Hagerty Inc-a Aktie

Ladies and gentlemen, greetings, and welcome to the Hagerty First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jay Koval, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone, and thank you for joining us to discuss Hagerty's results for the first quarter of 2026. 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's 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 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 and 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 8-K filing.

And with that, I'll turn the call over to McKeel.

Thank you, Jay, and good morning, everyone. Spring has finally arrived in Northern Michigan, and with it comes the unmistakable sound of engines turning over after a long winter's rest. Our members have been pulling their cars out of storage, checking all the fluids and tire pressures and getting back out on to the open road. I for one drove a 1963 Corvette split window into the Hagerty headquarters this morning, and I am smiling year-to-year. And One Team Hagerty has been right there with them and with me ready to welcome a record number of new members in 2026 as the driving season gets underway.

Let me jump to the headline. We are off to an excellent start to 2026. Written premiums increased 18% in the first quarter, ahead of our full year expectations. This marks 13 consecutive quarters of executing on our strategy to deliver compounding top line growth while making investments in our team, technology and members that should sustain high rates of growth in the years to come.

As we discussed last quarter, 2026 marks the first year in our history that we control 100% of the economics on our own U.S. book of business. This structural milestone shows up clearly in our results, 42% growth in earned premium and a 77% jump in adjusted EBITDA. The GAAP presentation of revenue down 5% and our net loss of $13 million are temporarily different due to the new Markel Fronting Arrangement, but the underlying business performance has never been stronger.

GAAP profits in 2026 are negatively impacted by the amortization of deferred ceding commissions paid to Markel in 2025 for policies written before January 1st. Think of it as settling the tab on the old structure. These deferred acquisition costs were $89 million in Q1 and wind down to 0 by the year-end 2026.

With that, let me walk through our first quarter results shown on Slide 3. We added a record 112,000 policies during what has historically been a seasonally light quarter for us. Top cars added are not surprising as they are the bread and butter for Hagerty, Mustangs and Miatas, C10 Pickup Trucks and Cameros. We are also seeing a rapidly growing contribution from more modern enthusiast vehicles, including German and Japanese imports, sought after by the rising generations of drivers.

Our written premium growth has been and will continue to be powered by new business count, unlike the broader industry that fluxes with the cycle. PIF growth jumped 15% as our retention rate remained steady at an industry-leading 89%. Retention at that level is not an accident. It is the product of decades of delivering on our brand promise to members who genuinely love their cars and trust Hagerty to protect them. We are delivering this growth with a careful focus on maintaining high-quality underwriting. Hagerty Re's combined ratio was 87%, and we took down our reserves by $6 million in the first quarter. Our underwriting team is one of the best in the industry, and we have been strengthening the capabilities of our in-house claims team.

Our sustained market share gains are impressive and indicative of the enormous B2B opportunity for us. We are diligently working on additional partnerships as well as deepening existing relationships by earning the right to ask for more business. Hagerty is uniquely positioned to help protect the carrier's classic car book of business with automotive expertise and excellent service, and we are making the necessary investments to lengthen our lead.

State Farm Classic+ is a great example of a tightly integrated partnership where both parties win. We now have an accelerating growth engine with expectations for their 19,000 agents to be selling new business in 40 states by year-end. The conversion of State Farm's existing 525,000 collector car policies to the Hagerty platform is also progressing well, and we remain on pace to convert most of these members to the new Classic+ program by the end of 2027.

In addition to the white space with national carriers, our independent agency channel with 50,000 agents is ripe with potential. We are investing to make it easier for these agents to do business with us, including straight-through processing and the automated tools that help them identify enthusiast vehicles already sitting in their existing books of business, likely insured as daily drivers. Our addressable market of 36 million vehicles expands every year, and we want to empower these agents to think of Hagerty as the best solution for their customers.

Let me move on to something that genuinely stopped all of us in our tracks during the first quarter. In March, Broad Arrow Auctions hosted a 2-day sale at Amelia Car Week in Jacksonville, Florida, and the results were historic, $111 million in total sales, 50% higher than any prior Amelia auction and with a 92% sell-through rate. The top lot was a 2003 Ferrari Enzo that sold for over $15 million, and we set 12 pricing records. The market for modern enthusiast vehicles has never been stronger, and every car that trades hands at a Broad Arrow Auctions is a potential Hagerty insurance policy. That is the flywheel in action. Our marketplace is not only a rapidly scaling profit center, but it is also a customer acquisition machine that gets cheaper with every car sold.

I want to put that into context. In just 4 years and through the hard work of an exceptional global team, we have become one of the world's leading collector car auction houses. When you combine Broad Arrow's deep expertise with the Hagerty brand, our global community of members and our unmatched proprietary valuation data, you get results that surprise even us. And those results tell us something important about the health of our market. International demand for the finest cars is strong. Values on great cars continue to appreciate. Buyers from 23 countries do not show up to an auction in Northern Florida unless they trust Hagerty and Broad Arrow. That is all good news for Broad Arrow's transaction revenue. It is also good news for Hagerty Re as insured values rise, so to written premiums.

Approximately 20% of our per policy premium growth over the last 15 years has come from our members voluntarily choosing to ensure their appreciating vehicles for higher guaranteed values. Our customers want their coverage to grow because their cars are worth more. That alignment between asset appreciation and insurance economics is absent from the standard auto market where vehicles tend to devalue or depreciate, and it is a structural advantage that compounds every year for Hagerty, augmenting our PIF-driven written premium gains.

Over the same 15-year period since 2010, our regulatory rate increases for Hagerty Re has averaged only 1.5% per year, bolstering our consumer-friendly value proposition. We saw robust auction demand continue at the Porsche Air/Water auction in April with sales up 30% year-over-year and a sell-through rate of 84%. And in May, Broad Arrow will once again serve as the official auction partner of the Concorso d'Eleganza Villa d'Este with the BMW Group on Lake Como, Italy. This will be our second year at Villa d'Este, widely considered to be one of the most prestigious Concours events in the world, and we expect to build on last year's inaugural event as Broad Arrow is increasingly recognized as the trusted brand in auctions across major European markets.

So in summary, our first quarter results were not only ahead of expectations, but they were far and away the best first quarter we have ever delivered. While it is only May, we are highly encouraged by how we are tracking towards our full year outlook.

With that, let me turn it over to Patrick to walk through the financial details.

Thank you, McKeel, and good morning, everyone. Before I begin, let me reiterate the headline. The underlying business is performing very well. Written premiums increased 18% ahead of full year expectations with record new member additions. Adjusted EBITDA jumped 77% to $85 million, including a $6 million reserve reduction due to favorable prior year development. And Hagerty Re's combined ratio was 87%. This is what a healthy compounding specialty insurer looks like when firing on all cylinders.

As McKeel mentioned, the GAAP presentation this year requires a brief reminder of what we shared on our fourth quarter call. Starting January 1 of this year, Hagerty Re assumed 100% of the underwriting risk on our U.S. book, a great economic outcome for us given the bump in underwriting profits and investment income. Under the new structure, the MGA commission revenue and the associated ceding commission expense that previously appeared gross on our P&L now eliminate against each other in consolidation, i.e., they net to 0. This is why reported revenue declined 5%, even though written premiums grew 18%. Additionally, there are $89 million of costs in the first quarter from the amortization of deferred ceding commissions for pre-2026 policies that result in a GAAP net loss of $13 million. This charge burns off entirely by year-end.

With that, let me walk through the financials shown on Slide 6 and 7. Written premium in the first quarter was $289 million, up 18% versus the prior year period. This is ahead of our full year guidance of 15% to 16%, an acceleration from last year's 14% growth driven by our omnichannel approach, combined with 89% retention.

Earned premium jumped 42% to $240 million, reflecting the 100% quota share retention in our U.S. book of business plus written premium growth. This is the structural improvement in our reinsurance economics that we have been working towards for a decade as we evolve our partnership with Markel.

Commission and fee revenue in the quarter was $16 million. As I noted, this line is no longer comparable to prior periods given the elimination of Markel-related commissions. As State Farm conversions continue during the next 2 years, commission revenue inflects upwards. And unlike the prior Markel commission structure, the State Farm MGA fees carry no offsetting ceding commission expense falling through more cleanly.

Marketplace revenue was $26 million, down 12%. We delivered record auction results at Amelia this year, but had lower inventory sales as we compared against last year's one-time sale at the Academy of Art University. Amelia cemented our position as a leader in the high-end auction market. We are investing significantly to position Hagerty as the undisputed global leader in both live and online sales.

Membership and other revenue was $22 million, reflecting steady growth in Hagerty Drivers Club, paid memberships and ancillary revenue streams.

Net investment income came in at $10 million, benefiting from our now larger investment portfolio at Hagerty Re that enjoys steady returns with low volatility, thanks to our focus on high-quality fixed income investments.

Moving on to expenses. Let's start with losses. In 2025 and into 2026, we are seeing declines in frequency and favorable development from prior years that allowed us to reduce reserves by $6 million in the first quarter. Hagerty Re's loss ratio was 38%, resulting in a combined ratio of approximately 87%. We deliver high rates of written premium growth with excellent underwriting discipline, thanks to more than 40 years of proprietary data on 40,000 distinct makes and models, increased efficiency of acquiring and serving members and selecting members who take exceptional care of their toys.

With the new Markel Fronting Arrangement, we have also adjusted our presentation of our expenses to allow investors to track and model our core insurance operations the way other insurance companies disclose their results. We will report the balance of the year consistently with our first quarter disclosures.

After adjusting for the amortization of the ceding commission for policies issued in 2025, the underlying business showed significantly improved profitability, which can be seen in our adjusted EBITDA of $85 million. We believe that adjusted EBITDA is the best metric to focus on as it reflects the true operating momentum of our differentiated business strategy. We are growing quickly and efficiently converting premium growth into cash flow.

I would point out that operating cash flow of $16 million was lower than the prior year's $44 million. With the new Markel Fronting Arrangement, we are paying claims directly, while under the prior structure, Markel paid the claims and we reimbursed Markel with a lag. So in Q1 of 2026, we made both the direct payments and the reimbursement for Q4 2025 claims of approximately $65 million. This normalizes during the balance of 2026. Adjusted for this doubling up of payments, operating cash flow increased roughly in line with adjusted EBITDA growth in the quarter.

First quarter loss before taxes was $21 million and includes $89 million of deferred acquisition costs. First quarter net loss was $13 million and net loss attributable to Class A common shareholders was $7 million. GAAP basic and diluted loss per share was $0.06 for the quarter based on 101 million weighted average shares of Class A common stock outstanding. Adjusted diluted loss per share, defined as adjusted net loss divided by 361 million fully diluted shares was $0.04 for the quarter.

We ended the quarter with $212 million in unrestricted cash, total investments of more than $1.1 billion and total debt of $229 million, which includes $110 million of back leverage for Broad Arrow's portfolio of loans.

Given the strength in our first quarter results and momentum as we head into the summer driving season, we are reaffirming our full year 2026 guidance and are trending toward the high end of these ranges. This includes anticipated written premium growth of 15% to 16%, adjusted EBITDA of $236 million to $247 million and a GAAP net loss of $41 million to $51 million. As has been our practice in prior years, we will revisit our full year outlook on the second quarter call, but we are increasingly confident in our ability to deliver great 2026 results for shareholders.

Looking forward a year, 2027 should be a more normalized year for Hagerty's P&L post 2026 complexity, where revenue growth more closely tracks written premium growth. We anticipate another year of mid-teens growth in written premium.

While we continue to make multi-year investments in member growth and other initiatives. These include increased capabilities around the Markel Fronting Arrangement, technology investments in our B2B distribution, build-out of our product and Broad Arrow teams, enhancements to our digital marketplace as well as expansion of our special investigation and material damage units. Early indications point to these being high-return investments that will fuel member LTV in the years to come.

That wraps up our prepared remarks. Operator, we can open the line for questions.

[Operator Instructions] We take the first question from the line of Pablo Singzon from JPMorgan.

Is there any seasonality considered for EBITDA through the balance of the year? It seems to me or as you pointed out, Patrick, right, it seems to me that at least through 1Q, you're running above the full year guide, and I'd expect revenues to increase through the balance of the year. So I'm just not sure if there's any offsets maybe I don't know if you're considering GAAP in the third quarter or some pick up in expenses that might sort of derail the simplistic math of just annualizing the 1Q number.

Yes. I think business is seasonal, and so the seasonal pattern has not changed. So you should always consider that in your modeling. And then we are investing in the business, and we talked about that on the last earnings call. And some of that ramps up over the course of the year. And we have the normal dynamic of inevitably in the first quarter, you don't end up filling all the headcount slots that are open. It just takes a little longer than expected. So we would expect to see some ramp-up of expenses embedded in the full year guidance. So I wouldn't just annualize the first quarter. Hopefully, that's helpful that gives you a direction.

Yes. And then the second question I had, just a broader topic, right? So competition in personal auto is increasing. I'm wondering how that's affecting dynamics in your core classic car insurance business. And then maybe just to tack on something to that, like how is the current environment affecting your thinking about the rollout of Enthusiast Plus?

Thanks, Pablo. It's McKeel. As you may recall, we've discussed this in some of our previous calls that when rates have gone up, for example, in standard auto, it tends to create shopping behavior that we actually benefit from. As you know, we're in a different kind of cycle now with standard auto where states are -- standard auto carriers are holding pretty steady right now, if not down. But we're seeing very strong year-over-year PIF growth in the core business, not just because of the additional new partnership accounts that are coming in from State Farm and others.

So in this case, just I think the flywheel effect of the business is holding our momentum strongly into this year, and we're not in any way negatively affected by the fact that the standard auto carriers are kind of in a lateral moving year from a rate standpoint.

We take the next question from the line of Michael Phillips from Oppenheimer.

You've talked a bit about in recent calls about your European expansion for the auction business. I guess, given the flywheel that exists in your overall business, can you talk about your appetite -- just remind us your appetite for expansion internationally for insurance business?

Yes. Thanks, Michael. It's a topic we've discussed for years. We've had an international business for over 20 years with our first entry outside of the country was actually in the U.K. We still have that business. It's growing. It's doing well. I think this order of things that we've really discovered by unlocking these very successful sales in Europe with Broad Arrow is helping us to understand the market differently than just sort of starting with insurance and then deciding whether membership is added and then thinking about marketplace later is that the order of things for us first is understand the market with these European auctions, getting that kind of sales team in force, in place, understanding the event environment and then deciding whether insurance is something that needs to be added on the back.

Something we have discussed in the past is that when we started our U.K. business back in the day, the U.K. was sort of a golden place to be able to operate throughout Europe selling insurance. So our MGA structure over there, we were able to consider writing directly into the European continent without having to create an additional entity after Brexit, that became much more difficult. So right now, we are still just operating in the U.K. We write a little bit of some larger collection business in Europe, but we're looking at opportunities, but right now, focusing on just rounding out that auction schedule on the continent.

Okay. I guess I was hoping you could expand a little bit more on the -- you mentioned the strengthening of your in-house claims team and kind of what's happening there and why -- how much of that's related to the change in the structure of this quarter? How much of that is related to -- I know you wanted to expand more enthusiast market, so kind of a different book of business that's coming. But just can you talk about that in-house claims team and what's happening there and why and how it's related to the changes that's happening in your overall business?

I'll take the high end of it and if Patrick wants to follow-up, I'll let him. So yes, we've always done claims in-house. It was a real differentiating thing for us even when we were just operating as an MGA. Of course, now having 100% of your risk, you want to be paying attention to every dollar you spend when it comes to claims while maintaining a very high level of NPS and customer satisfaction and sort of overall claim service rates. But even though this is a low-frequency claim business, the bigger you get, we will have more claims. And we decided we really needed to make the investments to upgrade that team.

We have some incredible leadership on the claims side who bring sort of the best of big auto industry claims expertise, but that understand the unique nature that repairing the types of vehicles we insure in our core book is very different than repairing a sort of standard auto where you can just bolt on a brand-new part because in many cases, repairing a vintage car, it takes time. You got to find the right kind of shop. You have to sometimes fabricate parts or parts have to be sourced from a variety of different places. So we have teams of people who help find those parts very different than a standard repair shop.

So I think what we're doing just sort of structurally bringing best practices from standard auto claims and kind of turnaround times and all the things that you can do to contain the leakage that can happen around claims practices while maintaining the high quality of work that our customers expect because you want to pay fast, but you don't want to rush so that they're concerned about the quality of the repair. So that's the sort of maybe structural piece. And I don't know how much it's affecting the math specifically, Patrick, or we just...

Yes, it's meaningful. The claims organization that they've changed the mix, right? The meaningfully increased the number of claims that are dealt with in-house versus using independent adjusters. And every time they've increased that baseline, they've proven that the return on that is pretty compelling. And so we sit down and decide to increase the baseline again. That's what happened over the last couple of years. And that return comes from when you're processing things in-house, velocity increases, the customer service is better and the ultimate economic outcomes are better as well.

And so the overall frequency and severity trends have been -- for the industry have been positive. We think we've got more tailwinds behind that because of this strategic decision to really invest in that capability. So we view it as a differentiator because these cars are different. They need a different level of expertise, and it's driving real value.

We take the next question from the line of Elyse Greenspan from Wells Fargo.

My first question is just on PIF. How should we just think about seasonality during the year? And I think in some years, right, Q1 tends to be like the lowest growth quarter of the year. Would you expect to see similar trends this year as we think about PIF growing during the year?

Yes. So this year -- last year, this year, next year, we do have the impact of the State Farm conversions. And so that's driving a meaningful increase in PIF. And that is not seasonal, right? That's based upon the rollout schedule with our partners at State Farm. And so that's meaningful and attractive. You have to kind of put that aside from a seasonality perspective.

And then we're seeing the same trends that we typically would see. The first quarter typically is a lower quarter for us in terms of PIF growth. We ramp-up starting kind of in April and now into May and through the summer months, and you see it ramp down again in the fourth quarter. So we're seeing those same -- that same underlying dynamic. But right now, we're also seeing a very attractive healthy growth in that traditional core business.

And then my second question, you guys, I think, are typically weighted to Q2 to update full year guidance, but you did say -- and I think you made some comments that said you're trending towards the high end of the ranges. It does seem like based on the Q1, right, that you're trending favorable to most items. So anything that we should think about like reversing? I mean, I guess I'm more interested just in thinking about adjusted EBITDA, right, and written premium growth, but really any components of guidance? Or is it just being somewhat conservative and just waiting to provide an update with Q2?

It's just waiting to provide the update. That's our approach on this. We've been consistent. We've concluded that not enough chapters of the books have been written at the end of 3 months. And so we'll do our first update after the second quarter.

Okay. And then I think you said with State Farm that you would be active, I think, in 40 states by the end of the year? And then would you expect to add the additional states in '27 to be at full capacity? Is that how to think about that?

Pretty much. There could be states that stretch a little bit beyond that just because they're more challenging from a regulatory standpoint. But by the end of 2027, we should be selling in almost all the states, and then we'll still have a little bit of a tail in terms of the conversions, right? There's always that lag where we sell new business first, you make sure that everything is working and then start the conversion process.

We take the next question from the line of Gregory Peters from Raymond James.

McKeel, in your opening comments, it's quite envious of your description of driving the Corvette into the office this morning. And I guess I'm going to go down a path that's probably unexpected, but I recently leased out a model Y, the Tesla Model Y. And I know this isn't your classic car addressable market, but I find the experience with it shockingly positive. I'm just curious because you're a car enthusiast, what you think of these new electric cars with the self-driving feature?

First of all, thank you. Yes, it was -- it's a super fun drive to drive the Corvette. And I'm reminded why they made some significant changes in 1964 after 1963 when you drive it. So it's a fun car, but you can't see out of the rearview mirror. I'm a huge fan of electric cars. And some car people who view it as some sort of dogmatic war going on. I don't view it that way. I think we're going to have more and more electric cars. I own an electric car. I have one of the Porsche Taycans, and I'm a big fan. I drive that year around.

Like you said, shockingly impressed. They're just great. They're great. They're simple, they're fast, they're quiet. They do a lot of great things. And I think you'll see more of them, and I think we'll be ensuring more of them in years to come. Like for us, it's -- there's always this shifting process, right, even with like the daily -- the cars that we insure today were daily drivers, some number of decades ago or some number of years ago. And there's a shifting process where people decide, I like this one, I don't like that one and the ones that survive are the ones that we end up insuring.

And so there is no doubt, as we do now, ensuring Tesla Roadsters that we will be ensuring certain Teslas out there in the future. And -- but finally, just on the self-driving thing, I also -- I took my first Waymo ride for what it's worth a couple of weeks ago, and I thought it was really cool and I played my own music in it and all that stuff. And I think we're going to have more self-driving cars as well. But I think there will be a world where there are human-driven cars. I think there'll be self-driving cars. And I think as that technology becomes safer and safer outside of cities right now, I think it's better off in cities personally. That it will be part of our world.

So we're going to be the ones out there advocating. We're the company that was built by drivers like me for drivers, and we'll be advocating for those people. But we recognize that we will be surrounded by self-driving cars.

Great. I know it was a little bit off topic, but not really. I mean it's a great...

Not really, non-topic. Yes.

It's a great product. It's not in your classic car sweet spot yet, but I'm sure it will be at some point.

Listen, I know you spent some time in your prepared remarks and maybe in the follow-up Q&A talking about the PYD, the prior year development. Can you just revisit that and just walk us through what's the source? Is it lower severity? And maybe take the results that you reported, is there anything -- any read-through as we look forward on how the reserves are seasoning?

Sure. So the prior year is about $6.5 million reduction that we had in the first quarter. And you'll recall in the fourth quarter, we had about a $20.5 million reduction in reserves. So this is a continuation. The $6.5 million, it was predominantly the 2025 accident year. And we're starting to see that development in the fourth quarter, and that influenced what we did in the fourth quarter. But it just matured and continues to mature in a very attractive way for us.

And so what we're seeing is a combination of from a severity standpoint, we're in a good spot, continue to be in a good spot. We talked about frequency before. We've talked about what we're doing in terms of claims outcomes. And so it's really just looking at the historical book of losses and as those are maturing and layering into that what we've done to make sure that we're delivering from a claim's standpoint, it's all adding up to that we end up in a better position. That's our market-to-market as of right now for prior years. We'll see how the balance of this year unfolds, but we think we're in a solid position right now.

We take the next question from the line of Mark Hughes from Truist Securities.

Patrick, you had mentioned that you probably see another year of mid-teens growth in written premium next year. Any early thoughts on EBITDA growth when we think about expenses that may be either ramping up or being leveraged? How should we think about EBITDA in 2027?

No, no early thoughts on that. We're going to stick to sort of the focus on the prompt year in terms of guidance. Hopefully, what came through in those comments, this is a business that continues to grow at that sort of very credible mid-teens type rate, so we feel good about that. And it's also a business that we have demonstrated that we've been able to expand margins over time. And then it's also a business that we're choosing to invest in to make sure that we deliver that growth, not just for the next year, the next 2 years, but for the long haul. And so that's the balance that we're constantly striking.

And then, McKeel, you talked about the higher guaranteed value that, that is a benefit over time. Is there a specific number that you would throw at that? Is that kind of a low single-digit tailwind? Or how should we think about how much that helps year-to-year?

Yes. Well, thank you. What's interesting when we go back -- what's interesting to compare it against is that when I think of the few times in my career where the market has taken some sort of dip. So for example, all the way back to, believe it or not, the dot-com crisis, the great financial crisis, we know COVID was -- had the exact opposite effect is that I was sort of looking at, okay, which cars kind of held steady and which cars kind of went up.

And we certainly have seen for the last 15 or so years where sports cars, sports racing cars, Ferraris, Porsches, that sort of thing, of earlier generations were the ones that showed the greatest amount of increases year-over-year, while the rest of the book kind of held steady, which is still differentiated from a standard brand-new daily driver book of business that would be depreciating over time.

But definitely, what we're seeing right now is this sort of more modern supercar, hypercar segment that we're seeing in the Broad Arrow business. Those are the cars that are most sought after. And they're lifting everything around them. So when we were seeing cars from -- so when I think modern supercars, I think cars from the '90s, even the 2000s. And these are Ferraris and similar types of cars that were that are just -- they're being purchased at a higher price point by new entrants into the market, but also by older well-heeled collectors.

And so it's that double effect where you get maybe new money deciding to come in there and pay 10%, 15%, 30% more than the car was worth or in a few cases, just multiples of that. But it's also that well-heeled collector that had an earlier generation of cars who they step up and say, well, I don't want to be left without the new hot thing. So I'm actually willing to lighten up on my other parts of my collection, so I can go buy the latest and greatest or they're just continuing to add to their collection.

So in general, it's sort of single-digit steady growth on those types of cars, but you get these just wild examples of like the 2003 Enzo that we sold for $15 million. I mean that was a $3 million to $5 million car a couple of years ago, and it's just astonishing.

Yes, Mark, we've looked at all that over the last 15 years, as McKeel described, on average, it ends up being low single digits. In those 15 years, there's only 2 years where it ticked down a little bit, and that can happen. And then some years, it's mid-single digits or even high single digits. But in the long run, it ends up being that low single-digit type number.

Very good. Well, I'll tell my own story I parked in church next to Camaro Z28 and it looked sort of like a beer, but it was still in pretty good shape. And when he pulled out it had the license plate and peak auto is intriguing and also since I had that car when it was new, I felt a little antique as you drove away. So anyway.

We don't call that a beer. We say it has patina.

It has patina. Yes. It's -- those are wisdom marks. As the 63 Corvette was, I must admit a little slow cranking when I was turning it over. And then I realized like, well, you're a couple of years older than I am, and I'm feeling a little slow cranking myself. So that's all right.

We take the next question from the line of Mike Zaremski from BMO Capital Markets.

Maybe just back to the excellent PIF growth and revenue growth question. It sounds like if you agree that underlying seasonality did take place. So the kind of the overlay was the State Farm conversions. I'm just trying to kind of help dimension the impact State Farm's having. Is that a fair way to think about it?

Yes, that's accurate.

Yes.

Okay. Great. And I can see there was a $50 million in proceeds from a loss portfolio transfer in the quarter. Any color on what happened there, any implications for capital return, et cetera?

So that's part of the overall transition evolution of our relationship with Markel. And so for the prior periods, we did a loss portfolio transfer. So they transferred to us $50 million. We've assumed all those liabilities. And keep in mind, this is the 20% or so because some of the prior years where we were taking a little bit less of the risk. But it really just represents that. So it's risk that we already had. We're just topping it up for those prior period. And so we received that cash. We put the liability on our balance sheet.

As you go through the queue, you'll see that we're assuming that there's a gain associated with that. And then that gain amortizes into the income statement over the expected settlement of those claims, which in the aggregate will take, I don't know, call it, 4 years or so, but it's pretty front-end loaded. And so that will flow through. This is not a risk transfer transaction, so it's a financing. And so it hits down on the other income and expense line item.

We take the last question from the line of Tommy McJoynt from KBW.

When we look at the mid-teens premium growth in the guide this year, is there a roughly even split between the core legacy Hagerty business, State Farm and Enthusiast Plus? Or is there one of those contributing more than the others?

Yes. We're not going to kind of break it down by the different lines that you just described. What I will say is this year, 2026 and then 2027 are going to be big years for State Farm conversion. I think between new and converted, we're already in excess of 100,000 policies. But in total, it's 500-plus thousand policies. And so we're kind of in the thick of it right now. So that is a meaningful driver this quarter and it will be this year and next year.

And then the core business continues to grow at the kind of rates that it has been for the last handful of years. So very consistent there. And then E-Plus is still very, very small. So that's not much of a driver at all right now.

Got it. And then switching gears. As we track the large national carriers start to file for rate decreases in some instances, we understand that probably doesn't impact the core Hagerty business, but does that at all impact your outlook for Enthusiast Plus, just where there's a bit more overlap with the daily drivers?

You're right for the core business, when we look at what our rate increases have been over the long haul, it's again, low single digits, right? So we're not -- and that's continued over the last couple of years. We've done some things on the liability front and address that. But our rate increases are pretty modest.

As we think about the E-Plus business, it's hard to say because that's the current environment right now. E-Plus, we're in one state in Colorado, right? And so we're rolling this out over time. And we're learning in Colorado, and we'll learn in the other states in terms of what the right approach is on pricing and what that means in terms of the liability of the product and the profitability, I should say. So it's hard to say that the current market is heavily influencing our plans there just because of where we are in the rollout plan.

Ladies and gentlemen, with that, we conclude the question-and-answer session. I now hand the conference over to McKeel Hagerty for closing comments.

Thank you, operator, and thanks to everyone on the call for your continued support. I want to close today by coming back to where we started this morning. Hagerty has never been better positioned to serve the community of auto enthusiasts who trust us to protect what they love. We have a fast-growing recurring revenue model built around specialty insurance that delivers combined ratios of 90% year after year. Our high-quality underwriting and rapidly scaling business allows us to price at a meaningful discount to traditional carriers.

What we are building at Hagerty is incredibly unique in the insurance world, making us the partner of choice because there is no one else who can do what we do for their customers, helping the retention and protecting their bundled business. We also have a fast-growing auction and marketplace business that did not exist 4 years ago and is setting world records all over the world. And we have a membership community approaching 1 million paid members that love our member-centric products and services.

Thank you, One Team Hagerty. The results we deliver are the product of your passion, excellence and hard work, and I cannot wait to see what this amazing team can accomplish over the coming years as we to double PIF count to 3 million by 2030.

We look forward to seeing some of you at Villa d'Este in May, and we hope many of you will join us at our annual investor event in Greenwich, Connecticut on May 29, where we will share an update on our progress towards delivering compounding profit growth for our shareholders. Invites will follow, but please reach out to us for more details or to our SVP. Until then, never stop driving.

Thank you. Ladies and gentlemen, the conference of Hagerty has now concluded. Thank you for your participation. You may now disconnect your lines.

Greetings, and welcome to the Hagerty Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the conference over to your host today, Jay Koval, Senior Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. And thank you for joining us to discuss Hagerty's results for the fourth 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's 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 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 and 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 8-K filing. And with that, I'll turn the call over to McKeel.

Thanks, Jay, and good morning, everyone. We appreciate you taking the time to join Hagerty's Fourth Quarter 2025 Earnings Call. As we approach the spring driving season, our team is hard at work preparing for the onslaught of new members we expect to add to the Hagerty ecosystem in 2026. Our members' cars are very special to them, and they are equally special to One Team Hagerty. This inherent love for their toys results in fundamentally better risk profiles due to the way our members care for their prized possessions, and Hagerty has the automotive expertise and guaranteed value proposition they are looking for to protect their cars. This includes innovating with new products and services that align with Hagerty's members' needs.

Our member-centric approach, built around the automotive passion, combined with our reinvestment posture, positions us to spin the flywheel faster, resulting in high rates of sustained written premium growth and even faster growth in profits, which should lead to strong returns for shareholders.

Let me dig into our excellent results for the full year 2025. Slide 3 shows how we handily exceeded our original expectations from a year ago, with revenue up 17% and net income surging 91%. Our profit growth benefited from record new business count and efficiency gains, as well as stable underwriting and better-than-anticipated loss trends, which permitted us to reduce reserves by $21 million. 2025 marked the third straight year of executing on our strategy to deliver high rates of top-line growth while more efficiently translating incremental revenue into profits and cash flow. Since going public 4 years ago, we have compounded revenue by 23% per year and increased net income by over $200 million, reflecting the strength and differentiation of the Hagerty business model, as our profit growth is driven by adding new members and not the rate cycle.

Operating cash flow is growing quickly, up 24% to $219 million. This cash flow positions us to lengthen our leadership position by reinvesting back into our value proposition for members. With excellent retention and strong Net Promoter Scores, we are operating from a position of strength as we look to grow our share of the 36 million vehicle target market from just 7% today.

Slide 4 shares some additional 2025 highlights. First, we welcomed a record 371,000 new members to Hagerty's ecosystem of products and services. Written premium gains of 14% accelerated throughout the year and were better than anticipated, thanks to share gains from our recurring revenue model. Importantly, our underwriting is not just high quality, but also low volatility. We ended the year selling new State Farm Classic Plus business in 27 states, and we are converting their U.S. book of 525,000 vehicles in 7 of those states. We also announced a new partnership with Liberty Mutual and Safeco. Marketplace and our auction businesses had an incredible year with revenue more than doubling as we expanded into Europe with auctions in Italy, Belgium, and Switzerland.

Total transaction value of vehicles sold at auction and through private transactions came in at $566 million, making Hagerty the #2 global player after just 3 short years in the market. Net income jumped 91% to $149 million as compounding premium growth, cost discipline, resource prioritization, and terrific execution by One Team Hagerty are fueling steady margin expansion. We also evolved our relationship with Markel by signing a new fronting arrangement where we retain 100% of the premium beginning January 1 of this year. For some perspective, it's an extremely rare occurrence in the insurance world to transition from earning a commission to capturing full economics, and we have been working toward this moment for over a decade, taking on more and more of the risk and premium, culminating with the recent move from 80% to 100%.

We are excited to continue partnering with Markel as we deliver seamless experiences for Hagerty members with greater operational control. Our technology and digital teams are steadily moving us toward a modern cloud-based architecture that should result in future efficiency gains and scalable growth, including the launch of Enthusiast Plus on Duck Creek to capitalize on the burgeoning demand from younger generations of car lovers.

We have continued to deepen our bench strength through several strategic hires across insurance, claims, technology, and marketplace. And finally, the estate of my late sister, Kim Hagerty, executed a secondary share offering that increased our float and trading volumes as we work toward being a more fully distributed public company. This is a long list of milestones, but at its core, 2025 was a year of investing for the future while delivering in the present.

Let me move on to Slide 5 and walk you through Hagerty's 2026 priorities, which are focused on further enhancing the member experience while becoming more efficient at delivering great products and services. First is implementing our new fronting arrangement with Markel, which creates a step function increase in potential underwriting profitability and investment income. To transition to this new 2% fronting arrangement, we are building out our internal team so we can control all aspects of our insurance risk, including administrative functions and regulatory filings. With this arrangement comes a complex set of noncash transitional costs that Patrick will discuss in more detail. But the key takeaway is that our underlying profit and cash flow increase under the new arrangement.

Our second priority is State Farm Classic+ expansion and conversion of additional states. We will also prudently expand our Enthusiast Plus product after launching in Colorado last summer. Third is to refine our distribution strategy with partners and accelerate our B2B efforts, including agent distribution enhancements that should drive additional share gains for Hagerty. Fourth is to maintain the quality of our growth through further investments in our claims expertise. This includes building out the material damage and special investigative teams to ensure that claims are handled very quickly and accurately. Fifth is to enhance our member-centric approach and refine the HDC or Hagerty Drivers Club value proposition. And finally, we will continue our multiyear tech transformation and Duck Creek implementation. Executing on these priorities in 2026 should result in another year of strong underlying growth in premiums and cash flow.

Let me now turn the call over to Patrick to share more details on our results and initial 2026 outlook.

Thank you, and good morning. Before I dig into the results, I wanted to mention that beginning this quarter, the company is presenting its consolidated financial statements in accordance with Article 7 for insurance companies, reflecting the ongoing transformation of the company's business operations. As a result, net investment income is now reported as a component of revenue with prior periods recast for comparability. Also, beginning this quarter, we present two segments: Insurance and Marketplace, which is a result of the continued revenue growth and geographic expansion of the Marketplace business.

With that, let me walk through our fourth quarter results shown on Slide 6 and 7. In the fourth quarter, total revenue increased 19% to $357 million. Written premiums grew 19% due to robust new business count helped by ramping State Farm conversions and our 89% retention. Commission and fee revenue jumped 18% to $106 million. Earned premium grew 14% to $193 million. Marketplace revenue increased 80% to $29 million. Membership and other revenue grew 8% to $19 million. Net investment income, including gains, was $11 million for the quarter compared to $10 million in the prior year period.

Turning to profitability, shown on Slides 8 and 9. We reported fourth quarter income before taxes of $48 million, up 186% year-over-year after incorporating investment income into both periods. Our loss ratio in the quarter came in at 31%, positively impacted by 11 percentage points due to the $21 million reserve reduction. This reduction was primarily due to the favorable development for the 2024 accident year as well as improvement in current accident year experience related to decreased severity and loss ratio trends in liability and physical damage claims.

Fourth quarter G&A increased 24% and full year growth was up 15%, inflated by 8 percentage points due to software-related costs for our new insurance policy management system and professional fees associated with the new Markel fronting arrangement. Salaries and benefits were up 20% in the fourth quarter and 19% for the full year due to incentive compensation accruals given our strong outperformance and additional headcount to support growth. Adjusted EBITDA came in at $57 million, up 97% year-over-year. Fourth quarter net income was $29 million, an increase of 238% from the fourth quarter of 2024.

Net income attributable to Class A common shareholders was $7 million after attribution of earnings to the noncontrolling interest and accretion on the preferred stock. And GAAP basic and diluted earnings per share came in at $0.06 for the quarter based on 100 million basic and 102 million weighted average diluted shares of Class A common stock outstanding. Adjusted earnings per share, defined as adjusted net income divided by 361 million fully diluted shares came in at $0.08 for the fourth quarter.

Let me reiterate a few of the key full year 2025 highlights that McKeel mentioned. Commission and fee revenue grew 15%. Earned premium for our risk-taking entity, Hagerty Reinsurance, increased 13% Marketplace revenue jumped 119% to $119 million. 2025 was our third full year of owning Broad Arrow and the team expanded into Europe with 3 successful auctions in 2025, plus January's auction at Retromobile Paris that launched 2026 with $21 million in sales. As McKeel mentioned, we delivered $624 million of total vehicle transactions, including $85 million of financing activity and another $40 million in online sales on Hagerty Marketplace.

With last week's announcement that Broad Arrow is now the official auction house of The Quail, a motorsport gathering during Monterrey Car Week, it is clear that our team is firing on all cylinders and is on track to becoming the market leader to help members buy and sell their special vehicles. Membership and other revenue grew 4% to $82 million.

Full year loss ratio for 2025 was 39%. With ceding commission for Hagerty Re at 47% of earned premium, our combined ratio was 87%, which includes 3 points of benefit from the $21 million reduction in reserves. Hagerty Re's return on equity for the year was 34% despite building the surplus necessary for the incremental earned premium in 2026 from the new Markel arrangement. Our high-quality underwriting was recently recognized by A.M. Best when they reaffirmed our A- rating and upgraded their outlook to positive. And we successfully renegotiated reinsurance terms for 2026 with a double-digit risk-adjusted decrease in costs.

Income before taxes jumped 49% to $139 million as we expanded full year margins another 200 basis points. and we delivered net income of $149 million, nearly double the prior year's $78 million. Full year net income includes the $21 million reserve reduction. This resulted in $0.37 of earnings per diluted share and $0.37 of adjusted earnings per share. Adjusted EBITDA grew 46% to $237 million from the prior year's $162 million, which includes investment income of $39 million in both periods.

And we delivered full year operating cash flow of $219 million as we capture more value across our ecosystem. We ended December with an unrestricted cash balance of $160 million and long-term debt of $178 million. Debt, excluding back leverage for Broad Arrow Capital's portfolio of loans collateralized by Collector Cars was only $110 million. We also doubled our lending facility for Broad Arrow Capital to $150 million to meet the borrowing needs of our global customers. And we surpassed $1 billion of investment securities in 2025, primarily high-grade corporate and government bonds.

Let me wrap up with our 2026 outlook shown on Slide 10. We anticipate that 2026 will be another year of record growth driven by new business count and the evolved fronting arrangement with Markel. We expect written premium growth of 15% to 16%, an acceleration from this past year's 14%. I want to highlight changes to our accounting related to the new Markel fronting arrangement that will start in the first quarter.

Due to the expanded underwriting and claims authority granted to us under the new arrangement, we now control the Essential book of business. Recall that Ascensia is the Markel Insurance company that issues our policies in the U.S. While our U.S. MGA and Hagerty Re will continue to operate in the same manner they have historically. Hagerty Re is now directly the customer of our MGA services, not Ascensia. Therefore, Hagerty Re will now pay the commission directly to our MGA. As a result, the consolidated financials we disclose will no longer show commission revenue or the associated ceding commission expense previously paid by Hagerty Re to Markel.

Commission revenue associated with the Markel alliance arrangement was $437 million in 2025 and ceding commission expense related to the company's reinsurance business with Markel was $344 million. In the consolidated income statement, these changes reduced reported commission revenue and ceding commission compared to prior periods. In a steady-state year like 2027, these will largely offset each other in our financials. 2026, however, is a transitional year, and we will have some noise we need to lay out in more detail to help you with comparability. I want to be clear, the driver of this noise is the strategically and economically attractive decision to assume the final 20% earned premium in our U.S. book of business with the new arrangement. This evolution gives us more control and flexibility, allows us to capture more of our high-profit, high-return underwriting business and increases our investment portfolio.

First, eliminating the commission revenue means 2026 revenue will come in below 2025 at between $1.28 billion and $1.3 billion. This is a bit counterintuitive considering our written premium, which is the key driver of insurance performance, is growing 15% to 16%. Second, for policies issued in 2025, Hagerty Re paid a ceding commission to Markel. We pay that upfront on the ceded premium with the expense being recognized over the 1-year policy life.

As of the beginning of 2026, about half of it is still on our balance sheet at approximately $190 million. We will continue to amortize that amount in 2026 with these burn-off costs inflating disclosed expenses, which will reduce reported profits before taxes by that $190 million. This is a noncash transitional expense that only impacts us in 2026 as we begin operating under the new structure. These costs will decline to 0 by year-end 2026 if they flow through the P&L from roughly $90 million in the first quarter to $10 million in the fourth quarter.

A related change to note is in 2026 and beyond, qualifying policy acquisition costs incurred by our MGA subsidiaries for policies issued under the fronting arrangement will be deferred and amortized over the policy term. This includes items such as broker fees, credit card fees and some people costs that are directly tied to generating new policies. Given the complexities around how these costs will impact GAAP net income, we will use adjusted EBITDA to help you better understand our underlying profit and cash flow growth.

Slide 11 reconciles the walk to adjusted EBITDA. We recognize there is a fair bit of potentially confusing changes in the presentation of the consolidated financial statements. Jay and I are happy to do follow-ups with anyone who would like to dive in. Wrapping up the guidance for 2026 and reflecting the transitional year, net income is anticipated to come in at minus $41 million to minus $51 million. We expect adjusted EBITDA to come in between $236 million and $247 million.

In summary, 2026 is on track to be another great year of growth at Hagerty, but accounting changes will create temporary noise in our 2026 GAAP reported results. 2027 should be a clean year as we have fully amortized the 2025 ceding commission, and our reported results will more closely align with our underlying profit and cash flow. Longer-term, we believe we are positioned to compound profit growth as we target doubling our policies in force to $3 million in 2030. Our differentiated model, brand strength and high-quality underwriting enable us to grow profits predictably year after year through sustained market share gains and with low volatility.

New business count-driven premium growth makes us unique in insurance, where most companies' profits are subject to the whims of the pricing cycle. And with an average annual rate increase of just 2% over the last 5 years, 1/3 the increase of daily driver peers, Hagerty is well positioned as a consumer-friendly brand with a compelling value proposition that should enable us to create shareholder value for many years to come.

With that, let's now open the call for your questions.

[Operator Instructions] The first question comes from Michael Phillips with Oppenheimer.

First question on -- Patrick, on the guidance, and I know there's a lot of moving parts. But if we take the net loss number, maybe just take the midpoint of that and add $190 million or maybe the tax effect of the $190 million, are we still below the 2025 $149 million net income? And I know that's way too simplistic given all the moving parts, but is that a basic way to start thinking about things?

I think with all the complexity, what we're asking people to really focus on is this adjusted EBITDA guidance that we've provided. And so, if you look at it that way, which is in the press release, what we've done there is it's the same definition we've always had for adjusted EBITDA. The only change that we've included is this last row Markel fronting arrangement transition costs, we're adding back the $190 million. And if you look at it that way, 2025 was a really good year. And it included at the end of the year, when we took a look at the reserves, we had a release of just north of $20 million.

If you kind of strip that out and then look at EBITDA in 2025 and then the guidance for 2026, I think we're showing something up like kind of 10 -- a little north of 10%. So that -- I think that's the cleanest way to think about it.

And maybe one quick one on.

The other one, just to clarify is in 2025, we also had the VA release below the line for valuation allowance for tax purposes and the TRA benefit as well. And so those are noise in the net income number in 2025 that we're not assuming there will be anything like that in 2026. And so those were benefits to net income. in '25 that don't recur in 2026.

And maybe one quick one on the ceding commissions to Markel 190. Is there any potential for that to move up from a profit-related commissions that might come in later? Or is that kind of a solid number?

That's a solid number.

On the loss ratio this quarter, you mentioned the reserve release, obviously. And then I don't think there was any last year. Last year fourth quarter did have some cats a little bit. I guess if you back all that out, your current quarter loss ratio probably moves to around 42%, I have last year, 40%. So, you mentioned an improvement in the current accident year. I'm confused on that. And can you help me with that one? And it looks like to me, the current accident year, again goes from about 40.4% to 42% this year once we back out the cat and the PYD.

Once you back out the cat and what else?

The 10.6 points of PYD this quarter.

Okay.

There's no cat, right? So 31.4% goes to 42%, I think, right?

Yes. I think the way that we're thinking about it, we did have reserve release, we did have a very good year in 2025 from a loss perspective. As we look to 2026, we're assuming that our losses are in line with what we've guided to previously, right in the low 40s. We are doing a lot of things in terms of how we manage claims or we've built up our what we call material damage unit. And so things are trending in a positive direction. But from a guidance standpoint, think of it as being right around that consistent number of 41% that we've talked about, and that's the right way to model it. Hopefully, that's helpful.

The next question comes from Charlie Lederer with BMO Capital.

So maybe just on the written premium guidance, obviously, 15% to 16% really strong. Can you walk us through the assumptions, I guess, of how much of the acceleration is from State Farm, Liberty Mutual and the legacy Hagerty operations? And then just one follow-up on that. I think Mckeel said that there are 7 State Farm conversions ongoing. How many have been completed so far? And how many remain?

Yes. On the written premium, we're not going to break it down by the different categories. The way to think about it is the traditional business, sort of the core traditional business continues to grow at similar rates to what we've experienced. State Farm is definitely accelerating that in 2026 and 2027, we will pretty much wrap it up a big year. '25, we're in 27 states by the end of the year, 7 of which are doing the conversions that you talked about. We're rolling out more conversions this year, so it really ramps up. So that is also a contributor. The Liberty Mutual, we announced that. We're getting underway. That has a relatively modest impact in 2026 and then kind of ramp up from there.

And just looking at Slide 19, so if I compare the post-1980 TAM to what you showed last quarter, it did go up a little bit. I guess, can you walk us through the assumption changes? Is that a change in data? Or does it reflect an increased, I guess, the appetite for Hagerty?

Yes. So as you'd expect, this is a living, breathing analysis. And so we're regularly looking at what we think the TAM is. And this is just the passage of time, right? Over time, the older cars don't go away typically, right? Once they become part of our universe, they're treasured assets and people keep them. And so you see very few of those coming out of the TAM. But what happens is additional vehicles join the TAM, right? There are manufacturers still making cool cars that people view as enthusiast vehicles, and those are exactly the kind of cars that we want to underwrite. So it tends to grow over time. So we just did an update.

And maybe just one last one. So you gave the numbers on the commission revenue from Markel in '25 and the ceding commission expense. So, as we think about the commission and fee revenue in '26, you guys still expect to get some, right, from your ex-U.S. operations and then the State Farm business, right, that should all still flow through commission and fee revenue. Is that the right way to think about that?

Exactly, exactly. The commissions that our risk-taking entity pays to our MGA, that still happens underneath. But upon consolidation, the commission revenue goes away, and the ceding commission goes away. So that's what we're communicating. The other parts of our business where we continue to provide those MGA services, as you described, internationally. So the U.K. business and State Farm, those will still show up as revenue on the P&L.

The next question comes from Gregory Peters with Raymond James.

So I think for the first question, I wanted to -- I was looking at your presentation and on Slide 5, you talked about the 2026 priorities. And I was intrigued that one of the items that wasn't really highlighted, which was a success in '25, was the marketplace revenue. And so, I was just -- when I triangulate the results you did in '25 with marketplace revenue and the guidance you've laid out for '26, just curious about your thinking about that area because that seems to be a strong area of growth for your company.

Yes. Well, thank you, and we were really proud of the delivery of both growth and profitability in 2025 from all of the marketplace activities, live auctions, and really starting to see a little bit of effort from the digital marketplace sales plus capital plus everything else. When we're talking about our priorities, definitely a very insurance-focused year. It kind of goes with our technology spend and how we're focusing on the core business growth, absorbing the State Farm business, et cetera, turning on new partnerships like Liberty Mutual, Safeco that we'll see the benefit of in the years to come. But the marketplace business is continuing to be an important part of our picture.

And our first really large sale actually happens next week, Amelia Island, which the press release went out with a very large catalog of cars, which could be really meaningful for us in the first part of the year. So, it's a big part of the business. By nature, in comparison to the insurance side of the house, it's a lumpier business. You just see a lot more variability. Teams are working really very hard but it's still a very important part of it. It's just not listed here.

Yes. I think as we think about the revenue from that, McKeel just mentioned Amelia Island, low estimates are $105 million, and that's the largest auction we've ever announced in our history doing this. So we're very excited about that. The way we think about it is the live auction business and the digital auction business will continue to grow. Some of that's geographic expansion. We did our first sale in Paris this year; so that happened in January. And each of the other sales that we've got, we're up to schedule now where we've got 8 scheduled auctions. Our goal is to grow each of those.

The private sale business, which had a phenomenal 2025, that's the more chunky sort of episodic business that McKeel was talking about. It was a truly phenomenal year, and we are expecting that business to do well again. But it's difficult from a confidence standpoint to put a high degree of confidence around the prediction there because it is just chunky and episodic. And so as you're triangulating, that may be one of the things that you need to think through phenomenal year in 2025. We'll have a good year this year, but it's hard to say that it's going to be at the same level of where we ended up in '25.

Well, your answer there got to the destination of what I was thinking about, which is trying to work through the mechanics of the flow-through to the income statement for Hagerty from both the digital and live marketplace. So that's clearly top of mind. Perhaps you can do that off further comments offline.

Yes, I'd love to do that. And that's why we went to segment disclosure, right? The business has grown to a point where it makes sense to split it out. We're sharing that information, obviously, in the documents that we've posted, and we're happy to have an offline conversation. It's an important business and continues to grow.

Great. I appreciate that. The other thing that is topical this year, in particular, is technology, artificial intelligence, and ChatGPT. I'm not sure there's a strong correlation between that and classic cars. But I'm sure there's opportunities across your organization to deploy technology to make you more efficient and more successful. Maybe you could spend a second and talk to us about what you're doing and where you're spending your money on that front to improve your company.

Thank you. It's not just a table topic or a topic du jour. It's important work for any kind of company, I think, and for us, too. I think when we think about doubling the policies in force by 2030, we have to find not just kind of core underlying efficiencies and how to run the business, but AI will be an important part of, in particular, how we personalize the experience for a much larger policyholder group and member group over time. This is where AI, we think can really shine for us. But we have a number of initiatives underneath our overall technology investments that are both either piloting AI programs or actively using them in other ways.

So, these range from fraud detection on the claims side, how we're analyzing valuations for both marketplace and the insurance valuation services that we offer. We have a number of areas in just the administrative side of this business. We have a lot of people who work in administrative functions. And I don't know about you, but I myself am using AI every single day to do my job in a clearer, more effective way, and we have a number of initiatives to make that happen. But ultimately, it is that personalization of service that we think will be the key benefit for us with AI. So, we have experiments, investments in every single part of that. And nothing to report yet in terms of concrete savings as most companies are also realizing, but we're there and we're very excited about what it can do for us.

And just one little detailed follow-up. You mentioned claim fraud. And I guess it's counterintuitive sitting back here that you would expect there to be claim fraud in classic cars. Do you think the incidence level for claim fraud in your area of the market, it's got to be lower than the broader market, generally speaking, but maybe you have some perspective on that?

Yes. It's just like claims frequency itself, it's lower than standard auto, but you're not immune to it. Our claims business is -- we're downstream from societal factors and all sorts of things. So, you insure more and more cars, you're going to have more and more claims and you'll have more and more instances of potential fraud. For us, it's just that we've always had an SIU or special investigative unit in this business as long as we've handled claims. We just have more sophisticated tools to make sure that we're watching the all the Ps and Qs, if you will, when claims are coming in to make sure that we actually owe the claim.

And we're really -- between that and as Patrick mentioned in an earlier answer, we stood up these new material damage units or what we used to call physical damage units that are just being very diligent, bringing in industry best practices in how you manage physical damage claims to make sure we pay what we owe, make sure the customer is happy, make sure we're working with our shops effectively, but you're not overpaying. And that's where -- we're not immune from big industry trends. But definitely, as you mentioned, it's lower in our particular part of the automotive world.

The next question comes from Elyse Greenspan with Wells Fargo.

I guess my first question, going back to some parts of the prior conversation, I was just hoping you guys have spoken to long-term targets right around PIF growth. Just trying to get a sense of just the outlook specifically for 2026. And then within '26, just how much of a ramp are you expecting from the 525,000 State Farm policies?

Sure. So, as we mentioned, on State Farm, we're now rolled out in 27 states as of the end of the year. So, 7 of those were doing the conversions of the 525,000, a subset of that within those states. The other 20, we're selling new business. And so when a State Farm agent has a new car with a customer or a new customer, that's what we do initially, and that's our rollout cadence. We always start with the new, and that's to make sure that everything is working and the product -- the agents understand the product, our systems, all that stuff.

And then what we've done is we've shortened the time that we're just doing the new. So, we're accelerating when we switch over to new conversion. And that really takes hold as we get into this year, 2026. So, the way to think about it is by the time we get to the end of this year, we'll move from those 27 states to close to full penetration. There'll be a few that stretch over into 2027. But most of the states will be up and running by the end of this year. And we'll be making further progress in terms of the conversions as well.

It won't be until 2027 that will be pretty close to full. All states are in conversion mode. We're picking up those policies. So, there's still a couple more year ramp on it. But this is the big year. This is the year that you're going to see real acceleration in getting to that $525 million. And it will happen kind of ratably over the course of the year.

And then there's a lot, I guess, within the guidance. But in terms of like just the loss ratio and how we think about that trending during 2026. Any kind of color that you can provide there relative to '25, I guess, if we exclude the PYD, how are you thinking about the overall loss ratio trending between the 2 years?

I think I addressed that in the previous question. The way we think about it is right at that low 40% number, call it, 41%, something like that. That's what we think about from a planning standpoint. As I think you know, in the first and second quarter, we're probably going to book to that just because there's not that much information yet on the prompt year. And as we get into the third and fourth quarter, we'll have more information and there potentially could be some caps, and that's when we think about some adjustments. But that's our framework for it.

The next question comes from Matt Carletti with Citizens.

This is David on for Matt. In terms of partnerships, I know there are ongoing that continue to evolve, but is there any sort of pipeline for new potential partners?

Thank you very much. So, these partnerships have been a big part of our growth story for almost 20 years. And just like all the conversation we have about State Farm, it's not just getting the conversation going and it's the contracting phase and the technology implementation phase, but then you get up and running, and it can take a couple of years to get them going. So, we're super excited about the partnerships we have. As we mentioned, we announced the new partnership with Liberty Mutual and Safeco, which was, for us, a really cool, I guess, kind of double win because it's not only a new partner, but it's also a partner that was actively competing with us in the collector vehicle insurance space, and they decided to partner with us instead of continuing to compete independently.

So, we're excited about that one. That will take a couple of years to start realizing what it can be. We have active discussions with others, both kind of bigger chunky partners that we don't currently work with as well as smaller and kind of mid-tier insurance partners. We're also looking at a couple of partnerships that are very different than our typical insurance partnership, but that we think can be, as I said, kind of chunky new additional opportunities to fill the pipeline. So more to come, and we'll announce them when we can.

The next question comes from Maxwell Fritscher with Truist Securities.

I'm calling in for Mark Hughes. How are you thinking about free cash generation in 2026? I guess, asked another way, how do you expect the year-end cash balance to compare to the $160 million you reported?

Yes. For 2026, you should think about the cash conversion similar to what you saw in 2025. We are -- our CapEx is it's kind of consistent with the numbers that we've shown over the last couple of years. Most of our CapEx is related to IT. There's not much else that we do that requires CapEx. And so, we're investing in our new platform, but we've been doing that for the last couple of years. So that will be consistent and the normal investments we make in our -- in the overall IT world. So, from a cash flow standpoint, that ends up being pretty close to D&A as well. And then the rest of it really is what we've communicated in terms of the growth in the earnings power of the business, you can start with our guidance around adjusted EBITDA. But assume similar cash flow conversion in '26 versus what we had this year.

And then following up on the AI question, and you might have answered this, so I'm sorry if I missed it, but are you seeing any opportunity on the distribution front from AI?

Thanks for the question. Clearly, in the marketing function of the business, AI will, and we're actually already piloting some ways that we're thinking about how you can distribute better or better work through lead generation and kind of demand gen. But that's the main focus right now. I know that there are some sort of early announcements out in the industry about almost more completely AI-driven different channels of distribution. Those are not right at the moment on our radar screen, but the group is very actively looking in these areas.

And we think because our -- the underlying premise of our business is to find people who love cars. It's an emotional connection between human beings and these cool vehicles. AI is undoubtedly going to provide opportunities for us to sift through that in more granular ways, especially as we were talking about in the earlier TAM answer as new and newer vehicles come online and become sort of in our target zone, we still have to find not just the vehicle, but we have to find the right people, and AI will be very helpful in that.

And our last question comes from Tommy McJoynt with KBW.

I had a question about what is your outlook for written premium per policy. I understand there's a lot of moving pieces with State Farm coming on board, the Enthusiast Plus program rolling out, perhaps what you guys are filing with rates. So, what do you see as the outlook for written premium per policy in '26?

Yes. I think what's going to happen in '26 and the things that would pull it up are -- there are some rate things that are flowing through. There's some mix things that flow through and valuation. And then some is just mix, where we're getting the business from. But the State Farm business, which is really ramping up, does have lower premiums, just the nature of those vehicles, the age of those vehicles and the insured value. And so that will be pulling down on that number. The way we think about it is the core business continues to grow at the rates that we had talked about. We've been very disciplined in terms of rate increases. We talked about on the call, 2% over the last handful of years versus 6% for the broader industry. And so, we'll continue to have our kind of rate increases where appropriate. So that will be a tailwind for us. The State Farm, just -- it's big, it's meaningful. And so that will have a sort of a counterbalance to that as we get into 2026.

And then second, you mentioned the acquisition costs that are incurred by the MGA starting to get deferred and amortized over the policy term. In '26, will there be some cadence to the quarterly impact of that? I'm thinking perhaps in the first quarter with everything being deferred and not much getting amortized yet, you might get a stronger earnings profile in the first quarter, but then more of a normal impact in the back half of the year. Am I thinking about that right?

Yes. The way to think about it is it kind of starts from zero, right, because under the new regime, as we sell policies in 2026, whatever we're putting on the balance sheet is in terms of DAC, that gets booked and it gets amortized over the one-year life of that policy. So you end up from a P&L standpoint, pushing those expenses forward. And so in 2026, you're going to have that ramp up, right? It's not until we get to the end of 2026 that we've renewed all those policies. We've taken on the new ones. So you've got sort of that full balance on the balance sheet, and it gets normalized in 2027. But yes, what you're describing is what's going to happen in '26.

At this time, I would like to turn the call back to McKeel Hagerty for closing comments.

Thank you, operator, and thank you, everyone, who called in and asked thoughtful questions. And thank you to One Team Hagerty for delivering fantastic near-term results while positioning Hagerty for durable compounding growth and margin expansion. Car culture is alive and well with new generations of car lovers driving strong demand for fun cars, especially more modern enthusiast vehicles. In other words, the best is yet to come as we make it easier and more enjoyable to be a driving enthusiast by becoming part of the Hagerty community.

We recently launched an ad campaign with our new marketing partner, Barrett Jackson, that I wanted to share with you as it encapsulates the essence of Hagerty. It goes something like this. At Hagerty, we don't see cars as thing, they are unique, alive and loved. We buy them, we wrench on them and sometimes we curse them. But most of all, we drive them. Muscle cars, supercars, rad cars, one-f-one spec cars, coops, convertibles, compacts, liftbacks, fastbacks and hatchbacks. We love them all because cars are for driving and Hagerty is for drivers.

We hope to see you next week at Amelia Island, Florida outside of Jacksonville for our Concours d'Elegance on Saturday, March 7, as well as 2 days of Broad Arrow Auctions on Friday and Saturday and Cars and Community on the main show field on Sunday. Our team is hard at work to make it the best Amelia Concour yet. And with that, never stop driving.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Greetings, and welcome to the Hagerty Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jay Koval, Head of Investor Relations. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Hagerty's results for the third 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's 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 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 and 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 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's Third Quarter 2025 Earnings Call.

While many of us are putting away our special cars in the fall after another fun driving season, we at Hagerty are breathing a sigh of relief that 2025 was a relatively benign year for catastrophes after a challenging start with the California wildfires.

As our reinsurers have pointed out to us, even in the worst of hurricane years, our book of collectible vehicles tends to significantly outperform what their models would have predicted. Our members love their cars and they will find ways to drive them to safety.

Building trusted relationships with our members through the years of delivering on our brand promise enables us to develop new products such as the recently launched Safe Storage Concierge, which provides guaranteed shelters for cars in hurricane-prone areas such as Tampa and Miami.

While we hope our members never need to use the program, if they do, we will be there for them, regardless of the type of vehicle that they love, leading to lower claim frequency and consistently strong and stable underwriting results year after year as we add new members.

Let me dig into the highlights from the first 9 months of 2025 shown on Slide 3. Total revenue increased 18%. New business count fueled by a 13% increase in written premium and 14% growth in commission revenue, an acceleration from the first half results as State Farm policy conversions ramp up month-over-month. October came in even stronger than September, delivering the highest Policy in Force or PIF growth in our history.

Earned premium in our risk-taking entity, Hagerty Reinsurance, increased 12% and membership, marketplace and other revenue jumped 54% due to the launch of our European auction business, plus growth in inventory sales and private transactions.

Moving to profitability. During the first 9 months of the year, our operating margins jumped another 350 basis points, resulting in net income gains of 73% to $121 million and adjusted EBITDA growth of 46% to $153 million.

High rates of compounding growth with a relentless focus on operating efficiencies are resulting in sustained margin expansion as we work towards doubling our policies in force to 3 million by 2030.

Hagerty has become one of the largest MGAs in the specialty vehicle insurance business, thanks to omnichannel distribution, best-in-class service, valuation and underwriting capabilities, not to mention a brand unlike any other with a Net Promoter Score of 82 that towers over the industry's average score of 37.

Our direct business is adding new members efficiently, thanks in part to our unique ability to drive a disproportionate number of people in Hagerty's funnel on the strength of the Hagerty brand and low-cost referrals. And our distribution team has been working diligently to cultivate relationships with the leading carriers in the U.S. as the majority of the specialty cars we seek to insure sit within their bundled policies.

With that, we announced yesterday that we had signed a new partnership with Liberty Mutual and Safeco. Liberty Mutual is the seventh largest auto insurer in the U.S. and has built a sizable collector car program over the past decade under the Safeco brand.

Hagerty will help Liberty Mutual engage and retain their customers through a combination of our excellent customer service and expertise at valuing, underwriting and handling claims on collectible vehicles. We are very excited to work closely with the Liberty Mutual team to help ramp up this partnership into 2027.

Moving on to Slide 4. A reminder of our 2025 strategic priorities built around 3 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.

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

Third is to expand our marketplace business internationally, leveraging the trust we have built in the United States. This includes 2 recent European auctions in Belgium and Switzerland, plus this past weekend's auction at the Wynn, Concours and Las Vegas, bringing our global vehicle value sold at Broad Arrow Live Auctions to $240 million through November 1.

We are methodically building Hagerty and Broad Arrow into the most trusted brands for people to buy and sell special vehicles and live auctions work synergistically with our private sales transactions and financing business.

And finally, we are investing in the technology re-platforming that will enable additional efficiency gains shown on Slide 5.

Slide 6 shares details on the new fronting arrangement with our strategic partner, Markel, that we discussed in late July. As a reminder, we have been moving towards assuming more of the premium and risk associated with our high-quality underwriting and this 2% fronting arrangement would allow Hagerty to control 100% of the premium and risk commencing in 2026, a 25% increase compared to the current 80% quota share.

We are excited to continue partnering with Markel as we build out our own capabilities to deliver a seamless experience for members with greater operational control, not to mention drive increased profitability from the additional underwriting and investment income.

Let me now turn the call over to Patrick to share more details on our results and increased 2025 outlook. Patrick?

Thank you, and good morning, everyone. Let me dig into the third quarter results shown on Slide 7 and 8. We delivered 18% growth in total revenue to $380 million.

New business count gains, combined with industry-leading retention of 89% drove a 16% increase in written premium. As expected, written premium growth accelerated in the third quarter, resulting in 2-year rate growth exceeding 30% as we ramp conversion of State Farm's 525,000 Classic policies to their new Classic Plus program, powered by Hagerty.

Commission and fee revenue grew by 18% to $137 million. Earned premium increased 13% to $187 million. Our loss ratio came in at 42% for the quarter in the first 9 months of the year, resulting in year-to-date combined ratio of 89%.

In Membership, Marketplace and Other Revenue jumped 34% to $56 million. As McKeel mentioned, we have quickly established ourselves as a leading auction house with unparalleled automotive expertise for our customers.

We also continue to build our online marketplace, offering 240 Barn Find vehicles from the first tranche of The Generous Collection in October with more collections to follow over the coming months.

Turning now to profitability, shown on Slide 9 and 10. We reported an operating profit of $34 million in the third quarter, an increase of 240% as operating margins jumped 590 basis points to 9%.

G&A increased 17% due to higher software licensing costs from our technology transformation as well as the professional fees associated with the August secondary offering of shares from Kim Hagerty's estate and the Markel fronting arrangement.

Salaries and benefits grew 44% due to higher year-over-year incentive compensation accruals, thanks to our strong financial outperformance this year.

As a reminder, last year's incentive compensation was negatively impacted in the third quarter due to elevated cat losses from Hurricane Helene.

Excluding professional fees and incentive comp, we are holding core growth in G&A and salaries and benefits to the mid- to high single digit range. This increase is due to merit and selective headcount additions to support future growth.

We had a fair bit of activity on the tax front this quarter. Given the sustained improvement in our profitability, we concluded that the company will generate sufficient future taxable income to realize a portion of our deferred tax assets. As a result, $38 million of the valuation allowance was released and recorded as an income tax benefit.

In connection with the release, we remeasured our tax receivable agreement liability resulting in an expense of $29 million, which was the driver of negative $21 million in interest and other income. Third quarter interest income from our investment portfolio was $11 million and interest expense was $2 million.

In total, we delivered third quarter net income of $46 million compared to $19 million a year earlier, an increase of 143%. Net income to Class A common shareholders was $19 million after attribution of earnings to the noncontrolling interest and accretion of the preferred stock.

GAAP basic earnings per share was $0.18 and diluted came in at $0.11. Adjusted EBITDA increased 106% to $50 million in the quarter. And we ended the quarter with $160 million in unrestricted cash and $178 million of total debt, which includes $75 million in back leverage for our portfolio of collateralized loans.

Let me wrap up with our updated outlook for 2025, where we again increased full year expectations for revenue and profits shown on Slide 11. We now expect 14% to 15% revenue growth and are increasing our assumptions for margin expansion. This should result in net income of $124 million to $129 million, equating to growth of 58% to 65% and adjusted EBITDA of $170 million to $176 million, an increase of 37% to 41% compared to 2024.

The net income range also includes a $6 million year-to-date net impact from the valuation allowance benefit of $38 million, partially offset by the increase in TRA liability of $32 million.

In summary, we are delivering on our 2025 strategic priorities and are well positioned to accelerate profit growth and cash flow generation as we move into 2026 and 2027, fueled by high rates of organic growth in new members.

Our brand strength and omnichannel distribution enable us to grow profitably during both good and bad times, making us truly differentiated from most P&C carriers, where profitability is dependent on the rate cycle.

When you combine multiple growth levers with ongoing operating efficiencies, we believe we are pulling together all the ingredients necessary to create shareholder value over the coming years.

With that, let us now open the call to your questions.

[Operator Instructions] Our first question comes from the line of Hristian Getsov with Wells Fargo.

My first question is on the Liberty Mutual and Safeco partnership. Can you maybe provide some quantification of how much of a PIF tailwind or premium tailwind that could be for your book kind of on a go-forward basis?

And in terms of like the financials, could we see something like a book roll later on in the partnership? Or I guess, how are you thinking about that long term?

Sure. Liberty Mutual and Safeco, we're excited. It's an important new partnership and it's very consistent with our overall partnership strategy, right?

They chose to work with us, because they know we're going to deliver the right product for those customers. So it's an important and very consistent step in our strategy.

Think of it as tens of thousands of customers. And so it's a good-sized opportunity. It's not sort of one of the State Farm type sized opportunity, obviously.

And then we continue to work through the details with State Farm and -- I'm sorry, with Safeco and how we'll be working with them and with Liberty Mutual. It's a combination of -- we are doing a book roll. We're taking this business on. And so we'll be sharing some economics with them.

And we're not going to give a lot of details on this because it's partner-specific. But think of it as another important step in the process as we build out the omnichannel distribution.

Got it. And then for the Enthusiast Plus rollout, any quantification on kind of like the PIF growth that's happening there? I know you're live only in a few states and it's still early on.

And then I guess, sticking with that, like how should we think about like your loss ratios on a go-forward basis, given that should be a younger, newer car cohort? And how would that kind of impact your loss ratios as that kind of like becomes a bigger portion of your mix?

Well, what we've talked about before, this is McKeel, by the way, and again, welcome to the call. As we've talked about with Enthusiast Plus, it's early days.

This is built on the knowledge that we've been gaining through years of what we referred to before as our Flex Program. So we're coming to it with a lot of knowledge, but we are opening up the underwriting aperture to be able to take on more types of risk.

We are live in one state. We will start rolling out new states. And as far as loss results, it's too early to be speaking specifically about it. But we're excited about what we're seeing and so far, so good.

Our next question comes from the line of Charlie Lederer with BMO Capital Markets.

Just on the strong growth in written premium, the acceleration in the quarter, I guess when we back out the PIF growth, it looks like the pricing growth accelerated. Can you kind of parse that out for us? Is that State Farm-driven? Or what's causing the kind of the premium per policy or the pricing to accelerate?

Yes. So on that one, I guess we would encourage you to think about that -- think about that on a trailing 12-month basis. Our business is very seasonal. And so if you're taking kind of -- I think if you look on a quarterly basis, you've got in your -- I think in your numerator, you've got something that's a seasonal quarter number.

And then your denominator, you've got something that's a much more smooth total policies in force number. So I encourage you to think about that on a trailing 12-month basis. If you do, you'll see it's much smoother than what sort of the quarterly analysis would say.

What this quarter, I think trend-wise, what we're going to see over the next couple of years is that kind of metric should actually decelerate, just because of what's happening with State Farm, right?

So State Farm is coming in with a lot of policies that are typically single car and they're typically a bit lower than what our core book has been traditionally. And so we may see that that kind of written premium per PIF will start to trend down a little bit, just because of that.

After we get through this massive intake of State Farm, the 525,000 cars, then you'll see that return to more historical levels.

It's really tough to do year-over-year quarterly comparisons. For example, last year, we were just getting going with State Farm. And so that created a little noise in the third quarter of 2024. This year, it's ramping up. And as it's ramped up, there's a pretty meaningful change in what those -- what the premium per policy is.

And so it's really hard to do this sort of at the aggregate level. The general trends you should focus on is in our core traditional book. We get typically 2%, 3% price increases over the long haul, much, much lower than what you see in daily driver. And we think that's a competitive advantage. We're able to win business because of that.

So we do get price increases, but typically that low single digits. I talked about State Farm, the dynamics there. And then over time, Enthusiast Plus, that will come with higher premiums per policy. This is -- will ramp up over the next few years, but that will change the dynamic as well.

So hopefully, that's helpful. As always, there's mix, there's seasonality. There's a lot of things that go into a metric like that.

That is helpful. Maybe you can help us triangulate, I guess, the upside to your guide in the quarter on revenue and EBITDA. I guess, at a high level, how much was from underwriting versus marketplace?

And I guess as we think about the strength in marketplace from some of the new business you talked about, how should we think about that trending from here, since there's some seasonality in that business, too, I think?

Yes. So the marketplace business, particularly live auctions and private sales, we are having a good year. It's a young business, a growing business growing quickly. And this year, it exceeded our expectations. And so that is reflected in the increase in guidance.

When you think about that business heading into next year, we should continue to see growth. We're pretty close to a full calendar. And so we've got the 4 auctions domestically and 4 in Europe. We may add 1 or 2 next year. And there's always the chance that there's a single owner sale that pops up.

But the event growth will -- we're not going to add 3 new auctions next year. And so what we're going to be looking for there is now we've got a full calendar and the ability to continue to drive more volume through each of those auctions.

And so I'd assume the growth rate in live auctions will decelerate next year, still grow, but it will decelerate just because we're not adding to the calendar.

Private sales this year was a big year. And so we've got to take a look at that. And some of that's episodic, some of that we think is sustainable and can grow. But this year was very, very strong in that regard. And that does get reflected in the increased earnings guidance. Is that helpful?

Yes. Yes. And if I could just sneak in one more. On Slide 16 of the earnings deck you guys put out, I think the chart on the right is a new slide or a new exhibit, I guess, the $35 million collectible car target market. Can you kind of talk us through that slide? And yes, I'll leave it there.

Sure. We can talk it through. It's not a new one. This is one that we've had out there for quite some time. I think the key intuitions from this, we have strong market positions in older cohorts.

And so if you go back to pre-war cars, 1950s cars, 1960s, we've got good penetration in those cohorts, but still room to grow. And so we do see growth in those cohorts.

And kind of with each decade, our penetration tends to be lower, right? So it's strongest in sort of the pre-war in the 1950s, still strong, but a little bit less as you get into the '60s, et cetera.

We know that there's those 11.1 million cars out there. We've got those in our database. We know where they are. And so currently, we were about 14% penetrated and there are opportunities to grow that.

Post 1980 and this is just when VIN numbers became industry-wide, and so it's just that's the demarcation point. Post 1980, you can see our penetration is much lower at 3.1%.

We've done a ton of work on those post-1980 cars to make sure that we really understand what in that broader 35 million do we think is core addressable. And so that's that Hagerty target market.

And so we think there's about 24 million vehicles that could fit for our program. And because we're so lightly penetrated there, that's where a lot of our efforts go. And that's a big driver behind the Enthusiast Plus product.

We needed to be able to price for more modern vehicles that may get used more frequently and that's why we designed that new program and launched that initially in Colorado with more to come.

Every decade, you end up with a certain cohort of cars that end up being collectible. That has not changed. And so we want to make sure that we've got a product in place and marketing in place that we can continue to grow with the market. Is that helpful?

Our next question comes from the line of Michael Phillips with Oppenheimer.

Patrick, I guess, first, I want to make sure I heard you correctly on your comments on some of the expense items, the salaries, benefits and G&A. I think you said for the 2 combined mid-single digit growth. Was that right? And if so, what time period were you talking about?

That's what it should be this year, for 2025 versus 2024.

And that was the 2 combined, correct?

Correct.

Okay. I guess more high level, what's -- is there any impact on the growth of your Driver Club membership in the near term maybe from adding on State Farm and then maybe also because of -- would that also be impact any growth potential, I'm thinking negative growth potential kind of headwinds to growth there because of State Farm and maybe also because of Safeco?

Well, so great question. And the way the Hagerty Drivers Club is typically sold is it's an add-on to the policy purchasing process. So somebody comes in, they get a quote and that's the same, whether it's a direct consumer or through an agent or through one of our big partners, including State Farm.

Then the second piece of the transaction is how we sell Hagerty Drivers Club, which is a $70 package with the features that we have in it. So pretty much wherever we are filling the top of the funnel and bringing it down through quote and application, we will see a lift in Hagerty Drivers Club.

And our job is to make sure it's attaching well and attaching efficiently and that we can offer it along the way. The way we think of Hagerty Drivers Club, it's a product package, but it's part of our membership strategy, which is when you treat somebody like a member, they're more engaged. There's longer lifetime value and it's all part of the core strategy. So more insurance means more Hagerty Drivers Club.

Okay. No, perfect. I guess is the uptick of that not the same from State Farm and possibly from Safeco, as it is from your traditional business?

It's too -- it's too soon to say, obviously, with Safeco, as we mentioned in the beginning of that. That is a book roll strategy there. So this is not just we put a product on their shelf and they're selling Hagerty.

This is Safeco, who had a collector car program and they are going to exit that program and roll that business to us, but it's too soon to know exactly how we will be attaching there as part of that kind of book roll process.

With State Farm, it's obviously our biggest new thing. The process is slightly different. The attach rates have been a little bit lower than our sort of standard through the front door process, but we're endeavoring to get that up to where it matches, if that helps.

Our next question comes from the line of Mitchell Rubin with Raymond James.

This is Mitch on behalf of [ Greg ]. My first question today, I was wondering if you could help quantify the sensitivity of your net investment income to the rate cuts and if the fronting shift change is going to have any impact on your view of liquidity of asset allocation?

The first one was investment sensitivity relative to the recent Fed rate cut is what you're saying?

Yes.

I don't have it in front of me. Patrick?

Yes. Mitch, appreciate the question. We have allocated most of the investments into high-grade corporate and government bonds, duration of 2 to 3 years. So it's not sitting in money market accounts. So we think we're pretty well protected there.

And my follow-up question, you had talked a little bit about the seasonality to the marketplace. Is there any seasonality to the loss ratio and acquisition costs in the fourth quarter?

So the way we think about loss ratio, there's, of course, seasonality in the underlying business because our business is so seasonal. Typically, what -- and we talked about this in other calls, in the first and second quarter of the year, we accrue to our planned loss ratio for the year.

In the first quarter, it's a relatively quiet quarter from a seasonal perspective. The actual loss activity is going to be quite low in the first quarter.

In the second quarter, it's starting to ramp up as we get into season. And so typically you'll see we're going to book to plan basically in Qs 1 and 2.

Q3 is the first quarter that we may make an adjustment to that, which is based upon experience, we're now deep enough into the year that it may warrant an adjustment. And then obviously, in Q3, you've got some information on cat season, not complete, but most of cat season has unfolded.

And then in the fourth quarter, that's when we'll make any final adjustment. So that's our policy. So far this year, we have been booking to plan. That's why you're seeing the 42%. And then in the fourth quarter, we'll make any final true-up.

Fourth quarter underlying business is one of the more quiet quarters, right? Anything that's more north, you're going to have less driving activity. People put the cars to bed for the winter and so you just see less activity.

What was the other part of the question?

Yes. That's helpful. No, that was it.

Our next question comes from the line of Mark Hughes with Truist Securities.

You mentioned that the October PIF growth was really good. Do you feel like sharing any specific details? And what was the driver of the improvement in the month?

Well, Mark, you've been with us a while and it's nice to hear your voice again. What I will say is it's the State Farm flywheel beginning to really turn.

We've been working on this integration for a long time. We started off the year -- we came into the year with kind of 4 states active for new business and our target is to finish -- our target was to finish the year with 25. We may be able to actually get up to 27 states.

So this is what we've been planning for and the reality is really starting to hit us. So teams are excited. But normally, in this very seasonal business when things start to quiet down in October, we're really humming along. So it's an exciting time for us.

Okay. Very good. In the presentation on the page where you talked about the change with Markel, you mentioned you secure expanded underwriting and claims authority. Is that just kind of an operational pro forma change? Or is there anything material to your business with, I guess, that increased authority?

Well, some of it is technical. I mean, in reality, we've had this great close partnership with Markel for a long time. The underwriting decisions very templatized, pricing decisions really driven through the data that we were driving, all of those things through the years when it was just a quota share arrangement.

By flipping this over to where we're taking 100% of the -- both the results and the risk of the program through a fronting arrangement, there are some technical new jobs that we'll be taking on as part of it.

So some of it will be part of Patrick's organization on the finance side, a little bit of it will be part of Jeff Briglia's organization on the insurance side, but pretty minimal from a headcount and G&A standpoint.

It's just sort of the last bits of the technical aspects of running that insurance company fully. So we've been preparing for it for months and we're ready to go.

Our next question comes from the line of Pablo Singzon with JPMorgan.

My first question is on guidance. Your EBITDA range for '25 suggests something like $20 million of EBITDA in 4Q at the midpoint, which is basically flat from last year on a much higher revenue base this year, right? Is there something that would prevent EBITDA growing in 4Q, maybe some quarter-specific expenses like bonus accruals or investments or the like?

Or is it just talked out, because if you look at this year, you've basically grown EBITDA dollars every quarter by at least $10 million. So anything to call out for 4Q, I guess?

No, I don't think there's anything specific. Typically, the fourth quarter is seasonally a lighter quarter for us and has tighter margins. And so it could swing around a little bit. Right now that's our best guess with how things come together. There's nothing specific that we're sort of increasing spending on. So we'll just have to see how it unfolds.

Okay. And then, Patrick, second question, just as you sort of transition to the Markel agreement and I presume you'll provide more detail on the next call, but any foreshadowing in how you think EBITDA might trend next year versus this, right? And I'm not looking for specific numbers, but as you think about like the moving pieces, right?

So investment income will enter EBITDA, there will be some cost deferrals in there, right? You'll retain more underwriting income, but then you lose some on the ceding commission -- or you'll retain more higher underwriting income and I think there will be some impact on the ceding commission expense as well.

So if you sort of put all those items together, any sort of like big picture way to think about how EBITDA might be different versus this year?

So we actually -- there's a fair number of things that we'll need to spend time with our investors and our analysts on that are changing for next year. So the big one is we're moving from Article 5 to Article 7.

So our disclosure will be more consistent with an insurance company. And that's a result of moving to 100% of the risk and continue to grow that business.

A consequence of that is, yes, we will have the investment income move kind of above the line, right, whereas now it's below the line. That's just geography. That will be hopefully pretty easy for people to get their heads around.

Disclosure will look different, right? We no longer have --balance sheet disclosure looks different. So we'll spend time walking people through that.

And then the change in the Markel relationship also is meaningful. And we previewed this back in August in advance of when we did the equity offering and we shared with the market sort of a page that reconciles big picture how to think about that.

The key thing is on a go-forward basis, we're no longer going to have the commission income related to that activity. That still happens internally, but that gets eliminated upon consolidation.

And as you mentioned, we're also now in a world where we're going to have deferred acquisition cost. So we're sorting through all those changes. And our plan is on the fourth quarter call next year we're going to -- Jay and I will work hard to create a road map and kind of walk people through exactly what the changes are.

I think directionally, it all goes back to this is a business that our insurance business, putting aside State Farm, which is kind of the pig going through the snake, wonderful, beautiful pig.

Putting that aside, we're going to grow in the kind of low teens written premium. And now we're going to own 100% of that business instead of 80% of that business, because of the change with Markel. Layer on top of that State Farm, you've got incremental commission activity from that.

So the business is growing. We have proven that. We've been able to drive margin expansion. Those things will continue. The presentation of it is going to get complicated or different. And so we just need to walk everybody through that.

Our next question comes from the line of Tommy McJoynt with KBW.

Just staying on that topic, one piece perhaps you can kind of help us drill into a little bit just is the policy acquisition costs that will start getting deferred and amortized over the policy term. Can you give us some early indications to how impactful that can be? Because it does seem like that could be a material change that could be accretive to earnings.

Not at this time. I need to make sure that we nail it all down and we're very clear on what the outcome is and share that with everybody. It's just still work-in-progress.

Okay. No problem. And then going back to the marketplace side, that business line has seen very strong revenue growth this year. Can you help us map how much of that is falling to the bottom line?

It looks like the sales expense has been rising in tandem and I know there's some sort of cost of goods sold there. So I'm just wondering what are the incremental margins on this revenue growth in that marketplace line?

Yes, it's a good question. And we plan for that business to be slightly operating profit positive this year. And it's certainly more so, but that more so is measured in single-digit millions of dollars, because it's still a relatively small business.

So it's definitely flowing to the bottom line, but we're not at a scale yet where you're talking about many millions of dollars.

The private sale business, it's just a little bit tricky because it is so episodic. We've had a very, very good year and the team has done a phenomenal job. But when we think about what does that mean for next year, that's one of those ones that's hard to predict.

The way to think about that business, though, is essentially, we're making brokerage commissions, right? Sometimes we're actually buying things and reselling those and making some merchant economics.

But oftentimes, it's really just an agency trade or maybe it runs through our balance sheet, because we do actually take title for a moment in time, but we're not really taking risk.

And so if you think about our auction business, where you're talking about kind of 10%-ish type buyers premium, the private sale business is not at that level. It can be high single digits, but it also can be low single digits.

And so you're making those kind of fees. And then your expenses related to it, a lot of the commissions that get paid to the frontline people. And then there's some operating cost overhead associated with it.

So it's a good business. On a contribution basis, it's very profitable. But right now it's -- it contributes to the bottom line, but it's not something that's fundamentally changing the outcome. Is that helpful from a framework standpoint?

Yes, that is.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management, McKeel Hagerty for closing comments.

[Audio Gap]

support. We are highly encouraged by our results over the first 9 months and we have a long straightaway in front of us.

Given the long lead times in the insurance industry, you will always need to plan and think long term out as you launch both products such as Enthusiast Plus and you cultivate new partnerships, including State Farm and now Liberty Mutual and Safeco.

And sustaining our double digit growth trajectory year after year requires investing in our teams and technology so that we can scale up efficiently and deliver compounding profitable growth. And that is exactly what we're doing at Hagerty.

We are executing with excellence on our near-term objectives, while investing in the company to capitalize on our growth potential over the next decade.

With that, we hope you and your families have a great holiday season and to consider searching through Hagerty Marketplace to find that perfect gift for your loved ones. Our team has pulled in some amazing collections and no reserve vehicles looking for the perfect owner, so happy shopping. Until then, never stop driving.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

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's 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's 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 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 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's 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 4 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, an 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. 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 1 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 fueled an 11% increase in written premium and a 12% growth in our commission revenue. 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 6 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 3 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 the $3 million by 2030.

Let's move on to Slide 4, which details our 2025 strategic priorities built around 3 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+ program in Colorado 2 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 2 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 actions built around partnerships with the ZutConcore 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 5.

I would note that we recently launched Enthusiast+ 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, Markel, shown on Slide 6.

As you know, we have had a highly successful partnership with Markel that began in 2013, when they acquired Ascensia to underwrite Hagerty's U.S. business. In 2017, we began to assume 25% of the premium in 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 Slides 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%, prove 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 2-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.

Mission and Fee revenue grew 11% to $143 million. Earned premium increased 13% to $178 million. Our loss ratio remained steady at 42%. And membership, Marketplace and other revenue jumped 78% to $48 million. In just 3 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 cost 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 head count 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 Re 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 noncash 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 noncontrolling 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 and 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 to 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. We 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+ 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. We believe we have a long runway in front of us, given our penetration of this 35 million card 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. Thank you.

[Operator Instructions]

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

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'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.

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 3 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?

Yes. 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+, 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 1 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 costs that you'll be leveraging, I think I understand what you're saying. How about the...

The licenses for our new platform, which is a Duck Creek platform. We started spending money on those in 2025 and -- 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 launch Enthusiast+, but it ramps up from there. And similar on the marketplace, right? We hire those people. And now in the second half of the year, we'll start producing revenue against it.

Yes. 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 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 89% combined ratio. 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 Hagerty 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 we'll be able to make the investment income on that as well. And we're earning something like I think 4.4% right now on investment earnings. So those are the 2 big economic drivers.

We do have to staff up a little bit. We're taking on new scope of work. And so that's a little bit of an offset to the 2 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 1 more. When you think about the shopping behavior 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?

Yes, 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 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. We're not in 1 of those phases where there is 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.

[Operator Instructions]

Our next question comes from Greg Peters with Raymond James.

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 addressable market for your business as we think about the next couple of years?

Yes. 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, very high-end auction and Concor environment that takes -- Concours actually. That was a real estimate that we had the team to go out there and build this business for us in Europe. And 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 at a fun place like Lake Como and Villadeste.

So off to a good start. And then the idea being that with the 2 additional auctions at the Zoot Concor in Belgium, which is a very well-attended high-end Concor environment, lots of different motoring activities take place there. Long history of auctions being successful there. That was the next 1 we announced and then onto AutoZurich, which is a very strong both enthusiasts 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 build 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 frothier at that high end. And what we found already is, again, a 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.

Right. Can we go 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 other agents?

Happy to. So this is a very important partnership for us and it will be long into the future. State Farm. If you think about it, it's like job to be done, they hired us to help really serve those passion of car people that they had on their books, but 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. 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 the agents in those states. Allstate or 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 4 of those states. And now we're starting the process of rolling the existing books in those 4 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, that rollover of the existing business with them. And so far, so good. It was -- it's a 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 Farms 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 the 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 have 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 the states. But maybe there's nuances at State Farm that prevent just a straight-line rollout. Maybe you give us some...

They have a clear cadence they have a clear cadence that 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.

Yes, 25 states, and that's swung up and down 1 state or 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 to double-click on the 1 thing, -- this is not 1 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 is 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 change of the fronting arrangement with Markel, and what got you to the point where you wanted to go to 100% retention. Just curious how you're thinking about that going into those conversations.

I'll start and Patrick can -- 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 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 evolution, 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%.

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

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 a recovery in the second half?

Sure. It's Patrick. So it's a little light to what we had planned for and expected. There's a few factors going on there. One is on the new business front, it's coming in a little bit below what we had 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 it. 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. 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 then 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 4 have started conversions. We've got another 7 or so states that will start conversions in the fall time table. And so that really does ramp up in the latter part of the year. Is that helpful?

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?

Not at this time, our tax situation is quite interesting, in nature of the partnership structure that we have. And then with the new Big Beautiful Bill Act. We're still doing our analysis and 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.

Our next question comes from Mark Hughes with Truist Securities.

Patrick, on the State Farm arrangement, the marginal economics on that business, given the kind of the risk structure, I think [indiscernible] 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 share to Hagerty's. 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 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%. And in the state farm situation is 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 or 12 points less than the 42. 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 convert all that business, help them continue to grow and we'll be earning a 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?

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

I think just 1 question on pricing 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 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.

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. 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 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 is an 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, Patrick was there anything there...

Yes. The average premium in 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 McKeel 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 is going back a couple of years in most of the states. And so that has washed its way through the book. 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. And you mentioned something about increased competition. If you could clarify that question, what are you seeing or what are you looking for there?

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

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 in other pockets where it's less so. And so the -- we're not seeing something fundamentally different on that front either.

Okay. Got it. And if I -- if we divide up if we create a -- called vehicles per policy, 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?

Yes. I mean -- thank you. It's a great question. It's -- 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. One of the entire reasons we've launched this Enthusiast+ 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 sort of 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 it allows us to say yes more and the intention with that Enthusiast+ business is that it will have higher average premiums. So for us, the big initiative, and it's been a multiyear complicated initiative has been to launch Enthusiast+, and that includes buying the driversize 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. So I must say that between the tech and the launch of Enthusiast+, it's been spend 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.

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

Thank you, operator, and thanks to all of you for your continued support. Hagerty 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 3 key positions with top-tier talent that we believe will be critical to our long-term success. This includes hiring Adam Van Loon, our new Head of Omnichannel insurance distribution after a career of working at Bain, Chubb and Plymouth Rock. We also hired us McHenry to lead our insurance products after great success at GEICO, Progressive and Lemonade.

Our third addition to Hagerty is Mark Burns, who has brought on board to tightly integrate Hagerty's brand and marketing efforts across our suite of products and services for car levers. One team Hagerty has never been stronger. And with that, we look forward to seeing some of you over the next 2 weeks as we had to monitor a car week, including our 2-day broad Aero auctions, where we will present some of the best cars yet. Until then, never stop driving.