Good day, everyone. And welcome to the MediaAlpha Fourth Quarter and Full Year 2022 Earnings Call. Today’s call is being recorded. All lines have been muted to prevent any background noise, and after the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the conference over to Denise Garcia, Investor Relations. Please go ahead.

Thank you, Lisa. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the fourth quarter and full year ended December 31, 2022. 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 first quarter of 2023, 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, February 23, 2023, 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 that are presented on a non-GAAP basis. This includes adjusted EBITDA, which we present in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered as 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 included in our press release and the shareholder letter issued today. Finally, I’d 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 will turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.

Hey. Thanks, Denise. Hi, everyone. Welcome to our fourth quarter and full year 2022 earnings call. I’d like to make a few observations before turning the call over to Pat for his comments. We saw strong performance in our Health Insurance vertical in the fourth quarter. This is driven by a sharp year-over-year increase in demand from Medicare Advantage carriers, and we remain bullish about the long-term growth opportunity with this segment. The market for Medicare Advantage is expected to continue to outpace growth of Medicare as a whole, and seniors are increasingly shopping for Medicare Advantage policies online. With carriers prioritizing direct relationships with their members, we expect Health Insurance companies to continue to increase their direct marketing investments, which represent tremendous long-term tailwinds for this business. Turning to our P&C insurance vertical, we believe Q4 was the low point of this auto insurance hard market cycle, and we are optimistic that 2023 will be a better year than 2022. Driven by the resumption of marketing investment by one leading carrier, who was early to achieve rate adequacy, we expect spending in our P&C marketplace to roughly double from Q4 to Q1, which is well above typical seasonal patterns. As the year progresses, we expect more carriers to return to growth mode as rate increases continue to be approved and as underwriting profitability is gradually restored. Coupled with the heightened consumer shopping behavior that will result from these double-digit pricing increases, we believe that this has the potential to create market conditions to support outsized growth coming out of this hard market. Now taking a step back, it’s now clear that 2022 will be remembered as one of the most difficult years ever for the P&C insurance industry. Our ability to deliver adjusted EBITDA and free cash flow in this unprecedented market environment not only speaks to the efficiency of our marketplace model, but also to our team and culture. As a bootstrap company, doing more with less has always been in our DNA, and I couldn’t be prouder of how the entire MediaAlpha team rose to the occasion this past year, enabling us to flatten our expense growth to meet these challenging conditions. Looking ahead, we continue to believe MediaAlpha can be a multibillion-dollar company due to the vast size of our addressable market and our highly differentiated marketplace model. We look forward to executing on this market opportunity and delivering strong top and bottom line growth in the upcoming years. With that, I will turn the call over to Pat before we open the call to your questions.

Thanks, Steve. We exceeded our expectations during the fourth quarter due to better topline growth in our health vertical in favorable expenses excluding non-cash items. We remain highly disciplined in our spending and continue to identify efficiency opportunities across the business. I will start with our balance sheet and cash flow. During the fourth quarter, we paid down $7.4 million of debt, bringing our cumulative debt repayments over the past three quarters to $27.1 million. We were pleased to generate $28.2 million of full-year free cash flow during what we believe was the bottom of the current P&C cycle, and we ended the year with $14.5 million of cash and considerable headroom relative to our debt covenants, leaving us well positioned to invest in growth coming out of the P&C hard market. Moving to our Q1 2023 guidance, we expect P&C transaction value to nearly double compared with Q4 of 2022, driven by an improvement in market conditions in our P&C vertical, in addition to normal seasonality. Although we are encouraged by these early signs of recovery, we still expect P&C transaction value to be well below Q1 2022 levels. In our Health Insurance vertical, we expect modest year-over-year growth in transaction value as we continue deepening our relationships with key carriers. For the Life and Other verticals, we expect transaction value to decline year-over-year at a similar rate as in Q4 of 2022. As a result of this, we expect Q1 transaction value for the company to be between $180 million to $195 million, a year-over-year decrease of 22% at the midpoint. We expect revenue to range from $106 million to $116 million, a year-over-year decrease of 22% at the midpoint. Lastly, we expect adjusted EBITDA to be between $5.5 million to $7.5 million, a year-over-year decrease of 9% at the midpoint. We expect Q1 adjusted EBITDA margin to improve modestly year-over-year at the midpoint, as we expect expenses to be roughly flat compared with Q4 of 2022. We expect quarterly expenses for the rest of this year to remain flat to up slightly as compared with Q1. Due to the uncertainty around the timing and slope of the P&C market recovery, we are not providing full-year 2023 guidance. But we believe the inherent operating leverage in our model and our ongoing expense discipline create the potential for strong adjusted EBITDA growth moving forward. With that, Operator, we are ready for the first question.

Thank you. We will take our first question from Michael Graham with Canaccord.

Thank you for the information. It's significant that you believe Q4 will be the low point for P&C. I recognize you mentioned that this hard market could last longer than many have anticipated, which is a positive insight. I wanted to ask about past cycles when you notice one carrier performing well with rate adequacy, as you described in your shareholder letter. Could you elaborate on how other carriers typically respond in the market? Additionally, do you have any historical insights on the usual time lag between when the leaders achieve rate adequacy and when they start to invest more compared to others?

Hey, Michael. It’s Steve. Let’s see, it’s a great question. I appreciate your commentary. Yeah, I think the way this market cycle is unfolding is remarkably similar to past hard market cycles where there was one leading carrier who is very early to achieve rate adequacy and restore underwriting profitability, really front-running the rest of the market in a big way and leaning back into growth mode, not just leaning, I would say, jumping. Now what we know is that, this will proceed the return of demand from a broader base of carriers. But in terms of the overall timing, I think, that’s when I think the parallels between the last hard market and this hard market kind of stop, because really what you are going to see is each carrier being on their own timeline based on the rate adequacy that they have been able to achieve and how long each of the carriers will wait until these rate increases earn through to improve their underwriting results before they then jump back into growth mode themselves. And so the best that we can tell you is that we expect this to happen throughout this year with various carriers coming in at different stages of the year. We do expect this to last into 2024. But in terms of just the overall timing and is it six months or is it three months that a leading carrier is going to front-run the rest of the marketplace, I mean that’s really hard to predict and it’s really going to depend on the individual carriers and their ability to really get their rates to a good place and where they need to be in terms of their underwriting performance before they really jump back into growth mode.

I agree. Thanks a lot, Steve.

We will take our next question from Cory Carpenter with JPMorgan.

Thanks for the question. Steve, I have one for you and another for Pat. Following up on that, some of the recent carrier results have been disappointing, especially considering used car prices have started to rise this year. I'm curious about what you've been hearing in recent conversations with carriers regarding these dynamics and if there's any risk that this could lead to further delays for some of the laggards. And for Pat, regarding the guidance, you mentioned seasonality and improved carrier spending. Can you break down how much each of those factors is contributing to your Q1 guidance? Thank you.

Yeah. Sure. So we are seeing the same results roll in, and certainly, I think, it is carrier-specific in terms of the tenor of the conversations that we are having with each carrier. There are carriers who have posted stronger results than you see them with a clear trajectory to restoring profitability and you can easily see those carriers coming back into the marketplace in three months to six months, and you see other carriers who really are indicating that 2023 or the vast majority of 2023 will be focused on getting their pricing right. So in terms of the unexpected development, I don’t know that we are seeing the same thing or we are hearing that from carriers. I think what you have seen is over the last six quarters, rate increases really outpacing the increase in loss cost, which really means that the industry is finally digging out, and you are seeing other things, like California starting to improve rate increases for the first time in years. And so, I think, overall, when you look at the broader industry, there are some negative signals coming from carriers. But as a whole, I do see the entire industry really starting to dig out, and this is reflected in the tenor of the conversations that we are having with each of the carriers, which is far more constructive and growth-oriented than they were in past years, and so we take that as a really positive sign. There will be some carriers that are laggards that will probably come back into the marketplace in the first half of 2024. But I would characterize the majority of the carriers that we are talking to as expecting a return to the marketplace sometime in 2023.

And Cory, this is Pat. To address your second question regarding our guidance for Q1 for P&C and the sequential growth compared to Q4, the distinction between seasonality and recovery is important. Historically, if you examine our results from recent years, typically in Q4 versus Q1, P&C growth would range from 10% to 15% at a minimum, and around 30% at maximum. This pattern suggests that most of this growth is likely seasonality, as consumers tend to shop more in Q1 than in Q4, with the remainder attributable to recovery trends, whether in terms of volume or pricing.

Great. Thank you, both.

Thanks, Cory.

We will take our next question from Meyer Shields with KBW.

Thanks so much. A couple of, I guess, small numerical questions. The G&A expense in the quarter was higher than it had been running, and I was hoping you could talk through whether there’s anything unusual in that?

I would say there was nothing particularly unusual regarding that. However, there were items included that would be excluded from adjusted EBITDA. We focus on managing the business with regard to adjusted EBITDA, and the G&A expenses that contribute to adjusted EBITDA have been quite inconsistent over the past few quarters.

Okay. That's helpful. On a related note, Pat, you mentioned in your prepared remarks about increasing investments, and I was hoping you could discuss the timeline for that, particularly in relation to P&C carrier spending?

Yeah. So on that question, Meyer, I would say that we have been managing the business pretty tightly through the hard market. And so I think if you were to look back at where we were on April 1st after we closed the CHT acquisition, we have got fewer people working at the company now, and I think we are in a spot where we feel like we are adequately resourced now. I think as we get further into the hard market, could I see us needing a bit more help on some of the account teams? Yes, I could. Could I see us investing to unlock some capacity in some other teams? Yes, I could. But I don’t think that’s imminent in the next quarter or two. And as we think about the investment profile of the business over the next couple of years, our view is that we are very focused on running efficiently. As Steve mentioned in his prepared comments, we are a bootstrap company and efficiency is in our DNA, and we don’t plan on losing that focus over time.

Okay. Perfect. And if I can sort of one more question, you mentioned, I think, Steve, that the Health Insurance brokers were pulling back, and I think that’s very consistent with what we are seeing broadly. Do you have any sensing conversations with them, whether that’s like a one-year, two-year phenomenon or this is a new reality for them?

That's a great question. I think right now it's too early to tell. One encouraging sign from the last enrollment period was that click spend from the broker segment held up reasonably well. We see this as a positive indication because it historically supported their own assisted online enrollment channel, which we increasingly view as the future shopping experience for Medicare Advantage. Some of the early results from the broker segment have also been encouraging. However, regarding their work on lifetime value and profitability issues, it's still too early to determine if this will take one year or two years to resolve. In the long term, we expect the demand mix within our marketplace, especially in our Medicare marketplace, to be a healthy combination of direct carrier spend and broker demand. This is what the distribution channel of this marketplace will look like moving forward, and we believe it will be reflected in the marketplace as well.

Yeah. And Meyer, this is Pat. Again, I would just going to follow-up on your G&A question. So the big driver of it being down was in or being up was in Q2 and Q3 we had some non-cash write-offs of an earn-out related to an acquisition. And so they were non-cash items, and that’s why it appears as if it was up, but on a cash basis and cost of operating the business, it was pretty non-consistent.

Got it. Perfect. Thank you so much for the help.

Sure. Thanks, Meyer.

We will take our next question from Andrew Kligerman with Credit Suisse.

Good evening. Following up on the last questions regarding health, there’s a trend with the brokers. We cover several companies that have Medicare Advantage brokers, and they are struggling significantly with customer acquisition costs. Is that the main issue making it challenging for them? Is it the customer acquisition costs, or is it concerning their bids when they have to bid on something in your channel? What is preventing them from being more effective?

That's a great question. I don't believe it's directly tied to customer acquisition costs. The challenges they're facing revolve around gaining a clearer understanding of the expected lifetime value of the policies they are acquiring. Ultimately, in performance and growth marketing, it is crucial to comprehend the anticipated value of a policy and align that with customer acquisition costs to achieve a target return on ad spend. Without a detailed understanding of the policy duration and the expected value derived from the consumer purchasing the policy, it becomes difficult to optimize customer acquisition costs for a positive return on investment with advertising expenditures. I think the brokers need to improve their understanding of expected lifetime value, how it varies across different marketing channels, and effectively utilize the precise controls available in a marketplace like ours. This will enable them to align their willingness to pay for acquiring a consumer with the value they anticipate gaining from that consumer. While there is a connection to customer acquisition costs, the key lies in matching that to expected lifetime value, which is what they need to figure out. As they gain a clearer picture of their consumers' expected retention rates and how these vary by marketing channel, we believe they'll be able to return to the market and effectively use a programmatic channel like ours to align their acquisition costs with expected value.

Okay. Yeah. That is a tough nut to crack on. Thanks for that thorough explanation, Steve. And then maybe just digging a little deeper on the P&C transaction value, as you were talking about the players, most of them coming back in 2023, look that on a state-by-state basis. Do you see some companies that maybe are disinclined to be in certain states, say those on the coast versus some other states? I mean, are you seeing some pickup that’s mixed among carriers, maybe you could talk a little bit about that?

I think that’s a great question. I think in a normal market environment, that’s what you would see that there are some states in which profitability is challenged or a pullback in marketing in those states and really go heavy in states where they actually have established profitability and have a high confidence in their rates. And what you would expect to see coming out of a market like this is that carriers start to lean back in those states where they have a high degree of confidence in the rates that they have achieved. Now I think one of the things that we are seeing in this marketplace that may be a little different than what we saw in the last hard market cycle is that we are seeing less of that kind of behavior and the indications that we are getting from carriers is that their profitability has been challenged severely for the last couple of years. And that when they come back, they expect to come back in full, and they will come back as the rates start to earn through and actually impact their underwriting profitability, and that they are not going to front-run rate adequacy, well, full rate adequacy by cherry-picking certain states where they already have rate increases to start to gradually get back into the marketplace. And so I think what we are going to expect to see as the year progresses is that carriers will really need to establish broader profitability in order to then come back into the marketplace as a whole as opposed to starting to ease back into the market in those states where they feel good about their rates. Does that make sense, Andrew?

Yeah. Makes a lot of sense, Steve. Thanks so much.

Sure.

Our next question comes from Daniel Grosslight with Citi.

Hi, guys. Thanks for taking the question. Congrats on the quarter. Let’s stick with the health segment here. So there’s been some chatter out there in the Medicare Advantage market about a potential slowdown given a less generous advance notice for plan year 2024; obviously, a lot is up in the air. But I am curious if you are hearing anything from your partners on that and if there are any leverage you can pull if you see a macro slowdown in Medicare Advantage?

I appreciate the question. The short answer is that it's too early to make any determinations. The proposed rates were released recently, just a couple of weeks ago, and they won't be finalized until April. As you know, there is an ongoing discussion between the large health insurance companies and CMS regarding the expected adequacy of rate increases for 2024. We have been discussing this with our partners, and the general feeling is that it’s really too early to determine the impact.

Yeah. Yeah. Okay. And you mentioned that health growth is accretive to contribution margin in your shareholder letter. I was wondering if you could quantify how much better health contribution is than the rest of the business and what are some of the drivers of that accretion?

I think if you look at our financials, you can see some distinct numbers. The significant difference is that in the health segment, we have a much larger open marketplace mix, which leads to a higher take rate on that side. Revenue is equivalent to transaction value, and the contribution as a percentage of transaction value in health is nearly three times that of the private marketplace. Therefore, the mix within the health segment is more advantageous, resulting in a significantly higher take rate. This is one reason why the fourth quarter is our largest, as it also represents our highest revenue period, contributing positively to the overall mix.

Yeah. Makes sense. And then one just housekeeping question, there was a big increase in accounts receivable this quarter. I know it’s related. But I am curious if you can talk about what drove that, and you are a little bit low on cash now; obviously, you are very efficient with that. But do you anticipate you will have to draw on your revolver and kind of what your working capital needs are in 2023?

Yeah. And on the AR side, I think that Q4 is a big quarter for us on the health side, and so we have a number of folks that spent big in the final days of AEP and OEP, and so those were built at the end of the month, and so we had some AR from that. We haven’t had any collection difficulties. From a revolver standpoint, just kind of walk through the chronology of it, we drew $25 million on it on April 1st to fund an acquisition. We have paid off $20 million of that over the course of 2022. We still have $5 million outstanding on it, and we do not anticipate needing to draw on that going forward.

Got it. Thank you.

Thanks, Dan.

We will take our next question from Mike Zaremski with BMO.

Hey, good evening. I'm interested in whether the revenues on the Property & Casualty side are becoming more concentrated with a smaller group. Do you expect this trend to continue in the near future? If so, does that imply that transaction values per lead might stay somewhat low, since you would need more significant participants in the market to help increase transaction value levels?

Yeah. And Mike, this is Pat. I can take that one. The concentration on the Property & Casualty side has become more concentrated in Q1 compared to Q4, due to one carrier focusing on growth and increasing their spending. The top spender in Q4 represented a smaller percentage than they will in Q1. Will this trend continue? I believe it will for a while until other carriers re-enter the market significantly, at which point we expect to see the concentration start to decrease. The key question is the timing of when other carriers will come back strongly. When that happens, we are confident that the concentration will spread out a bit more. As for your second question regarding transaction value per lead, I can say it has increased significantly in Q1 compared to Q4. The main reasons for this are that one advertiser is more active and bidding more, and some states that previously had low bids have raised those bids or reactivated them, positively influencing the overall marketplace.

And I think the carriers in our marketplace recognize that because of the marketplace model and because of the supply partnerships that we have, as pricing goes up, they will get more volume, even if they are the highest given bidder for a given consumer segment. And our past experience has been that it’s absolutely a competitive market environment that will drive up pricing, and we expect to see those competitive dynamics revert back to a more normalized situation as the year progresses. But it’s been also our experience that you only need a small number of major carriers to be back in place to really replicate the competitive dynamics you need to start to get every advertiser really paying based on their expected return on ad spend independent of competitive considerations.

Got it. That’s helpful. And second question is sticking with P&C, just curious if any changes in the marketplace in terms of home insurance and bundling or that’s still obviously a long-term growth driver? Just curious if anything is changing on that front?

Yeah. I think this is more of a speculation that you are seeing in the marketplace more than anything else that we are seeing in our marketplace. It’s that because these pricing increases that consumers will be faced with are pretty unprecedented. I mean these pricing increases are the highest that the industry has seen in about 40 years, and because of the magnitude of these increases in the auto insurance segment, the bundlers, which are often referred to as the Robinsons, which is a very profitable and desirable segment for the entire industry, may be up for grabs because people who are normally bundling their auto and home policies and willing to stick those together or wanting to keep those two together may actually break those apart and shop for a separate auto insurance carrier because of the magnitude of the rate increases that they are seeing. And so I think that will be a really interesting dynamic to see unfold because that Robinsons segment is typically one that doesn’t shop around very much, which is one of the reasons that they are so attractive to P&C carriers. And if the pricing increases that we are seeing now, which really, again, are unprecedented, really starts to put this segment back into the marketplace to shop for auto insurance rates and they show a willingness to really break apart this auto-home bundle, I think that will really lead to a very interesting dynamic and some pricing increases as this very highly desirable consumer segment really comes into play for the first time.

Interesting. Appreciate the color.

Sure.

And thank you, ladies and gentlemen. That does conclude our call. Thank you for your participation, and you may now disconnect.