Hagerty (HGTY) Q3 2025: Operating Margin Jumps 590bps as State Farm Conversion Accelerates

2025-11-04 | By EarningsIQ Research

Hagerty’s third quarter marked a decisive inflection in both scale and profitability, fueled by the rapid ramp of State Farm policy conversions and robust expansion in marketplace and membership revenues. The company’s omni-channel distribution strategy, new carrier partnerships, and fronting arrangement with Markel are structurally increasing operational leverage while extending Hagerty’s control over underwriting and claims. With margin expansion outpacing revenue growth and major platform transitions underway, Hagerty is positioning for sustained double-digit growth as it broadens its reach in the specialty vehicle insurance market.

Summary

• Margin Expansion Surges: Operating leverage from scale and efficiency initiatives is driving outperformance in profitability.
• Distribution Engine Accelerates: State Farm and new Liberty Mutual/Safeco partnerships are materially expanding policy count and future addressable market.
• Strategic Platform Shifts: Upcoming Markel fronting transition and technology investments will reshape financial reporting and risk profile in 2026.

Performance Analysis

Hagerty delivered a standout third quarter, with total revenue rising 18% to $380 million and operating profit up 240% as operating margin surged by 590 basis points to 9%. The company’s core insurance business, which operates as an MGA (managing general agent, an entity that underwrites and administers insurance on behalf of carriers), saw written premium growth accelerate to 16%—fueled by the ongoing conversion of State Farm’s 525,000 classic car policies to the new Classic Plus program powered by Hagerty. This influx, combined with industry-leading retention of 89%, delivered the highest policy-in-force (PIF) growth in company history during October.

Marketplace and membership revenues also contributed meaningfully, up 34% year-over-year, driven by the launch of the European auction business and increased inventory sales. Hagerty’s risk-taking entity, Hagerty Reinsurance, reported a 13% increase in earned premium, with a disciplined loss ratio of 42% and a year-to-date combined ratio of 89%, underscoring underwriting stability. Adjusted EBITDA more than doubled, and net income rose 143% year-over-year, reflecting both top-line momentum and improved cost discipline.

• Distribution Flywheel Engaged: State Farm conversions and Liberty Mutual/Safeco partnership are adding tens of thousands of new policies, expanding reach and scale.
• Marketplace Outperforms: Auction and private sale revenues exceeded expectations, though management expects growth to moderate as event calendar matures.
• Expense Management: Core G&A and salaries are being held to mid-single-digit growth, with incentive comp and professional fees as the primary drivers of higher expenses this quarter.

Hagerty’s multi-pronged growth levers and operational discipline are translating to accelerating profit growth, even as mix shifts and seasonality introduce some volatility into quarterly comparisons.

Executive Commentary

Strategic Positioning

1. Omni-Channel Distribution and Carrier Partnerships

Hagerty’s ability to partner with major carriers—most notably State Farm and, newly, Liberty Mutual/Safeco—places it at the center of the specialty vehicle insurance ecosystem. These relationships leverage Hagerty’s brand and service capabilities to access large books of bundled auto policies, driving policy count and enabling efficient customer acquisition. The Liberty Mutual/Safeco deal, while smaller than State Farm, reinforces Hagerty’s position as the preferred specialty partner for top-tier carriers and sets the stage for further policy rollovers and shared economics.

2. Marketplace and Membership Ecosystem

The company’s expansion into live auctions and private sales, both domestically and in Europe, is creating new revenue streams and deepening member engagement. Marketplace revenues are up sharply, and the business now operates eight major auctions annually. While management expects growth rates to moderate as the calendar fills, the ecosystem approach—combining insurance, membership, and vehicle sales—creates cross-sell synergies and increases customer lifetime value.

3. Underwriting Control and Markel Fronting Transition

The move to a fronting arrangement with Markel, effective 2026, gives Hagerty 100% control of premium and risk (up from 80%), expanding underwriting and investment income potential. This shift will also change financial disclosure, with investment income moving above the line and deferred acquisition costs being amortized. While some incremental operational responsibilities will be assumed, management expects minimal impact on headcount or G&A. The transition positions Hagerty to capture more value from its underwriting expertise and data-driven pricing models.

4. Product Innovation: Enthusiast Plus and Modern Vehicle Penetration

Hagerty’s launch of the Enthusiast Plus program targets modern enthusiast vehicles, addressing a segment where current penetration is just 3.1% versus 14% in pre-1980 classics. This product, built on years of data from the FLEX program (a flexible underwriting initiative), opens new addressable markets and is expected to drive higher premiums per policy over time as rollout expands to more states.

5. Technology Replatforming and Efficiency Gains

Ongoing technology investments are enabling operational efficiencies, supporting margin expansion and scalable growth. Higher software licensing costs this quarter reflect this transformation, but management maintains that core expense growth is being tightly managed, setting up for further leverage as the business scales.

Key Considerations

Hagerty’s quarter underscores the power of focused execution on multiple growth levers, but also highlights the complexities of seasonality, mix shifts, and evolving financial reporting as the business model matures.

Key Considerations:

• State Farm Integration Momentum: The State Farm flywheel is driving record PIF growth, but brings lower premium per policy, temporarily diluting average policy metrics.
• Marketplace Growth Moderation: Exceptional auction and private sale performance boosted results, but management expects growth rates to normalize as event additions slow.
• Expense Discipline with Strategic Investment: Core G&A and salaries are kept in check, while technology and partnership costs are being absorbed to support future scale.
• Financial Reporting Shifts Ahead: The Markel fronting transition will change earnings presentation, with investment income and deferred acquisition costs moving above the line; investors will need to adapt to new disclosure formats.
• Underpenetrated Modern Vehicle Opportunity: Penetration in post-1980 vehicles remains low, providing a long runway as Enthusiast Plus expands.

Risks

Mix shift toward large carrier partnerships could pressure average premium per policy and reduce attach rates for high-margin membership products, at least initially. Marketplace revenue is episodic and subject to event timing, while the transition to full risk ownership with Markel increases Hagerty’s exposure to underwriting volatility and investment income sensitivity. Technology replatforming and evolving reporting standards also introduce operational and investor communication risks during the transition period.

Forward Outlook

For Q4 2025, Hagerty guided to:

• Seasonally lighter operating profit, with EBITDA expected to be flat year-over-year due to margin compression and event timing.
• Continued strong policy growth as State Farm conversions expand to 25–27 states.

For full-year 2025, management raised guidance:

• Revenue growth of 14%–15% and net income growth of 58%–65%.
• Adjusted EBITDA of $170–$176 million, up 37%–41% from 2024.

Management emphasized that the business is entering 2026 with accelerating profit growth drivers, and that disclosure will evolve as the Markel fronting arrangement takes effect:

• Investment income will be reported above the line, affecting EBITDA comparability.
• Deferred acquisition costs will be amortized, impacting expense recognition.

Takeaways

Hagerty’s Q3 results validate the scalability of its specialty insurance model and the strategic value of its carrier partnerships.

• Margin Expansion Outpaces Revenue: Operating leverage from scale, disciplined expense management, and improved underwriting are driving profit growth faster than top-line expansion.
• Distribution and Product Innovation Expand TAM: State Farm and Liberty Mutual/Safeco conversions, along with Enthusiast Plus, are unlocking new segments and geographies.
• Investors Should Watch Reporting Transition: The Markel fronting shift in 2026 will materially change financial statement presentation and risk profile, requiring careful analysis of new metrics and disclosures.

Conclusion

Hagerty is executing on its strategy to become the leading specialty vehicle insurance and marketplace platform, with strong evidence of profitable growth, operational discipline, and expanding market reach. The next phase will test its ability to manage more risk directly and maintain growth as its business model evolves.

Industry Read-Through

Hagerty’s results highlight the value of niche underwriting expertise and the power of carrier partnerships in specialty insurance. The company’s ability to convert large books of bundled policies from major carriers signals a broader trend toward ecosystem integration and partnership-driven growth in insurance distribution. Marketplace and membership models that deepen customer engagement are gaining traction, and the move to fronting arrangements and full risk ownership may become more common as MGAs seek to capture greater economics. For industry peers, the focus will increasingly be on operational leverage, technology-driven efficiencies, and the ability to adapt financial reporting to more complex, integrated business models.

HGTY Financials Insurance Omnichannel Marketplace Membership Underwriting Specialty