Hagerty, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Hagerty, Inc. is a global specialty insurance provider focused on the enthusiast automotive and marine market, offering insurance, vehicle valuation tools, and a range of automotive lifestyle experiences.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hagerty’s core business revolves around providing insurance for classic, vintage, and enthusiast vehicles.

Hagerty’s revenue model is multifaceted, comprising earned premiums, membership and marketplace revenue, as well as commission and fee revenue, largely driven by the number and value of policies underwritten, as well as the number of active memberships and transactional volume in their marketplaces.

Revenue is primarily derived from underwriting classic car and marine insurance policies through its MGA (Managing General Agent) subsidiaries, commissions on sales through insurance distribution channels, plus a rapidly increasing marketplace revenue stream based on sales of collectible vehicles and automobilia through their digital platform and physical events.

Industry Trends: The collectible vehicle market is experiencing growth driven by affluent individuals seeking alternative investments, coupled with increasing nostalgia for vintage cars. The broader insurance sector is undergoing change as well, adapting to new regulations and technologies. A shift toward online sales platforms and digital experiences is evident across many industries, including insurance. However, these trends make the business more vulnerable to competition.

Margins: Hagerty’s operating margins are moderate, but they face challenges due to the nature of the insurance business and fluctuating expenses, especially around insurance claims. Their core operations are profitable; however, investments in new initiatives can have some short-term impact on margins.

Competitive Landscape: Hagerty faces a unique set of competitive forces, a mix of competitors including small players, who focus on niche markets, as well as established insurance companies that may start to offer insurance for collector cars, as the market is growing and profitable.

To differentiate from other insurance companies, Hagerty leverages its extensive data, specialized products for enthusiasts, a direct relationship with their customers, and a community built around automotive events.

What makes them different: Hagerty’s strength lies in its focus on the enthusiast market, where it has established a strong brand and loyal customer base. The company provides additional value by creating communities, hosting events and providing valuation data that is useful for its target market. Their digital platform and exclusive data related to vehicles provide strong barriers to entry, and are their biggest moat drivers.

Financials:

The company’s financial performance has demonstrated steady growth in revenues, mostly attributable to the growth of the insurance business and marketplace segment, but its profitability has faced some headwinds owing to increasing costs, investments in new products and initiatives. Revenue in Q3 2024 shows some volatility, with total revenue declining 17.6% vs previous year due to lower premiums, but the prior year period benefited from a high level of premiums related to new business growth. Commission and fee revenue had a considerable increase of 18.5% compared to last year, due to an increase in direct business driven by their MGA segment. The direct channel is the company’s fastest growing segment. The company’s overall focus on controlling costs and developing innovative products has started to generate positive results, and profitability has become a major priority for management. Net income for the first 9 months of 2024 rose 173.7% to 18,682 million compared to a loss of (24,340 million) from the same period last year, attributed mostly to the increased top-line, and also to reduction in claims and related expenses. The reduction in net loss is further supported by the adoption of new accounting standards related to the tax effect of stock warrants, which resulted in a positive effect of $30.2 million in Q3 2024, as well as a foreign currency gain. The company’s balance sheet also strengthened with cash and cash equivalents of $313 million. *Revenue growth: While total revenue had declined compared to previous year, the company reported a 4.4% growth in core premiums, and expects increased retention and an increase in new policies to be the primary drivers of revenue growth. The long-term goal is to be more strategic about the type of members they are trying to acquire. *EBITDA and Profitability: Operating expenses have grown, but at a slower pace, and the company has a high focus on efficiency, leading to better profitability. While adjusted EBITDA declined in Q3, the company is expecting growth in the near term due to business improvements and cost reduction measures. The company intends to reach a mid-20s operating profit by the mid-2020s. *Cash Flows: Hagerty is focused on investing in its business, as well as maintaining a balance between investing and repaying their debt. They generated a positive free cash flow for the 9 months, and are focused on managing the pace of their growth, while managing working capital well. *Debt: They have successfully lowered their debt, and have significant cash reserves to manage their business. Total debt outstanding under their credit facility has been reduced to $105 million. They are focused on de-leveraging the balance sheet.

Recent Concerns: Hagerty has experienced fluctuations in its earnings due to several factors, including higher-than-anticipated claim costs, a slowdown in new vehicle policies, and the effects of macro events like high inflation and economic slowdown. They are working to control costs and implement cost-cutting measures, as well as increase prices and improve underwriting profitability. The company has also taken steps to better analyze data and to make their models more consistent with current reality. They also expect higher returns from investments in technology.

Moat Rating: 2/5 - Narrow Moat. Justification: Hagerty benefits from some moat qualities, like a brand focused on a specific niche, large data related to vehicle valuations and historical performance, established partnership networks, and an affinity for the automotive enthusiast community that provide some barriers to entry, and allow it to command premium prices in insurance. They have been also actively buying up new innovative tech companies to improve their platform and customer experience, helping grow their moat. However, the ease of entry for competition and the lack of proprietary technology limit their moat’s width. Moreover, the increase in digital offerings, especially for insurance contracts, exposes the company to competition. The dependence on economic conditions also limits their defensibility.

Legitimate Risks:

Increased competition: New competitors may enter the market, offering similar services at lower prices and better benefits.
Technological changes: New insurance models and technology, as well as tech disruption in the insurance sector, could render existing services and offerings obsolete.
Economic downturn: Economic recessions and slowdowns could reduce consumer spending on discretionary items like classic cars, and this could affect the demand for Hagerty’s insurance and other offerings. Also, it could limit their premium increase potential.
Inflation: High levels of inflation, as well as interest rate hikes, directly affects the prices and profitability of the company.
High Claims: Increasing frequency and severity of claims can adversely affect profit margins and require price increases, potentially driving away some customers.
Operational Issues: Integration of new acquisitions, implementation of new technology, and expansion into new markets may create complications for the operations.
Regulatory Changes: Changes in local and international insurance regulations may require modifications in their strategies and offerings, and potentially require more operational costs.
Execution Risk: Successfully implementing their business plan requires strong execution and capital allocation, and failures in this department will have a negative effect.
Brand value decline: Changes in customer preferences, a decline in the brand’s popularity, or a hit to its reputation could damage their ability to attract and retain customers.
Cybersecurity risk: The company maintains sensitive information about their customers on their platforms, which is very vulnerable to cyber attacks, any such breach could have a material effect.
Debt and Interest Rate risk: With higher amounts of debt on its balance sheet, they are subject to interest rate risk. An increase in interest rates would make the business less profitable.
Acquisition risk: Hagerty has made several acquisitions over the years, integrating these businesses has led to additional expenses, write-offs, restructuring and operational changes, that may not be as efficient as predicted initially.

Business Resilience:

Strong brand loyalty: Hagerty benefits from its focus on the enthusiast market and has developed a loyal customer base.
Diverse product offerings: Hagerty’s business is quite varied, offering insurance, marketplace, events, and other products for car enthusiasts. This diversified business offers support in any unexpected events and disruptions in the various sectors.
Focus on improving operations: The company is increasingly focused on optimizing operations, reducing costs, and improving its business model, with the goal of increasing efficiency and profitability.
Long-term customer relationships: The company has been successful at maintaining long-term relationships with their clients, due to the quality and reliability of their service, as well as the community that they provide, leading to recurring business, which is beneficial for business sustainability.

Understandability: 2 / 5 Justification: While the concept of Hagerty’s business is relatively straightforward-providing insurance for classic cars and related items, its multi-faceted revenue model, the intricacies of the insurance industry, and the financial implications of its varied operations, can make it relatively complex. For example, understanding the impact of reinsurance, different types of debt and instruments, as well as complicated revenue recognitions is harder for normal investors to grasp.

Balance Sheet Health: 3 / 5 Justification: Hagerty’s balance sheet is adequate, but not perfectly healthy, as compared to companies with more mature operations. They have adequate cash and investments, as well as tangible assets, to support the business needs and the business cycle, but also have considerable debt. While their debt is not dangerous, it still limits their flexibility and financial strength, especially in times of downturn. Their equity has been volatile, especially with the recent fluctuations of stock prices. In Q3 2024 the book value of equity had dropped from roughly 1.7 billion to 1.573 billion. Their debt levels are under watch, but at the moment they are in control, having taken various steps in reducing it. However, the company’s financial state has improved considerably with improved operational and financial performance.