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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. [Operator Instructions] 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 at investor.hagerty.com. Our earnings release slides and letter to stockholders covering this period are also posted on the IR website as well as our 8-K filing. 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 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.

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 Kirby Roads beckon. There are car shows and options and 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 and revenue and profits. The rate and durability of that growth is 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. Business process improvements, cost discipline and smart technology investments should 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 to 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 to create an industry-leading user experience for customers and to scale critical elements of the business. Let me share a few key highlights from our first half results shown on slide 3. 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 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 over the prior year period, with operating margins up 840 basis points. This margin improvement resulted 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. Slide 4, is a reminder of our 2024 priorities including: first, improving loyalty to drive renewals and referrals, a highly profitable way for Hagerty to grow. Second, enhancing the member experience in a cost-effective and efficient way, leveraging technology to reduce variable costs as we scale up. Third, building Hagerty marketplace in 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 and would point out that 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. Slide 5, shares some examples of how we are positioning Hagerty for a sustained, multiyear operating leverage and high rates of flow through beyond 2024. First, continue to utilize our marketing team to efficiently acquire new customers; second, evolve our member service center to serve our members more effectively, reducing handle times and freeing up resources for high rates of member growth, and; third, identify 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 is 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 to 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, shown on Slide 6 and 7. 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 that 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% and 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 the fewer locations post dissolution of the joint venture last fall. Earned premium grew 24% to $158 million and loss ratio came in at 41% 8 point below last year's second quarter. We produced stable and highly predictable underwriting results, thanks to decades of experience ensuring customers special vehicles. Turning now to profitability shown on Slides 8 and 9, 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. Salaries and benefits grew 8%, as merit increases took hold in the second quarter, along with higher accruals for incentive comp, given strong year-to-date results. Adjusted EBITDA increased $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. Significantly improved operating margins drove the $27 million improvement in net income along with higher interest income and the absence of last year's $3 million restructuring charge. The change in fair value of our private and public warrants in the quarter was minimal and will no longer be an issue going forward following our successful exchange offer. 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, divided by fully diluted shares of $360 million 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 precious resources on their highest and best use. First in July, we successfully exchanged the $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 motor sport 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 shown on slide 10. 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 and 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, but 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 and position us to drive margins significantly higher over the ensuing years. With that, let us now open the call to your questions.

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

Yes. Thank you. Good morning.

Hi, good morning.

The hiring about Sean McMullan to run the digital marketplace, anything you can say about kind of his early priorities 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, he was responsible for a lot of different areas in Amazon, most recently the Amazon Music division has been to knit together a lot of the complexity of a big platform like Amazon. And one of the things we're excited about is we know digital marketplace in and of itself is an important thing for us. We have -- we think it has a lot of promise and we're looking forward to it continuing to expand. But the secret sauce for us is going to be how it knits together with all the other tools in our toolbox. So valuation, our speed digital acquisition, those types of things. So he's going to be looking at both of those things. How do we continue to march of the core underlying growth? And then how do we knit the pieces together?

Understood. Thinking about the -- you've just said this very strong, consistent growth in written premium. If you think about it now versus 12, 24 months ago, just kind of pricing impact in the market, your strategic relationships with other carriers, kind of what are the -- is that evolving and changing? What have you observed over the last 12, 24 months?

Hey, Mark, it's Patrick. I'll handle the price one and then McKeel can talk about where things stand with our partners. Overall market pricing, we think this year is going to end up something -- for daily drivers something like up 10% or so as companies continue to take rate. And that compares to us, and we think it will end up being something like up 3%. So we are taking rate and that is a benefit for us and that continues in 2024, but we're just doing it at a much lower rate. And we think that's part of why we're able to grow so quickly. The value prop for our customers, because we understand the risk and how to price it is really compelling.

And I guess I would add to that what we're hearing from our partners is we all know the -- it's a regulated business. They have to get -- everybody has to get their pricing right. We're really required to make sure that we're delivering profitably. And a lot of that action is working its way through the industry, although early indications are that it's starting to level off maybe on an industry-wide basis. The benefit we've had over the last year or 18 months or whatever it is, is just the rate increases in general push people out there to shop and we've definitely benefited from that. And so because we're -- and when it comes to, well, gee, somebody might have three, four, five cars and one of those is a special car that maybe is better insured by us. We get a benefit from that one. There's a lot of rate taking going on out in the market. So as it levels off, for us it's sort of back to business as usual. Do what we do well, communicate about the value proposition, and keep celebrating the cool cars that people own and the agents who need to bring them to us.

Patrick, you talked about the 30% incremental margin. You've had a tremendous expense leverage. Is that kind of a good target on a go-forward basis? You said you think you're positioned to drive significantly higher profitability as the 30% of good ratio?

I think what we've communicated so far is we'll be at that kind of level, we think for full year 2024, and that's consistent with the guidance. We do expect there to be continued margin expansion on a go-forward basis. In terms of where that shakes out for next year, we'll communicate that early next year when we give guidance. But as we've talked about on these calls, we've turned the corner and we've gotten to profitability in the aggregate a little bit last year and more meaningful this year. And -- but we're not where we need to be, right? We think that the overall business should end up being something in the high teens maybe getting close to 20% overall operating profit margin. And that will take us another couple of years two, three years to get there. So we do expect there will be continued expansion.

Thank you very much.

Thanks, Mark.

Thanks, Mark.

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

Hi. Good morning.

Good morning, Pablo.

Good morning. The tax rate came a bit below what we were expecting. Was there anything unusual this quarter? And how should we think about the go-forward tax rate?

No nothing unusual this quarter. And I think on a go-forward basis, it should be consistent with where we've been. I don't -- there's nothing quirky that I could point to.

Okay. And then on interest and other income, right? So I think there is interest expense and then there's actual invested income. Did that line improved pretty strongly on a sequential basis right from about $7 million to $12 million sequential. What drove that? And how should we think about that contribution to the P&L going forward?

So we have started producing a lot more cash. A lot of that is just the expansion of the margins. A lot of it is the renegotiation of our arrangement with McKeel, where we now get paid our CUC. And we shifted it from being all paid in sort of in arrears the following year to now it's paid for the most part on a monthly basis. So that's been a big positive cash flow swing. So the amount of cash we have to invest within the MGA and within Hagerty Re continues to build. And so the big driver is we just -- we're talking about more invested cash. And then the other is just the rate environment. And so relative to where we were in previous years, we've been able to get around 5%, sometimes north of 5% earnings on those cash balances. We did implement a new investment strategy and that kicked off April 1st. So the results of that aren't really reflected much in the numbers yet. It will be going forward. And to put it simply, previously we were entirely invested in cash. And now we've moved to a strategy where we're invested overwhelmingly in investment-grade bonds. We have some exposure to other asset classes. But the simple way to think about it is, before we were essentially entirely exposed to short-term interest rates, because we're invested in cash. We've now pushed out our duration a bit. It's kind of two to three years, versus being cash like. So we think that we've simply moved on to the efficient frontier, right? We're actually taking less risk, but should be able to produce better returns going forward.

That makes sense. And just a quick follow-up on that point, Patrick, so 2Q was $12 million of income. Would it be fair to assume that you don't back off that level, right? Are you just thinking about cash balances and where rates are right -- this isn't the any reason why you sort go back from the 12 million baselines in 2Q, right?

No. That's -- as we sit right now, obviously the interest rate environment is pretty volatile right now. And so things may move around, but I think it's a reasonable assumption for the balance of the year.

Got you. Thank you.

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

Hey. 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. And we have a long runway ahead of us, as we help members to protect buy-sell and enjoy their prized vehicles. We have multiple legs to our profit growth including high-growth, distribution business and 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 people to buy and sell collector cars. Bring them all together, and we have the recipe for success that positions us well to further penetrate the $46 million collector car opportunity in the United States 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 all come together. For those that haven't yet been 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 there. And until then, never stop driving.