver great experiences for our members. Let me share some color on the quarter, given the inflationary environment. We did experience slower than anticipated new business counts in the second quarter as unprecedented inflation impacted consumer behavior. While our business model has proven to be resilient over the years, delivering sustained growth through good times and bad, we are not completely immune to increasingly cautious consumers. As we have seen in previous periods of uncertainty, we saw a modest demand impact at the beginning of the second quarter that quickly stabilized. We believe that part of the slowdown in new business count during the second quarter was due to the reduced marketing budgets of our large insurance distribution partners, as they look to offset some of the challenges from slower growth and higher combined ratios, as frequency and severity have increased on daily driven vehicles. The other impact from this environment is that higher vehicle values in the collector space create a higher than normal trend in single policy vehicle sales. This causes a dip in our normal retention levels. While most companies would covet an 88% retention figure, it’s currently running slightly below the 89% to 90% that we have modeled for 2022. Back to our big moves for 2022. You will recall that we made an initial investment in the Broad Arrow Group earlier this year to help build our Hagerty Marketplace platform for members to buy, sell, and finance collector vehicles. The ongoing strength and long-term growth potential of the resale market validate our initial investment, and has led us to announce today, that we are acquiring the remaining 60% of Broad Arrow in a stock deal valued at $64.8 million. We expect Broad Arrow to be immediately accretive to our revenue and EBITDA in 2022, and are pleased to share that Hagerty Marketplace is trending well ahead of the original expectations when we formed the joint venture. The experienced Broad Arrow team is growing rapidly, and they have been successfully identifying opportunities to leverage Hagerty’s brand and membership model to build momentum in 2022 by accelerating investments in marketplace. We expect Broad Arrow to contribute meaningfully to Hagerty’s future growth as we leverage our growing membership base to directly drive revenue and EBITDA in this compelling adjacency. Not to mention, further strengthen our insurance business. The opportunity for Hagerty is large. Over the last 12 months, we’ve seen 300,000 cars transact across Hagerty’s insurance book with a total value of $12 billion. Our Hagerty Marketplace efforts can provide large new revenue opportunities as well as opportunities to keep a vehicle insured by Hagerty post-sale, not to mention potentially to add Hagerty Driver’s Club member fees and further engagement. Moving now to an update on State Farm on Slide 6. The teams are making solid progress working diligently on integrating our systems, seeking regulatory approvals, and moving into the testing phase. We expect to begin activating State Farm’s 19,200 agents to sell classic car policies during the first half of 2023, as well as to begin the state-by-state conversion of the existing 460,000 policies to the new program. Our teams are focused on delivering a seamless experience, and we believe that this customer-centric approach is what will help sustain our high organic growth rates over the coming years. The upfront investments to deliver our digital initiatives and to launch the State Farm partnership and others are substantial, but we believe that Hagerty shareholders will benefit longer-term from the increased size and profitability. This includes growing commission streams, reinsurance revenue, as well as Hagerty Driver’s Club. Strategic partnerships, such as State Farm, can augment our high rates of organic growth and drive operating leverage. Importantly, this is a win-win for partners as they seek to protect their insurance bundle, including daily drivers, home, umbrella, etc. As car lovers know well, there is no better way to lose a customer than through an unsatisfying claims process on the collector car, and Hagerty has created the expertise to deliver claims NPS scores that are consistently near 90. Slide 7 highlights several additional milestones achieved towards delivering a seamless digital experience for members, including launching the Hagerty roadside mobile app, launching Hagerty classified for members to buy and sell their cars, reaching 9 million monthly views on YouTube with great original content for auto enthusiasts, and transitioning all event ticketing and vehicle submissions to the Concours Digital Event platform that supports all of our owned and operated events. Our purpose as a company is to save driving and car culture for future generations. We do this by continuing to facilitate access to our automotive communities around the world that meet the human need for social interaction and connectivity with others in the car community. As we think about the coming years, we remain committed to improving an already great business model. This includes investing in a disciplined manner to continue delivering best-in-class experiences to members, support our digital transformation, and to drive better cross-selling of our products. Our One Team Hagerty is energized and committed to winning in the automotive enthusiast world, while maintaining a careful eye on costs. On that note, as we look ahead, we are prioritizing our time and resources to the strategic priorities that will drive our long-term profitable growth.

Thanks, McKeel. Let’s get right into the financial results for the second quarter shown on Slides 8 and 9. We continue to deliver solid growth across our membership, insurance, and enthusiast offerings. On a year-over-year basis for the second quarter, total revenue grew 23% to $206 million. Commission and fee revenue grew 14% to $96 million, driven by new business written premiums and policy in force retention of 88%. Membership and other revenue increased 21% to $16 million, benefiting from an increase in total paid members. Earned premium grew 34% to $94 million, driven by new business premium growth, policy retention, and a 10 point increase in our US contractual reinsurance quota share to 70%. It’s worth noting that our trailing 12-month revenue from Hagerty Re was $346 million, reaching 50% of total revenue for the first time, and it’s expected to continue to grow quickly as our quota share increases another 10 percentage points to 80% in 2023. Revenue per paid member increased 16% year-over-year to $158, compared to $136 in the prior year period. This growth was fueled by the higher quota share, higher commissions and fees, as well as from owned events, and revenue from our recent acquisition of Speed Digital. Total written premium grew 14% year-over-year to $238 million, compared to $208 million in the prior year period. Loss ratio remained stable year-over-year at 41%. We also announced that we are acquiring the remaining 60% of Broad Arrow Group. The Broad Arrow team of industry veterans is off to a strong start and they are executing well on the business plan. Additionally, the synergies across the Hagerty ecosystem have been greater than anticipated, and we now expect a meaningful contribution in 2022 from the fully consolidated results, including revenue growth and positive EBITDA. We will share additional details on the acquisition in the third quarter. McKeel mentioned the $12 billion of transactional value that crossed the Hagerty book of business. As we have previously discussed, the total global addressable market is multiples of this figure, creating a sizable TAM for us to pursue over the coming years. We structured the $64.8 million stock deal to tightly align with the Broad Arrow team with our corporate objectives of creating value for our stakeholders. For those of you who are able to join us in Monterrey next week, the Motorlux auction will mark the first of many Concours level auctions for Hagerty as we develop our platform across both live and online markets. Turning to profitability on Slides 10 and 11. For the second quarter of 2022, we reported an operating profit of $2 million, compared to an operating profit of $14 million in the prior year period. This decline reflects the significant investments that we continue to make in the Hagerty ecosystem across software development, acquired media and entertainment assets, scaling expenses related to State Farm, and accelerated investments in Hagerty Marketplace. As previously disclosed, these expenses include substantial pre-revenue costs for the design, development, and integration of digital platforms with new and existing legacy insurance management and agency reporting systems. We believe that the current pace of investment spend should subside as we move through 2023, positioning us for improved operating leverage and profitability. The net loss for the quarter was $5.5 million versus net income of $12.5 million a year earlier. In the second quarter of 2022, we recorded a fair value loss of $5.4 million related to our private and public warrants. This fair value adjustment was the primary driver for the net loss for the quarter, as well as the previously mentioned pre-revenue costs. GAAP loss per share was $0.07 based on our weighted average shares of Class A Common Stock outstanding, and adjusted loss per share was $0.02. Our adjusted EBITDA was $16.1 million for the second quarter, compared to $19.3 million in the prior year period, driven by previously mentioned incremental costs incurred this year. We believe adjusted EBITDA is an important supplemental measure of operating performance on a consistent basis, as it removes the impacted items which are non-recurring and not the direct results from our core operations. Our contribution margin of $98.2 million grew 16% from the prior year’s $84.5 million. We utilize this metric to evaluate the amount of total revenue that exceeds variable cost and is available to pay fixed costs and reinvest in growth. Let’s now turn to our 2022 outlook as shown on Slide 12. Our business has strong momentum as we head into the back half of 2022. This includes a favorable rate environment where most competitors are taking premiums up to offset higher loss rates and wage pressures. We believe the Hagerty brand has strong pricing power, and inflationary environments can be supportive of premium growth through rate increase actions taken and rising car values. Our rate increases will begin to flow through our results in the back half of 2022 and build further into 2023. We were encouraged to see written premium growth accelerate in July, and we believe our 24% to 28% revenue growth trajectory positions us well for another great year in 2023, predicated on mid-teens organic growth in written premiums, higher rates, increasing quota share, and the expected contribution from Broad Arrow Group. Moving down the P&L, we now expect full year adjusted EBITDA of $15 million to $20 million, which at the midpoint is roughly $10 million lower than our previously anticipated range. This is largely due to the accelerated spend in areas supporting State Farm and Broad Arrow Group. Full year 2022 GAAP net income and EPS are also temporarily depressed due to these investments, but are offset by the anticipated $28 million accounting gain on the sale from the original 40% stake in the Broad Arrow Group. In the aggregate, the theme for 2022 is consistent with what we have previously shared. 2022 is a year of significant investment that we believe will position us for sustained growth and operating leverage over the coming years. Given the economic backdrop, we will continue to be vigilant on all aspects of our cost structure and prioritizing investments that will support our long-term growth ambitions and include investing methodically in the long-term strength of the Hagerty brand. Strong organic revenue growth, combined with cost discipline positions Hagerty for margin expansion and improved cash flow over the coming years.

Thanks, Fred. In closing, I’m so proud of what the Hagerty team is accomplishing, compounding growth year-after-year. Our track record of success has been built on the strength of our brand and the quality of our team, powering mid-teens organic growth in the core business while investing in new partners and products that drive even greater scale, revenue, and profitability in the future. With just a 3% to 4% share of the current addressable market today, we believe we are in the early days of realizing Hagerty’s full potential. Thank you again for joining us today, and we’d like to open up the call for your questions.

At this time, we’ll be conducting a question-and-answer session. Our first question comes from the line of Mark Hughes with Truist. You may proceed with your question.

Yeah, thank you. Good afternoon. What was the catalyst for the acceleration in July? I think you talked about the lower new business count being impacted by your distribution partners’ marketing spend being a little more restrained. Is that changed in July? Is the rate environment getting better for you? What’s the – what’s the catalyst?

Thanks, Mark.

Thanks for the question. It’s McKeel. You know, what we’ve seen, and I’ve been in this for a long time, this is not our first time in an economic downturn. My first experience was actually in the dot-com bubble bust, then the financial crisis, and even COVID. What we see in each of these instances has been very similar. We’re growing along at a high rate, and then when consumer confidence gets rattled, it’s like the whole market in the car world kind of taps the brakes, and it flows all the way through the entire insurance world. So, we keep growing, we just keep growing at a slightly lower rate. It’s not volatility up and down, it’s just this depression for a short period of time, and it stabilizes. This year with this, it’s the same thing that happened. We just saw a slightly less demand than we had planned in that kind of second quarter period, but it stabilized quickly. When you really hit the big driving months in the middle of summer, people start buying cars and having fun, and maybe they start feeling more confident that whatever is going on out there, it’s not the end of the world. We’ve done quite well. So I’m very encouraged, which is why we reaffirmed our thinking about the back half of the year, but there definitely was that little bit of a drop there for a short period.

Understood. I think you said part of your EBITDA guidance was spending more on State Farm. Was that that you’re spending more or you’re just not getting the revenue at the timing you expected?

It’s you know two things. One, the State Farm is a piece of it. Almost all of our investments have been either substantially platforming or kind of re-platforming things that the systems we’re building to take on the large chunk of State Farm business are also useful to the rest of our partnerships. We have a lot of other partners other than State Farm, and we’re certainly excited to get them on board, but they’re just one. The other one is really, we are moving towards really consolidating up the Broad Arrow acquisition that we announced today, and we decided to accelerate heavily on the continuing our digital spend to get ready for Hagerty Marketplace rather than to throttle it out to next year.

Yeah, just to add to that, Mark. Thanks for the call and for this question. When you look at State Farm on the revenue side, we do not have any estimate in the 2022 guidance for State Farm revenue. So, there is none in the plan for State Farm, and it wouldn’t be in the year-to-date results as well. On the other aspect of it, regarding expense, we’ve completed development for the State Farm project and we’re now in testing. A bit of that first half expenditure was to accelerate and complete that development so that we could move into the testing phase.

And then, if I understand it properly, it looks like the State Farm is going to be happening soon. But it’s pushed out a little bit from your earlier thinking. Can you talk about that? I think you might have touched on it, but what the issues might have been and how you see a path to getting that resolved?

Well, you know, thank you, and it’s a big question. We’re actually very pleased with the progress all around State Farm. You know that was important for us to remind ourselves and everybody that this is a long-term contractual partnership. This is not an if, it’s a when, and there are large investments in Hagerty, and their CEO sits on our Board. It’s not like we’re hoping we get State Farm’s business, it’s just sort of when. We’ve really, to put it in context, if there’s anything that looks like a delay, it’s just complexity. We have a very large group of agents and a very large group of policies that we have to manage in the first year and months that it comes on. We’re an 80 plus net promoter score company, and State Farm is very proud of the way they serve their customers. We just want to make sure it’s really, really right as we turn things on. That complexity is what has lengthened the testing phase, which we felt was very, very important and we just want to be very customer-centric when we think about it. Just to put State Farm in context, we’ve shown very strong revenue growth this year without State Farm. Fred talked about the trajectory in the next year. Our goal is to continue growing at very high rates of revenue year-over-year based on the way our ecosystem works, and State Farm, like our other partners, will be important to that. But even though it’s large, it’s not that big of a piece as we think going forward in the years ahead.

Thank you very much.

Thank you, Mark.

Our next question comes from the line of Paul Newsome with Piper Sandler. You may proceed with your question.

Good morning. Thanks for the call. I was hoping you can help me size a little bit the expenses that you’ve made so far for all these roll ups in State Farm just being part of investments in future growth? I assume most of that goes through your general and administrative expenses. I was wondering if you didn’t have this desire to invest more heavily in some of these long-term programs, would your general and administrative expenses sort of rise in line with your revenue? Or is there some other way we should be looking at just to size the impact of these investments you’re making?

Yeah, it’s a great question, Paul, and good to talk to you. When I think about where we are from an expense perspective, $80 million in the first half of the year was spent on what we think are non-recurring pre-revenue costs. A good portion of that was accelerating development for State Farm, and we had other costs there as well. When we think about where they are, they’re in several spots on the P&L, including the wage line where we have folks working on State Farm, and it would include the consulting line where we have consultants helping us with some of that development. SG&A, of course, would be a smaller part of it. When we think about SG&A as a percentage of revenue, it would not grow as fast as revenue, the revenue at 24% to 28% as we’ve guided to is not the increase you’ll see in SG&A, and so, it will not be in line necessarily with that. Hope that helps.

No, that’s great. And then kind of a similar point. Anyway, you can help us evolve then if you see basically with that – you said expenses should subside next year. Is that kind of the idea that we would see continue to increase in expenses, but at just a slower pace, and will that pace be kind of commensurate with, you know, somewhere around revenue growth or should it be something different than that?

Yeah. I think we look at it from a couple of perspectives, Paul. Obviously, to grow 24% to 28%, you have to invest in the business, and we’ll do that and be opportunistic while we look at all lines of our expense structure for cost savings, and we’re doing that as any good company will do as they modulate their expense line with revenue and macroeconomic factors. At this time, I think we’re thinking that when we finish the State Farm development, right, which we’re there, and when we finish the accelerated development for the launch of Broad Arrow Group, which we’re getting close to, we will have digital platform expenses going into 2023. With those two major development projects behind us, we feel that we will have the opportunity now to create some operating leverage by reducing the overall development digital spend that we incurred in 2022.

Well, let some other folks ask questions. But thank you for the call and thank you for the help as always.

Thanks, Paul.

If there are no additional questions, I will turn the call back over to the Hagerty team for concluding remarks.

Thank you all very much. Thank you for those questions. Hopefully we helped you clarify your understanding about what we hope you think is a great story about how Hagerty is performing in 2022 and how we’re thinking about the future. We’re certainly excited, and we think we’re doing very well, given the larger environment. We remain even more confident in how the passion of the automobile and the way we tap into it creates a unique business result in comparison to other types of companies around the space. We’re very pleased with it. I will say this for anybody who follows the automotive world, next week is kind of like our Super Bowl and World Series all together, which is Monterey Car Week to Pebble Beach Concours at our Laguna Seca historic races. Our first Broad Arrow Auction at our Motorlux event. Hagerty has a couple of big media efforts out there. If you’re interested in tuning in, we’ll be live streaming the Pebble Beach Concours, we’re the official media partner of both the Pebble Beach Concours and The Quail, a Motorsports Gathering. You’ll be able to watch live results of that first Broad Arrow auction, which will be really exciting, with 90 lots expecting to even do very well in this environment. It's a super exciting group of cars, which is going to be a great and really nice look forward in how we think of ourselves relative to this great economic engine that we built and how we’re going to accelerate that in the years to come. Thank you all very much and thank you for your time and attention. Have a great time and keep on driving.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.