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Greetings, and welcome to the Hagerty Second 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, 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 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 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, 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 second quarter 2023 earnings call. Hagerty has a track record of delivering double-digit written premium growth over the last 2 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 through 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 spend 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 shown on Slide 3 of our investor deck, including: total revenue jumped 28% during the first 6 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 6 months. This growth was fueled by 20% membership growth, $12 million of marketplace revenue described on Slide 4, and a 12% increase in other revenue, including sponsorship and event admission revenue. Finally, regarding our commercial partnership with State Farm, shown on Slide 5, we are excited to announce that we will soon begin writing new policies in 4 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. Now, 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 6 months of 2023. Our team is executing well on our profitable growth ambitions, and we are positioned to deliver on our 2023 key initiatives shown on Slide 6. As a reminder, they include: first, delivering high rates of revenue growth powered by a sustained double-digit written premium gains as well as 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, we believe this 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 7 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 to execute on our long-term growth ambitions and to allow us to save driving a 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 shown on Slides 7 and 8. We delivered 27% growth in total revenue in the second quarter to $261 million with written premium growth of 16% in 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, and growing contribution from our online marketplace. 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 cats, 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, as shown on Slide 9, we reported a second quarter operating profit of $17 million, an increase of $15 million over the prior year period. Operating profit this quarter also included a $3 million charge, primarily related to the impairment of leases for facilities we are no longer using and are actually working to sublease. 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 as we successfully execute on our profitable growth ambition. Net income also includes a $4 million swing in fair value adjustment related to our private and public warrants. GAAP earnings per share was $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 shown on Slide 10. As McKeel mentioned, given this consistently strong and visible top-line momentum in our business, 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%, 2 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 Slide 11, which shares 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 with the products that allow us to widen the aperture of our underwriting, while maintaining historical combined ratios. We also have a $25 million commitment of long-term debt financing from State Farm for Hagerty Re. This capital tops off our cash and liquidity, positioning us to progress to a self-sustaining cash generating model and demonstrates the conviction of our strategic investors. 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, add incremental profits from assuming more of the risk from our stable underwriting, 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. [Operator Instructions] 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 kind of refresh me on what you’re getting in terms of rate, the 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 sort of mid-teens. And of that kind of two-thirds of it is coming from rate and the bottom is from volume. So think about rate as high-single, touching double-digit rate increase and then the balance is coming from growth in units.

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

There is some evidence of that. So the appetite gets reflected in rate, obviously. And so rates are going up across the board, and that is causing some folks to shop. And so, when we’re winning new business and when we can track what’s going on and the customers give us the information, yes, some of it is the fact that our rates are viewed as quite competitive right now based on what’s going on more broadly in the market.

Yeah, yeah. And then the online marketplace, kind of give us the update of your progress there?

Yeah. Mark, McKeel here. We’re actually very, very pleased. What we’re trying to do with that team is balance, this balance of sell-through rates and the amount of competitive bidding per lot. So, we started off with the steady drumbeat of sort of 1 car per day, call it, and now we’re, I think, touching 3. We’ve also started testing rolling through larger groups of cars that spill-out over a period of days. And the idea is to make sure for the consigners that we maintain that level of strong bidding and getting above their estimates, when it comes to a reserving kind of practice. So we’re very, very pleased with it, and we look forward to seeing that kind of growth continuing ahead, so good stuff. And, I guess, I would say one more thing about the digital auction platform. And this is being developed completely by our own digital product teams, and we are rolling out new features, new capabilities every 2 weeks in a sort of 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 for 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 and understanding 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 just clarify kind of what – I wasn’t quite sure there, Sid, can you help me?

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

Look, our mix at 75% is physical damage, 25% liability when you look at our losses over time. And so, we do skew very differently. What we’re experiencing right now is our loss ratio, we think, is in a very good spot. We did see some liability pressure last year. We talked about that and we strengthened our reserves for that earlier this year. We’re not seeing that now. We’re seeing liability. The rate increases we’re getting are flowing through, and so we’re not seeing that same liability pressure right now. And then on the severity side, yes, inflation and things are more expensive, but we’re right back to that low-40s loss ratio, so in a good spot.

All right. Thank you.

Thanks, Sid. Appreciate it.

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

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

Well, net income is so tricky for us, because there are so many different pieces to it. We’ve got the warrant liability. We’ve got the non-controlling interest. So it’s difficult to give sort of a quick reconciliation. You do raise a good point, which is we’re now earning on our cash balances, both within the MGA business and Hagerty Re. We’re earning pretty significant interest income right now, just based on where interest rates are, and we’re very safely invested in very short-term, but the rate increase is really benefiting us. And so, you’ll see that net interest income line is going to continue to be positive. On the financing, actually, the type of capital we raised, because it’s convertible preferred. So there’s a dividend associated with that, but that’s not hitting that interest income line, right? So we actually use that capital in the short-term to pay off some revolver, so we’re saving on interest income, and then we’ve got the benefit of higher rates right now. And so, you’ll continue to see a positive on that line for the balance of the year.

Pablo, I’m happy to follow-up with you after the call on some of the moving parts, but you also see the restructuring line is $3 million for the quarter, which would hit net income, not adjusted EBITDA. So that accounts for the majority 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. But the question I had is, how do you see the cost base trending from here, I guess, in dollar terms, right, as the impact of your cost savings work their way through the P&L? And looking forward as you continue to invest for growth, are we sort of a trough here and maybe expenses start growing reasonably from here?

Well, it’s really – if you look at the numbers, the line items in 2023 that we really focused on, are trying to make in that cash cost curve would be salaries and benefits. And the year-over-year, we’re up 0.6%, right? So I think really strong accomplishment there. And then G&A, it’s only up 2.8% year-over-year. So all the steps that we took to take cost out of the business and try to bend that cost curve are really paying off and that’s going to continue. We’re starting the budgeting process in the next month or so for 2024, and we’ll give guidance on how things come together in the early part of next year. But we’re really focused on driving margin expansion. And we turned the corner, right? So we will produce a profit this year. It will be modest. And what we want to do is continue to expand margins in 2024. Some of that will be top line growth, right? This business incredibly grows, written premium in the mid-teens and with our marketplace business that’s growing quite quickly. And so there’s just operating leverage that comes from that, that will help with margin expansion, but we’re going to keep focused on keeping the cost under control.

Okay. And then last for me. Patrick, you had 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 baked into that. Although, there’s not a lot of valuation change right now going on.

Okay. Thank you.

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. This results 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 such as our State Farm partnership. And we are well on our way towards delivering the bottom line growth that will fund our growth ambitions and creating value for our shareholders. We hope to see as many of you as we can out in Monterey next week for the car festivities that includes the Pebble Beach Concour and Monterey historic races and our very own gathering called Motorlux. And if you’re at that direction, please look us up. But until then, never stop driving.