Hagerty, Inc.

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 Kaval, 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 third quarter of 2023. I'm joined this morning by McKeel Haggerty, Chief Executive Officer, and Patrick McClimat, Chief Financial Officer. During this morning's conference call, we will refer to an accompanying presentation that is available on Haggerty's investor relations section of the company's corporate website at investor.haggerty.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 in slide two 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 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 financial metrics to most directly comparable GAAP measures that are further supplemented by this morning's 8K filing. And with that, I will 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 third quarter 2023 earnings call. For classic and enthusiast car owners, November is a look back, look forward kind of month. This is when we reminisce about the adventures and misadventures of the past driving season and dream about the spring driving season to come. At Hagerty, we are deep into planning season and how we can better serve our members in 2024 with products and services they need to enjoy their vehicles. But I think it's really important for a team of 1,700 people at Hagerty to stop and to celebrate all that we have accomplished over the last 12 months. Simply put, we are successfully executing on the strategy we set forth at the end of 2022 to significantly improve our profitability without negatively impacting our high rates of organic growth. From a top line perspective, 2023 growth looks a lot like 2022, but better. Over the first nine months, we've grown written premiums by 16% on top of last year's 15% gains. and total revenue has jumped 28% compared to last year's 27% growth. There is nothing more powerful than sustained compounding growth. The area where 2023 looks dramatically different than 2022 is the bottom line. Last year at this time, we had minimal adjusted EBITDA. Expense growth was too fast, technology spend too great, and we weren't delivering the flow through you would expect from a rapidly scaling business model built around a great brand. Fast forward to today, during the first nine months of 2023, we have delivered adjusted EBITDA of $78 million, a year over year improvement of $78 million. These results would not have been possible without the excellent execution and commitment from our team. Importantly, We've been taking the actions necessary to further improve margins over the coming years. I would point out that we are on track to deliver an eight percentage point improvement in our adjusted EBITDA margins this year. This is even more impressive as we have continued to thoughtfully invest in our long-term growth opportunities. This includes the technology and people necessary to support the rollout of the State Farm Classic program that we launched in September, ramped up technology spend as we build out Hagerty's online marketplace and additional tech investments we are making in the insurance technology platform implementation that will position Hagerty to drive strong flow through of incremental revenue into the incremental profits over the coming years. Let's now dig into a few key highlights of our year to date results shown on slide three of our investor deck. This includes A total revenue jump of 28% during the first nine months of 2023 to $755 million. Written premiums grew 16% and commission revenue grew 18% on strong underwriting results. The Hagerty brand and value proposition is resonating with consumers who are seeing double-digit rate increases as the industry endures unprecedented inflationary pressures. And our risk-taking entity, Hagerty Reinsurance, Earned premium over the first nine months jumped 32% due to the growth in written premium and our increased level of quota share to 80% as we assume more of the risk and premium associated with our stable underwriting capabilities. We are largely through what has thus far been an uneventful cat season in the Atlantic. Membership marketplace and other revenue increased 47% during the first nine months. This high rate of growth was fueled by 20% growth in membership revenue, thanks largely to new member growth and $25 million of marketplace revenue described on slide four. We believe our membership business, known as Hagerty Drivers Club, is an extra gear for our insurance business by helping fuel high customer satisfaction and retention. A $70 annual fee gives members access to white glove flatbed towing, a subscription to our award-winning magazine, discounts on goods, services, and events, full access to our evaluation tools built through decades of experience, and a global membership community that fosters real-life human interactions around members' shared passion for automobiles. Finally, regarding State Farm, we are pleased to report that the program launched in four initial states in September. State farm agents in these states are beginning to sell new policies, along with Hagerty Drivers Club memberships, and we will begin to convert their existing classic car program members to the new classic plus program administered by Hagerty as we move through 2024. Let me now move on to slide six, where we have again increased our 2023 expectations for written premium growth, now expected to be 15 to 16%, resulting in total revenue growth of 26% to 27%. On the bottom line, we have driven 10 points of adjusted EBITDA margin expansion over the first nine months. Given the year-to-date performance and our trajectory as we head into the seasonally small fourth quarter, we are also increasing our EBITDA expectations for 2023. For context, we began the year expecting $40 to $60 million in adjusted EBITDA, and we now anticipate delivering $75 to $85 million, roughly 60% higher than our initial guidance. We are also continuing our evolution towards becoming a fully integrated insurance business with AMBEST's recent announcement that we have received a financial strength rating of A minus excellent for Hagerty Reinsurance. This is a great outcome right out of the gate We began this journey a decade ago when we inked the original agreement with Markel and moved into a quota share arrangement, assuming more of the premium from our underwriting, creating another profit stream for the company beyond the commission revenue. In summary, we are creating a visible path to becoming a leaner, stronger, and more profitable company that can self-fund our high rates of growth year after year. Our productivity initiatives will drive strong cash flow generation over the coming years on top of the $132 million of year-to-date operating cash flow. Cash flow combined with this summer's capital raise of $105 million positions us to continue to invest and to execute on our long-term growth ambitions and to allow us to save driving and to fuel car culture for future generations. Let me now turn the call over to Patrick to cover the third quarter financials in more detail.

Thank you, McKeel, and good morning, everyone. McKeel shared some of the highlights from the first nine months, so let's dig into the third quarter results shown on slide seven and eight. In the third quarter, we delivered 27 percent growth in total revenue to $276 million, with written premium growth of 15 percent, powered by robust growth from the new business count and a bump in retention. Commission and fee revenue grew 21 percent to $103 million, due to the written premium gains and the normalization of contingent underwriting commissions in the absence of Hurricane Ian. Membership, marketplace and other revenue jumped 37% to 33 million versus the third quarter of 2022 when we acquired full ownership of the Broad Arrow Group. Marketplace revenue came in 6 million higher due in part to the progressive ramp of our online marketplace. Earned premium grew 30% to 140 million driven by new written premium growth and the 10-point increase in our contractual reinsurance quota share in 2023 to 80%. Our loss ratio came in at 41%, consistent with historical levels. We deliver stable underwriting results in large part due to the passion and care that our members ascribe to their prized possessions. Now, turning to profitability, shown on slide 9. We reported a third quarter operating profit of $16 million, an increase of $37 million over the prior year period. Operating profit included a $4 million loss and impairment related to the termination of the garage and social joint venture and failed drive share. These actions resulted from the strategic review of our business and our decision to focus our people and resources on the clear opportunities to properly grow our insurance, membership, and marketplace businesses. In the aggregate, we delivered third quarter net income of $19 million compared to $24 million a year earlier. In 2022, net income of $24 million benefited from a $35 million revaluation gain related to buying the rest of Broad Arrow Group, as well as an $11 million swing in fair value adjustment related to our private and public warrants. So, the underlying business produced meaningfully improved net income results, primarily driven by the significantly improved operating margins. as we successfully execute on our profitable growth ambitions. GAAP earnings per share was $0.04 based on 84 million weighted average shares of Class A stock outstanding. Our adjusted EBITDA during the third quarter was $37 million, a $47 million improvement over the $10 million loss in the prior year period. And operating cash flow in the third quarter jumped 83% to $62 million. Let me now move on to our revised 2023 outlook, which we have increased for the third straight quarter this year, shown on slide 10. As Michele mentioned, given the consistently strong and visible top line momentum in our business, we are increasing our outlook for total revenue growth to 26 to 27%, powered by written premium growth of 15 to 16%, as we add around a quarter of a million new members in 2023. Moving down to P&L, we've again increased our profit expectations for the full year. We now expect positive net income of $2 to $12 million and full year adjusted EBITDA of $75 to $85 million. In summary, we are delivering exactly what we set out to do a year ago as we began planning for 2023. We've been able to maintain our top line momentum while implementing actions that are driving a swift return towards historic double digit margins. Importantly, we are taking the steps necessary to sustain these high rates of growth and flow through to the bottom line over the coming years. With that, let us now open the call to your questions.