Hagerty, Inc.

Greetings and welcome to Hagerty's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Koval, Head of Investor Relations. Thank you.

You may begin. Thank you, Operator. Good afternoon, ladies and gentlemen, and thank you for joining us for Hagerty's third quarter 2022 earnings conference call. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website at investor.hagerty.com. Our earnings release accompanying slides and quarterly letter to stockholders covering this period are also posted on the IR website. Joining the call today are McKeel Haggerty, Chief Executive Officer, and Patrick McClima, Chief Financial Officer. Before we start, I would like to remind you that the discussion today may contain statements related to our business that can be considered forward-looking, including statements concerning our expected future business and financial performance, our ability to maintain existing and acquire new members, our plans to expand market share, including investments and partnerships, expectations regarding key operational metrics, and other statements regarding our plans and prospects. Forward-looking statements are often identified with words such as we expect, we anticipate, we believe, or similar expressions. These statements reflect our view as of today, November 10th, and should not be considered our views as of any subsequent date. We do not undertake any obligation to update or revise any forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and 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 other important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are available on Hagerty's Investor Relations website and at SEC.gov. Finally, during today's call, we will refer to certain non-GAAP financial measures. A discussion of these non-GAAP financial measures, along with a reconciliation to the most directly comparable GAAP measure, is included in our press release, Investor Deck and Form 10-Q, copies of which can be found on the investor relations section of our website and on the SEC's website at sec.gov. Unless otherwise noted in today's call, all comparisons are on a year-over-year basis. And with that, I'd like to turn the call over to Michiel Hagerty, our founder and CEO.

Thanks, Jay, and good morning, everyone. Thank you for joining us to discuss our third quarter results. Before we get into the quarter, I want to welcome Patrick to his first Hagerty earnings call as our new CFO. I also want to thank Fred Turcotte for a decade and a half of outstanding service and collaboration. We announced Fred's planned retirement two months ago and are excited for him as he moves into a strategic advisory role helping the company with special projects. Overall, we are very pleased with our third quarter results, which reflect the strength and resiliency of our highly differentiated business model addressing the auto enthusiast market. Let's start with slide three of our investor deck, which shares some of the key year-to-date highlights through September 30 2022. This includes written premium growth accelerated during the third quarter to 16%, resulting in 15% growth during the first nine months. Written premium growth is the key metric that underpins Hagerty's total revenue growth today. The Hagerty brand is winning in the marketplace, pulling new customers into our ecosystem and supporting rate increases to offset inflationary pressures. In the third quarter, new business count contributed eight percentage points of the 16% premium growth, while rate actions and evolving mix to include more modern enthusiast vehicles drove the other eight points. Total revenue grew an impressive 29% in the third quarter, and year-to-date revenue jumped 27%. In addition to the continued strong revenue growth of Hagerty RE, our membership business, as well as our garage and social locations, Q3 was our first quarter fully consolidating Broad Arrow Group into Hagerty Marketplace. During the quarter, under our ownership, Hagerty Marketplace contributed solid revenue and profits, including the very successful Motorlux auction in Monterey, California. Total active members grew 7% year-over-year to 2.6 million. And our team continued to invest in the State Farm integration on both the technology and people side as we anticipate rolling out the partnership during the first half of 2023. We expect the initial 10-year contract to drive meaningful scale and growth for Hagerty as we help State Farm grow their new Hagerty-powered Classic Plus program as well as offering Hagerty Drivers Club memberships for these customers. We are very encouraged by our 27% year-to-date revenue growth, which keeps us on track to deliver full-year 2022 revenue toward the high end of our previous outlook, despite a challenging economic environment and heightened volatility across the broader property and casualty space. We believe this strong growth trajectory positions us well for 2023, including continued double-digit gains in written premium, 80% quota share in Hagerty RE, a move to a single-tier pricing of $70 on Hagerty Drivers Club, as well as a full-year contribution from Marketplace's live and online auctions, we'll share more specific details on our outlook for 2023 on our fourth quarter call. We also love the time-tested defensive characteristics of a recurring business model, as most auto enthusiasts continue to spend on their passion through economic downturns. As my mother loved to say at the dinner table, people take good care of their toys, and collector cars occupy rarefied air in the prioritization of constrained resources. Everything we do is done to make it easier for auto enthusiasts to enjoy their special vehicles, offering the products and services that improve their experience, resulting in high retention and an excellent net promoter score. Slide four highlights the consistent Compounding written premium growth, our model is delivered over the last decade. Our outperformance compared to the industry expanded over the last nine months with written premium growth of 15% coming in at roughly five times the industry's estimated growth. After four decades of collecting data, we consistently underwrite these special vehicles at significantly lower loss ratios than the industry average. Even with the disastrous impact from Hurricane Sandy a decade ago, our 2012 loss ratio remained under 50%, and we were able to bring our loss ratios back down through rate increases over the following year. Our loss ratio in the third quarter increased to 56%, resulting in year-to-date loss ratios of 47%. While our underlying business performance remained solid over the first nine months, the higher loss ratio was driven by 3.4 percentage points of losses from Hurricane Ian, and 2.2 percentage points due to increases in U.S. liability reserves. Ian's net exposure was limited to $10 million due to our successful approach to risk and reinsurance management, and given the higher severity losses in our liability lines, we strengthened Hagerty Reed by $6.5 million to maintain a prudent level of reserves compared to estimated ultimate reserve needs. We expect our loss ratio to return to the 41% range next year based on recently implemented rate increases. Even with the higher than normal loss ratio, our combined ratio of 95% compares favorably to the industry average. The strength and stability of our business model allows us to reinvest in our platform year after year and to deliver new products and experiences to consumers, which paves the way for future growth. Retention remains stable around 88%, which is slightly below expectations due to the robust resale market for single vehicle policies. Roughly two-thirds of our 12 percentage points of attrition so far this year has been driven by vehicle sales, highlighting the strength and love for Hagerty through a retention rate closer to 96%, excluding the impact from these sales. Importantly, We are still growing our net vehicle count in the high single-digit range, a testament to the strength of our brand and value proposition. Which leads me to an update on Hagerty Marketplace and why we are so excited about our future potential as a high-trust platform for members to browse, buy, sell, and finance collectible cars. As a reminder, we acquired Broad Arrow Group in August of this year and conducted our first live auction with Motor Lux in Monterey. shown on slide five. In Monterey, we sold over $55 million in vehicles, generating $5 million in commission revenue with 88% of lots sold. Auctions of this size can generate 30% EBITDA margins, so with two more auctions in the fourth quarter, including the recent cars of Jim Taylor with $21 million in vehicle sales, we are encouraged as we plan our 2023 auctions. Equally exciting is the recent launch of our online time-based auction platform, where Hagerty can serve consumers as the trusted brand for both buyers and sellers of vehicles, offering certification services, title and escrow, as well as financing options. These higher value-added services differentiate our product from competitors. The opportunity is substantial, with a total collector vehicle value in the U.S. of over $1 trillion. If you were to assume in a typical year that 5% of vehicles trade hands, it implies a transaction value of $50 billion, which, at a 10% commission, would result in $5 billion in total net revenue. When consumers decide to sell their vehicles today, they typically rely on small and regional markets, including local classified ads, dealer sales, Facebook market, versus gaining access to a nationwide network of potential buyers. Our team is focused on making sure Hagerty captures more than its fair share of the opportunity as these sales move online. For context, the largest competitor in the space is on track for well over $1 billion in vehicle sales this year and is growing annual transaction value at close to 60%. As we mentioned last quarter, the Hagerty marketplace is expected to be immediately accretive in 2022. We underwrote the investment in Broad Arrow Group on its standalone merits, but we see a clear path to recapture the policy on the buyer's side by introducing new consumers to the products, services, and entertainment options that make up our automotive lifestyle ecosystem, including Agri-D Insurance and Drivers Club. Our partnership with State Farm is progressing well, as you'll see on slide six. and the teams continue to work hard integrating our systems, seeking regulatory approvals and progressing through the testing phase. As we work towards providing the high quality and agent experience that our customers expect, we anticipate that we will begin activating State Farm's 19,200 agents on a state-by-state basis during the first half of 2023, including beginning to convert the existing 460,000 policies to the new program. We believe that this partnership with State Farm will help unlock significant growth in their classic auto business, creating a win-win for both companies. And we are excited to stand up the platform next year and create value for shareholders through the scaled up revenue and normalization of digital investments post 2023. And slide seven highlights several of the key year-to-date milestones across our ecosystem, including our continued progress with State Farm, Marketplace's successful launch, increasing quota share of Hagerty RE, solid growth and membership, and strong delivery of content and experiences to customers through our media and entertainment platform. At Hagerty, our purpose is to save driving and car culture for future generations. To that end, we have been building an ecosystem of products and services and entertainment for car lovers that honors and catalyzes the passion for cars and driving. And we will continue to facilitate access to our automotive communities around the world that meet the human need for social interaction and connectivity with others. As we think about the next decade, we remain committed to improving an already great business model. This includes continuing to execute on our long-term growth strategy by delivering best-in-class experiences for members. But most importantly, we will take a disciplined approach to resource allocation and cost containment to improve our margins and cash flow and return to profitability on the other side of these elevated investments. With that, I will turn the call over to Patrick to discuss our financial results in more detail, including our early thoughts on the financial strategy into 2023.