Greetings and welcome to Hagerty Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jay Koval, Investor Relations. Thank you, sir. You may begin your presentation at this time.

Thank you and good afternoon, ladies and gentlemen and thanks for joining us for Hagerty’s second quarter 2022 earnings conference call. My name is Jay Koval, and I recently joined Hagerty to lead their Investor Relations’ function, and I look forward to working with all of you. 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 Hagerty’s IR site. Joining the call today are; McKeel Hagerty, Chief Executive Officer; and Fred Turcotte, Chief Financial Officer. Before we start, I would like to remind you that the discussion today may contain statements related to our business that may be considered forward-looking, including statements concerning our expected future business and financial performance, our ability to maintain existing and to acquire new members, our plans to expand market share, including planned 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 only our view as of today, August 10th, 2022, 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 Investor Relations website and 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 Stockholder Letter, 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 McKeel Hagerty, the CEO of Hagerty.

Thanks, Jay and good afternoon, everyone. We appreciate your interest in Hagerty. I’m pleased to report that we continue to deliver solid results during the second quarter, despite the increasingly challenging macroeconomic backdrop. Before Fred and I dig into the numbers, we wanted to say thank you to our 1,700 plus One Team Hagerty members, who worked tirelessly to deliver high rates of consistent growth, including 26% revenue growth so far this year. This team is comprised of long tenured Hagerty employees as well as the newly hired that are excited to join the company that is just beginning to hit its stride. Their hard work combined with our ongoing investments in people, technology and infrastructure will help power our results in the years to come, as we continue to tap into the growing and resilient passion for the fun side of the automotive world. Slide 3 of the investor deck that we posted on our website shares some of the key year-to-date highlights. This includes, total revenue grew 23% in the second quarter and 26% during the first half compared to the prior year periods. Total active members grew 9% year-over-year to 2.5 million. Written premiums grew 14% in the second quarter and 15% during the first half. We also entered into a definitive agreement to acquire the remaining 60% of the Broad Arrow Group for $64.8 million. We expect the deal to be immediately accretive to 2022 revenue and EBITDA as the business ramps quickly, leveraging the strength of the Hagerty ecosystem. Integration continues for the long-term in contractual State Farm partnership. The digital and technology teams have moved into the testing phase and regulatory approval process with State Farm. We now expect to begin activating State Farm’s 19,200 agents to sell classic car policies during the first…

Thanks, McKeel. Let’s get right into the financial results for the second quarter shown on Slides 8 and 9. We continue to deliver a solid growth across our membership, insurance and enthusiast offerings. On a year-over-year basis for the second quarter, total revenue grew 23% to $206 million. Commission and fee revenue grew 14% to $96 million, driven by new business written premiums and policy in force retention of 88%. Membership and other revenue increased 21% to $16 million, benefiting from an increase in total paid members. Earned premium grew 34% to $94 million, driven by new business premium growth, policy retention and a 10 point increase in our US contractual Reinsurance quota share to 70%. It’s worth noting that our trailing 12-month revenue from Hagerty Re was $346 million, reaching 50% of total revenue for the first time. And it’s expected to continue to grow quickly as our quota share increases another 10 percentage points to 80% in 2023. Revenue per paid member increased 16% year-over-year to $158, compared to $136 in the prior year period. This growth was fueled by the higher quota share, higher commissions and fees, as well as from owned events and revenue from our recent acquisition of Speed Digital. Total written premium grew 14% year-over-year to $238 million, compared to $208 million in the prior year period. Loss ratio remained stable year-over-year at 41%. We also announced that we are acquiring the remaining 60% of Broad Arrow Group. The Broad Arrow team of industry veterans is off to a strong start and they are executing well on the business plan. Additionally, the synergies across the Hagerty ecosystem have been greater than anticipated and we now expect a meaningful contribution in 2022 from the fully consolidated results, including revenue growth and positive EBITDA. We will…

Thanks, Fred. In closing, I’m so proud of what the Hagerty team is accomplishing, compounding growth year-after-year. Our track record of success has been built on the strength of our brand and the quality of our team, powering mid-teens organic growth in the core business, while investing in new partners and products that drive even greater scale, revenue and profitability in the future. And with just 3% to 4% share of the current addressable market today, we believe we are in the early days of realizing Hagerty’s full potential. Thank you again for joining us today and we’d like to open up the call for your questions.

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mark Hughes with Truist. You may proceed with your question.

Yeah, thank you. Good afternoon. What was the catalyst for the acceleration in July? I think you talked about the lower new business count being impacted by your distribution partners’ marketing spend being a little more restrained. Is that changed in July? Is the rate environment getting better for you? What’s the – what’s the catalyst –

Thanks, Mark.

Thanks for the question, it’s McKeel. It - you know what we’ve seen, and I’ve been in this you know for a long time, this is not our first time in an economic downturn, my first experience was actually in the dot-com bubble bust, and then the financial crisis and even COVID. And what we see in each of these instances had been very similar. We’re growing along at a rate, a high rate and then – when kind of consumer confidence gets rattled, it’s like the whole market in the car world kind of taps the brakes, and it flows all the way through the entire insurance world. So, we keep growing, we just keep growing at a slightly lower rate. It’s not volatility up and down, it’s just this – it’s this depression for a short period of time, and it stabilizes. This year with this and it’s the same thing that happened, we just saw a slightly less demand than we had planned in that kind of second quarter period, stabilized quickly. And then when you really hit the big driving months in the middle of summer, and people buying cars and having fun, and maybe people starting to feel more confident that whatever is going on out there, I won’t use the R word you know that it’s not the end of the world. We’ve done really quite well. So I’m very encouraged which is why we reaffirmed our thinking about the back half of the year, but there definitely was that little bit of a drop there for a short period.

Understood. I think you said part of your EBITDA guidance was spending more on State Farm. Was that that you’re spending more or you’re just not getting the revenue at the timing you expected?

It’s you know two things. You know, one, the State Farm is a piece of it, almost all of our investments have been either substantially platforming or kind of re-platforming things that the systems that we’re building to take on the large chunk of State Farm business are also useful to the rest of our partnerships. We have a lot of other partners other than State Farm and we’re certainly excited to get them on board, but they’re just one. The other one is really, we – as we are moving towards really consolidating up the Broad Arrow acquisition that we announced today, is that, we decided to accelerate heavily on the – continuing our digital spend to get ready for Hagerty Marketplace rather than to say, throttle it out to next year. But Fred, do you have another though?

Yeah, just to add to that, Mark. Thanks for the call – for this question. When you look at State Farm on the revenue side, we do not have any estimate in the 2022 guidance for State Farm revenue. So, there is none in the plan for State Farm and so wouldn’t be in the year-to-date results as well. And then I’d say on the other thing – on the other part of it on the expense side, we’ve completed development for the State Farm project, we’re now in testing. So a bit of that first half expenditure was to accelerate and complete that development, so that we could move into the testing phase.

And then, if I understand it properly, it looks like the State Farm is – it’s going to be happening soon. But it’s pushed out a little bit from your earlier thinking. Can you talk about that? I think you might have touched on it. But what the issues might have been and how you see a path to getting that resolved?

Well you know, thank you and it’s a big question. We’re actually very pleased with the progress all around State Farm. You know that was important for us to remind ourselves and everybody that this is a long-term contractual partnership. You know this is not an if, it’s a when and there are large investment in Hagerty and their CEO sits on our Board. So, it’s not like we’re hoping we get State Farm’s business. It’s just sort of when. But we’ve really, to put it in context, and well, first of all, if there’s anything that looks like a delay, it’s just complexity, we have some very large group of agents, very large group of policies that we have to manage in the first year and months that it comes on. And we – you know just were an 80 plus Net Promoter Score company State Firms is very proud of the way they serve as customers. So we just want to make sure it’s really, really right as we turn things on. And so complexity is decided, as I guess will lengthen the testing phase, which we felt was very, very important and we just want to be very customer-centric when we think about it. But you know, I’d just say, just to put State Farm in context, you know as we’ve shown very strong revenue growth this year with – without State Farm you know Fred talked about the trajectory in the next year. Our goal is to you know continue growing very high rates of revenue year-over-year based on the way our ecosystem works and State Farm, like our other partners, will be important to that. But it’s actually even though it’s large, it’s not that big of a piece as we think going forward in the years ahead.

Thank you very much.

Thank you, Mark.

Our next question comes from the line of Paul Newsome with Piper Sandler. You may proceed with your question.

Good morning. Thanks for the call. I was hoping you can help me size a little bit the expenses that you’ve made so far, it for all these roll ups in State Farm just being part of you know investments in future growth? You know, I assume most of that goes through your general and administrative expenses. I was wondering if you didn’t have this desire to you know invest more heavily in some of these long-term programs, would your general and administrative expenses sort of rise in line with your revenue? Or is there some other way we should be looking at just to kind of size the impact of these investments you’re making?

Yeah, it’s a great question, Paul and good to talk to you. When I think about you know where we are from an expense perspective, $80 million in the first half of the year was spent on what we think are you know non-recurring pre-revenue costs. And a good portion of that was accelerating as best we could to development for State Farm, and we had other costs there as well. And when we think about where they are, they’re in several spots on the P&L, it would include the wage line, where we have folks working on State Farm, it would include the consulting line, where we have consultants helping us with some of that development. SG&A, of course, would be a smaller part of it. When we think about SG&A as a percentage of revenue, it would not grow as fast as revenue, revenue at 24% to 28% as we’ve guided to, is not the increase you’ll see in SG&A. And so, it will not be in line necessarily with that. Hope that helps.

That’s – no, that – that’s great. And then kind of a similar point. Anyway, you can kind of help us evolve then if you see basically with that – you said expenses should subside next year. Is that kind of the idea that we would see continue to increase in expenses, but at just a slower pace and will that pace be kind of commensurate with you know somewhere around revenue growth or should it be something different than that?

Yeah. I think we look at it from a couple of perspectives, Paul, obviously to grow 24% to 28% you have to invest in the business and we’ll do that and be opportunistic, while we look at all lines of our expense structure for cost savings, and we’re doing that as any good company will do, as they modulate their expense line with revenue and macroeconomic factors. So, you know at this point in time, I think we’re you know we’re thinking that when we finish the State Farm – when we finish the development of State Farm, right, which we’re there, when we finish the accelerated development for the launch of Broad Arrow Group, which are getting close to, we will have digital platform expenses going into 2023. But with those two major you know sort of development projects behind us in a material way you know we feel that we will have the opportunity now to create some operating leverage by reducing the overall development digital spend that we’ve – that we incurred in 2022.

Well. Let some other folks ask questions, but thank you for the call and thank you for the help as always.

Thanks, Paul.

If there are no additional questions, I will turn the call back over to the Hagerty team for concluding remarks.

Well, thank you all very much. Thank you for those questions. Hopefully we helped you you know clarify your understanding about what we hope you think is a great story about how Hagerty is performing in 2022 and how we’re thinking about the future. We’re certainly excited, we think we’re doing very well, given the larger environment. And we remain even more confident in how the passion of the automobile and the way we tap into it really creates a unique business result in comparison to other types of companies around the space. So we’re very, very pleased with it. I will say this for anybody who follows the automotive world the two – that next week is kind of like our Super Bowl and World Series all together, which is Monterey Car Week to Pebble Beach Concours at our Laguna Seca historic races. Our first Broad Arrow Auction at our Motorlux event. Hagerty has a couple of big media efforts out there. If you’re interested in tuning in, we’ll be live streaming the Pebble Beach Concours, we’re the official media partner of the Pebble Beach Concours, and The Quail, a Motorsports Gathering, you’ll be able to watch live results of that first BAG auction, which will be really exciting, 90 lots expecting to even do very, very well in this environment, super exciting group of cars, which is going to be a great and really – a really nice look forward and how we think of ourselves relative to this great economic engine that we built and how we’re going to accelerate that in the years to come. So, thank you all very much and thank you for your time and attention. Have a great time and keep on driving.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.