HGTY - Greenhaven Road Capital - Hagerty: One Day Closer To State Farm
2023-08-12 11:00:00 ET
Summary
- Hagerty, a classic car insurance company, pays out only 42 cents for every dollar of revenue, compared to the industry average of over 70 cents.
- State Farm, the largest auto insurer in the US, has invested $575 million in Hagerty and will onboard over 480,000 policies, leading to potential growth and profits.
- Hagerty's reinsurance subsidiary, HagertyRe, has the option to buy out its partner Markel's remaining stake, which could generate over $16 million in profits per year.
The following segment was excerpted from this fund letter.
Hagerty ( HGTY )
Hagerty is a company we own that’s pursuing several initiatives that will very likely yield a stronger business with the passage of time. As we have detailed in past letters, Hagerty focuses on the classic car industry. Their primary source of revenue (and profits) today is related to insurance. Classic cars represent an attractive niche in the insurance industry. People take care of their toys, and because an accident can impact resale values, they often do not claim damages to their insurance companies. The net result is that for every dollar taken in as revenue, Hagerty pays out only 42 cents to cover damages, compared to an industry average greater than 70.
The largest auto insurer in the U.S. is State Farm. They invested $500M into Hagerty at the IPO (technically de-SPAC transaction) and another $75M this past quarter. State Farm sits behind the Hagerty family and global specialty insurance provider Markel as the largest shareholders of Hagerty. This year, the Hagerty and State Farm IT systems will be sufficiently integrated and tested such that Hagerty should start onboarding 480,000+ State Farm policies. The onboarding is contractual and in both parties’ best interest.
Every day is one day closer to transitioning the State Farm relationship from a cost center (setting up the systems) to a source of growth and profits. The State Farm partnership coming online is not a question of if; it is a question of when. The partnership will be profitable… the question is, how profitable?
Reinsurance is another of Hagerty’s paths to improved earnings that will just take time. The reinsurance business is very profitable, and their subsidiary HagertyRe has the option to buy out their partner Markel’s remaining 20% stake. Right now, HagertyRe benefits from Markel’s credit rating. As it establishes its own investment grade rating, HagertyRe can exercise its option on Markel’s remaining interest for $23M, and that one-time capital outlay should generate an incremental $16M+ per year in profits. Hagerty should make that investment all day long when the time comes.
Other initiatives that will take time to be fully reflected include two rounds of layoffs that should accelerate profitability while still investing in growth (revenue grew 30% last quarter). I think operating margins in 2024 will exceed 7% and continue to expand as growth initiatives are realized. Hagerty is also making a large investment in creating an online marketplace for classic cars. This should be a wonderful asset-light business over time that has the added benefit of cross-selling insurance policies to the new car buyers. The business is nascent, but will compete with Bring-A-Trailer, which transacted ~$1.4B of vehicle value in 2022. Hagerty’s online marketplace quadrupled during the second quarter. It is being built listing by listing, feature by feature. One day at a time….
The share price of Hagerty has declined modestly during our ownership, but the business has undoubtedly gotten bigger and stronger. The founding family owns ~51% of the company, so they care. They have grown it from a small business operated by their parents out of their house into a company that employs 1,800 people and should generate ~$1B of revenue this year. Eventually the multiples should stop compressing, and we will get paid on the growth in revenues and profits, so we wait.
Every day we are one day closer to State Farm, one day closer to owning all the reinsurance business, one day closer to a robust marketplace – and all the while the core business continues to grow 10%+ organically. Eventually, the progress will be represented in the share price. Math is math.
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Greenhaven Road Capital - Hagerty: One Day Closer To State Farm