Hagerty Inc (HGTY) 2025 Q2 法說會逐字稿

Greetings and welcome to the Hagerty second quarter 2025 earnings conference call. (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. Thank you, you may begin.

Thank you, operator, and good morning, everyone. Thanks for joining us to discuss Hagerty results for the second quarter of 2025. 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 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 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 at SEC.com.

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 will turn the call over to McKeel.

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty second quarter 2025 earnings call.

This summer has been another great driving season as we remain on track to welcome a record number of new members to Hagerty in 2025, helping them protect, buy, sell, and enjoy their special cars.

After four decades in the car world, I have learned that everyone has their own car story ranging from someone who loves brass horseless carriages to modern day high performance vehicles, off-road vehicles to vintage woody wagons, and American made muscle cars to Japanese Kei cars.

Regardless of the type of vehicle, we know it's special to that member, leading to an emotional connection that inspires safer driving habits, which in turn leads to lower claims frequency and consistently strong underwriting results.

And our team of auto enthusiasts is here to provide the excellent service, guaranteed value coverage and a suite of Hagerty products and services to help celebrate their vehicle. This passion and love of cars shared by one team Hagerty and our members results in sustained high rates of growth.

Let me dig into some highlights from the first half of 2025 shown on slide 3. Total revenue increased 18%. New business count fuelled an 11% increase in written premium and a 12% growth in our commission revenue.

Earned premium for a risk-taking entity, Hagerty reinsurance, increased 12%, and membership, marketplace, and other revenue jumped 68% due to higher inventory sales and the launch of our European auction business.

Moving to profitability during the first six months of the year, our operating margins jumped another 210 basis points, resulting in net income gains of 46% and adjusted EBITDA growth of 28%. Over the last three years, we have expanded first half operating margins by nearly 14% points, and we expect continued gains as we double our policies in force to $3 million by 2030.

Let's move on to slide 4, which details our 2025 strategic priorities built around three themes simpler, faster, and better integrated.

First, is to expand our specialty insurance offerings to protect more of the collectible market including modern enthusiast vehicles with the launch of our Enthusiast plus program in Colorado two weeks ago.

Second, is to simplify and better integrate the membership experience across our products and services, creating revenue, synergies and driving cost efficiencies. This is how we engage with our members in a unique and authentic way.

Third, is to expand our marketplace business internationally, leveraging the trust that we have built in the United States.

We announced two additional European auctions on the heels of the excellent results from our inaugural Villa d'Este auction in May where we achieved a 78% sell-through rate. These include auctions built around partnerships with the Zu Concore in Belgium and Otto Zurich in Switzerland.

We are methodically building Hagerty and Broad Arrow into the most trusted brands to help people around the world buy and sell special vehicles. And finally, we are investing in the technology replatforming that will enable efficiency gains shown on slide 5.

I would note that we recently launched Enthusiast plus on Duck Creek, a leading cloud-based insurance platform. Our technology spend should trend down as a percent of revenue as we accelerate the top line in 2026 and 2027 and begin to realize the efficiency benefits from these investments.

Before I turn the call over to Patrick to share more details on our results and increased 2025 outlook, I wanted to walk you through the recently announced fronting arrangement with our long standing partner Martel shown on slide 6.

As we have had a highly successful partnership with Markel that began in 2013 when they acquired Essentia to underwrite Hagerty's US business.

In 2017, we began to assume 25% of the premium and risk associated with our high quality book of business and steadily increased it to the current quota share of 80% with Markel retaining 20%.

On July 24, we announced that we had signed an LOI to move to a new fronting arrangement with Markel, where Hagerty would control 100% of the premium and risk commencing in 2026 while paying a 2% fronting fee to Markel to issue policies and provide administrative support.

The evolution of this partnership will result in increased profitability for Hagerty in the form of additional underwriting and investment income along with greater operational control. We are excited to continue partnering with Markel and believe the new arrangement will position us to unlock even more value for Hagerty shareholders over the coming years. Patrick?

Thank you and good morning, everyone. Let me dig into the second quarter results in more detail shown on slide 7 and 8. In the quarter we delivered 18% growth in total revenue to $369 million.

New business count gains combined with industry leading retention of 89%, with an 11% increase in rent and premium. If 11% is below the 13% to 14% growth we expect for the full year, even our expectations for faster growth in the second half as State Farm ramps.

Our two year rates of written premium growth during the first half were over 30% and should remain steady at those levels in the second half as growth accelerated back into the mid-teens during July.

Emission and fee revenue grew 11% to $143 million, earned premium increased 13% to $178 million.

Our loss ratio remains steady at 42%, and membership, marketplace, and other revenue jumped 78% to $48 million. In just three years we have quickly established ourselves as a leading auction house with unparalleled automotive expertise across Hagerty's products, focused on cultivating trusted long-term relationships with our customers.

Turning now to profitability shown on slide 9 and 10, we reported an operating profit of $48 million in the second quarter, with operating margins up 70 basis points to 13%. We are maintaining tight discipline on our costs to translate double digit commission gains into faster rates of profit growth.

G&A increased 6% due primarily to higher software licensing costs from our technology transformation, and salaries and benefits grew 11% due to merit increases and additional headcount to support our growth.

Adjusted EBITDA increased 20% to $64 million as we improve the efficiency of our business model. Our growing capital base at Hagerty Ree and balanced investment strategy resulted in $11 million in second quarter investment income.

Interest and other income of $6 million included $2 million of interest expense and a $3 million non-cash increase in the tax liability related to our partnership structure.

In total, we delivered second quarter net income of $47 million compared to $43 million a year earlier, an increase of 11%. 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 $91 million shares of Class A common stock outstanding.

We ended the quarter with $140 million in unrestricted cash and $176 million of total debt, which includes $39 million in back leverage for our portfolio of collateralized loans.

Let me wrap up with our updated outlook for 2025, where we increased full year expectations for revenue and profits shown on slide 11.

Given our first half results and solid business momentum, we are increasing our 2025 revenue expectations with 13% to 14% growth powered by similar rates of written premium growth and strong gains from our marketplace business.

We are also increasing our assumptions for margin expansion and now expect net income of $112 million to $120 million up 43% to 53% and adjusted EBITDA of $162 million to $172 million up 30% to 38% compared to 2024.

In addition to executing on our 2025 strategic priorities, we are well positioned to deliver accelerated growth as we move into 2026, fueled by State Farm's ramp and market share gains.

We are excited to welcome their 525,000 current program members and to help them grow their classic business.

Our partnership pipeline is strong and growing as top 50 carriers realize that they could benefit from a partnership with Hagerty to help them fuel their own growth and improve retention with our differentiated approach to caring for their members and special cars.

Enthusiast plus should become a material growth driver over the medium term as we target more of the modern enthusiast vehicles with the right product and pricing to service these vehicles.

As we continue to get smarter at utilizing our data to target members with superior driving characteristics with their special toys, we have more precisely defined our target market for 25 to 40 year old cars that are more likely to be collectible versus just an older vehicle that might still be used as a daily driver.

This includes filtering by vehicle and body type, equipment and powertrain packages and original MSRP the 1999 Toyota Camry would be a good example of this.

We believe we have a long runway in front of us, given our penetration of this 35 million car target market is only 6.7%. When you combine our top line momentum and growth levers with our ongoing efficiency initiatives and the proposed Martel hunting arrangement.

We believe we're pulling together all the ingredients necessary for strong shareholder value creation over the coming years. With that, let us now open the call to your questions.

(Operator Instructions) Mark Hughes, Truist Securities.

Yeah, thank you. Good morning.

Good morning, Mark.

The marketplace revenue quite strong this quarter. Do you have any thoughts on kind of pacing on Q3, Q4, when you look at the event that you have got in front of you. What's the trajectory of that going to be? And then when we look at your full year total revenue guide, how much of that is marketplace. I don't know if you can share that detail.

Sure. First, on the second quarter, we had a very strong second quarter in terms of private sales, some of which included inventory sales. I think we've talked about the fact that opportunistically at times, we will purchase cars and then resell those either at auction or in this case, privately. And the way that, that works just through the accounting is the full sale price of the car ends up being the revenue. And obviously, we're doing it to make the margin on that.

And so there was a fair bit of that activity in the second quarter. And then just private sales, even when we're not talking about inventory, so pure agency transactions, also has been quite strong in the first half of this year. So, I think that's a key driver for the year to date revenue.

And then second half of the year, the growth really will come. We feel good in a week or so, we've got Monterrey coming up, and that auction came together well, and we'll see what happens in the room as always. But as McKeel Hagerty talked about in the comments, we have -- we are launching additional auctions this year. And so we'll have an auction, Belgium, Switzerland and then also Las Vegas. And so those will drive incremental growth.

None of those three existed last year, and that's reflected in the guidance for the second half of the year as well.

Very good. When you -- the $20 million in incremental technology spending, what's the outlook when we think about 2026, is that all going to going to go away or is that going to drop by half or any thoughts on that?

Yeah, I think we've talked about this on previous calls, and we try to be very careful with our language. We're intentionally not describing it as a onetime that would go away, as you're suggesting. The concept is that we had to increase spending. So it was $20 million, $15 million of which is related to technology.

The other $5 million is really related to marketplace. And so putting together the team and for the auctions that I just talked about, we've meaningfully grown our footprint in Europe to support the business.

But the $15 million, the way to think about it is, it's the fact that as we've invested heavily in our new technology platform, which is now actually in use, we've launched Enthusiast plus, and we're selling policies. Think of that as pre-revenue spending, right? So we spent on both technology and people to get ready to launch the platform.

Now we're starting to actually sell on the platform, but we're only in one day that will ramp up over time. So what we're trying to explain is there's a pinch point in profitability because we're spending those dollars in advance of when the revenue shows up.

So the concept is not that it goes away. It's that we'll actually be delivering real revenues, both from the insurance side and the marketplace side on a go-forward basis. So we gave clarity on that really to just explain that pinch point. Does that help, Mark?

It does, so that's cost that you'll be leveraging. I think I understand what you're saying. How about the --.

The licenses, the licenses for our new platform, which is a Duck Creek platform. We started spending money on those in 2025, and for the first half of the year, there was no revenue associated with. Second half of '25, there's a little bit as we launched Enthusiast plus, but it ramps up from there. And similar on the marketplace, right? We hired those people, and now in the second half of the year, we'll start producing revenue against it.

Yeah, the earnings, impact from the Markel shift, other things equal, is that how would we look at that contribution to the bottom line?

Sure. So And we put out a set of slides when we announced that 10 days ago, whenever it was, and the concept is, by picking up the incremental 20% points of quota share, we're going from 80% quota share up to 100%.

The benefits to us are one, we get the incremental underwriting profit on that and as you know that within Hagerty, the way that that business works is it runs at about a 89% combined ratio. So on the incremental 20 points we'd expect to earn, call 11 points of operating profit. And so that's a meaningful benefit at the Hagerty level.

And you can take the current book of business that we're running and cross it up by the incremental 20% points of quota share, and that's a way to think how it flows through.

Additionally, we're now getting that earned premium within Hagerty, and we'll be able to make the investment income on that as well, and we're learning something like 4.4% right now on investment earnings. So those are the two big economic drivers.

We do have to staff up a little bit, we're taking on a new scope of work and so that's a little bit of an offset to the two positives, but I think if you just focus on the incremental investment earnings, the incremental underwriting profit, you'll get most of the answer.

Understood. If I could just squeeze in one more. When you think about the shopping behaviour of customers. I think you've mentioned on earlier calls that some of the higher pricing across the industry has perhaps been beneficial as consumers have shopped around and you've had an attractive offering. How would you characterize the market right now in terms of just the potential flow related to the dynamics across the broader space?

Yeah, I'm happy to take a crack at it Mckeel can add. We're in business with all the top insurance companies and so we talked about what they're seeing in their core business and you share with them what we're seeing.

And the general theme now with the exception of progressive is, people are seeing this being a year where unit growth is a bit below what they had expected. Progressive, obviously in a different situation where they're spending heavily and there, growing quite aggressively.

And so I would say it's somewhat of a balanced marker right now. We're not in one of those phases where there's intense spending on new customer generation in the broad industry that's leading to those high levels of shopping, maybe that we saw in years past, it seems more muted again with the exception of Progressive. Having said that, our quote bond continues to be very strong and up year over year, and so we're confident from a new business perspective, but maybe not kind of the frothy environment that you can see in other times.

Very good, thank you.

(Operator Instructions) Greg Peters, Raymond James.

Hey, good morning, everyone. I wanted to go back to your expansion into in Europe, and maybe you can help, and I know you've talked about this before, so, just maybe remind me about what you see in terms of the adjustable market for your business as we think about the next couple years.

Yeah, hey Greg, it's Mckeel. Thanks for that, we're pretty excited about our, expansion into Europe, and, really with auctions being the lead step here.

Our auction at Villa d'Este, which is a very high-end, auction and Concours environment that takes place that they come over.

Concours actually, that was a real testament that we had the team to go out there and build this business for us in Europe, and it, we can't emphasize enough that, live auctions and private sales are very client oriented. So in order to have the business that you can't just hang the shingle out and hope for the best. It's very much like if you have the team, you have the specialists, they go out and generate the business.

Find the potential buyers and the auction room, especially if you do it in a fun place like Lake Como and Villa Este. So, off to a good start, and then the idea being that, with the two additional auctions at the Zoo Concur in Belgium, which is a very well attended high-end.

Concours environment, lots of different motoring activities take place there, long history of auctions being successful there. That was the next one we announced and then on to Otto Zurich, which is a very strong, both enthusiast and kind of more towards this modern enthusiast car.

They call them young timers actually over in Europe, kind of the German speaking term for that kind of newer vehicle category, which is where all the expansion is and where a lot of our, I guess, most greatest demand is in our auction business.

So what we think we've done here is built the right team for Europe. We're focusing on the right, most growing marketplace, rather than trying to just beat, kind of beat into a tougher market of, older cars and where there's a lot more, it's a little bit frontier at that high end. And what we found already is again, great team, plenty of demand, and a lot of sorts of early indications that we've made the right moves at the right time.

So far so good in Europe. We, we'd look to see in the next couple of years an even bigger auction calendar for us in Europe and also build out that private sales capability. So looking forward to that as well as a full auction schedule for us in the US.

Right, thanks for that detail. Can we get to State Farm? I know, this is, seems like it's beginning to really impact your financials. Maybe you can give us a sense of how, where you are in the process of the State Farm integration and rolling out your business to their all of their agents.

Happy to. So, this is a very important partnership for us and it will be long in the future, State Farm, if you think about it, it's like a job to be done. They hired us to help really serve those passionate car people that they had on their books, but they, they're a big insurance company and this was not an area they specialized in so right now I think we're live in 17 states.

We might have added a few more, even 1,616, I think we're adding a couple more even as soon as this week. And that is focused on new business. So, this is where when you open up to the agents in those states to all state State Farm in total has a little over 19,000 agents.

So, each, state has a large number of them. So, it focuses first on new business. Now we've been already doing new business in four of those states, and now we're starting the process of rolling the existing books in those four states over to us now.

So it's up and running. The next couple of years are going to be, high volume both from a new business standpoint as well as starting that.

You know that rollover of the existing business with them and so far so good. It was a, it's complicated technology integration. The teams worked really hard to make sure that we were, both doing it correctly the way we want to do it on our end and then, mating up with State Farm's very large systems.

Has been a heavy lift, but we're happy to say we're up and running and so far so good. The best thing that we're seeing is that the new business numbers that we every time we turn on these states, the agents are very excited to be able to have access to this product, and they're a highly motivated sales team. So we would look to see this to be an ever, more important part of our new business story.

Do you, thanks for that. That's interesting. Do you have an objective like to be in 30 states by the end of the year, or I mean, ultimately I guess your objective is to be in all of those states, but maybe there's nuances of, at State Farm that prevent just this as a straight line rollout. Maybe you can-- they have a clear Cadence.

They have a clear Cadence that they're, they want to be careful that they can pre-communicate, they can train their agents, they can create all their territory and regional people to be ready for this. I think the goal is, something in the 20s, right? 25 states by the end of the year, yeah, 25 states, and that's swung up and down one state or two.

The idea would be to be in all of the available states by, over the next couple of years. There are states like California for all the things you read about in the news that tend to be challenging and lag a little bit, and they will for this too. And also it's important to note that State Farm doesn't do business in every single state. I think notably like Massachusetts.

I don't think they do business there for this type of business. So yes, the goal is to be in all, and I think just a double click on the one thing, this is not one of those cases as we have with other partners where it's, you put the product on the shelf and you hope that somebody buys it in the store.

This is a case where there's a big chunk of business that will roll over to us as some of these states roll on and we get into the conversion process. So it's just different, than when sometimes we, it's exciting to turn on a new partner and you hope they sell a lot they're both going to sell a lot and convert a lot. So that's why State Farm's quite important to us.

Makes sense. I guess the last question you touched upon it in your comments and your answer before, but just curious about the background in the cha fronting arrangement with Markel, and, what got you to the point where you wanted to go to a 100% retention, just curious, how you were thinking about that going into those conversations.

Coming up, Pat, I'll start. Patrick, and if there's details I missed here, from the very beginning 2013, the very base core intention of the business is that we would eventually take risk and we would eventually take all of the risk.

The form of that, being an MGA and how we would take risk behind it, the quota share arrangement was that became the most practical way to do it through the year starting in 2017, ramping up the quota share to the current 80%.

But from the beginning, this was a, this is a friendly intended evolution of how the business would work. The, both the timing and the terms of that final phase of where you go from 80% to 100% has always been something that we would be discussing with Markel through the years and it just, through our sort of normal partner, they're a big owner of the company too, but sort of normal partner discussions with them.

We just kind of mutually agreed that it was time for us to go from that 80% to 100% and then to change the form of that from kind of the quota share to a normal fronting fee. They own a big fronting business called State National. They did not have that business when we first started with them, and they decided that they really prefer that fronting relationship.

So natural evolutions both from their side and our side, but it's a happy thing for Hagerty because as Patrick, I think detailed a little bit earlier. It's economically a very good thing for us over the next couple of years and we have the ability, we have good experience in the 80 -- at the 80% quota share level and we're ready to take on that last 20%.

Right, thanks for the answers, Mckeel and Patrick.

Thank you, Greg. Good to hear from you.

Pablo Singzon, J.P. Morgan.

Hi, this is [Kevin] on for Pablo. So premium growth in the first half of '25 is running a little below your full year outlook. Why is that and what factors do you think will help the recovery in the second half?

Sure, it's Patrick. So, it's a little light to what we had planned for and expected. There are a few factors going on there. One is on the new business front; it's coming in a little bit below what we'd expected.

And most of that is intentional. We have deemphasized growth in certain markets where we just didn't see adequate profitability, and so you can think about markets like California and New York, and we're working on changes in those markets to get back to a position where we can grow again, but we did pause that a bit in the first half of the year.

And then we've actually transitioned our direct approach in terms of how we spend. We refined our model and we're much more focused on a return on advertising sales approach versus previously we were more focused on minimizing our cost to acquire a customer and you can imagine the logical outcome, right?

We're getting what we believe are better customers as measured by our expected lifetime value. But in some cases, we're getting less customers we're just optimizing for a different metric now. So those are the factors that went into it.

We actually feel very good about both of those decisions, and we think that things will change in the markets where we had to slow down a bit, and we're really excited about our new approach to maximizing returns on new customers.

And in the second half of the year, what we're going to see is we just talked at length about State Farm. That will start to really ramp up. And Mckeel talked about the fact we're in 16 states. The original four have started conversions. We've got another seven or so states that will start conversions in the fall timetable, and so that really does ramp up in the latter part of the year. Is that helpful?

Yes, thank you, and then a follow up to that, the tax rate in the first half has been running a little low. Do you have an expected tax rate for the second half of the year?

Not at this time. In our tax situation is quite interesting, the nature of the partnership structure that we have, and then with the new Big Beautiful Bill Act, we're still doing our analysis of what the implications of that are and so we don't have an update on that right now. It's implied in what we put in terms of the net income guidance, but there's some moving pieces right now.

Okay, thank you.

Mark Hughes, Truist Securities.

Yeah, thanks for taking the follow up. Patrick on the State Farm arrangement, the marginal economics on that business, given the kind of the risk structure, I think State Farm retaining risk, how does that work, just in terms of the latest thoughts on how it flows through the P&L with that written premium being quite strong but then kind of flowing through the rest of the income statement a little differently.

Sure. The way to think about State Farm is, there is no risk. It's written on State Farm paper and there is no quota shared to Hagerty. So, this is a pure agency relationship.

And then the way to think about it is State Farm continues to do all the distribution, right? State Farm agents are managing these -- excuse me, the existing customers, they're going out and finding the new customers and managing that whole scope of work.

You can kind of think about that as sort of like a broker relationship and so in our normal business, where we're paying brokers, whatever it ends up being a 10%,12%, 13%.

In the State Farm situation, it's their paper. They've got their own sales force and so kind of carve that economics out. So the easiest way to think about it is in our core MGA for the core program, the commissions are kind of 41% to 42% depending on where the CUC shakes out.

But if you back out of that, the fact that we don't have to pay distribution costs, the commission that we're getting for the State Farm relationship is kind of 11 points or 12 points less than the [42 points]. So it's still very attractive and healthy commissions for all the value that we're adding. You just, you back out that distribution component.

And then if you look at the State Farm book, ultimately, it's going to be right now there's 525,000 vehicles. The pricing on their book is a bit less than what ours would be in terms of the average premium, and that will evolve over time.

But our opportunity is to convert all that business, help them continue to grow, and we'll be earning a 30, 30% low [30 ish] type percent commission on that book of business, and we're doing it through the core MGA, right, so everything else we're leveraging our existing expertise, our existing process, and so we anticipate this being a very profitable business. And then whatever we sell in terms of HTC to the new State Farm members, that will be incremental economics for us. Is that helpful, Mark?

Sure I appreciate that rundown. Thank you.

Mike Zaremski, BMO Capital Markets.

Hi, thanks. Good morning. I think just, one question on, pricings or pricing or premium for vehicle trends, looks like it's trending down a bit, the overall market, we kind of can see lost costs are for nine and, competitions building, any comments there and I believe just to intertwine in you just said the State Farm average, premiums per vehicle are also a bit lower than the portfolio. Thanks.

Just looking a little bit on the on the outside in approach, and thanks for the question. It's a good one, as you may know, we publish something that we call our Hagerty value index. It's through our evaluation tools. We have an amazing team of people that track the market out there.

It is true based on the index you look at that that pricing or valuation specifically of cars is call it soft, flat, whatever it is, especially at the high end but it's remaining quite steady.

What you don't see in uncertain economic times in this market is a lot of, say, panic selling or gosh, my car isn't increasing in value this year, so I'm going to go sell it. People just hang on to it and continue to pay their insurance premiums.

So, valuation is, from again that index and marketplace standpoint kind of soft to flat but holding steady by almost every measure. I'm not sure if that addresses the second part of the question.