Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the MediaAlpha Q3 2021 Earnings Call. Thank you. Denise Garcia, Investor Relations, you may begin your conference.

Thank you, Emma. After the market closed today, MediaAlpha issued a press release and shareholder letter, announcing results for the third quarter, ended September 30, 2021. These documents are available in the Investors section of our website, and we will be referring to them on this call. Our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the fourth quarter and the full year 2021, which are based on assumptions, forecasts, expectations, and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from those reflected in those statements. Please refer to the company's SEC filings, including its annual report on Form 10-K and its quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. These forward-looking statements are based on assumptions as of today, November 10, 2021, and the company undertakes no obligation to revise or update them. In addition, on today's call, we will be referring to certain actual and projected financial metrics of MediaAlpha, which are non-GAAP financial measures. These metrics include adjusted EBITDA, contribution and contribution margin, and we present them in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our press release and shareholder letter issued today. Finally, I would like to remind everyone that this call is being recorded and will be made available for replay via a link on the Investors section of the company's website at investors.mediaalpha.com. Now I'll turn the call over to Steve for a few introductory remarks before opening the call to your questions.

Thanks, Denise, and thank you everyone for joining the call. Our transaction value in the third quarter of 2021 was $255.1 million, an increase of 17% year-over-year. While this was a healthy growth rate in light of our outstanding performance in the second half of 2020, it fell short of our expectations as we faced headwinds in our P&C insurance vertical, with many of our auto insurance partners temporarily scaling back their marketing investments in response to higher-than-expected underwriting losses. These headwinds are also leading us to revise our guidance downward for the remainder of the year. We've been through these auto insurance cycles before and remain confident in our future growth. Despite the general pullback, nine of our top 20 P&C insurance carrier partners increased their investments with us in the third quarter by 50% or more compared to the prior year period. We believe this illustrates the continuing strength of the insurance industry's secular shift to online direct-to-consumer distribution models. In addition, our lean operating model puts us in an enviable position to invest in growth as others may be pulling back. We believe that these factors will enable us to scale rapidly once the carriers restore their profitability. One very bright spot during the quarter was our higher-than-expected year-over-year growth of 44% in our health insurance vertical, which is unaffected by the trends in the auto insurance market. We continue to see outstanding performance in this vertical in the current open and annual enrollment periods and expect this team to have a very strong fourth quarter. During these times, we will continue to focus on what has made us successful: disciplined execution, a growth mindset, and putting our partners' needs first. We approached the last hard market with this foundation and emerged from that market cycle into a period of tremendous growth that saw us pull away from our competition by leaps and bounds. We have no doubt that we will also come out of this period stronger than ever and ready to seize the opportunities ahead. With that we'll open it up to your questions.

Your first question comes from the line of Michael Graham with Canaccord Genuity. Your line is open.

Hi. Thanks a lot. Just a couple of questions. The first one, Steve, maybe just comment on in past experience how long some of these auto cycles have taken to sort of trough and rebound? And you mentioned that nine of the top 20 grew by over 50% year-over-year, which is pretty astounding given the overall environment. I'm just wondering if you could comment on was there a common thread for those carriers? Were these the ones who were already more fully embracing DTC, or is there any common thread to those carriers that had heavy spending persist?

Hi, Michael, thanks. Great questions. With regard to our past experiences, I mean, we have been through this before, right? What we saw in the last cycle that was back in 2015 and 2016 was driven by three big things: lower-than-expected gas prices, higher-than-expected employment, and an increase in distracted driving, all of which led to higher-than-expected frequency. What you saw unfold there was a hard market cycle that lasted a little over two years. I think this time around, there's still a lot of uncertainty. The market dynamics are still fluid. But I think what we're hearing from most of our carrier partners is that this underwriting cycle is going to unfold much more quickly. And it makes sense when you think about what the reasons are behind this cycle because it's related to post-pandemic driving patterns, pandemic-related supply chain issues that are leading to severity issues, and losses from major catastrophe events like Hurricane Ida. The one thing that we know about the duration of this cycle is that as many large carriers have announced, we do expect them to continue to take rate well into the first half of 2022. Having been through these cycles before, it is hard to foresee the market coming back in full until they're done with this rate-taking process. Now as the profitability is addressed, having been through this before, we fully expect to know that the industry is going to revert back to growth mode pretty quickly, particularly in our ecosystem because of the overall efficiency and how quickly they can scale back in our ecosystem. So what we're focused on in this period is really about laying the foundation and the groundwork to accelerate out of this profitability cycle. What the current carrier focus on profitability and efficiency enables us to do is to make additional progress with initiatives and integrations to boost efficiency that honestly gets overlooked sometimes when carriers are just trying to grow. And what this means is more granular conversion tracking integrations, better data-passing integrations, and increased interest in carriers working with us as a supply partner to generate revenue from non-converting shoppers. Focusing on these aspects during a hard market cycle like this is one of the ways that we put distance on our competitors coming out of the last cycle, and we expect to be able to do that this time around as well. Now, Michael, your second question about nine out of 20 carrier partners in the P&C vertical growing by over 50% quarter-over-quarter in Q3, I think the common thread is that these are all carriers that were still relatively early in the adoption of direct-to-consumer marketing. And so, we talk about the secular shift a lot. I would say that if there's one common theme connecting those nine carriers, it's that they're in innings two or three of this adoption curve and not in innings six or seven.

Got it. Super helpful. Thank you, Steve.

Sure. Thanks, Michael.

Your next question comes from the line of Daniel Grosslight with Citigroup. Your line is now open.

Hi, Guys. Noting that there is increasing certainty on Medicare Advantage advertising, requiring all Medicare Advantage marketing materials to be submitted to CMS prior to use, I'm just wondering if you guys have seen any slowdown in lead generation from your supply partners or your own interest assets in this?

Yes, understood. And sorry you broke up a little bit, but I think you're asking whether the CMS pre-approval requirement for Medicare Advantage advertisement has led to any kind of slowdown in our ecosystem.

Yes.

Yes, it hasn't. We are actually having a very strong enrollment period and haven't seen any material impact from these new CMS guidelines. First, our owned and operated websites aren't subject to the CMS pre-approval requirements. And then we do work with demand and supply partners who are subject to those requirements. Those partners haven't pulled back with us in any way. In fact, some of those partners are the ones increasing their budgets two to three times what they were in the last enrollment period. The overall feedback we are getting from them is that getting the pre-approval for digital advertising copy has been a lot quicker than for offline ad copies, such as TV ad copy and radio ad copy.

Got you. Okay. Thank you. That's helpful. And then, as a follow-up, we saw that the conversion in P&C was pretty different than we had expected. So just wondering what the private market dynamics were in P&C this quarter?

Yes, that's a great question. In Q3, we observed that some major supply partners significantly expanded their operations and established direct relationships with a few larger property and casualty carriers. This led to a shift in our marketplace dynamics. However, we do not provide specific guidance on the mix of open and private marketplace transactions due to potential short-term fluctuations driven by partnerships. It's important to note that the growth of our private marketplaces is advantageous for both our business and the industry. This product was specifically designed for large supply partners who require a technology platform solution more than a full-service marketplace. The increasing partnerships within our private marketplace indicate that we have succeeded in helping these supply partners scale through our open exchange. Additionally, many of these partners are increasingly adopting our private marketplace product, suggesting we have adapted our offerings to meet their evolving needs. The requirements of these partners differ significantly based on their size in the open exchange versus their presence as large partners. For these larger partners, our private marketplace is a unique platform offering, unmatched by competitors. We have around nine to ten such partnerships, while others have not achieved even one, despite their efforts. This situation also fosters deeper, integrated partnerships with some of the largest supply partners, who enter into multi-year exclusive agreements with us as private marketplace partners. It's essential to recognize that the dynamics will shift more towards the open exchange as new demand partners grow, since smaller or mid-sized demand partners usually can’t establish as many direct relationships as larger ones. We also anticipate growth among newer supply partners, including smaller and mid-sized ones, as they expand, as well as an increase in carrier partners. However, our private marketplace product is not tailored for carriers, regardless of their scale. Over the long term, it is crucial for us to maintain a healthy balance between both models, as this suggests we are effectively meeting the needs of both our small and mid-sized supply partners, as well as our largest partners.

Got you. That was helpful. Thanks for the color.

Thank you.

Your next question comes from the line of Meyer Shields with KBW. Your line is now open.

Great. Thanks. Two basic questions, if I can. First, within P&C, are you seeing any signs of concern about insurance companies wanting to raise rates but having some regulatory friction?

I could answer that pretty quickly. That is something that we're seeing mostly, quite honestly, just in the trade press and not any specific feedback that our partners are giving us.

Okay. Perfect. And then, I don't know whether this is manifesting itself at all, but a number of the, I guess, senior health brokers are struggling with retention. I was hoping you could walk us through what impact that has on MediaAlpha, if any?

Well, those brokers are both demand and supply partners of ours. To the extent that they're going to struggle with retention, that would lead them to potentially sign a lower expected lifetime value for the customers that they acquire. This would lead them to pull back on the bids that they have in our ecosystem. So for us in our channel, we're not seeing that. In fact, we're seeing actually some of the biggest budget increases coming from these brokers in our ecosystem. Keep in mind that the vast majority of the demand is directly from the carriers themselves and not from these types of brokers.

Okay. Perfect. Thank you so much.

Yeah. Thanks, Meyer.

Your next question comes from the line of Frank Morgan with RBC Capital Markets. Your line is now open.

Good afternoon. So, it sounds like in terms of the cycle itself on the P&C side, that 2023 is the year where hopefully things get back to normal. Is there a lag from the time the underwriting improves and where marketing spend goes up, or is it pretty much simultaneous with the improvement in the underwriting margins? What would be your experience from past cycles on that?

Yeah. Hey, Frank. I would not characterize the market coming back in 2023; I would characterize it as we don't know exactly when it will, right? I mean, we do have some partners calling us that they expected back in the early part of this year again, and then we have other partners calling us with expectations of being back later. We also see the rate filings and the pace of the approvals that are happening and we see companies announcing that these rate takings will continue well into 2022. Now, when it does come back, we tend to see little to no lag from taking rates to coming back to marketing. Honestly, that's what a partner just told us yesterday. There may be some differences this time around because there is a bit of uncertainty around what the severity is going to look like, because keep in mind the underlying issue here is that we're emerging from a once-in-a-lifetime pandemic, and a lot of the patterns that people are seeing both in terms of frequency and severity are kind of once-in-a-lifetime events that have been hard to predict. But what the carriers are telling us is they will be back very quickly after the rates are taking effect simultaneously with the rates being taken. Keep in mind, though, that this industry is dealing with something that's an uncertainty that is new to a lot of people.

Understand. And just one more on this topic. I think last quarter you called out two of your large top carriers—were you saying that more than two that number has increased since last quarter in terms of those who are either contemplating or have cut budgets?

Yeah, Frank, that's right. That's right. I think we started to see the early signs in Q3. There is one aspect of this cycle that I alluded to which is different from the last one, which is it did unfold quickly and more uniformly across most carriers than in the last cycle. Again, it's due to a multitude of factors, but really the unexpected severity stemming from supply chain issues that are pandemic-related that a lot of carriers weren't foreseeing.

Got you. Well, I guess having diversity is a good thing now with the strength you're seeing on the health side of the business. So maybe just one question there; you had earlier question on churn. But I'm just curious, as we listen to the DTC brokers report this season, there does seem to be a bigger focus on the quality of new business that they add. So, I'm curious, does that maybe even drive more demand for you if the desire is to have quality members come on board to reduce churn? Does the consumption of leads go up, or what would you—how do you think that would affect the business?

Well, I think it would affect the business positively. That's part of why we're seeing very high levels of demand from some of those broker partners that you're referring to. We're seeing demand at levels of two to three times previous periods from those demand partners. As they focus on quality, the extent that their budgets with us and their investment with us is going up, I think that's exactly what you're alluding to.

Okay. Thank you.

Thanks Frank.

There are no further questions. This ends today's conference call. Thank you for all attending. You may now disconnect.