Conference Transcript - HGTY 2025-09-04

Tommy McJoint, Analyst — KBW

Okay. All right. We're going to go ahead and get started here. My name is Tommy McJoint with KBW, and I'm joined by McKeel Haggerty of Haggerty, of course. And to start us off, just to kind of introduce everyone to Haggerty, we have a video that we can start off with.

Operator

When we collect, we aren't just keeping things. We keep memories, visions, moments, perfect Saturdays on perfect roads. We keep what drives us. Did you find my OGTO?

Operator

Happy birthday, Dad.

Operator

I can't believe it. We won't let it stall out. It captured our hearts and shaped our lives. The road calls to us and we will always take the wheel. We are not just collectors. We are all drivers. Hagerty. Let's drive together.

McKeel Hagerty, CEO

Well it just just breathes insurance doesn't it? You know everything about that. You know just a little intro and then you know we'll have a conversation is that everything about Hagerty is a lot about what you just saw in that video there. We're from the very beginning over 41 years ago have been about this sort of love of special vehicles, love of the automobile and it's weird in an insurance setting or an investor setting to talk about human emotions, but the unique characteristics of our business are driven by that idea that when you have something that you bought and you care for, or maybe you inherited, you take really good care of it. And wherever there is that care when it comes to cars, you see different risk dynamics. So from the beginning of this business, starting as a kind of MGA operating in the States, and then eventually Canada and the UK, and now a risk taker, it all starts with that human emotion that there are tens of millions of people out there who love these cars. And because of that, they take really good care of them. And because of that, we can build a really cool insurance business around it. Now, the challenge though, like every good business, you're trying to figure out how to solve problems. And some of the problems that we were always trying to solve is how we're going to grow the business. And so from the beginning, we really built this omni-channel distribution model. So not only do We sell directly to consumers, like people like you'd see in the video there. And it's not just vintage cars. You also saw some newer cars there, because that's a big part of our story is how the dynamics of the types of cars people are interested in is evolving. But we also sell through agents and brokers out there. We have tens of thousands of agents that we work with. And then finally, we partner with the biggest insurance companies out there in the world to help manage their books of business of these types of cars, sometimes behind the scenes, but never white-labeled. Always there's a Hagerty partnership, and they're always exclusive. And the most recent, which maybe we'll talk about, is our partnership with State Farm. So we have this membership model that we interact with people. We built an automotive brand. When people think of us, they think of us as being with them, not a big corporation selling policies to them. And they think of themselves as members of Hagerty, not just a client of Hagerty, not just an insured, not just somebody buying a policy from them. And they can get it to us anyway. through again directly through a broker or through an insurance company and then really kind of one of the final cool pieces and a big piece of this kind of ecosystem this dynamic that we built is that we entered the the trade side of the business buying and selling cars by acquiring an auction company and standing up a digital auction marketplace this is a really cool part of the business and it really is complementary to the insurance side of the house because right now we insure two and a half million vehicles and last year alone our clients our members bought and sold over 300 000 vehicles for a total transactional value of about 15 billion dollars worth of car transactions and our goal in all of that is to become the place where we would help them buy and sell those cars but there's also this shopping dynamic long before you buy a car you shop you read magazines you join car clubs you watch youtube videos well guess what those are all the places that we are too with our media business. So we, our, our, uh, YouTube channel does not talk about insurance. It's three and a half million subscribers looking at car content. Um, our magazine is the highest circulation car magazine of any car magazine out there. People are reading about cars, again, not about insurance. And so, um, this is kind of what makes Hagerty unique. And it's, we, we get to play with a lot of fun stuff like this. And it's been a, I think it's just like the most fun business that's based on insurance you could have. And by the way, fourth year attending this conference, a big, big step forward of seeing Tommy's note about the business and covering our stock. So really grateful for the thoughtful consideration of what makes our business unique and grateful to be here with you. Yeah, it's, you know,

Tommy McJoint, Analyst — KBW

Hagerty obviously is an insurance company as part of it. And that's, you know, why you're here today, but the ecosystem, as you described, is much bigger, and the brand is much bigger than that. So maybe starting off, one of the lines of distribution that you talked about is working with national carriers and the agent side. What is it about the classic and collector car area that the national carriers have a hard time servicing themselves? Why do they need to share their economics with Hagerty for their hard-earned customers?

McKeel Hagerty, CEO

That's a great question. of the tens of millions of cars that are out there just in the United States registered that's in our really target market, most of those are insured by standard auto carriers just on a package policy. And that's usually because the agent out there placing that account wants to keep the home and the regular cars and the boats and everything all together. The challenge with a vintage car especially is that every car when you buy it new, it's depreciating in value. It hits some sort of trough at the bottom, and then sometimes they just become salvaged, and they just kind of go away. The cars that we're interested in, they go down in value, or sometimes they go down a little bit less in value if they're, say, a new Ferrari, but they go down in value, and then eventually they start appreciating again, and it's when that J-carve starts curving back up that the big insurance companies don't know what to do with it. Their models are not set up to deal with cars that are gaining in value. They're only designed to deal with cars that are depreciating. And then when it comes to claims, which for big insurance companies, they need to have happen very efficiently. Claims have to be paid very quickly. That is the dynamic in modern auto insurance. For us, to repair a car, if it's been damaged, can take months, if not years. And that is just not how insurance companies are set up. So we can partner with a big insurance company and say, look, the client is very important to you. A tiny fraction of that premium is a vintage car or two or three. Let us handle that for you. We'll cut up the math in the background. And we'll take care of the tough part. We'll make sure the values are handled well. We'll give them this extraordinary experience. They'll become a member of the Hagerty Drivers Club. And we'll handle the claims so we're not throwing your claims teams into a tizzy over what to do with these cars. So this is about them retaining the business, even though, yes, we are sharing in the economics. And in every single case, including our latest partnership with State Farm, they came to us. and their number one auto insurer in the United States saying, look, this is a segment that we really want to take good care of. You're the best at doing it. Let's create this partnership.

Tommy McJoint, Analyst — KBW

So auto insurance is one of the more cyclical elements of the insurance space, I would say. You constantly have pricing, chasing lost costs. One of the things that I did as part of my research on Hagerty was, and I was interested to see, was the stability of the loss ratio performance that you guys have had. But can you maybe talk through, like, why that has been the case? How are you guys differentiated from, you know, what the daily driver insurers experience?

McKeel Hagerty, CEO

Yeah, it's interesting. Well, for one thing, there's not a lot of competitive dynamics from the pricing standpoint, from a competitive pricing standpoint. There were MGA, a number of MGAs out there doing this. There are now very few. Our growth kind of consolidated that market. So pricing has been very stable. Competitive dynamics have been very stable. So you don't get that kind of hardening and softening market piece. Again, values are going up in general over time. Frequency of loss tends to remain very, very low, although severity of loss can be high. It's expensive to fix these things when they do need to be fixed. And then it's really a lifetime value play because when people buy these cars, when they own cars like this, they want to own them for life. They're not trading in and out of them. These are not two- or three-year auto leases where you get more of that dynamic. These are things that people buy and they hold on to forever. and so and and by the way that tends to be both pretty immune even from economic cycles when you know the economy is good and people are feeling flush they tend to buy more cars when the economy is soft they tend to hang on to the cars that they have they still pay their premiums and it's also not we're pretty immune from from tariffs because there's not a big wide supply chain of parts needing to come in to fix these cars. And right now, as it stands, cars at least 25 years and older are not subject to the tariffs in terms of import cars. So hopefully that stays the same. That could change tomorrow, but we're here to help regardless.

Tommy McJoint, Analyst — KBW

For anyone in the audience that has a classic or collector car, people are often very surprised to see what the price, the premium price is for Hagerty. Is the idea of the offering savings to potential customers a part of the proposition that you guys...

McKeel Hagerty, CEO

I mean, if you think about it and, you know, all of the things that have been just in the regular news, consumer, you know, news that, you know, insurance prices are going up for regular cars, you know, still insuring a vintage car is a lot cheaper than insuring sort of a normal regular car. Now that, I'm talking about a $35,000, $40,000, $50,000 vintage car, not a million dollar car. Those can be a little bit more expensive. But, yeah, it's still, there's real value to this, and the value is, you know, cheaper price and a completely different service experience.

Tommy McJoint, Analyst — KBW

So it's good underwritten business, and this leads to a big change that's undergoing at Hagerty is the idea of risk retention in your relationship with Markel. Can you sort of give an overview on what's changing there, how that's evolved over the history?

McKeel Hagerty, CEO

Yeah. On the insurance side, the business started as an MGA, which means you're taking commission income, and hopefully you're underwriting good business, and you make a little bit more at the end of the year on a commission basis, contingency basis. We started taking risk in 2019 in our partnership with Markel, and when we started the relationship with Markel, actually before that in 2013, we explained very clearly. our intention was to become a risk taker behind our MGA distribution model and you know we hope you can be with us on that journey but someday someday you won't be taking any risk in this we couldn't exactly explain when but we started in 2019 that ratcheted up to where we were taking about 80 percent of the risk and then with the idea that eventually maybe in 2030 we'd be able to take the rest of the risk kind of finish completing the cycle and through a lot of of discussions that we had with Markel in the recent year, we decided to, you know, move that from a 80% quota share to a 100% retention of the risk and more of a fronting arrangement. And it was really mutual. It's good for them. It's good for us. We're excited about it. It'll be a meaningful change to how we talk about things in 26, which we'll get to in those, you know, Q4 kind of earnings in March. But it's an exciting opportunity for us. Now, our new program, which we call Enthusiast Plus. We're actually underwriting 100% of that through a insurance front that we bought last year called Driver's Edge. Everything has a driving element to it. But yeah, that's been our path is build the distribution model first, take risk on the back end, and then build this kind of flywheel dynamic around how we retain customers.

Tommy McJoint, Analyst — KBW

You mentioned there the Enthusiast Plus side and retaining that through the Driver's Edge subsidiary that you guys have. Is your expectation that the underwriting performance of that new program will be any different than what you guys see through your existing program?

McKeel Hagerty, CEO

Yeah, so what the data is telling us is that contrary to the popular belief that only really old people like really old cars, what we found is, in fact, the newer younger generations like buying cars of this type. They're just newer cars, and so they tend to be cars from the 90s early 2000s so you think you know think porsche think mustang think corvette think toyota supra think mazda miata cars that are relatively new in the in the big scheme of the cars that we insure and those are people coming to us that are in their 40s in their 30s in their lower 50s younger than our average age and our rating structure didn't couldn't flex enough to be able to say yes to all of those and what we wanted to do is say yes to the people that we were they that we're coming to our door, and what the new Enthusiast Plus program allows us to do is simply that. Say yes to the people coming to us, have more flexible pricing, which allows us to keep the loss dynamics exactly in the target zone of where we want to be. So on a combined ratio standpoint, it should be right there. Slightly higher average premiums, but we've found through the decades that we've been doing this is that the longer somebody holds the cars, the risk dynamics tend to get better and better over time. We just need more ways to welcome more people to the club. And that's what we get with Enthusiast Plus.

Tommy McJoint, Analyst — KBW

And is the expectation that there will be more miles driven?

McKeel Hagerty, CEO

Yeah, newer cars are frankly more drivable, you know, than older cars. I was spending some time driving a 97-year-old car that I own. And I can tell you, I love driving 97-year-old cars, but not everybody does. They're a little funky in traffic. And you don't want anybody to stop really quickly in front of you because the brakes are like made out of leather, I think. You know, they're not great. So, yeah, we're going to see more miles out of newer cars, but the pricing kind of balances all of that out. And our job is just to be really more and more efficient, which is why we've been making tons of investments on the technology side of the house, which I know you've spent some time on, and as so many of the property casualty insurers have, and we're doing it too. So it's been a big part of our world in the last few years.

Tommy McJoint, Analyst — KBW

And I think you touched on this earlier, but I just want to make sure I heard it correctly. the notion of the risk of tariffs for you guys, it's a big point of discussion for a lot of auto insurers out there. Can you just clarify the carve-out that you guys see on the tariff exemption?

McKeel Hagerty, CEO

Well, right now, as it's drafted, cars 25 years or more if they're imported. There was always a 2.5% tariff. As of right now, that stays in place. Now, there's a thought that that may ratchet up to sort of the country standard, whatever it ends up being, say, for the EU. somebody trying to import a car of any age from the eu and if that's the case that could change the dynamic of newly imported vintage cars to the space which is not a big part of it's not a big number every year um it will definitely change people buying things like brand new ferraris brand new porsches brand new you know lamborghinis that kind of thing but that group that buys those cars are pretty immune from price sensitivity, so it just doesn't affect us much. And we charge our premiums based on the value of the car, and if it costs them 25% more to buy a car, we insure it for what they paid for it. So we're pretty set there. On the more like supply chain side of tariffs, there just isn't a big demand for parts for these cars to repair. Again, frequency is super low and even though we insure two and a half million cars today and you know growing rapidly every year um it's there just isn't a high enough frequency where tariffs affect the cost of repair that much so we're um pretty you know no not 100 immune but pretty immune from the big effects of

Tommy McJoint, Analyst — KBW

tariffs and that's in reference to things like you know steel and like parts that you just aren't

McKeel Hagerty, CEO

really you know buying a windshield wiper motor you know like those tend to come from overseas

Tommy McJoint, Analyst — KBW

um and so just at a high level it does feel like you know 2026 and maybe even right now is kind of an inflection point you know for for haggerty um you guys have spent you know a lot of upfront money sort of building and investing in the business and you guys are starting to retain more business is that is that is that how you view it in the sense that we are at an inflection point

McKeel Hagerty, CEO

right yeah it's it's like the plan is really coming together and it's really been by design So, you know, we're able to gain much more in the economics on the risk-bearing front with the change in Markel that really incepts in January 26. So that's going to be, you know, something really positive to talk about. Our Enthusiast Plus program will roll out in more states, which, again, big, heavy sets of investments. That starts rolling out. We'll be rolling out in more states with State Farm on the State Farm Partnership, which is by far our largest partnership from a distribution standpoint. We're going to be in 25 to 27 states by the end of the year. We'll start rolling out more states next year. Our auction business, which is the really fun live auction thing, if you've ever watched one of those on television, we'll have a full schedule of auctions both in the U.S. and Canada. That's already pulling a meaningful kind of oar in the water, if you will, on the profitability side of the business. So lots coming together in 26. We're excited about it. Of course, we'll talk about it next year, but we're really looking forward.

Tommy McJoint, Analyst — KBW

Are there any other big sort of investments that you think you need to make right now or near term?

McKeel Hagerty, CEO

Well, we're going to be, you know, look, we have to continue digitizing the experience as much as we can. We'll keep making tech investments. You know, we know that AI is going to play a big and important part in our business, especially on the customer service side. That takes time, money testing, all those sorts of things. You know, fortunately, when it comes to taking more risk, We had, you know, plenty of capital to be able to take on the additional risk that we'll be getting from Markel. So we don't have those, you know, those kind of needs. And, you know, we're investing in our, say, our auction business. So, you know, investing in the European expansion. We, you know, say on our international business, we've been in the U.K. for a long time, 20 years. We've been in Canada for a long time. We have a large share of business in Canada. People have often asked, what about Europe? Would we think about those places? is originally we thought we were going to be able to write European business through the UK and then Brexit happened, which I'm sure everybody knows that was not necessarily the greatest thing for the UK insurance world. What we think the market entry point for our brand in the future will be starting with auctions, starting with events, starting with auctions, kind of get people used to the brand long before you'd sell insurance. So we kind of like the investments we're making and we'll keep playing them forward. And we've had a number of great quarters of growth, but also expanding margin. And that's what we're really focused on right now. And we want to make sure we deliver on what people expect. Just pause here to see if there's any questions from the audience.

Tommy McJoint, Analyst — KBW

One of the things you just touched on there was the auction business, which I'm always sort of impressed to hear about. Can you walk through the actual economics of maybe the margin profile of that business? It has been, if you just look at the simple revenue contribution of that business, it has grown tremendously.

McKeel Hagerty, CEO

Yeah, and percentage-wise, it's growing a lot, and, you know, still relatively small, and mostly because the insurance business is growing so fast. And we've just always been this real, you know, organic CAGR, steady Yeti growth, and you saw it well when you did your research around us. On the auction side, you know, this is a very well-established business. There are a few, you know, big players in this space, you know, companies with names that people in here would remember, even if you're not in the automotive space. And what we did is, you know, we acquired a team of people who were starting a new competitive auction business and brought it into our house. Very different. It's not a recurring revenue business like insurance and membership, like the rest of our businesses. It's, you know, very much a transactional business. But the way it works is when you construct particularly a live auction, they're almost built to be profitable right out of the gate. You, you know, you can sign cars to the book that you're going to be selling at an auction specifically with the idea that if you hit your sell-through rates, you're profitable from day one. Like literally, it's like an opening weekend for a movie. You kind of know right how you're going to land the plane, right what it needs to be. So it's, it's not recurring revenue predictive, but it's a very predictive profitable business right out of the chute. The digital marketplace business is a slower growth thing for us. We think it'll ultimately be the biggest scale but we're you know right now what we're doing is actively selling large collections of cars on our digital auction play marketplace and the trick there is to balance the buy sell dynamics is that you have to make sure that you're filling your auction sites with great cars that people want to buy but you can never let your sell-through rate drop too low because then suddenly your supply dries up it's a it's a very delicate little balance so for us that'll be a little bit more of a slow growth thing. And that business is just starting to see the economics that we'd like to see. But again, early stages, and it's very much kind of part of our digital picture. And I know this is an audience probably not used to talking about a transactional car business, but I will tell you, we are not actually the first company in the world to do this. There was a specialty auto insurer kind of like us in Australia years ago that was called Shannon's. They were the first to ever have this kind of what I think is a peanut butter and chocolate combination of an insurance business alongside a marketplace business. That business was sold years ago, but it was really one of my first inspirations. And what we're seeing right now is not only can we grow the insurance business organically, letting the flywheel spin, is that just that shopping dynamic of people wanting to come and see what cars sell for and what's kind of hot is a great way to attract people to your front door.

Tommy McJoint, Analyst — KBW

So you've described the marketplace side. You guys also sporadically participate in actually buying and selling cars yourself. Do investors need to be worried they're going to wake up one day and see a billion dollars of car inventory on your balance sheet?

McKeel Hagerty, CEO

No, other than they'd probably be fun to drive. I hope they'd be fun to drive, but we don't do that. You know, the nature of the auction business, and it's just like the art market, But now and then, auction companies, in order to get a transaction done, they'll end up buying a couple of cars for inventory with the idea that they're kind of sold out through the next sale. And so if you think of, you know, if somebody comes to you with, you know, 50 cars they want to sell at auction, maybe only 15 of them are really suitable to the auction. So you have to, but you don't want to lose the client. So you're pretty much doing anything you can to make sure you get the 15 cars. And if that means you buy five and sell them some other way, it's just how it's done. So yeah, that kind of flows in and out of the numbers, but it's certainly not something that we're actively doing. We don't want to own, I mean, I personally like owning some cars, but not in the auction business. We'll keep that separate. Yeah, separate. I keep that very

Tommy McJoint, Analyst — KBW

separate. Let's switch over to talk about the State Farm relationship and the expansion there, a very exciting opportunity that's, you know, been announced, I want to say it was 2020 or 2021 one time frame? Before I was born. Yeah, absolutely. So just kind of remind everyone where you are in

McKeel Hagerty, CEO

the rollout process now. Yeah, so we were really grateful that we got the St. Farm business up and running. You know, biggest auto insurance company in the United States. Very deliberate in the way they build systems. Very deliberate in the way they do things. And very, very, very careful. Also, I would say they too are going through a lot of technology transformations. I think they've talked pretty openly about it, even though they're not a public company. So we stood up four states last year. Actually, those four states on new business exceeded our expectations, and then we're starting to do the conversion process. As part of this, the numbers that we reported publicly over the next couple of years, in addition to being available for new business with the 19,000 state farm agents, we'll just ingest about 525,000 new clients just as part of rolling that business over to us. So a very significant amount of new business coming our way. The difference with this and our other partnerships like the Allstates and Progressives and everybody else is this is not a, you know, maybe they'll bring more business our way. This is a book. This looks like a book roll. It's just the book roll is within a State Farm company where they were writing all of those cars one way. We're moving them over into a new company and we're going to help manage that program for them again so we can get the the pricing and the valuations right and and help them handle claims and so far you know they're just a wonderful partner um and uh you know we're staffed systems are ready we're ready to rock with handling more state farm business but i will say this we work with a number of the other insurers but we also have a pipeline of of additional partnerships that we're working on so So, you know, hopefully in coming conferences, we'll be able to talk about yet some new ones that we're working on.

Tommy McJoint, Analyst — KBW

And to frame that 525,000 vehicles, that's relative to a total policy count. I think you guys have a little over one and a half million. So it's a very big, very big number.

McKeel Hagerty, CEO

And two and a half million vehicles, one and a half million policy count-ish. So it's a lot. A lot coming our way from State Farm.

Tommy McJoint, Analyst — KBW

And can you also clarify that there is a difference in terms of how this is strictly going to be an MGA relationship? This is a commission-driven. and there's no risk retention on that?

McKeel Hagerty, CEO

Yeah, we do not take any risk in the State Farm business. And, you know, I'd love to someday, but, you know, that's not the way the deal was crafted. And, you know, it's a very good deal for us. It's a huge MGA relationship. And it was very unusual for State Farm. State Farm has some other partners that do some other business with them, but they had never turned on a partnership that allowed someone else to insure cars because they just have tremendous pride in being the number one auto insurer. And, you know, they're really careful about those clients. So we were a really unique partnership for them. And, you know, it was a real kind of leap of faith, you know, from them to us that we could handle it. And, you know, we wanted to, we were excited to get the partnership up and running. And so, you know, they have a board member on our board. And when we went public, they made a significant investment in us as well, which was just kind of a sign that, you know, they were all in. And that's a good one. That's a great big partner to have.

Tommy McJoint, Analyst — KBW

and so that takes you to nine of the top 10 carriers that you partner with that we believe one still remaining anything you can share on that no i can't not not yet but you know hope

McKeel Hagerty, CEO

to be able to share on those and really you got to look at it as it's it's it's not even the top 10 it's the top 25 it's the top 30 and you know what's what's amazing about the automotive insurance world in the united states is you know we tend to think about those big brands that advertised on television but like in every single state there are smaller you know single state insurers or regional insurers that are really very good at what they do and you know we're working on partnerships with a number of those as well and they don't you know they don't intend to make the headlines but they're important you know potential partnerships for us so we have a team out you know actively working those today mm-hmm what one thing that I find

Tommy McJoint, Analyst — KBW

helpful with with Hagerty is that I think the simplicity of the growth story and you guys have a sort of a projection to double, you know, policy count by 20, 20, 30, 20, 30, yeah. And I think that actually groups nicely into sort of three buckets is how we think about it, with roughly a third from State Farm, you know, a third from this new Enthusiast Plus program, and then a third from the core business. Thinking about that second piece there, the Enthusiast Plus business, what gives you guys conviction that there are, you know, 500,000 potentially vehicles, that's my number not yours but sort of to grow in that and that new channel just as it stands today

McKeel Hagerty, CEO

we're walking away from so much of this business that's just coming to us and we just either are kind of our pricing our underwriting profile does not allow us to take it on to the program as it is today and you know i am an entrepreneur by nature and i don't like turning away good business and it's good business that we could just not adequately price so we needed this new program we needed a whole new platform really to be able to say yes more and that's the model so the you know the best thing about it is our marketing efforts are working they're bringing these people to the front door i just don't want to turn them away and so that's that's how we're you know the data is showing that we can write a lot of this business over the coming you know handful of years and that's why you know this is not guidance it's just directionally we you know we're we see that doubling of our piff count by 2030 is you know right right in the sort of target zone of where we'll be and and we have a lot of things we're working on beyond for beyond 2030 as well um if there's anything i've learned about the insurance world is it's it's a wonderful stable business but sometimes it's a slow build and you gotta you know you gotta patiently build out programs you have to make sure things are right and and then you you ride the wave when when it's going.

Tommy McJoint, Analyst — KBW

Customers that get turned away now, are they sort of informed to be on a wait list or say, you know, coming soon you'll be available?

McKeel Hagerty, CEO

Yeah, we've been communicating with them. You know, once we got really confident, we were gonna be able to get the Enthusiast Plus up and running and, you know, and or even with older, you know, older contacts, it's more like, hey, coming soon, there is something coming for you. So, you know, check us out again. But, you know, I'd always get it right before I get it big. And, you know, in insurance, it's really important that you get the systems right. And that's why, and this is all, this is a fresh carrier. It's a fresh Duck Creek system. It's brand new. It's why we've made so many big investments over the last couple of years and why we're excited about it.

Tommy McJoint, Analyst — KBW

And so as folks think about making projections, the contribution from that Enthusiast Plus, should we think of it as more, you know, back-end weighted of between now and 2030? Think of it more in the out years just because new states need to be introduced

McKeel Hagerty, CEO

in this testing period yeah i mean 26 will be uh you know again we're not going to be in a huge number of states in 26 but 27 you know 27 28 will be when you really see the ramp in that and if we can make it faster we will but you know again make it right before you make it big

Tommy McJoint, Analyst — KBW

and similar question for state farm what's the trajectory that you guys think you can

McKeel Hagerty, CEO

yeah now that's that should happen on a faster pace um simply because you know for a couple of reasons one is you know we're already committed to 27 states this year we'll get a large number of states next year. There will always be some stragglers. Probably everybody here knows that you know there are some states like say California that are you know it's slower for all auto insurers or any kind of insurer to get things approved there. You got to be pretty careful in those states anyway to get the pricing right. So not worried about California right away but you know we want to be in the majority of states and really have the majority of that over 500,000 converted over in 27. They also write six-month policies. We write 12. So that business will be converting faster within a year, which will allow us to realize some of that a little bit faster

Tommy McJoint, Analyst — KBW

than we might have if it was just annual premiums. In the playbook with State Farm, as I remember it is, you'll go into a state, they'll only write Hagerty policies on new policies with State Farm, and then after some time period, which I don't know if you've quantified.

McKeel Hagerty, CEO

A test period, yeah.

Tommy McJoint, Analyst — KBW

A test period. Is that years? Is that months before you?

McKeel Hagerty, CEO

Yeah, it's months. I mean, it's completely at their testing pace, and they are incredibly deliberate, let's just say. And so, yeah, when they flip the switch, then you just start converting. So, you know, we're converting the original four states now, and, you know, everything is about, you know, matching their pace and trying to accelerate it whenever we can.

Tommy McJoint, Analyst — KBW

And so you guys have been building the infrastructure to support State Farm for five years now with nothing on the top line contribution yet. How sort of much of a headwind to the margin has that been, sort of building that? And should we benefit from going forward once that revenue start coming on?

McKeel Hagerty, CEO

Yeah, I mean, it has been a headwind. And definitely when there was a period of time when we thought some of it would come out a little bit faster, we slowed down some of the spend to manage that. and that was I think a pretty important aspect of what we're doing but you know I'm I can tell you having launched you know dozens of these types of partnerships in my career the big dynamic difference here is that this is more this is a book role this is not an this is not an if this is a when and when you have that kind of opportunity where you know the biggest and one of the biggest companies out there is going to be sending you a bunch of business you better be ready And that was, I wanted to be able to front load it as much as we could.

Tommy McJoint, Analyst — KBW

I can just check if there's any questions out here. Yeah, can we get a microphone over?

Operator

You know, you might have said this and maybe I missed it, but could you talk a little bit about just sort of the expected return profile of Enthusiast Plus versus the business you're doing today? It seems like there's a different dynamic to these policies and these risks. And so maybe they're more capital intensive. and how you plan to sort of manage that risk?

McKeel Hagerty, CEO

No, thank you. Well, so first of all, we've actually been testing these segments of the business for a number of years through a kind of intermediate program that we added to our core business that we call Flex. So it allowed us to test some of the different risk dynamics around underwriting pricing, different sort of specific risk characteristics. So we're not going into this blind. We're actually coming into this really informed. And that Flex program is actually the first bit of business that will move over into the new Enthusiast Plus program. The business is going to be 100% written on our new platform, which is a Duck Creek platform, which is going to be significantly more efficient and more self-service driven than our current business, which is very much a consumer friendly kind of talk to everybody, get to understand their cars a lot more. so there will be trade-offs both ways there'll be different risk dynamics but a much more efficient platform and ultimately the duck creek platform will run the entire business over the next few years and so what we wanted to be able to do is get that up and running for the new program while it was still small before we committed you know moving a million policies over or whatever to a brand new platform which i don't know if you think that's scary but i think that's kind of scary um And so we want to be really careful before we do that. So one of the reasons that, you know, we early on, if you've looked at any of our numbers before, we spent a lot of time talking about loss ratio. Our loss ratios are extremely low relative to the regular auto market. And while we're shifting to just more of a market standard combined ratio is that's it, it's a dynamic. It's a ratio between, you know, a numerator and a denominator. and we feel that this program will perform very substantially similar to the core program, primarily because you're going to be seeing higher average premiums. Again, we want to be a lifetime value kind of business. We want to keep these cars for life. So what we want to make sure that we're doing as we evolve into this business is that people feel like they're kind of joining us for life. Why would they ever even bother shopping? And that's why also pricing is an interesting dynamic because you want to capture the right premium, but you don't want to be so high that you push people into the market every year. And so that's where our membership feature really steps up. So when you become a member of our Hire-D Drivers Club, it's $70 a year. There's some free features too for people who just want to get newsletters and that sort of thing. But the $70 feature, we're actively in your life as a car-oriented company. You're getting our magazine six times a year you're getting invited to events you get offers for discounts on car oriented stuff and so they just they just are hearing about Hagerty a lot more be if you're a member if you participate in our member program then if you're just buying an insurance policy and getting a bill on a monthly or quarterly basis and so the Enthusiast Plus program will have all of those same dynamics which we think will be a good advantage for us so good

Tommy McJoint, Analyst — KBW

question though. That's a great question. Yeah, and we'll just have time for maybe one or two questions if there's anything else. I can end with one. Sure. What's your favorite car? Oh, sorry. The Bond, Aston Martins, usually. Yeah, Bond, Aston Martins. They're pretty cool. Yeah. But so as I think about, you know, the Hagerty stock, there's, you know, the Hagerty family, State Farm, Markell each have significant economic interest in Hagerty. It's great to have long-term holders. The counter to that though is that the liquidity and the float of the stock is not very high. We did see last month there was a secondary sale, increased the float by about 4%. Are there any plans you think in your mind for more secondaries that investors should think about

McKeel Hagerty, CEO

on the horizon? Yeah, thanks. The biggest thing we hear about when we're meeting with investors here upstairs is float. Float's one of the things they're staring at, float liquidity in the stock. um we were really glad to get that secondary out there was the first one we did anybody who's ever done one of those they can be a little painful especially if it's your first first one but it really worked out well and you know we're really pleased with the support we got from um kbw and jp morgan uh through that process so starting that march towards greater liquidity the majority of the shares we sold were from my late sister's estate so i originally this is a family-owned business my two sisters and I owned it before we did a small minority sale and then went public and so you know they we were selling the estate shares they've not said they would sell more but I we think there probably will be additional secondaries out there eventually you just want to have enough float that shares can be absorbed through sort of the normal means but we'll be ready for it we were you know we got through this process and the stocks been performing nicely since then and you know my job is just to keep running the business well and we'll be responsive when that needs to happen so thanks for your help with

Tommy McJoint, Analyst — KBW

that too so yeah absolutely and are you gonna be driving back to Michigan and

McKeel Hagerty, CEO

anything oh I so wish I so wish but I have I have a couple of good car tours coming up driving some really old cars and one in California and one in Arizona in October so I'm looking forward to that there's nothing like driving a really old car slow it just it it slows you down and you have to be really present with them. So it forces you into a different state of mind. You should try it. It's pretty awesome. Great. All right, McKeel, thanks so much. Hey, thank you. Thanks, everybody.