Greetings, and welcome to Hagerty's Third Quarter 2022 Earnings 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. It is now my pleasure to introduce your host, Jay Koval, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, ladies and gentlemen, and thank you for joining us for Hagerty's Third Quarter 2022 Earnings Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. Our earnings release accompanying slides and quarterly letter to stockholders covering this period are also posted on the IR website. Joining the call today are McKeel Hagerty, Chief Executive Officer; and Patrick McClymont, Chief Financial Officer. Before we start, I would like to remind you that the discussion today may contain statements related to our business that can be considered forward-looking, including statements concerning our expected future business and financial performance, our ability to maintain existing and acquire new members, our plans to expand market share, including 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 our view as of today, November 10, 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's Investor Relations website. 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 press release, investor deck, and Form 10-Q. Copies of which can be found on the Investor Relations section of our website. 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, our Founder and CEO.

Thanks, Jay, and good morning, everyone. Thank you for joining us to discuss our third quarter results. Before we get into the quarter, I want to welcome Patrick to his first Hagerty earnings call as our new CFO. I also want to thank Fred Turcotte for a decade and a half of outstanding service and collaboration. We announced Fred's planned retirement two months ago and are excited for him as he moves into a strategic advisory role, helping the company with special projects. Overall, we are very pleased with our third quarter results, which reflect the strength and resiliency of our highly differentiated business model addressing the auto enthusiast market. Let's start with Slide 3 of our investor deck, which shares some of the key year-to-date highlights through September 30, 2022. This includes written premium growth accelerating during the third quarter to 16%, resulting in 15% growth during the first 9 months. Written premium growth is the key metric that underpins Hagerty's total revenue growth today. The Hagerty brand is winning in the marketplace, pulling new customers into our ecosystem and supporting rate increases to offset inflationary pressures. In the third quarter, new business count contributed eight percentage points of the 16% premium growth, while rate actions and evolving mix to include more modern enthusiast vehicles drove the other eight points. Total revenue grew an impressive 29% in the third quarter and year-to-date revenue jumped 27%. In addition to the continued strong revenue growth of Hagerty Re, our membership business as well as our garage and social locations, Q3 was our first quarter fully consolidating Broad Arrow Group into Hagerty Marketplace. During the quarter, under our ownership, Hagerty Marketplace contributed solid revenue and profits, including the very successful Motorlux auction in Monterey, California. Total active members grew 7% year-over-year to 2.6 million. And our team continued to invest in the State Farm integration on both the technology and people side as we anticipate rolling out the partnership during the first half of 2023. We expect the initial 10-year contract to drive meaningful scale and growth for Hagerty as we help State Farm grow their new Hagerty-powered Classic-plus program as well as offering Hagerty Drivers Club memberships for these customers. We are very encouraged by our 27% year-to-date revenue growth, which keeps us on track to deliver full year 2022 revenue toward the high end of our previous outlook despite a challenging economic environment and heightened volatility across the broader property and casualty space. We believe this strong growth trajectory positions us well for 2023, including continued double-digit gains in written premium, 80% quota share in Hagerty Re, a move to a single-tier pricing of $70 on Hagerty Drivers Club, as well as a full year contribution from Marketplace's live and online auctions. We'll share more specific details on our outlook for 2023 on our fourth quarter call. We also love the time-tested defensive characteristics of our recurring business model as most auto enthusiasts continue to spend on their passion through economic downturns. As my mother loves to say at the dinner table, people take good care of their toys and collector cars occupy rarefied air in the prioritization of constrained resources. Everything we do is done to make it easier for auto enthusiasts to enjoy their special vehicles, offering the products and services that improve their experience, resulting in high retention and an excellent Net Promoter Score. Slide 4 highlights the consistent compounding written premium growth, our model has delivered over the last decade. Our outperformance compared to the industry expanded over the last nine months with written premium growth of 15% coming in at roughly five times the industry's estimated growth. After four decades of collecting data, we consistently underwrite these special vehicles at significantly lower loss ratios than the industry average. Even with the disastrous impact from Hurricane Sandy a decade ago, our 2012 loss ratio remained under 50%, and we were able to bring our loss ratios back down through rate increases over the following year. Our loss ratio in the third quarter increased to 56%, resulting in year-to-date loss ratios of 47%. While our underlying business performance remained solid over the first nine months, the higher loss ratio was driven by 3.4 percentage points of losses from Hurricane Ian and 2.2 percentage points due to increases in U.S. liability reserves. Ian's net exposure was limited to $10 million due to our successful approach to risk and reinsurance management. And given the higher severity losses in our liability lines, we strengthened Hagerty Re by $6.5 million to maintain a prudent level of reserves compared to estimated ultimate reserve needs. We expect our loss ratio to return to the 41% range next year based on recently implemented rate increases. Even with the higher-than-normal loss ratio, our combined ratio of 95% compares favorably to the industry average. The strength and stability of our business model allows us to reinvest in our platform year after year and to deliver new products and experiences to consumers, which paves the way for future growth. Retention remained stable around 88%, which is slightly below expectations due to the robust resale market for single-vehicle policies. Roughly two-thirds of our 12 percentage points of attrition so far this year has been driven by vehicle sales, highlighting the strength and love for Hagerty through a retention rate closer to 96%, excluding the impact from these sales. Importantly, we are still growing our net vehicle count in the high single-digit range, a testament to the strength of our brand and value proposition, which leads me to an update on Hagerty Marketplace and why we are so excited about our future potential as a high-trust platform for members to browse, buy, sell and finance collectible cars. As a reminder, we acquired Broad Arrow Group in August of this year and conducted our first live auction with Motorlux in Monterey. In Monterey, we sold over $55 million in vehicles, generating $5 million in commission revenue with 88% of lots sold. Auctions of this size can generate 30% EBITDA margins, so with two more auctions in the fourth quarter, including the recent Cars of Jim Taylor with $21 million in vehicle sales, we are encouraged as we plan our 2023 auctions. Equally exciting is the recent launch of our online time-based auction platform where Hagerty can serve consumers as the trusted brand for both buyers and sellers of vehicles, offering certification services, title and escrow as well as financing options. These higher value-added services differentiate our product from competitors. The opportunity is substantial with a total collector vehicle value in the U.S. of over $1 trillion. If you were to assume in a typical year that 5% of vehicles trade hands, it implies a transaction value of $50 billion, which at a 10% commission would result in $5 billion in total net revenue. When consumers decide to sell their vehicles today, they typically rely on small and regional markets, including local classified ads, dealer sales, and Facebook Marketplace versus gaining access to a nationwide network of potential buyers. Our team is focused on making sure Hagerty captures more than its fair share of the opportunity as these sales move online. For context, the largest competitor in the space is on track for well over $1 billion in vehicle sales this year and is growing annual transaction value at close to 60%. As we mentioned last quarter, the Hagerty Marketplace is expected to be immediately accretive in 2022. We underwrote the investment of Broad Arrow Group on its standalone merits, but we see a clear path to recapture the policy on the buyer side by introducing new consumers to the product, services, and entertainment options that make up our automotive lifestyle ecosystem, including Hagerty insurance and Drivers Club. Our partnership with State Farm is progressing well, as you'll see on Slide 6, and the teams continue to work hard integrating our systems, seeking regulatory approvals, and progressing through the testing phase. As we work towards providing the high-quality agent experience that our customers expect, we anticipate that we will begin activating State Farm's 19,200 agents on a state-by-state basis during the first half of 2023, including beginning to convert the existing 460,000 policies to the new program. We believe that this partnership with State Farm will help unlock significant growth in their classic auto business, creating a win-win for both companies, and we are excited to stand up the platform next year and create value for shareholders through the scaled-up revenue and normalization of digital investments post-2023. Slide 7 highlights several of the key year-to-date milestones across our ecosystem, including our continued progress with State Farm, Marketplace's successful launch, increasing quota share of Hagerty Re, solid growth in membership, and strong delivery of content and experiences to customers through our media and entertainment platform. At Hagerty, our purpose is to save driving and car culture for future generations. To that end, we have been building an ecosystem of products and services and entertainment for car lovers that honors and catalyzes the passion for cars and driving. And we will continue to facilitate access to our automotive communities around the world that meet the human need for social interaction and connectivity with others. As we think about the next decade, we remain committed to improving an already great business model. This includes continuing to execute on our long-term growth strategy by delivering best-in-class experiences for members. But most importantly, we will take a disciplined approach to resource allocation and cost containment to improve our margins and cash flow and return to profitability on the other side of these elevated investments. With that, I will turn the call over to Patrick to discuss our financial results in more detail, including our early thoughts on the financial strategy into 2023.

Thank you, McKeel, and good morning, everyone. It's great to be here today as part of One Team Hagerty. I would like to thank McKeel and the Board for this opportunity and also thank Fred for the tremendous effort he has put into making this a smooth transition. Before digging into the quarterly financials, let me start by sharing some of my early thoughts on Hagerty, two months into the job. First, the auto enthusiast space is large and highly fragmented, and the market opportunity for Hagerty is compelling. With just 4% share of the insured market today, we see a long runway ahead as we use our powerful brand, trusted relationships, and unique customer value proposition to take share in a growing space. This will be powered by double-digit organic growth as well as new incremental partnerships such as State Farm. Second, the ongoing evolution in Hagerty Re to assume more of the risk that we underwrite through Markel's Essentia platform should allow us to build our capital base and create a high-quality, fast-growing profit stream for the company. Third, Hagerty's Marketplace platform is just getting going in the transactional market for enthusiast vehicles. It's a large and profitable market, and our team can leverage Hagerty's trusted brand status and 2.6 million member community to quickly drive scale and profitability. And fourth, while we may be opportunistic when it comes to small bolt-on transactions, we can deliver our strategic growth ambitions without the need for additional sizable deals. Hagerty has made significant investments during the last several years, and our job now is to weave these together to drive synergies across our ecosystem of offerings for auto enthusiasts and deliver strong profit growth over the coming years, starting in 2023. Put simply, we are fortunate to have the wind at our back when it comes to our revenue drivers today. As a newly arrived CFO, one area I believe we can improve is our expense management and prioritization of resources. You can see this in our year-to-date results, where expense growth outpaced our top line. Much of this is due to the heightened investment in technology to support large-scale partnerships such as State Farm and the rollout of Marketplace. Some is due to our decision to go public, which comes with considerable new costs. Additionally, we've added people to support growth in our traditional insurance and membership businesses, and also in new areas such as events and Marketplace. It is imperative that we not just deliver the revenue growth we anticipated but carefully manage our costs so we can achieve profitability and positive cash generation in short order. For historical context, our EBITDA margins from 2012 to 2017 exceeded 10%. So there is significant upside from improving our financial discipline. We are deep in budgeting season for 2023 and currently taking the necessary steps to slow the growth in our expenses to a rate meaningfully below the growth in our revenues. During the past few years, we have relied heavily on high-priced contractors to do digital product development, software engineering, and other projects. We are winding down many of these contracts and insourcing the remaining work at a lower total cost. We are carefully looking at all of our third-party expenses and working to reduce scope, price, or both. We also recently announced a voluntary retirement program. We are taking a fresh look at all expenses. Additionally, we are viewing our various initiatives and prioritizing the ones that add the most value to our core insurance, membership, and marketplace businesses and deemphasizing the ones that have dragged on profitability during the last few years. Hagerty is a high-growth company with a rightsized infrastructure, and we will generate the profits and cash flow necessary to fund our long-term growth strategies, reward our shareholders, and allow us to save driving and car culture for future generations. Now let's dig into some of the numbers from the third quarter. We delivered solid growth across all revenue streams. On a year-to-date basis, for the third quarter, total revenue grew 29% to $217 million. Total written premium grew 16% to $222 million. This represents a two-point acceleration from the second-quarter rate of growth. Commission fee revenue grew 12% to $85 million, driven by solid contributions from new business written premium and policy in-force retention of 88%. While base commissions grew 16%, total commissions in the quarter were negatively impacted by an elevated loss ratio, including Hurricane Ian that reduced the contingent underwriting commission by $4 million. Membership Marketplace and other revenue increased 80% to $24 million, benefiting from an increase in total paid members and the addition of $6 million in marketplace revenue, primarily from our very successful Motorlux auction in Monterey. Earned premium grew 37% to $107 million, driven by new written premium growth, policy retention, and a 10-point increase in our U.S. contractual reinsurance quota share to 70%. Revenue per paid member increased 25% to $164. This growth was fueled by higher premiums, commissions, and underwriting revenue as well as revenue from Marketplace, owned events, and garage and social. Turning to profitability, for the third quarter of 2022, we reported an operating loss of $21 million compared to an operating profit of $2 million in the prior year period. This decline includes $10 million we are reserving for net claims cost for Ian, $1 million to reinstate our reinsurance strategy following Ian, and a $6.5 million increase in our reserves for U.S. auto insurance claims driven by higher liability costs. The majority of our premium goes towards physical damage, but recently, we have seen liability severity increase on our U.S. business. As a result, we strengthened our reserves in the third quarter allowing us to maintain a prudent level of reserves compared to the estimated ultimate needs. We are implementing rate increases that should drive our loss ratios back down to the 41% area. Our reduced profitability also reflects the significant investments in technology and people across the organization, but primarily related to the State Farm partnership and accelerated investments in Hagerty Marketplace. I would note that marketplace investments are both on budget and on time, including last week's launch of our online auctions. Net income for the quarter was $24 million versus net loss of $1 million a year earlier. In the third quarter of 2022, we recorded a fair value adjustment of $12 million related to our private and public warrants as well as a $35 million revaluation gain related to our equity stake in Broad Arrow Group. GAAP earnings per share was $0.18 based on our weighted average shares of Class A common stock outstanding. The decrease in warrant liability and the gain on Broad Arrow makes our EPS look odd this quarter. So you will see in the 10-Q, we added a simple calculation stripping both of these items out of the numerator and using the total shares outstanding, including the Class B shares held by Hagerty Holding Corp and Markel as the denominator. On that basis, adjusted EPS was a loss of $0.06 per share, which is more in line with what you would expect given the operating losses discussed above. Our adjusted EBITDA was a loss of $10 million for the third quarter compared to $8 million in the prior year period, driven by the same cost items I already went through. Now let's turn to our revised 2022 outlook. As McKeel mentioned, our revenue has been outstanding, and we are tracking towards the high end of the full year outlook for 24% to 28% growth. Keep in mind that our mid-teens organic growth in written premium was augmented by the increase in quota share with Ascensia and revenue from acquisitions. Written premium growth is well balanced, including high single-digit growth in net new business count and rate increases that should help us offset inflationary pressures in 2023. These higher rates, combined with the increased quota share will continue to drive revenue for Hagerty Re. In Marketplace, we expect to build on our current momentum during the fourth quarter and into 2023 through both digital auctions on Hagerty Marketplace and Broad Arrow's live auctions. Moving down the P&L, we now expect full year adjusted EBITDA to be a loss of $5 million to $10 million. This lower range is almost entirely driven by the previously mentioned costs related to Ian, increased reserves for U.S. auto, and the lower contingent underwriting commission. Full year 2022 GAAP net income and EPS are similarly impacted by these items. In summary, Hagerty is delivering top-tier revenue growth consistent with our expectations and 2022 remains a year of significant investment, which will position us for sustained growth and operating leverage going forward. We are taking the necessary steps to improve profitability and cash flow in 2023, including cost containment initiatives and prioritization of resources. Meanwhile, we will invest in the long-term strength of the Hagerty brand to continue compounding our top and bottom line growth in the years ahead. With that, let me turn the call back to McKeel for closing comments.

Thanks, Patrick. As we approach our first anniversary as a public company, I want to reflect on the great work that our amazing teams have accomplished. This includes managing through all of the potential challenges that come as a public company without missing a beat on executing against the sizable growth opportunities for the Hagerty brand as a leader in the auto enthusiast space. The addressable market is large, growing, and highly fragmented, and we have never been better positioned to profitably grow our business and to fund our future growth ambitions. This pivot towards more profitable growth will require discipline, hard work, and intense focus, but we've assembled great teams that are up to the task and are committed to our mission. In 2023, we expect to begin leveraging these high rates of top-line growth into even faster bottom-line growth and to drive outsized returns for shareholders. Thank you for joining us today, and we'd like to open up the call to your questions.

Our first question comes from the line of Mark Hughes with Truist.

The 8% increase in new business contributes to the overall growth. I'm curious how much of that was due to rate changes and the evolving mix in written premium. Can you share your thoughts on the rate increases you may be filing now in relation to the rise in losses you've mentioned, particularly the higher liability costs? What do you anticipate the rate will be, and how do you view the loss trend? Any insights on these would be appreciated.

Sure. Happy to. So the way to think about rates, we've filed in, I think, 35 states. So that's starting to flow through now and will continue to flow through in the fourth quarter and into 2023. We are planning on a subsequent rate filing as we get deeper into next year. So we'll see increased rates filtering in over the course of the year. You should think about that as high single digits, call it 8%. In terms of the impact between valuation and rate, it's a mix between the two. Right now, it's more rate than it is valuation. That's contributing to the overall kind of mid-teens growth in written premium.

And how do you see the trend in loss costs? If you take frequency and severity, given the new liability severity that you're seeing, if your pricing is up 8%, what's the loss cost trend?

Mark, it's McKeel. I'll kind of take that because it's near and dear to my heart. The big thing that we're focused on is some elevated liability experience that we're seeing, and that's really where we kind of wanted to make that prudent adjustment in Hagerty Re. So this is I guess I would describe it as social inflation, often things kind of out of the direct underwriting control of the business. Our rate filings are really focused in the liability area, and that's what's starting to wash through the books and will for the next couple of quarters, so really manageable. The underlying business and the way the premiums are constructed for us are really heavily weighted on the physical damage side, which remains really, really positive for us.

If you look at what happened during the quarter and the reserve strengthening that we took and where we ended up in terms of loss ratio, the 46.8% on a year-to-date basis. If you put it off to the side, Ian, that's about 3.4 points and this increase in the U.S. reserves that we're talking about is about 2.2 points. When you think about those, you get right back down to the kind of 41%. As the rate filters through, we think we'll be in that 41% area on a go-forward basis.

Okay. And then the $10 million hit from Ian, was that your retention? Was the gross loss higher?

Yes, our retention reflects that the gross loss was higher, and we have a $10 million cap in the program, which represents our total exposure. The cost to reinstate the reinsurance program is around $1 million, and those two figures are essentially the same.

Yes. Has there been any change in the timing for State Farm? I believe you mentioned it was on cost and on schedule. Is there any update from the last three months?

Mark, McKeel again. We are on track for the first half of next year. We are progressing through the complex testing, focusing on technology and wiring at this stage, and the teams are collaborating effectively. There is a positive outlook in that regard.

And did you break out a dollar amount for the pre-spending, so to speak, the ramp-up costs associated with State Farm? I think you've done that in the past. Do you have any updates for this quarter?

It's in the Q. I'm not sure in the earnings but I know it's in the Q.

It is. I can follow up with you after the call to run through the numbers.

Okay. If it's in the Q, I'll get it there. And then just a final question. The paid Hagerty Drivers Club, I think your target was up 5% to 6%. You're in that range now. How is that trending any nuance here related to the economy or inflation, maybe inflation is going away? We can all feel better about that. But any update on where you think that growth is going to trend.

Well, if we're talking about just kind of our underlying Hagerty Drivers Club sort of rate of uptake because typically, you get a new customer through the front door, which is typically an insurance quote, then we have this percentage of uptake. It's actually trended very positively this year. We've added some real, we think, value to the Hagerty Drivers Club program. We continue to merchandise it well. So it's kind of a low-cost, high-value package that works well for both our insurers and non-owners. So it's actually tracking very well in there.

Mark, just on your questions on Page 10 of the earnings slides on the right-hand side, underneath adjusted EBITDA. We're at $24 million on a year-to-date basis for those items that you talked about. So the pre-revenue cost related to State Farm.

Okay. Appreciate that.

Next question comes from the line of Greg Peters with Raymond James.

This is actually Sid on for Greg. First, just wanted to touch on the contingent commissions. I know it kind of trends with the loss ratio. And so just if you could remind us, is there a point with the loss ratio where it could impact the contingents, and if so, is that based on full calendar year loss ratio results? Or is it more on a quarterly basis?

Thank you, Sid. It's McKeel here. It definitely aligns with the overall calendar year loss ratio. It's a complex situation for the year. However, we've been in this long enough to make accurate predictions. When the loss ratio shifts, it can slightly affect the contingency underwriting commission. Could it potentially go to zero? Yes, but that would require an unimaginable catastrophic change to the loss mix of the business. While we expect a minor adjustment to the contingency underwriting commission this year, it should be relatively small—around a percentage point less than what CUC could be.

So if fully loaded CUC is 10% based upon how it's tracking right now, we're sort of in the 8.5% area, and we'll see how that shakes out for the balance of the fourth quarter. It's a very modest impact. The impact of an event for CUC purposes is capped at $1 million. So there would have to be, to McKeel's point, multiple individual events before we really get into that.

Okay. Yes, that makes sense. And then maybe just pivoting back to the State Farm partnership. I know it's expected to start rolling out state by state early next year. Just curious, is there a target date or time period you're shooting for to have the rollout completed in all states? Trying to get a sense of maybe we should start to see the full benefits of the partnership at the beginning of 2024. So any insight there would be helpful.

Yes, that's a great question. One distinction between the State Farm program and our underlying program is that while both the product and pricing are similar, State Farm's programs are always six-month policies whereas we offer one-year policies. If you were to carry out a book roll, it would typically take 18 to 24 months to fully realize the benefits of onboarding all those customers. However, the advantage of our relationship with State Farm—and what we anticipate—is that once we begin operations, we expect an accelerated rollout across the remaining states. This means we should start to see benefits from integrating the approximately 460,000 policies during the latter half of 2023 and into 2024, which is quicker than our usual book roll timeframe. Nonetheless, it will certainly extend into 2024.

Our next question comes from the line of Paul Newsome with Piper Sandler.

Maybe just to step back. Obviously, you're getting great growth rates. How do you think of sort of PIF count prospectively? And do you think you're relative to what you think the market is doing? Are you gaining actual customer PIF count over what you think the market is growing? Or is that any sort of view on what you think you are versus what's going over with the overall size of the market?

Yes. Well, nice to hear from you. Thank you. Yes, definitely, as we look at it, it's about an 8% kind of PIF count for us, which we don't spend a lot of time focused on the, say, regular auto insurance market, but we know from this year that with many of the very, very large insurers who are our partners slowing down their advertising spends in the earlier part of the year that a lot of those companies are seeing pretty low PIF counts if kind of any at all in some cases. So 8% this year for us. We feel really strongly about it, given the kind of uncertainty of the overall environment. Our experience in previous economic slowdowns, both going all the way back to even the dot-com crisis and then the financial crisis and other kind of hiccups in the economy is that you'll see a little bit of a dip in the top line PIF growth, but not like a complete shutting down of it. When we reflect on, for example, the financial crisis, it's kind of a confidence thing. People just aren't as focused and in our role as they might be during a normal time. And that's a little bit what we've seen this year. So we're quite happy with the 8%.

And part of the key for us is retention, right? So the 88% retention. If you peel that back, the main reason we lose people is because they've sold the vehicle. It's not that they've decided to move to another provider. So if you strip out selling the vehicle, our retention is like 96%. So we're growing and keeping people and so it's an incredibly stable book of business.

I was hoping you could return to the reserve change. This quarter, we saw a number of auto insurers talk about potentially increased severity due to larger, more expensive accidents, as well as bodily injury claims. I was curious if you saw any of that because it seems like the answer is no. But maybe you could talk to that as well. It seems to be your issues may be coming from a little bit different source than, say, a standard auto insurance company.

Yes. Thank you. And it's interesting when you look at the kind of long-term results of our program, when we see things, it almost tends to be the exact opposite of what happens in the regular auto insurance world. We know that what's driving a lot of the changes in the challenges, I think the regular auto insurance industry has is those are costs related to physical damage claims, especially with used car vehicle prices being up the way they are, and issues related to parts and supply chains. That's what they're seeing. For us, it's almost purely liability settlements and things related to liability claims. In some cases, because of on and underinsured motorists, these can be settlements that have nothing to do with the vehicle that we insure. It's just the nature of the legal system as it stands today, and we get dragged into that stuff. That's why we took that $6.5 million hit and are looking at getting our rates right for us going forward, and we're pretty confident in the year ahead.

Just the numbers behind that. So for us in a typical year, 70% of our losses are physical value, and just 30% are our liability. If you look at the industry, it's not quite the opposite, but pretty close. The industry is more like 40% when it comes to liability and 60% on physical damage. We just have a very different profile.

The bodily injury that that's part of your liability? Or do you consider that probably so?

Yes. Our rates are influenced by factors like bodily injury coverage such as MedPay or PIP, which vary by state. While this is an important aspect, our main concern is ensuring that rates are set correctly moving forward, especially regarding uninsured and underinsured motorists. This varies by state, but these situations often lead to jury trials where we can become involved as an additional insured in the household of the affected individual.

Okay. And the last topic I wanted to talk about is all lots of excitement in the insurance industry about higher reinsurance costs. Your structure is a little bit different than others. Could you talk about how the higher reinsurance cost could or could not affect your business prospectively, if we do see that next year?

Thank you. I know it's certainly talking to a lot of other insurers and going to insurance conferences; it's like everybody is holding their breath about what's going to happen to reinsurance costs next year. We also know that cheap reinsurance is not a business model; maybe it's a benefit of running a good underlying business. But how we're thinking about it is this is the first year we've actually penetrated our reinsurance layer. What I would say without being too specific since we're still working through the losses related to Ian, is that even with that $10 million retention and the actual losses being a little bit higher than that, it was well below what our model had for us. So even then, we feel pretty confident in being able to go forward in the next year for a renewal, confidently renegotiating for a favorable rate based on how we underwrite, how we price, and how we control losses. We feel pretty good about what we’ll be able to do next year.

You’ll see in the Q, the gross that flows through is about $18 million. Our retention on that is just the $10 million. The total for us was $27 million or so before salvage, which is a fraction of what the model said it should have been with this event. It speaks to the nature of the risks that we're underwriting. Our team is in the field before these events, helping people move their vehicles. We've got stories where one member is offering to store vehicles of another member. It's just very different than daily drivers.

Again, I was just actually going to sort of the cost structure within your system. I think the hurricane Ian losses, it is what it is. Do you have any thoughts on how that impacts the company?

We're actually feeling pretty good about what that renewal will look like in the spring.

Our next question comes from the line of Pablo Singzon with JPMorgan.

Just one for me. I wanted to follow up on your comments regarding expense management. I was curious if you could frame for us given that you do provide a breakout of fixed operating expenses as well as contribution margin? Where should we see that expense benefit filtering through? And any comments on the magnitude and basis improvement there?

Yes. So we're right in the budgeting process now. The approach that we took was really to look up and down the P&L across all different businesses. We've challenged people to really look at it with a fresh set of eyes, and me being new, I think is helpful with that. The areas that we're focused on, one would just be the cost of labor, and there are opportunities for us to automate and ensure that we're building operating leverage. On a go-forward basis, we won't have to increase headcount at the same rate that we're increasing revenue. There will be a fair bit around the labor side of things where we think we can do better. I think G&A is another area. As I mentioned on the call, some of these are unavoidable, and they come with the structure of being a public company. But I believe there are other opportunities where we could be a bit more efficient and lean. We're really going up and down, and the main framework is we've got this incredibly robust business on the written premium side that can grow in the mid-teens. Then we've added things like Marketplace, which are small but growing much faster than that. We just have to ensure that the underlying resources grow at a discount to that. Over the last couple of years, they've been growing at the same rate, so we're going to bend that curve on the cost side to make sure that we get to profitability quickly.

There are no further questions in the queue. I'd like to hand the call back over to McKeel Hagerty for closing remarks.

Well, thanks again. I love having the questions here today. I really appreciate the time and attention. Please reach out if you have any other further questions for us. Rest assured, we're going to keep focusing on the future and our mission of saving driving and car culture for future generations. Hopefully, you see that we think we have a highly differentiated business model that really taps into that automotive passion, but also taps into a pretty special part of the insurance and other parts of the business model that will allow us to build a more efficient business, but also enhance profitability over time. We're excited about this work, and excited to be able to build this plan with our team and deliver for our shareholders. We appreciate all of your support. So keep on driving.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.