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…

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 2 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…

[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.