Hagerty Q2 2025 Earnings Report

Hagerty EPS Results

• Actual EPS: $0.13
• Consensus EPS: $0.11
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: N/A

Hagerty Revenue Results

• Actual Revenue: $368.70 million
• Expected Revenue: $347.15 million
• Beat/Miss: Beat by +$21.55 million
• YoY Revenue Growth: N/A

Hagerty Announcement Details

• Quarter: Q2 2025
• Date: 8/4/2025
• Time: Before Market Opens
• Conference Call Date: Monday, August 4, 2025
• Conference Call Time: 10:00AM ET

Hagerty (NYSE:HGTY) provides insurance agency services worldwide. It offers motor vehicle and boat insurance products; and reinsurance products. The company provides Hagerty Media, which publishes contents through the Hagerty Drivers Club Magazine (HDC), video content, and social media channels; HDC that offers subscription based products and services, including HDC Magazine, automotive enthusiast events, proprietary vehicle valuation tools, emergency roadside services, and special vehicle-related discounts. In addition, it offers HVT, a valuation tool used by the customer to access current and historic pricing data of collector vehicle models. Further, the company offers Hagerty Garage + Social, a platform that provides clubhouses and car storage facilities. Hagerty, Inc. is headquartered in Traverse City, Michigan.

Hagerty Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Total revenue increased 18% to $369 million in Q2, driven by 11% growth in written premiums and a 78% rise in membership and marketplace revenue, lifting operating margin to 13% and net income by 11%.
• Positive Sentiment: Full-year 2025 guidance was raised to 13–14% revenue growth, net income of $112–120 million (up 43–53%), and adjusted EBITDA of $162–172 million (up 30–38%), reflecting strong first-half performance.
• Positive Sentiment: Hagerty signed a new fronting agreement with Markel to retain 100% of premiums and risk in 2026 for a 2% fee, expected to boost underwriting profit and investment income.
• Positive Sentiment: The State Farm partnership is live in 16 states, combining new business and book roll-overs to serve 525,000 members and expand distribution through 19,000 agents.
• Positive Sentiment: Hagerty launched the Enthusiast Plus insurance program and expanded its auction platform to Europe (Belgium, Switzerland), plus deployed a Duck Creek cloud system to enable future cost efficiencies.

Presentation

[Operator]

Greetings, and welcome to the Hagerty Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Kasal, Senior Vice President of Investor Relations. Thank you. You may begin.

[Jay Koval, SVP - IR & Communications at Hagerty]

Thank you, operator, and good morning, everyone. Thanks for joining us to discuss Hagerty's results for the 2025. I'm joined this morning by Mikhail Hagerty, Chief Executive Officer and Chairman and Patrick McClima, 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.haagerty.com. Our earnings release, slides and letter to stockholders covering this period are also posted on the IR website as well as our eight ks filing.

[Jay Koval, SVP - IR & Communications at Hagerty]

Today's discussion contains forward looking statements and non GAAP financial metrics as described further on 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 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 at 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 eight ks filing.

[Jay Koval, SVP - IR & Communications at Hagerty]

And with that, I will turn the call over to Mikhail.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's second quarter twenty twenty five 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 K 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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 2025 shown on Slide three. Total revenue increased 18%. New business count fueled an 11% increase in written premium and a 12% growth in our commission revenue.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Earned premium for our 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 two ten 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 percentage points and we expect continued gains as we double our policies in force to $3,000,000 by 02/1930. Let's move on to Slide four, which details our 2025 strategic priorities built around three themes: simpler, faster and better integrated.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

These include auctions built around partnerships with the Zutt Concur in Belgium and Auto 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 five. 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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, Markel, shown on Slide six. As you know, we have had a highly successful partnership with Markel that began in 2013 when they acquired Essentia to underwrite Hagerty's U. S. 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%.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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?

[Patrick McClymont, CFO at Hagerty]

Thank you, and good morning, everyone. Let me dig into the second quarter results in more detail shown on Slide seven and eight. In the quarter, we delivered 18% growth in total revenue to $369,000,000 New business count gains combined with industry leading retention of 89% drove an 11% increase in written premium. This 11% is below the 13% to 14% growth we expect for the full year, given our expectations for faster growth in the second half as State Farm ramps. Our two year rate to 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.

[Patrick McClymont, CFO at Hagerty]

Mission and fee revenue grew 11% to 143,000,000 Earned premium increased 13% to 178,000,000. Our loss ratio remained steady at 42%. And membership, marketplace, and other revenue jumped 78% to 48,000,000. 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 nine and ten.

[Patrick McClymont, CFO at Hagerty]

We reported an operating profit of $48,000,000 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 and 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 $64,000,000 as we improved the efficiency of our business model. Our growing capital base at Hagerty Re and balanced investment strategy resulted in $11,000,000 in second quarter investment income.

[Patrick McClymont, CFO at Hagerty]

Interest and other income of $6,000,000 included $2,000,000 of interest expense and a $3,000,000 non cash increase in the tax liability related to our partnership structure. In total, we delivered second quarter net income of $47,000,000 compared to $43,000,000 a year earlier, an increase of 11%. Net income attributable to Class A common shareholders was $9,000,000 after attribution of earnings to the non controlling interest and accretion on the preferred stock. GAAP basic and diluted earnings per share was $09 based on 91,000,000 shares of Class A common stock outstanding. We ended the quarter with $140,000,000 in unrestricted cash and $176,000,000 of total debt, which includes $39,000,000 in back leverage for our portfolio of collateralized loans.

[Patrick McClymont, CFO at Hagerty]

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 $112,000,000 to $120,000,000 up 43% to 53% and adjusted EBITDA of $162,000,000 to $172,000,000 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.

[Patrick McClymont, CFO at Hagerty]

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 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.

[Patrick McClymont, CFO at Hagerty]

We believe we have a long runway in front of us given our penetration of this 35,000,000 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 Markel funding arrangement, we believe we are 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]

Thank you. We will now be conducting a question and answer session. You. Our first question comes from Mark Hughes with Truist Securities. Please proceed with your question.

[Mark Hughes, Analyst at Truist Securities]

Yeah. Thank you. Good morning.

[Patrick McClymont, CFO at Hagerty]

Good morning, Mark.

[Mark Hughes, Analyst at Truist Securities]

The marketplace revenue quite strong this quarter. Do you have any thoughts on kind of pacing on Q3, Q4 when you look at the events that you've 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.

[Patrick McClymont, CFO at Hagerty]

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.

[Patrick McClymont, CFO at Hagerty]

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 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.

[Patrick McClymont, CFO at Hagerty]

We'll see what happens in the room as always. But as Michiel 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.

[Mark Hughes, Analyst at Truist Securities]

Very good. The $20,000,000 in incremental technology spending, what's the outlook when we think about 2026? Is that all going to go away? Or is that going to drop by half? Or any thoughts on that?

[Patrick McClymont, CFO at Hagerty]

Yes. I think we've talked about this on previous calls, we try to be very careful with our language. We're intentionally not describing it as a one time that would go away, as you're suggesting. The concept is that we had to increase spending. So it was $20,000,000.15000000 of which is related to technology.

[Patrick McClymont, CFO at Hagerty]

The other 5,000,000 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 $15,000,000 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.

[Patrick McClymont, CFO at Hagerty]

Now we're starting to actually sell on the platform, but we're only in one state. It 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.

[Patrick McClymont, CFO at Hagerty]

So we gave clarity on that really to just explain that pinch point. Does that help, Mark?

[Mark Hughes, Analyst at Truist Securities]

It does. So that's cost that you'll be leveraging. I think I understand what you're saying.

[Patrick McClymont, CFO at Hagerty]

How about the Yes. So the licenses for our new platform, which is the 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. 2025, there's a little bit as we launched Enthusiast Plus, but it ramps up from there. And similar on the marketplace, right?

[Patrick McClymont, CFO at Hagerty]

We hired those people. And now in the second half of the year, we'll start producing revenue against it.

[Mark Hughes, Analyst at Truist Securities]

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

[Patrick McClymont, CFO at Hagerty]

Sure. So and we put out a set of slides when we announced that ten days ago, whenever it was. And the concept is by picking up the incremental 20 percentage 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 Re, the way that that business works is it runs at about an 89% combined ratio.

[Patrick McClymont, CFO at Hagerty]

So on the incremental 20 points, we'd expect to earn, call it, 11 points of operating profit. And so that's a meaningful benefit at the Haggerty re level. And if you can take the current book of business that we're running and gross it up by the incremental 20 percentage points of quota share, and that's the way to think how it flows through. Additionally, we're now getting that earned premium within Hagerty Re, and so we'll be able to make the investment income on that as well. And we're earning something like 4.4% right now on investment earnings.

[Patrick McClymont, CFO at Hagerty]

So those are the two big economic drivers. We do have to step up a little bit. We're taking on new scope of work, 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.

[Mark Hughes, Analyst at Truist Securities]

Understood. If I could just squeeze in one more. When you think about the shopping behavior of the 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?

[Patrick McClymont, CFO at Hagerty]

Yes. I'm happy to take a crack at it and Mikhail can We're in business with all the top insurance companies, and so we talk to them about what they're seeing in their core business and 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 they're growing quite aggressively. And so I would say it's somewhat of a balanced market right now.

[Patrick McClymont, CFO at Hagerty]

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, 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.

[Mark Hughes, Analyst at Truist Securities]

Very good. Thank you.

[Operator]

Our next question comes from Greg Peters with Raymond James. Please proceed with your question.

[C. Gregory Peters, MD - Insurance at Raymond James]

Hey, good morning, everyone. I wanted to go back to your expansion 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 addressable market for your business as we think about the next couple of years.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Hey, Greg. It's Makil. 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 Duste, which is a a very, very high end auction and concourse environment that takes place at the Como, one world's oldest concourse actually.

[McKeel Hagerty, CEO & Chairman at Hagerty]

That was a real testament that we had the team to go out there and build this business for us in Europe. And it you know, we can't emphasize enough that, you know, live auctions and private sales are very client oriented. So in order to have the business, 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 they fill the auction room, especially if you do it in a fun place like Como and Villa D'Este. So off to a good start.

[McKeel Hagerty, CEO & Chairman at Hagerty]

And then the idea being that with the two additional auctions at the Zutt Concours in Belgium, which is a very well attended high end Concur 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 Auto 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

We're focusing on the right most growing marketplace rather than trying to just kind of beat into a tougher market of older cars and where there's a lot more it's a little bit frothier at that high end. And what we found already is, again, great team, plenty of demand and a lot of sort of early indications that we've made the right moves at the right time. So far so good in Europe. 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 U. S.

[C. Gregory Peters, MD - Insurance at Raymond James]

Right. Thanks for that detail. Can we put 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?

[McKeel Hagerty, CEO & Chairman at Hagerty]

Happy to. So this is a very important partnership for us, and it will be long into the future. State Farm, if you think of it as, like, job to be done, they hired us to help really serve those passionate car people that they had on their books, but, you know, they they're 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 16.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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 rollover of the existing business with them. And so far, so good. 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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.

[C. Gregory Peters, MD - Insurance at Raymond James]

For that. That's interesting. Do you have an objective, like, to be in 30 states by the end of the year? I mean, ultimately, I guess your objective is to be in all of their states, but maybe there's nuances at State Farm that prevent just a straight line rollout? Maybe you can give us some

[McKeel Hagerty, CEO & Chairman at Hagerty]

perspective They on have a clear cadence. They have a clear cadence that they want to be careful that they can precommunicate, 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?

[Patrick McClymont, CFO at Hagerty]

25 states by the end of year.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Yes, 25 states. And that 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 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Think notably, like Massachusetts, I don't think they business there for this type of business. So, yes, the goal is to be in all. And I think, just to 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

They're both going to sell a lot and convert a lot. So that's why State Farm is quite important to us.

[C. Gregory Peters, MD - Insurance at Raymond James]

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 chain, the fronting arrangement with Markel. And what got you to the point where you wanted to go to 100% retention? Just curious how you were thinking about that going into those conversations.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Coming up well, Pat, I'll start, and Patrick can if there's details I miss here. From the very beginning, 13, the very base core intention of the business is that we would eventually take risk, and we would eventually take all of the The form of that being an MGA and how we would take risk behind it via 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 is a friendly intended evolution of how the business would work. 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.

[McKeel Hagerty, CEO & Chairman at Hagerty]

They own a big fronting business called State National. They did not have that business when we first started with them, they've 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 at the 80% quota share level, and we're ready to take on that last 20%.

[C. Gregory Peters, MD - Insurance at Raymond James]

Great. Thanks for the answers, Matteo and Patrick.

[Patrick McClymont, CFO at Hagerty]

Thank you, Greg. Good to hear from Greg.

[Operator]

Our next question comes from Pablo Singzon with JPMorgan. Please proceed with your question.

[Kevin Wijendra, Equity Research Associate at JP Morgan]

Hi. This is Kevin on for Pablo. So premium growth in the 2025 is running a little below your full year outlook. Why is that? And what factors do you think will help a recovery in the second half?

[Patrick McClymont, CFO at Hagerty]

Sure. It's Patrick. So it's a little light to what we had planned for and expected. So 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.

[Patrick McClymont, CFO at Hagerty]

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.

[Patrick McClymont, CFO at Hagerty]

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.

[Patrick McClymont, CFO at Hagerty]

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. We're And really excited about our new approach to maximizing returns on new customers. And then 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.

[Patrick McClymont, CFO at Hagerty]

And Mikhail 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?

[Kevin Wijendra, Equity Research Associate at JP Morgan]

Yes. Yes. 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?

[Patrick McClymont, CFO at Hagerty]

Not at this time. 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.

[Kevin Wijendra, Equity Research Associate at JP Morgan]

Okay. Thank you.

[Operator]

Our next question comes from Mark Hughes with Truist Securities. Please proceed with your question.

[Mark Hughes, Analyst at Truist Securities]

Yes. 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 and L with that written premium being quite strong, but then kind of flowing through the rest of the income statement a little differently?

[Patrick McClymont, CFO at Hagerty]

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 share 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.

[Patrick McClymont, CFO at Hagerty]

Right? State Farm agents are managing these ex 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 at 10%, 12%, 13%, In the State Farm situation, it's their paper.

[Patrick McClymont, CFO at Hagerty]

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 or 12 points less than the 42. So it's still very attractive and healthy commissions for all the value that we're adding.

[Patrick McClymont, CFO at Hagerty]

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 convert all that business, help them continue to grow, and we'll be earning a low 30ish type percent commission on that book of business. And we're doing it through the core MGA, right?

[Patrick McClymont, CFO at Hagerty]

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?

[Mark Hughes, Analyst at Truist Securities]

Sure. Appreciate that rundown. Thank you.

[Operator]

Our next question comes from Mike Zaremski with BMO Capital Markets. Please proceed with your question.

[Michael Zaremski, MD & Senior Equity Research Analyst at BMO Capital Markets]

Hi, thanks. Good morning. I think just one question on pricings or pricing or premium per vehicle trends. It looks like it's trending down a bit, the overall market. We kind of can see loss costs are from 9% and competition is building.

[Michael Zaremski, MD & Senior Equity Research Analyst at BMO Capital Markets]

Any comments there? And I believe just to intertwine in, you just said State Farm average premiums per vehicle are also a bit lower than the portfolio.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Just looking a little bit 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 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 pricing or valuation specifically of cars is, call it, soft, flat, whatever it is, especially at the high end.

[McKeel Hagerty, CEO & Chairman at Hagerty]

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 a 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, though, Patrick. Was there anything you had there?

[Patrick McClymont, CFO at Hagerty]

The average premium, it can tend to move around a bit. Right now, what we're seeing relative to last year and our own expectations is pretty much in line. So we're not as Mikhail said, the elements that drive rate for us are going to be obviously rate changes. And we did have a period where we were increasing rates, just going back a couple of years in most of the states. So that has washed its way through the book.

[Patrick McClymont, CFO at Hagerty]

We do have valuation. Typically, long term trend, we see values increase. And right now, we're more in a stable market. So there's less rate that's coming from increasing underlying values. But there's nothing that we're looking at that gives us pause.

[Patrick McClymont, CFO at Hagerty]

And you mentioned something about increased competition. If you could clarify that question, what are you seeing or what are you looking for there?

[Michael Zaremski, MD & Senior Equity Research Analyst at BMO Capital Markets]

I would just your answer is helpful. Just increased competition, we're just meeting from a top down level of looking at just pricing KPIs, for other competitors in the industry, and you can see CPI data too. So And probably go ahead.

[Patrick McClymont, CFO at Hagerty]

I said when it comes to competition within our niche, right, things operate very differently in the collector car niche. And so when we look at the specialists who compete, it feels pretty normal, right? You can see pockets where people are competitive and other pockets where it's less so. And so there's we're not seeing something fundamentally different on that front either.

[Michael Zaremski, MD & Senior Equity Research Analyst at BMO Capital Markets]

Okay. Got it. And if I if we if we divide if we create a KPI called vehicles per policy, it doesn't seem like it moves around much, of course. I think it's gone up a tiny bit over the last couple of years. Is there anything we should be thinking about in terms of initiatives to increase vehicles per policy?

[McKeel Hagerty, CEO & Chairman at Hagerty]

Yes. I mean, it's thank you. It's a great question. It's a for us, it's a beautiful thing. People tend to have I think we're at 1.7 vehicles per policy today if you think about kind of the core business and what we call our flex business.

[McKeel Hagerty, CEO & Chairman at Hagerty]

One of the entire reasons we've launched this Enthusiast Plus program is to be able to say yes more to the inbound business that is coming our way. Sometimes this will be somebody adding additional vehicles to the policy that we otherwise could not underwrite because of whatever sort of pricing or risk dynamics that we didn't feel comfortable with in the core program. And then it's also really meant to say yes to more newer customers that we don't currently have. So that doesn't necessarily increase the 1.7, but allows us to say yes more. And the intention with that Enthusiast Plus business is that it will have higher average premiums.

[McKeel Hagerty, CEO & Chairman at Hagerty]

So for us, the big initiative and it's been a multiyear complicated initiative has been to launch Enthusiast Plus, and that includes buying the driver's insurance company, which we mentioned is live in a single state that will start expanding over the coming months and quarters and then standing up the entire new, what we call our Apex platform, which is to be able to handle all of that newer business with more flexible pricing as well as eventually to manage the core business over time. I must say that between the tech and the launch of Enthusiast Plus, it's been kind of a month of celebrations here after lots of year several years and certainly a lot of quarters and months of hard work. So that should start addressing that. Thank you.

[Operator]

We have reached the end of our Q and A session, and I would now like to pass the floor back over to Mikhail for closing comments.

[McKeel Hagerty, CEO & Chairman at Hagerty]

Thank you, operator, and thanks to all of you for your continued support. Aggregity is firing on all cylinders, and we have solid business momentum and a long straightaway in front of us. Sustaining this trajectory year after year requires great talent. And over the last month, we have been able to fill three key positions with top tier talent that we believe will be critical to our long term success. This includes hiring Adam Van Lune, our new Head of Omnichannel Distribution after a career of working at Bain, Chubb and Plymouth Rock.

[McKeel Hagerty, CEO & Chairman at Hagerty]

We also hired Dessi McHendry to lead our insurance products after great success at GEICO, Progressive and Lemonade. Our third addition to Hagerty is Mark Burns, who is brought on board to tightly integrate Hagerty's brand and marketing efforts across our suite of products and services for car lovers. One team Hagerty has never been stronger. And with that, we look forward to seeing some of you over the next two weeks as we head to Monterey Car Week, including our two day Broad Arrow auctions where we will present some of the best cars yet. Until then, never stop driving.

Participants

Executives

• Jay Koval, SVP - IR & Communications
• McKeel Hagerty, CEO & Chairman
• Patrick McClymont, CFO

Analysts

• Mark Hughes, Analyst at Truist Securities
• C. Gregory Peters, MD - Insurance at Raymond James
• Kevin Wijendra, Equity Research Associate at JP Morgan
• Michael Zaremski, MD & Senior Equity Research Analyst at BMO Capital Markets