Greetings and welcome to the Hagerty Second Quarter 2024 Earnings Call. At this time, all participants are in a 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 Jay Koval, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator. And good morning, everyone and thank you for joining us to discuss Hagerty's results for the second quarter of 2024. I'm joined this morning by McKeel Hagerty, Chief Executive Officer and Chairman; 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 slides and letter to stockholders covering this period are also posted on the IR website. Today's discussion contains forward-looking statements and non-GAAP financial metrics as described in the earnings presentation. Forward-looking statements include statements about our expected future business and financial performance and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. For a discussion of material risks, please refer to our filings with the SEC, available on our Investor Relations website. The appendix of the presentation also contains reconciliations of our non-GAAP metrics to the most directly comparable GAAP measures. And with that, I'll turn the call over to McKeel.

Thanks, Jay and good morning, everyone. We appreciate you taking the time to join Hagerty's second quarter 2024 earnings call. As most car lovers know, summer is our golden time. The breezes are warm and the open roads beckon. There are car shows and events in abundance, including our Greenwich Concours in June and Car Week in Monterey, California, starting next week. Hagerty is built for these moments, with our entire business model carefully curated around a shared passion for cars. This singular focus executed by our amazing team of professionals has allowed us to deliver high rates of compounding growth in revenue and profits. The rate and durability of that growth are powered by a great value proposition with excellent customer service from our team of 1,700 Hagerty employees. This team's strong execution allowed us to exceed expectations for the sixth straight time this quarter and to upgrade our full-year outlook as our business model begins to hit its stride, delivering written premium growth of 18% in the first half of 2024. This increase is on top of the prior year's first half gains of 17%, which was on top of 2022's first half growth of 15%. Sustained mid-teens growth positions us to double our revenue every four to five years. We expect business process improvements, cost discipline, and smart technology investments to allow us to efficiently convert incremental revenue into increasing profits, driving margin expansion in the quarters and years to come. One team, Hagerty has never been better aligned and is only getting stronger, including the recent hiring of Jeff Briglia as our President of Insurance. Jeff has a proven track record of strategic change management across a variety of business areas including insurance product development, claims, distribution, marketing sales, and customer service. His 22 years of experience and leadership will help us identify additional opportunities to further improve our value proposition for auto enthusiasts by leveraging Hagerty's decades of data. We also announced last week that we have hired Sean McMullen from Amazon to become the SVP of our Digital Marketplace and Valuation. Hagerty's online marketplace has enormous potential, and Sean will help us create an industry-leading user experience for customers and scale critical elements of the business. Let me share a few key highlights from our first half results. This includes commission and fee revenue gains of 18% during the first six months in line with written premium growth and fueled by 8% growth in vehicle count. Earned premium for our risk-taking entity Hagerty reinsurance jumped 26% due to written premium growth and last year's increase in quota share. Membership marketplace and other revenue grew 16%, powered by 41% growth in the marketplace due to higher revenue from live auctions and financing streams and the methodical ramp of Hagerty's online marketplace. First half profitability improved significantly, with operating margins up 840 basis points, resulting in a $50 million improvement in net income and a $39 million jump in adjusted EBITDA. First half G&A declined 3%, and salaries and benefits grew only 5%, as we maintain a strong focus on cost discipline and driving operational efficiencies. Our 2024 priorities include first, improving loyalty to drive renewals and referrals; second, enhancing the member experience in a cost-effective and efficient way; third, building Hagerty marketplace as the most trusted and preferred place to buy, sell, and finance collectible vehicles; and fourth, increasing our flexibility and control over our underwriting profits including the CNIC insurance company acquisition. We are proud of the great results we are delivering so far this year, as this growth and margin expansion is on top of the gains we delivered in the first half of 2023. On a two-year basis since 2022, we have increased first half net income by $41 million and adjusted EBITDA by $70 million. Also, we are positioning Hagerty for sustained multiyear operating leverage and high rates of flow through beyond 2024. This includes utilizing our marketing team to efficiently acquire new customers, evolving our member service center to serve members more effectively, and identifying potential savings within our claims organization to maintain our historically low combined ratio. Given the excellent results during the first six months and strong business momentum that has carried over into the third quarter, we have increased our full-year outlook for revenue and profit growth. We now expect revenue to come in between $1.16 billion and $1.18 billion, with net income of $76 million to $84 million and adjusted EBITDA of $130 million to $140 million. Improved margins and cash flow generation will enable us to continue reinvesting in our members and create value for shareholders over the coming years. Let me now turn the call over to Patrick to go through the second quarter results and 2024 financial outlook in more detail.

Thank you and good morning, everyone. Let me walk you through our results for the three months ended June 30, 2024. In the second quarter, we delivered 20% growth in total revenue to $313 million. Written premium grew 16% due to robust new business count, and retention improved to 89%. The commission and fee revenue jumped 17% to $129 million, slightly higher than written premium growth on strong underwriting results. Membership, marketplace, and other revenue increased 14% to $27 million. Our Broad Arrow team of automotive specialists is delivering strong and growing revenue across our live and private party sales, as well as higher financing revenue from our dedicated collateralized facility. Membership revenue grew in the mid-teens, offset by lower garage and social revenue due to fewer locations after the dissolution of the joint venture last fall. Earned premium grew 24% to $158 million, and the loss ratio came in at 41%, eight points below last year's second quarter. We produced stable and highly predictable underwriting results, thanks to decades of experience insuring our customers' special vehicles. Turning to profitability, we reported a second quarter operating profit of $38 million, an improvement of $21 million versus the prior year period, up 121%. The operating margins expanded by 550 basis points to more than 12%. We held G&A flat in the quarter, while salaries and benefits grew 8%, as merit increases took hold in the second quarter along with higher accruals for incentive compensation given strong year-to-date results. Adjusted EBITDA increased by $19 million year-over-year to $53 million. This is on top of the $18 million improvement in EBITDA delivered in the second quarter of 2023, resulting in a two-year stacked improvement of $37 million. On the bottom line, we delivered second quarter net income of $43 million compared to $16 million a year earlier. This significant improvement in operating margins drove a $27 million improvement in net income, along with higher interest income and the absence of last year's $3 million restructuring charge. The net income attributable to Class A common shareholders was $9 million after attribution of earnings to the non-controlling interest and accretion on the preferred stock. GAAP basic and diluted earnings per share was $0.09 based on $86 million weighted average shares of Class A common stock outstanding. Adjusted earnings per share defined as consolidated net income before the change in fair value of warrants came in at $0.12 for the quarter and $0.16 for the first half of 2024. Operating cash flow in the first half of the year jumped from $71 million to $122 million, resulting in an end of June unrestricted cash balance of $121 million versus long-term debt of $98 million, $41 million of which is back leverage for Broad Arrow Capital's portfolio of loans collateralized by collector cars. We took some additional actions during the last few months to further simplify our business and focus resources on their highest and best use. First, in July, we successfully exchanged $19.5 million outstanding warrants for 3.9 million shares of Class A common stock. This should help remove the noise in our net income and EPS going forward and eliminate the cost of valuing and accounting for the warrants. Given the warrant exchange, our fully diluted share count including preferred shares and unvested equity awards is now $360 million. Second, we also expanded the borrowing capacity of our credit facility by $75 million with the addition of a new bank, Wells Fargo. Finally, we sold MotorsportReg, our motorsport event calendar and online management platform, and created a long-term marketing partnership with a strategic buyer, Parella Motorsports, who owns and operates motorsports events such as the Sportscar Vintage Racing Association, the Trans Am Series, Formula Regional Americas, and Formula 4 in the US. Let me wrap up with our 2024 outlook. As McKeel mentioned, we increased our outlook for total revenue growth to a range of 16% to 18%, powered by 14% to 15% growth in written premium. High rates of top-line growth combined with operational efficiencies and the benefits of scale should continue to drive operating leverage. We now expect net income of $76 million to $84 million, up roughly $15 million from the outlook we shared on our first quarter call, equating to year-over-year growth of 170% to 198%. Adjusted EBITDA is now expected to be $130 million to $140 million, representing growth of 47% to 59%. In summary, we are executing well on our plan to deliver high rates of compounding revenue growth, margin expansion, and cash flow production, and we are on track for 11% to 12% adjusted EBITDA margins in 2024. We believe the best is yet to come as the investments in our people and technology should result in 30-plus percent incremental margins from 2022 to 2024, positioning us to drive margins significantly higher over the ensuing years. With that, let us now open the call to your questions.

Thank you. Your first question comes from Mark Hughes with Truist Securities. Please go ahead.

Yes. Thank you. Good morning.

Hi, good morning.

The hiring of Sean McMullen to run the digital marketplace, anything you can say about kind of his early priorities and what you envision there as he takes over?

Well, hey, thanks. It's a great question. We're really excited to have Sean join the team. His experience at Amazon, where he was responsible for many different areas including the Amazon Music division, has equipped him to manage the complexity of a big platform like Amazon. One of the things we're excited about is that we know the digital marketplace is significant for us. We believe it has a lot of promise, and we're looking forward to it continuing to expand. However, the secret sauce for us is how it integrates with all the other tools in our system. So valuation, our speed digital acquisition, those are things Sean will focus on. So he's going to be looking at how we continue to drive core growth and how we knit the pieces together.

Understood. You mentioned the strong, consistent growth in written premium. How does that compare to 12 or 24 months ago with regard to pricing impact in the market and your strategic relationships with other carriers? What changes have you observed over the last 12 or 24 months?

Hey, Mark, it's Patrick. I'll handle the pricing aspect, and then McKeel can discuss where things stand with our partners. Overall market pricing is expected to end up being something like up 10% this year for daily drivers, as companies continue to take rate. In comparison, we think it will end up being about a 3% increase for us. We are indeed taking rate, which is a benefit for us and will continue into 2024, albeit at a much lower rate. We believe this competitive pricing structure is part of why we are able to grow quickly. Our value proposition for customers, because we understand the risks and how to price them, is incredibly compelling.

I would add that what we're hearing from our partners is significant, as everyone knows it's a regulated business and requires accurate pricing on everyone's part. We must ensure that we're delivering profitably, and that action is gradually working its way through the industry. However, early indications show pricing may begin to level off on an industry-wide basis. The benefit we've experienced over the last year or 18 months has resulted from rate increases driving individuals out there to shop for insurance, which we've benefited from. So as we return to a normal business environment, it will be important for us to do what we do best—communicate our value proposition and celebrate the unique cars our customers own as well as the agents who connect them with us.

Patrick, you discussed the 30% incremental margin. You have experienced extraordinary expense leverage. Should we target this level going forward? Is this a good estimate?

We've indicated that we're targeting that level for the full year 2024, which aligns with our guidance. We anticipate continued margin expansion as we progress. We will communicate specifics about rates for the following year early next year when we give guidance. We've also discussed turning a corner towards profitability last year and making meaningful improvements this year. However, we still have room for growth. We believe that the overall business should target high teen margins, possibly approaching 20%. We expect this to take an additional two to three years to achieve, but we foresee continued expansion.

Thank you very much.

Thanks, Mark.

Thanks, Mark.

Next question comes from Pablo Singzon with JPMorgan. Please go ahead.

Hi. Good morning.

Good morning, Pablo.

The tax rate came in a bit below our expectations. Was there anything unusual this quarter? How should we think about the tax rate going forward?

No, nothing unusual this quarter. I believe the tax rate moving forward should be consistent with where we've been. There's nothing quirky that I could point to.

Okay. And then regarding interest and other income, the interest expense increased, and actual investment income jumped sequentially. What contributed to that? How should we view that line on the P&L going forward?

We have indeed started producing substantially more cash. This is partly due to margin expansion and our revised agreement with McKeel, which now allows us to receive our CUC largely on a monthly basis instead of being paid in a lump sum at the end of the year. This has produced a significant positive cash flow swing for us. Consequently, we have more cash available, which is being invested within the MGA and Hagerty Re. The primary driver of this is our growing cash reserves. Additionally, the rate environment has also improved. Compared to previous years, we have been able to achieve returns above 5% on those cash balances. We implemented a new investment strategy starting April 1st, although the results of that shift are not fully reflected in the current numbers yet. We expect those changes will be visible going forward. Previously, we were entirely invested in cash, but now we are moving towards investment-grade bonds, which has helped improve our risk profile while still aiming for higher returns.

That makes sense. As a quick follow-up, would it be reasonable to assume that you won't drop below the $12 million income level from 2Q? Is there any reason you would go below that baseline?

As of now, given the interest rate environment is volatile, it may fluctuate, but I think it's reasonable to expect the level around $12 million for the rest of the year.

I would like to turn the floor over to McKeel Hagerty for closing remarks.

Thank you, operator, and thanks to all of you for your continued support and interest in Hagerty. We have carefully curated the Hagerty brand over the last four decades for car lovers. There's a long runway ahead, as we help members protect, buy, sell, and enjoy their prized vehicles. We have multiple avenues for profit growth, including our high-growth distribution business, evolution in our control over underwriting profits, a membership offering that drives engagement and retention with excellent Net Promoter Scores, and a growing marketplace that is fast becoming the trusted and preferred platform for buying and selling collector cars. Combining these elements positions us well to further penetrate the $46 million collector car opportunity in the U.S., delivering durable, profitable growth year-after-year. Next week, we will be in Monterey, California, one of the largest automotive events in the world where the stars and the cars come together. For anyone who hasn't been before, it’s an incredible opportunity to enjoy the auctions including our own Broad Arrow two-day sale at the Monterey Jet Center, car racing at Laguna Seca, and, of course, the Signature Pebble Beach Concours d'Elegance on August 18. We hope to see you there. Until then, never stop driving.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.