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Greetings, and welcome to the Hagerty First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Koval. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss Hagerty's results for the first 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 at investor.hagerty.com. 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 on Slide 2 of the earnings presentation. Forward-looking statements, including statements about our expected future business and financial performance, 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 which are also available on our Investor Relations website and at sec.gov. The appendix of the presentation also contains reconciliations of our non-GAAP metrics to the most directly comparable GAAP measures that are further 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 first quarter 2023 earnings call. Over the last 6 months, we have been working diligently to reengineer our business processes with the goal of delivering high rates of bottom-line growth, fueled by the combination of sustained top-line momentum and significantly improved margins. Patrick will cover the steps we have taken in more detail, but I couldn't be prouder of the Hagerty team and what we have accomplished over the first three months of 2023. Slide 3 of our investor deck shares some of the key first quarter highlights, including total revenue gains of 30% in the quarter, powered by written premium growth of 18%. We anticipated a strong start to the year, and while the first quarter is our seasonally smallest, contributing roughly 20% of the full year’s revenue, we are encouraged by the solid consumer interest in Hagerty suite of products. In our risk-taking entity, Hagerty Reinsurance, premiums jumped 32% due to the growth in written premium and our increased level of quota share of 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 jumped 63%, fueled by 22% membership, $7 million of marketplace revenue, as seen on Slide 4, and a 32% increase in other revenue, including sponsorships. And our team continues to make steady progress with the State Farm integrating, shown on Slide 5, on both the technology side and the people side as the teams prepare to begin writing new policies under the 10-year agreement later in 2023. In short, we have a powerful growth story, and our top-line momentum has continued into 2023. Now over the last two calls, we have talked at length about our heightened focus on managing expenses in an uncertain economic environment. This cost discipline will help us deliver the profitability necessary to invest in our future growth ambitions, saving driving and fueling car culture for future generations. These efforts resulted in a significant inflection in our profit trajectory during the first quarter as we delivered positive adjusted EBITDA of $7 million, a $13 million improvement over the prior year’s period of $6 million loss. We also announced an organizational restructuring in early April that should drive additional cost savings over the coming quarters. In short, our team is executing well on our profitable growth ambitions, and we are well positioned to deliver on our 2023 key initiatives shown on Slide 6; including, first, delivering high rates of revenue growth powered by sustained double-digit written premium gains and incremental revenue from membership and marketplace. We are reconfirming total revenue growth of 22% to 26% for the year. Second, continuing our evolution into a vertically integrated insurance business. And third, significantly improving the profitability of our business through cost containment and operational efficiencies. We believe we are well on track to deliver the upgraded profit outlook for 2023 adjusted EBITDA of $55 million to $75 million. Our teams have mobilized around this short list of priorities, and we feel confident about the pivot to profitability that we have begun to deliver in 2023. Let me now turn the call over to Patrick to cover the financials in more detail.

Thanks, McKeel, and good morning, everyone. Let's dig into the strong results from the first quarter shown on Slides 7 and 8. As McKeel mentioned, we delivered 30% growth in total revenue, including strong gains in core insurance, marketplace and membership. Written premium increased 18%, in line with our expectations for a very strong start to the year. Hagerty's brand strength can be seen in the 88% retention and quality of written premium growth, with equal contributions from new business count and rate increases. Commission and fee revenue grew 19% to $75 million due to the strong growth in written premiums. Membership, marketplace and other revenue increased 63% to $27 million, benefiting from an increase in total paid members, a transition to a single-tier membership at $70 and an additional $7 million in marketplace revenue. Earned premium grew 32% to $117 million, driven by new written premium growth and another 10-point increase in our contractual reinsurance quota share to 80%. And our loss ratio remained stable in the quarter at 41%. Turning to profitability, shown on Slide 9, we reported a fourth quarter operating loss of $16 million, compared to a loss of $13 million in the prior period. This operating loss included a $6 million restructuring charge related to the reduction in force that we implemented in the quarter, which drive margins higher as well as reduced hiring plans and other cost containment initiatives. Focus areas included reducing the total fixed cost to serve our customers, including the member service center, underwriting and claims as well as refining the infrastructure behind our cost to acquire new customers through our direct and wholesale channels. This restructuring is the continued evolution in our business model that we embarked on 6 months ago to drive significantly improved profitability during the coming years and should result in additional annualized cost savings of $20 million to $25 million, of which we expect to realize roughly $15 million over the balance of 2023. Operating loss also incorporates $4 million of accelerated amortization from the write-down of the majority of our media assets in the quarter related to lower-than-anticipated advertising revenue. While we expect less direct monetization from Hagerty Media, we will continue to leverage this high-quality content as an effective way to bring in new customers and drive engagement across the Hagerty ecosystem. Net loss for the quarter was $17 million (sic) [$15 million], compared to a net gain of $16 million a year earlier. The year-over-year change in net loss was primarily driven by the $32 million swing in the fair value adjustment related to our private and public warrants. GAAP loss per share was $0.06 based on our 83 million weighted average shares of Class A stock outstanding. Our adjusted EBITDA in the fourth quarter was positive $7 million, a $13 million improvement over the $6 million loss in the prior year period. The year-over-year improvement in adjusted EBITDA is a result of continued growth, compared with our disciplined approach to cost and focused initiatives, and we expect to see this improved trajectory continue over the balance of 2023. Let me now move on to our 2023 outlook shown on Slide 10. As McKeel mentioned, given the strong start to the year, we are reconfirming our outlook for total revenue growth of 22% to 26% powered by written premium growth of 11% to 13%. Our rate increases are locked and loaded, and Hagerty brand is on track to add another 0.25 million members in 2023, creating a growing base of auto enthusiast to provide products and services. Moving down the P&L. We now expect full year adjusted EBITDA of $55 million to $75 million, equivalent to 6% to 8% margins. This increased outlook incorporates the additional expected savings from the recent restructuring and should accelerate our return to double-digit EBITDA margins. In summary, we are well on our way toward achieving our 2023 plan for profitable growth. We have judiciously removed back-of-the-house costs that do not impact our brand strength and excellent customer service as seen in our Net Promoter Score of 83 and retention of 88%. This recipe should allow us to continue to gain share over the coming years and deliver significantly improved margins and profitability. With that, let's now open the call to your questions.

Thank you. [Operator Instructions] Your first question comes from Mark Hughes with Truist. Please go ahead.

Yes. Thank you. Good morning. Any change in the State Farm timing or momentum this quarter compared to what you might have discussed on the 4Q call?

Thanks, Mark. It's a great question. And we're still feeling quite confident that we're going to be launching in our 4 states yet this year. We were code complete on the integration between the technical teams in April, and we're continuing down the path. So really no change. We're going to be up and running at this year, in the second half of the year with those 4 states. And then the intention between the teams, which is to get going and keep the momentum accelerating really. But really, the momentum question, I think is the key piece. State Farm continues to be very committed to the program. The teams are excited about it, and they continue growing their own business, so that will be good for us.

And then, I see your loss ratio very steady. Any impact here from inflation, could you just talk about the kind of the price versus inflation dynamic as you're seeing it play out?

Yes. Mark, we might have talked about before, last year, we were seeing this tricky combination of some increased costs in a few pieces of loss cost. But we've really seen some nice stabilization this year. Some of it due to of course rate is coming through, but also just it's a combination of valuations and managing expenses through the claim process seem to be working very effectively. So we're feeling really quite good about our targets here.

Yes. And you gave a pretty good range of EBITDA guidance, $55 million to $75 million. What needs to happen in order to hit the higher end of that range? What are some of the variables that you need to see play out in order to do, again, the high end of that range?

Sure. It's Patrick, and Mark, good to talk to you again. We feel good about the range. We feel confident in sort of the midpoint of the range right now. I would say that we've started the year from a revenue standpoint particularly written premium-related revenue, with a little bit of wind behind our sales. It was a good first quarter. So we feel good about that. Not enough that we're going to declare that we need to move the guidance, but it does give us confidence that we should be within that range. So on a go-forward basis, it continues to deliver written premium growth, to continue to deliver new customers, both of which are off to a good start so far this year. First quarter is seasonally slow, but the haymaking quarters are the second and third quarters, so we've got to keep pushing that advantage. And then as you work down the P&L, we're doing everything possible to make sure that we're being very focused on costs, right? So we did a cost exercise at the end of last year. We did another one during the first quarter. So we're trying to insulate the P&L and increase the likelihood that we hit our plan, which would put us right in the midpoint of that range. So I think it's lining up pretty well right now. It's just too early in the year to declare that we're going to be more near the top and the bottom of the range, but we'll keep pushing.

Next question, Greg Peters with Raymond James. Please go ahead.

Good morning. This is Sid on for Greg. Just wanted to go back to the underwriting results. I just wanted, I guess, clarify your comments to see did you see any changes in severity or frequency in the first quarter, compared to the end of the year last year?

I think the better way for us to talk about it would be relative to what we've seen in other first quarters. Keep in mind that our business is so seasonal, and these wonderful cars are typically resting during the first quarter of the year in most places. And so when we look at it relative to last year and the year before, we're kind of right in the middle and so it's what we had predicted in terms of loss ratio. Our mix is heavily skewed towards the property side of things, physical damage as opposed to liability. That's coming in line with what we had expected. So I think you should assume that we're off to an as-expected start to the year, consistent with historical results.

Next question, [Edward Riley] [ph] with [indiscernible]. Please go ahead.

New to the story here. It looks like marketplace is growing nicely. Just at a broad level, could you maybe talk about customer acquisition strategy within this segment and how you can increase market share going forward?

Thank you, and nice to talk to you. So our marketplace consists of kind of three distinct groups of how we think of that. So we have our live auction strategy, which is really exciting and that launched midyear last year with a couple of really fun and exciting sales that delivered great top and bottom-line results. And that's very much a client-based business. So the team that, when we acquired Broad Arrow Group, there's a group that knows these clients, they're out there working with them to acquire cars, helping them sell cars, helping them find cars. And very often, those transactions take place at live auction. There's also a robust private sale aspect to that when a customer wants something and they can just kind of get it done in between a live auction, whether it's buying or selling. We're off to a great start there. We're really excited that the official partner with Porsche North America to do their 75th anniversary sale in June in Atlanta at the Porsche Experience Center. So that's a real marquee auction. We just had our Amelia Island auction a couple of months ago. And then, we'll have our Monterey sales. And the idea here is that we may build out a couple more events during the course of the year. Again, client-focused, maybe a large collection becomes available, and that's what we focus on there. Same thing with the private treaty side. The digital auction strategy is most the scalable piece of our marketplace strategy, and that we're still, I would describe us as just kind of coming out of the beta test mode. There are a number of great digital platforms out there where you can buy and sell cars of these types. We believe ours is differentiated because we're going to be really emphasizing the trust and transparency that we have with the [indiscernible] brand, really delivering on valuation making sure information as much as available as possible and that people, when they buy something that they really get what they're paying for. So we're going to start seeing more scaling up of that business in the coming months and quarters and years ahead. And we've already started to put more volume through the digital channel. So for us -- we have just short of 800,000 or so paid members. That's our main marketing group. We're going to be working with them to help them buy and sell cars, whether it's at live auctions or on digital. And we're also using our social channels and all of our other marketing channels to acquire those new customers. I'd remind one thing to you since you're kind of new to the story is that a cool thing about our scale in this total addressable market is that within the last year, our members bought and sold over 300,000 cars and over $12 billion worth of value there from a transactional standpoint. And that's what we're targeting first. We're less concerned about what's happening outside of our world, and more with concerned about what's happening inside of our member group.

Okay. Great. Thanks for that. And then, just given the cost initiatives you've taken recently, do you see any challenges in maintaining that Net Promoter Score going forward?

Well, thank you. Net Promoter Score, while not a financial metric, is something that's very important to us, because we believe it's one of the most important metrics to not only compare how your customers think of you. The fact that having this high the Net Promoter Score 82, 83, I think is where we are right now, I mean that tells you that majority of the interactions we're having with our clients, our members, are leading to them telling their friends to come to us to buy from us or to use our services. So we've seen our Net Promoter Score hold really strong heading into this year, just like we're seeing with the tailwinds of our growth. And it's important to recognize that with our cost-saving initiatives, our restructuring, this has not been one where we've gone in and limited our ability to serve frontline members on a day-to-day basis. It was much more in supervisory positions and new hiring strategy. So we're focused on the member, and we need that Net Promoter Score to help deliver our growth.

We've actually pulled the data. And so this was a profitable company to the tune of kind of high single, low double-digit profit margins 8, 9, 10 years ago and was still in the 80s from an NPS perspective. And so there's a keen focus on delivering value for the customer and really celebrating that customer and that hasn't changed. What we've really focused on is, think of it as infrastructure. When it comes to the front line delivering for the customer that doesn't change. When it comes to how we do that behind the scenes, back of house, that's what we're going to -- we have focused on, we'll continue to focus on to deliver efficiencies.

[Operator Instructions] Next question comes from Pablo Singzon with JPMorgan. Please go ahead.

Any reason why the 18% growth in premium growth should not carry over through the rest of the year? Your guidance for the full year is implying a step down to about 11% to 12% for the subsequent quarters this year.

It's the seasonality and also how rate increases flow through. And so as I said earlier on the call, we started the year with a little bit of wind behind our sales, so a little bit better than what we expected in terms of written premium growth, but not much, it's pretty much in line, because we did think about exactly when the rate increases flow through in different states. And then that has obviously influenced, how that flows through is influenced by renewals. And so when you plan it out over the course of the year with the seasonality and with the rate increases, we still think that that 11% to 13% range makes sense. Right now I feel very comfortable with the middle point of that range. And hopefully, we'll continue to have a little more wind behind our sales. But it's a good estimate for now based on seasonality.

Got it. And then just moving to the loss ratio. Does the 41% this quarter reflect the higher liability that you set up last year. I think it was in the third quarter. Just wanted to check that those picks are carrying through in the current loss ratio that you reported.

Yes. So last year, we took an increase in the reserves for liability. That did reflect what was going on in terms of inflationary environment, the social inflation and inflation. And so that logic is baked into how we're setting the loss ratio accruals. Now keep in mind, we did take rate increases as well. And the rate increases were heavily weighted towards the liability side. And so that's offsetting that increase and it gets us back to the low 40s that we've talked about is the right loss ratio for the business.

Yes. Understood. And then the last one for me. In the press release, you provided a breakdown of the outlook which is very helpful. I was curious about the one line there, other income, where you're projecting, I think, about $10 million of income for the year. Can you talk about what's in that line? Thank you.

It's essentially the earnings on our cash, right? So we have both our own cash and then we've got restricted cash. Some of that's in HagertyRe, some of that's within the MGA entity. And for the most part, it's invested at the very short end of the curve. And what's happened with interest rates, we've made sure that we've adjusted our investments appropriately, but we're now earning significantly more than what we had previously just based on where the rate curve is. I think it's sort of in the mid-4s right now in terms of what we're earning.

Thank you. There are no further questions. I would like to turn the floor over to McKeel for closing remarks.

Thank you, operator, and thank you to One Team Hagerty for your hard work and dedication. Well, we've had to make some tough decisions over the last 6 months, including the recently announced restructuring. I believe we have never been better positioned to capitalize on the latent growth from Hagerty's Affinity business model. Our rapidly growing customer base creates the scale benefits that allows us to continue to invest in the products and services that help auto enthusiast enjoy their passion for fun cars and for driving. And importantly, we're executing with the discipline that will create the profits needed to reinvest and sustaining these high rates of growth over the coming years, and thank you, our stakeholders, for continuing to support us. One more item of note, our Greenwich, Connecticut and our Concours d'Elegance is fast approaching, and we plan on hosting an event for investor on the afternoon of Friday June 2 in Greenwich. We look forward to the opportunity to spend more time with you in person. So be on the lookout for more details from us. Until then, never stop driving.