10-Q: Hagerty Inc. Reports Strong Second Quarter Growth Driven by Premium and Membership Increases

Hagerty Inc. saw significant revenue growth in the second quarter of 2024, driven by increases in earned premiums and membership revenue, alongside strategic investment portfolio diversification.

Summary

• Hagerty Inc. reported a strong second quarter with total revenue reaching $313.2 million, a 19.9% increase compared to the same period last year.
• Commission and fee revenue grew by 16.9% to $128.8 million, driven by both new and renewal policies.
• Earned premium increased by 23.6% to $157.6 million, reflecting growth in subject premiums.
• Membership, marketplace, and other revenue rose by 13.7% to $26.8 million, with growth in membership fees and marketplace activity.
• Operating income saw a substantial increase to $38.1 million, compared to $17.3 million in the prior year.
• Net income was $42.7 million, a significant increase from $15.5 million in the same quarter of 2023.
• The company diversified its investment portfolio, purchasing investment-grade fixed maturity securities and equity securities.
• Adjusted EBITDA was $53.1 million, up from $34.4 million in the prior year.
• Adjusted earnings per share was $0.12, compared to $0.05 in the prior year.

Sentiment

Score: 9

Explanation: The document presents a very positive outlook with strong financial results, significant growth, and strategic initiatives. The company's performance is well above expectations, indicating a high level of confidence.

Positives

• The company experienced strong growth in both commission and fee revenue and earned premium.
• Membership, marketplace, and other revenue also showed solid growth.
• Operating income and net income saw substantial year-over-year increases.
• The company successfully diversified its investment portfolio.
• Adjusted EBITDA and adjusted earnings per share both showed significant improvement.

Negatives

• Losses and loss adjustment expenses increased by 20.8% to $64.7 million, consistent with the higher volume of assumed premium.
• Ceding commissions, net increased by 21.7% to $73.4 million, primarily due to the increase in earned premium.
• Sales expenses increased by 14.4% to $48.0 million, driven by broker expenses and borrowing costs.

Risks

• The company is exposed to interest rate risk and credit risk related to its investments in fixed maturity securities and equity securities.
• Fluctuations in interest rates can directly affect the market valuation of fixed maturity securities.
• The company is subject to credit risk as a holder of fixed maturity securities, with potential losses due to defaults or impairments.
• The company's loss ratio was 41.1% for the three months ended June 30, 2024, and 42.0% for the three months ended June 30, 2023, indicating a need to manage claims effectively.

Future Outlook

The company believes that its sources of liquidity will be sufficient to support its anticipated short and long-term commitments, operating needs, and capital requirements. Future capital requirements will depend on factors such as reinsurance premium growth, underwriting results, and market adoption of its product offerings.

Industry Context

Hagerty operates in the niche market of classic car and enthusiast vehicle insurance, which has seen consistent growth. The company's focus on membership and marketplace offerings complements its core insurance business, aligning with broader trends in the automotive enthusiast community.

Comparison to Industry Standards

• Hagerty's growth in earned premiums and membership revenue is strong compared to the broader insurance industry, which has seen more modest growth.
• The company's adjusted EBITDA growth of 54.5% year-over-year is significantly higher than the average for insurance companies.
• Hagerty's focus on a niche market allows it to command higher premiums and achieve better retention rates than general insurance providers.
• The company's diversification into marketplace and finance activities is a unique strategy compared to traditional insurance companies, providing additional revenue streams.

Legal Proceedings

• The company is involved in various claims and legal actions that arise in the ordinary course of business.
• The company could be subject to litigation, fines and/or penalties related to a data security incident in 2021.

Related Party Transactions

• The company has a master alliance agreement with State Farm, under which State Farm's customers can access Hagerty's features and services.
• Hagerty Re has a quota share agreement with a subsidiary of Markel, and cedes 50% of the risk to a subsidiary of State Farm.
• Hagerty Re has an unsecured term loan facility with State Farm.
• The company has an alliance agreement with Markel, under which policies sold by Hagerty's U.S. MGAs are underwritten by Markel subsidiaries.

Stakeholder Impact

• Shareholders will benefit from the strong financial performance and growth.
• Employees may benefit from increased incentive compensation.
• Customers will continue to have access to Hagerty's insurance and membership offerings.
• Partners will benefit from the company's continued growth and success.

Next Steps

• The company expects to complete the CNIC acquisition during the third quarter of 2024.
• The company will continue to monitor and manage its investment portfolio in accordance with its investment policy.
• The company will continue to focus on driving efficiencies in order to achieve growth and profitability goals.

Key Dates

Keywords

insurance, reinsurance, classic cars, enthusiast vehicles, membership, marketplace, premiums, commission, EBITDA, financial results