Greenhaven Road Analyst

[Greenhaven Road Analyst @GHRAnalyst]

@GreenhavenRoad There is a lot more detail in the deck, but here are the relevant slides:

[Greenhaven Road Analyst @GHRAnalyst]

@chen_isheng

Not Mr. Miller (analyst handle vs. fund handle), but happy to jump in here.

Is the data advantage on car values hard to replicate? It's a bit of a nuanced answer, but I would say yes for older cars and maybe less so for newer cars. Prior to the standardization of VINs, each manufacturer had its own serial numbers and free reign to assign them in whatever way made sense to them. Hagerty has patented a "decoder ring" for lack of better word that can match the vast majority of those serial numbers to the specific make/model/year of car. Without that information, you don't know if you are insuring a car worth $3k or $30k.

In terms of quality of service, it's interesting how conceptually it should be easy to replicate, yet rarely is. Why does every insurance company not just pay the claims their customers submit and service each of those customers at the highest levels? I don't know, but they don't. Why have 9 of the 10 largest auto insurance companies partnered with Hagerty for classic/collector policies if they could easily replicate it in-house? Probably because the combination of data advantages, specialized knowledge, service, etc. are more easily outsourced to a niche provider than bringing inhouse to a larger organization. Remember, classic/collector policy premiums are tiny sliver of the average insurers overall book, yet the emotional attachment to the car is multiples of that to other insured assets.

In terms of distribution/churn, I think that is a more obvious answer. Clearly a policyholder is more likely to stay with Hagerty after becoming a client. With 88-90% retention rates, that is clearly superior to any other auto insurance company out there. However, it's even better than that. The vast majority of policyholders that churn do so because they sold the only vehicle that was eligible for a policy. However, given Hagerty's increasing reach in the car show/live-auction/online marketplace space, they are best positioned to capture the new car owner as a client after the sale.

[Greenhaven Road Analyst @GHRAnalyst]

(1/x) A short thread on $HGTY’s business model and why we believe it has long-term compounding potential.

Disclaimer: The information in this thread is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence. Greenhaven Road holds a position in the security mentioned and may change that position at any time.

[Greenhaven Road Analyst @GHRAnalyst]

Sorry for the delay, didn't see the notification come through. It's a very good question, so will give some thoughts based on conversations we've had and other research.

Starting with the recent acquisitions, I don't think there has been enough time to really derive meaningful benefit to new business insurance count. Speed Digital and Broad Arrow Group are primarily related to building/growing the marketplace/auction product, though could be a meaningful source of low-CAC insurance business in the future. Given that ~80% of Hagerty's insurance churn is related to owners who have sold their sole covered car, Hagerty has the opportunity to capture the insurance client on the other end of the transaction if marketplace scales to a large enough size. We think it is possible, but this is still very much TBD. Either way, Hagerty will have a lot of data coming through it's marketplace business that could be used for more effective targeting of potential insurance clients.

Similar to the above mentioned acquisitions, I view the car show acquisitions more as a marketing asset. Prior to acquiring these shows, Hagerty was paying to sponsor/advertise at the events. It's unclear exactly how much this spend was, but I've heard as high as $400k for some shows. In essence, purchasing a show could be seen as a lumpsum purchase of 10 years of advertising, except that the shows can generate a profit (not a massive amount, but some). They also offer a prime venue for potential future auctions, creating synergies with the Broad Arrow acquisition.

So what exactly has caused the slowdown in new insurance business? I don't know for sure, but there are a few factors that I believe have contributed. First, I've heard from industry executives that Progressive (and a few other insurers) completely shut off digital marketing spend for a period in early to mid 2022. Progressive is a large Hagerty partner and lower marketing would be expected to have some impact on the downstream Hagerty additions. Second, I've also heard that a number of insurance partners were slowing or, in some cases, eliminating all together new policy writing in California during 2022 (regulators not allowing needed price increases, so logical response by insurers). Despite price increases, direct premiums written in CA appear to have grown 16.4% in 2022, which is in line with the previous 5 year average but down from ~18% in 2021, all years where price increases were likely minor. This would imply lower policies in force growth in a market that appears to be ~10.5% of Hagerty's business.

Finally, there is likely a macro overlay that should be considered. McKeel Hagerty has mentioned it in calls previously, but economic uncertainty has historically slowed new insurance business gains for a short period of time before picking back up again as uncertainty clears. I can't say whether that uncertainty is behind us or not, but I can say that Hagerty has a number of avenues through which they can continue to grow their policies in force. While we can't see the progress within all existing partners, statutory filings indicate that at least 3 national-level partners have been growing their business with Hagerty at annual rates of 12% - 25%. Despite that growth, we believe there is still 5-10x more business from those partners before Hagerty has fully penetrated the opportunity there.

[Greenhaven Road Analyst @GHRAnalyst]

Can you clarify what you mean about "looting" of the company and payments to new board members?

Did the Hagerty family take some chips off the table? Yes, though there is some nuance there regarding who the cash went to and for what reason (some was related to a family member estate). In terms of payments to new board members, are you talking about the Speed Digital acquisition and Rob Kauffman? If so, there is an easy explanation there I can go into if that's what you are referring to.

[Greenhaven Road Analyst @GHRAnalyst]

(9/9) When you put it all together, $HGTY is a great business with secular and company-specific tailwinds driving its growth. It’s certainly not crazy to imagine 2-3x returns from here over the next 5 years and is well worth the time to diligence further. I am starting a $HGTY modelers chat group – DM me if you have done the work and want to be included.

[Greenhaven Road Analyst @GHRAnalyst]

(8/x) HGTY’s “Other” segments include the industry’s go-to valuation source (Hagerty Valuation Tool), high-end car shows, upscale storage/clubhouse (Garage+Social), and a few other product offerings, all of which should naturally support their emerging marketplace/auction product. In their two-sided marketplace offering, pushing too hard on growing one side can have an inordinate (and potentially fatal) impact on the opposite side. To date, Hagerty has grown slowly and methodically, adding supply while maintaining sell through rates. The other products in this segment will likely be integrated into the marketplace over time as volumes grow, creating numerous opportunities to create value (low-cost customer acquisition for insurance business, ancillary products such as warranties, pre-purchase inspections, etc.).