Greetings, and welcome to the Hagerty Second Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A brief 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, Mr. Jay Koval, Head of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Hagerty’s results for the second quarter of 2023. I’m joined this morning by McKeel Hagerty, Chief Executive Officer; and Patrick McClymont, Chief Financial Officer. During this morning’s conference call, we will refer to an accompanying presentation that is available on Hagerty’s Investor Relations section of the company’s corporate website. Our earnings release, accompanying slides and letter to stockholders covering this period are also posted on the IR website. Our 8-K filing is also available there, along with our earnings press release and other materials. Today’s discussion contains forward-looking statements and non-GAAP financial metrics as described further in the earnings presentation. Forward-looking statements include statements about our expected future business and financial performance and are not promises or guarantees of future performance. They 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 important factors that could affect our actual results, please refer to those contained in our filings with the SEC. The appendix of the presentation also contains reconciliations of our non-GAAP metrics to the most directly comparable GAAP measures supplemented by this morning’s 8-K filing. And with that, I’ll turn the call over to McKeel, our Founder and CEO.

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join our second quarter 2023 earnings call. Hagerty has a track record of delivering double-digit written premium growth over the last two decades, and One Team Hagerty has been hard at work positioning the company to sustain these high rates of growth over the coming years. We do this by solving problems for car lovers by providing the products and services that these enthusiasts need to enjoy their prized possessions. So I’m proud to report that we continue to deliver robust top-line momentum during the first half of 2023, fueled by high-teens written premium growth. And we significantly grew profitability despite ramped-up technology spending as we build out our buy and sell marketplace and prepare to launch the State Farm commercial partnership over the coming months. Let’s dig into the first half results, including: total revenue jumped 28% during the first six months of 2023 to $480 million; written premiums and commission revenue both grew 17% during the first half. The Hagerty brand is strong and our superior value proposition is resonating with consumers in an industry suffering from unprecedented inflationary pressures. In fact, in the first half of 2023, we added a record number of new policies, surpassing the very robust numbers we delivered during 2021. In our risk-taking entity, Hagerty Reinsurance, first half earned premium jumped 34% due to the growth in written premium and our increased level of quota share to 80%. We have continued to assume more of the risk and premium associated with our strong and stable underwriting capabilities. Membership, marketplace, and other revenue increased 53% during the first six months, fueled by 20% membership growth, $12 million of marketplace revenue, and a 12% increase in other revenue. Finally, regarding our commercial partnership with State Farm, we are excited to announce that we will soon begin writing new policies in four initial states under the 10-year agreement. Good things take time, and we are confident that the State Farm Classic Plus program is the beginning of a very fruitful commercial partnership that will be a win-win for both companies. Over the last several calls, we have talked at length about our intense focus on managing expense growth so that we can return to historic levels of double-digit profitability in short order. We are pleased to announce that our year-over-year margin improvement is running ahead of expectations. First half adjusted EBITDA of $41 million increased $31 million. And we also delivered positive operating income and net income during the first six months of 2023. Our team is executing well on our profitable growth ambitions, and we are positioned to deliver on our 2023 key initiatives. As a reminder, they include: first, delivering high rates of revenue growth powered by sustained double-digit written premium gains and incremental revenue from membership and marketplace. Given the strong first half results and continued business momentum, we are increasing full year revenue growth expectations to 23% to 27%, fueled by written premium growth of 13% to 15%. Second, continuing our evolution into a vertically integrated insurance business, which we believe will create meaningful value for consumers as we increase our control by reducing the frictional costs inherent in the current structure; and third, significantly improving the profitability of our business through cost containment and operational efficiencies. Given the strength of our first half results, we are upgrading our full year outlook for adjusted EBITDA to a range of $60 million to $80 million, which implies over seven points of margin expansion from 2022. In summary, we are on a path to becoming a leaner, stronger, and more profitable company that can self-fund these high rates of growth. Our productivity initiatives will drive cash flow generation over the coming years, which, when combined with our recent capital raise of $105 million, should position us to continue to invest and execute on our long-term growth ambitions and allow us to preserve the driving car culture for future generations. We believe this strategy will create value for our stakeholders, including members, partners, and investors. Let me now turn the call over to Patrick to cover the financials in more detail.

Thank you, McKeel, and good morning, everyone. McKeel shared some of the first half figures, so let’s dig into the second quarter results. We delivered 27% growth in total revenue in the second quarter to $261 million, with written premium growth of 16% and large gains in marketplace and membership. Hagerty’s brand strength can be seen in the 88% retention and quality of written premium growth with strong contributions from new business count and rate. Commission and fee revenue grew 15% to $110 million due to the written premium gains. Membership, marketplace, and other revenue jumped 44% to $24 million, benefiting from an increase in total paid members, a transition to single tier pricing for membership at $70 per year, and an additional $5 million in marketplace revenue from the successful Porsche 75th anniversary auction in June. Earned premium grew 35% to $127 million, driven by new written premium growth and another 10-point increase in our contractual reinsurance quota share in 2023 to roughly 80%. Our loss ratio, including catastrophes, came in at a stable 42%. Our book performs differently from daily drivers because our customers take good care of their toys. Now, turning to profitability, we reported a second quarter operating profit of $17 million, an increase of $15 million over the prior year period. Operating profit this quarter included a $3 million charge related to the impairment of leases for facilities we are no longer using. In the aggregate, we delivered second quarter net income of $16 million compared to a net loss of $6 million a year earlier. The year-over-year change in net income was primarily driven by the significantly improved operating margin. Net income also includes a $4 million swing in fair value adjustment related to our private and public warrants. GAAP earnings per share were $0.03 based on our 84 million weighted average shares of Class A common stock outstanding. Our adjusted EBITDA during the second quarter was $34 million, an $18 million improvement over the $16 million in the prior year period. Let me now move on to our upgraded 2023 outlook. Given this consistently strong and visible top-line momentum, we are increasing our outlook for total revenue growth to a range of 23% to 27%, powered by written premium growth of 13% to 15%, which is two points higher than previously anticipated. Our rate increases are locked and loaded, and the Hagerty brand is on track to add a record 25 million new members in 2023, creating a powerful base of auto enthusiasts to provide our products and services. Moving down the P&L, we have again increased our profit expectations for the full year. We now expect net income in a range of negative $12 million to positive $8 million and full year adjusted EBITDA of $60 million to $80 million, $5 million higher than prior EBITDA expectations of $55 million to $75 million. Before I wrap up, I wanted to highlight some additional details related to the $105 million capital raised from strategic investors at the end of June. We raised $80 million of convertible preferred equity at Hagerty, Inc., including $50 million from State Farm to support our growth initiatives. This includes our continued evolution into a lower-cost full-stack carrier. We also have a $25 million commitment of long-term debt financing from State Farm for Hagerty Re. This capital enhances our cash and liquidity, supporting our growth to a self-sustaining cash-generating model. In summary, we are well on our way towards achieving our 2023 plan for strong revenue growth and margin expansion. Importantly, we are laying the groundwork that will power our results over the coming years as we look to sustain our commission growth while also building out our marketplace platform. With that, let us now open the call to your questions.

Thank you. We’ll now be conducting a question-and-answer session. Our first question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Yeah. Thanks. Good morning.

Hi, Mark.

Patrick, you mentioned the rate increases are locked and loaded. Can you refresh me on what you’re getting in terms of average rate these days?

I guess, the way to think about 2023, what we’re guiding to now in terms of total written premium growth is mid-teens. Of that, about two-thirds of it is coming from rate, and the balance is from volume. So think about rate as high single-digit, touching double-digit rate increase, and then the balance is coming from growth in units.

How much are you perhaps being helped in terms of units or perhaps not by the dislocation in the broader personal lines market that maybe the appetite of some of your competitors is not what it used to be? Therefore, you’re seeing more policyholders migrate to your alternatives. Is that a dynamic?

There is some evidence of that. The appetite gets reflected in rates, obviously. And so rates are going up across the board, and that is causing some folks to shop. When we’re winning new business and when customers provide us the information, yes, some of it is the fact that our rates are viewed as quite competitive based on the broader market.

Yeah, yeah. And then the online marketplace, can you give us an update on your progress there?

Mark, McKeel here. We’re actually very pleased with our online marketplace. We’re trying to balance sell-through rates with the amount of competitive bidding per lot. We started with a steady drumbeat of one car per day and now we’re touching three. We’ve begun testing larger groups of cars that spill out over a period of days to maintain strong bidding and surpassing estimates. We look forward to continued growth, and I’d add that the digital auction platform is being developed by our own digital product teams. We are rolling out new features and capabilities every two weeks in a traditional agile sprint methodology.

Understood. Thank you.

Thanks, Mark.

Thanks, Mark.

Thank you. Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.

Hey, good morning. This is Sid on behalf of Greg. I believe, last quarter you mentioned your book is skewed more towards physical damage. And it seems like physical damage has been more sticky for some of the larger, more traditional auto carriers. I understand your target customer is different, but with the loss ratio ticking up this quarter, I’m just curious to hear your perspective on what you’re seeing there.

When you say sticky, can you clarify what you mean?

From some disclosures we’ve seen, it seems like physical damage continues to run a little bit higher from a severity perspective than some of the other components.

Our mix at 75% is physical damage and 25% liability when you look at our losses over time. We do skew very differently. Our loss ratio is in a good spot. We did see some liability pressure last year, which we talked about, and we strengthened our reserves for that earlier this year. We’re not seeing that now. The rate increases we’re getting are flowing through, so we’re not seeing the same liability pressure right now. Although inflation and expenses are higher, we are getting back to that low-40s loss ratio, so we’re in a good spot.

All right. Thank you.

Thanks, Sid. Appreciate it.

Thank you. Our next question comes from the line of Pablo Singzon with JPMorgan. Please proceed with your question.

Hi, good morning. Your investment income has picked up, and I think you’ll incur incremental financing costs over the balance of the year due to the capital raise. Can you talk through your expectations for those items? And as I look at your guidance, I think net income went up by $1 million, and EBITDA by $5 million. Is the gap there all financing?

Net income can be tricky for us because there are numerous components. We’ve got the warrant liability and non-controlling interest, making it difficult to give a quick reconciliation. You raise an important point. We’re now earning on our cash balances, both within the MGA business and Hagerty Re. We’re earning significant interest income based on current interest rates and are safely invested in very short-term instruments. The increase in rates is beneficial. Regarding financing, the type of capital we raised is convertible preferred, which has a associated dividend but is not impacting that interest income line. We actually used that capital to pay off some revolver debt, saving on interest income, while benefiting from higher rates. You’ll continue to see a positive on that line for the remainder of the year.

Pablo, I’m happy to follow up with you after the call on some of the moving parts. You also see the restructuring line is $3 million for the quarter, which would hit net income, not adjusted EBITDA, accounting for most of the delta.

Yeah. That makes sense, McKeel. And then the second question, I guess for Patrick, just on expenses, right? I think you’ve demonstrated good cost control here. What do you see the cost base trending from here in dollar terms as your cost savings initiatives reflect in the P&L? Are we at a trough here, and will expenses grow reasonably from this point?

If you look at the numbers, in 2023, we focused on keeping the cost curve in check. Salaries and benefits are up 0.6% year-over-year, so we’ve done well there. G&A increased only 2.8% year-over-year. All the steps taken to manage costs effectively are paying off and will continue. We’re starting the budgeting process for 2024 soon and will provide guidance on our plans. We want to keep driving margin expansion, and we’ve turned a corner. We plan to produce modest profits this year while striving to expand margins in 2024. Some of that growth will come from top-line growth, and this business is growing written premium in the mid-teens.

Okay. And then last for me. Patrick, you mentioned rate benefit contributing about two-thirds of premium growth. Does that rate benefit include the increase in the agreed values for the vehicles?

Yeah, that would be included in that, although there hasn’t been a lot of valuation change occurring right now.

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Hagerty for any closing remarks.

Thank you, operator, and thanks to all of you for your continued support. We are once again operating from a position of strength. One Team Hagerty is providing unparalleled customer service for auto enthusiasts, resulting in an industry-leading Net Promoter Score of 83, which helps fuel retention and new business. Our omni-channel distribution allows us to capitalize on this brand strength through Hagerty’s direct-to-consumer channel as well as cultivating new commercial partnerships. We are well on our way towards delivering the bottom line growth that will fund our growth ambitions and create value for our shareholders. We hope to see as many of you as possible out in Monterey next week for the car festivities, which includes the Pebble Beach Concours and Monterey historic races as well as our gathering called Motorlux. If you’re in that direction, please look us up. But until then, never stop driving.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.