Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I've spent quite a bit of time analyzing this part of the industry and looked deeply at Hagerty and some of the other players, but I haven't gotten a good sense of the international market dynamics. It would be great to hear about your experience, not only at the Hagerty UK business, but also how the classic and collector car insurance industry may be similar or different than the US.

I am happy to fill you in and give you whatever insight I can. The first question was about the evolution of Hagerty in the UK and my role within that. By background, I worked as a private Lloyd's broker, where one of the departments had a transit business, and they were asked to insure a particular high value £2 million car going from Europe to America. We found out Mr. Hagerty was coming on a golf trip and I ended up playing golf with him in Ireland in 2004, where he spoke excitedly about his business and that he wanted to set up in the UK. He felt concerned that when some of the top collectors left the USA to come to Europe for touring or whatever reason, they insured with others and he wanted to provide a door-to-door service. 

In 2005, we undertook a heavy research and development program and scoured the UK market which had a dozen players in the market at the time. They were all doing the exact thing when you called for a quote, which was ask when your house insurance was due, what your wife's inside leg measurement was and how many dogs you had. It's a torrid set of questions before you get to talk about your pride and joy. We felt there was a gap in the market and, in our due diligence, we tied ourselves at the hip with Allianz. 

My old business partner and I wrote the wording, did the rating and sorted out the IT. In conjunction with McKeel's team, we built the strategy and developed a marketing plan, which we begun executing in 2006. Fast forward to 2019 and we built the business up to where it was generating a £1.2 million net profit to the group, before removing the enormous central allocations from America. My role in that was a board member. I was involved in leadership approach, recruitment, underwriting relations, marketing, event attendance and brand ambassador, all the things you would expect. 

Imagine Hagerty as it was, when it set up in the 1980s, when Frank and Louise started their boating agency. Essentially, my business partner and I were the UK Frank and Louise focusing on cars. If I could do things differently, we would have branded it slightly differently. We relied heavily on the name Hagerty which no one in the UK had heard of. Someone would ask us if we sold apparel because we had Hagerty jackets on. We told them we were in insurance and they asked why we didn't have that on any of our signage? Every time we went to Traverse City, we stole stuff from them to re-purpose in the UK. We developed a good team and built a dynamic culture of petrol heads. We tried as much as we could not to employ anyone from an insurance background, but those who were enthusiastic about classic cars. You can teach insurance but not classic. We did many things differently which was challenged by some of the guys in the States. We were the first to start putting our client's cars on the stand at the Festival of the Unexceptional.

I've seen people talk about it on LinkedIn as I follow the UK folks.

I devised the concept and executed the plan on that, which was trying to disrupt the market because there are many concours with top cars everyone aspires to own one day if they win the lottery, but unrealistic and no one has ever driven these cars apart from 0.25 percent of the population. We were always asked for a quarter million pounds to sponsor this or that event, so I devised the concept of the Festival of the Unexceptional, where you support the everyman car. It's coming up to its 8th year, but in the first year, I went to every event trying to find the best of the worst cars and inviting them to come. And instead of holding it at 18th hole at Pebble Beach, we held it on a golf driving range in the Midlands. Everything was slightly tongue in cheek and it captured the imagination. We got coverage on the BBC and in national UK newspapers and it took off and became an exciting movement for us. It made our name more known in the area where we needed to make a market impact. 

65% of cars in the UK are valued at under £25,000 and everyone knew us because we had amazing cars on our adverts, we were this big American company and people thought we only looked after collectors. I left the business 18 months ago with a team of 25, which has grown to 45. I know the revenue has dropped off by 30% so they are currently struggling. 

The other key part was managing the underwriting relationship. We used to work with Allianz but in 2009, three years after working with them, they were having a bad COR on their motor book, so they told us to increase our rates by 35%. We challenged them on that because our loss ratio was sub 25% and increasing our rates wasn't going to work for us. They said it was an edict from the top and they insisted on it, so we moved our business to Hiscox. My background in Lloyd’s of London meant we had high value limits available. We won major international accounts meeting people through that Lloyd's affiliation. In 2020, I left the business and I was the MD reporting directly to Richard Hutchinson, the former president of the business.

I spoke with Richard a few months ago and it was a great conversation. In 2019, the business was at £2 million, and Companies House data shows £2.2 million. You said the profitability was there before crazy allocations, what did those entail?

The license fee was close to $100,000 to use the Hagerty name. We also had central allocations for using management time, so we paid a little bit of Richard's salary, HR and marketing. Our allocations were comfortably seven figures, which for a business our size seemed disproportionate. We challenged those on a regular basis in board meetings but were told that's the way it is. There was also a benefit to offsetting some US expenditure towards an international group for tax purposes. Did you ever speak to Fred Turcotte?

I've spoken to Fred several times.

Fred manufactured all that. That was always a challenge for us because we were working our hardest but the bottom line didn't look great. I know there was heavy investment and considerable debt allocated towards the UK operation. I'm not sure how much of that is a tax write off, but it doesn't look good in Companies House when the numbers show considerable debt and they are consistently losing money. Whenever we set up new partnerships, Fred would have to write the letter confirming a parental guarantee was in place and shared high-level numbers as it was a private business at the time.

What would the operating margin have been minus excessive allocations?

We were probably making £600,000 net profit, which is $1 million.

That calculates to 40% to 45% margin.

Yes.

You mentioned the loss ratio being 25%, is that what the average was? I know the US ranges from 36 to 42 depending on the year; is that different in the UK?

The 25% loss ratio we had was up to 2009 when we moved our business from Allianz to Hiscox. We had a good year when the loss ratio was sub-30, but other years it was close to 50, so our range was between the late thirties to mid-forties.

That is, essentially, the same as the US business.

Yes.

What typically drives loss ratios up to 50%? Is it a one-off incident where an expensive car gets wrecked or is it more storms?

It has less to do with storms. One thing which is unique to us, which was always an issue for the underwriting officers in Hagerty US, is unlimited liability. A prime example was in 2012 when a guy on the Isle of Wight got knocked off his bike. He was an Olympic potential who broke his wrists and had life threatening injuries, and was clearly never going to be able to do anything athletic again. The payout was £58 million which is unlimited and punitive. One year, someone drove his Alvis into a brick wall. The damage to the car was £30,000 but the damage to him was £3.5 million.

It seems they may have remedied that, in that earlier this year, there was a partnership with Markel where they capped their limit to $1 million and Markel covers the rest, does that sound familiar?

That's how we had it originally. We told our underwriters we wanted to share in the profit commission, but if a liability claim is above £1 million, that will cut into their reinsurance model, therefore we don't want to be penalized. It was agreed we would cap it and there was a sliding scale. The max we could earn in any year was 50%, and the minimum was obviously nil, but physical damage or liability was always capped at £1 million. The way we used to structure it – which no longer happens – is Hiscox Insurance Company would take the first quarter million of any one vehicle, and if the vehicle was worth £1 million, the £750,000 over and above that would be taken by their Lloyd syndicate. 

We arranged an internal reinsurance program, which meant we had a different rate for the top layer, which was more cost effective than insuring everything from the ground up. Markel are considerably sized, but they take everything from the ground up and charge a lower rate on that bottom line number because they take on the full million as opposed to 250,000. That will inevitably impact their loss ratios and they will charge less than their predecessors as a result.

The last UK report showed 27,000 policies in force covering 60,000 vehicles. I've seen some presentations with estimates of two million registered classic collector cars, which is a big difference. Where are the remaining 1,940,000 vehicles being insured and why hasn't the penetration been bigger?

The US has four or five players in the classic car industry whereas the UK has four or five players in a 10-mile radius. We also have comparison websites who invest a huge amount of money attracting business into the books. The most recent stat I heard was that 89% of anyone who buys a car insurance product in the UK has initially received a quote through one of the aggregators. That includes classics, modern and trailers. The UK market is busy – and that two million market cap extends every year – as people are desperate to get this type of business. It's a loss leader into getting home and contents. 

If my range has a portfolio suite of products, I can insure your MG for £80 and charge a small fee on that, but on the back of that I might get another £600 from you because I will get your everyday car, home and life insurance. Hagerty have a mono-line product and only one market carrier, so they don't have the chance to offset the rating or use a panel of insurers to get the best deal for a sector of the market. Those are the biggest challenges they currently face in the UK. Of those who call themselves classic car insurance specialists, the largest has 85,000 to 90,000 policy holders, which represent 50,000 policies. All the specialists in total won't have more than 450,000 of those cars, because 1.6 million are insured in the general market.

Are the dynamics of the classic car insurance in the UK the same in the US where if you wreck your car, a traditional car insurer will pay you the depreciated value? If your MG is 10 years old, they will only pay you a small amount, whereas if you have a US Hagerty policy, you will be paid the guaranteed value in the collector space?

We call it the agreed value here and no depreciation is taken into account. Some classic car business includes extra benefits I know Hagerty don't offer. If you have a claim and they remove an original component of the car, they have to replicate it and the vehicle loses value as it's no longer 100% original; some policies cover that diminution in value. Everyone is trying to further develop their product. One of the notes on the agenda is how Hagerty are getting on; they are being left behind. They have double the staff from when I was there yet are not doing double the business, so they are carrying a lot of fat. 

The management team that was there when I left are mediocre. They brought in a new MD whose background was American Express. I don't know him but I've heard conflicting comments from people who have met him. Some speak favorably, others not, so overall everyone realizes Hagerty has changed dramatically in the last 24 months. They've invested heavily, some would argue too much in events and lifestyle. The UK market is so busy that this constant stream of content which is great for the US, doesn't always work well in the UK. Three simple things always came out of the brand survey; what's the price, what's the product and how is the service? McKeel has a vision for the Hagerty Drivers' Club to be a media business in the UK, but we have a different culture.

I had a question about Hagerty Driver's Club which they're planning to launch in 2023; it seems like you don't think that will be well-received in the UK?

I don't know how it will manifest itself or how the end product will look. I know they'll invest heavily in it but I don't know anyone who would sign up and pay extra to get benefits they can get for nothing elsewhere. The big thing they're going to be pushing is access to their showroom at a new site in Bicester, but that's not a big enough draw for people to go to someone's office. Members-only events may be good, but I haven't seen what that looks like so I can't pass comment. The chatter from everyone is they're going to spend large and I don't know the UK market is ready for it.

You mentioned competitors use it as a loss leader to get homeowners and life, that exists in the US with State Farm or USAA who have a similar portfolio approach, but they partner with Hagerty specifically for the collector side, and it seems that's not the same setup in the UK. Is that something they do as well, so they're able to do all of those things, or could a partnership model evolve later?

There are many different insurance companies here, including KGM, Markerstudy, Zurich Private Clients, Chubb, Allianz and Aviva. They all offer a classic car product and you will get full commission as opposed to going to Hagerty, who use a US carrier unknown in the UK and offer a substandard product compared to others. All those carriers are also willing to get your home and everyday car. I work for a different company now and I can go to any of the markets and get a good rate for a classic car online through a portal from one of the companies. I can tap in the smallest bit of information and buy it straight away from their portal. I also get better commission than I would going to Hagerty. In the past, it would have worked pretty well if we partnered with someone, but we were seen as an NGA. The wholesale side of the business is diminishing because so many other insurance companies are offering big brokers specialized products in this area.

Who are the top four competitors to Hagerty in the specialist space?

Adrian Flux, Grove & Dean, Footman James and RH Specialist in order of size. Adrian Flux have a huge call center with a stack it high sell it cheap type approach. Grove & Dean are investing heavily online on their PPC. Footman James have strong branding, have been in the business the longest and are the most recognized brand. By virtue of that, they have a sizable portfolio which doesn't diminish because no one is currently offering anything different in the UK. RH Specialist is a heritage brand who are aligned with the Bentley Drivers Club and others, and have a good reputation.

Could Hagerty acquire one to grow their footprint or is that not feasible?

They wouldn't be able to acquire Adrian Flux who are the same size as Hagerty with regards to premium income in the US. Grove & Dean, possibly. Footman James are owned by a UK consolidator called Ardonagh, whose EBITDA multiples would be so enormous it wouldn't make economic sense. RH has recently been acquired by the A-Plan Group so they're not about to offload them.

If they went after Grove & Dean, which brand would they keep?

I would suggest the Hagerty brand is the stronger of the two. Hagerty have a recognized brand which is well-known within the consumer market. Their relatively mediocre team and leadership that are currently in place don't have the vision to drive the business forward. They're not doing anything to disrupt the market or develop the product. Those are the cons. The pros are that it's a very strong, well-respected and well-recognized brand with good presence in the market after a huge amount of investment into the business over the past couple of years, which will pay dividends.

If I were to hand you the keys to the UK Hagerty business tomorrow, what would you do in the first 90 days to drive that change you're saying needs to happen?

I would have a meeting with my underwriting partners to find out what they want from being aligned with us and what we're going to get by having a long-term partnership with them. I'd like to know how we can develop the products and I would share with them what the competition is doing and ask them how they will ensure we always develop the product. I would get rid of a sizable amount of the team. I would ensure we have passionate car lovers answering the phone at all times and have outgoing gregarious guys going to events and re-engaging with consumers, rather than sponsoring things and not having a presence. I would ensure we talk to people and I would employ a chief underwriting officer whose full-time role would be to evolve the product and ensure we are ahead of the market in terms of pricing, service and all the benefits we can wrap up. On the 91st day, I would expand internationally.

I know Germany is listed as a big market and they've invested money there. My understanding was that the UK business, prior to Brexit, was going to be a point where you could write into the rest of the EU, any commentary on that piece?

McKeel was very clever because he bought a company called Classic Car Analytics, a German valuation business. When you buy classic car insurance there you need a valuation certificate to go with it, and he has the valuation certificate business. In Germany, everyone renews on the 1st of January, so there is a rush from November December when everyone starts to renew their cover. It was very much the intention that the Hagerty office, now called Hagerty UK, formally Hagerty International, would be the satellite office from which you can work in the EU, Southern Hemisphere, South America and UAE. Brexit put paid to that and it will take considerable investment to get any footprint into European markets. As to being slightly further afield in other regions, it takes a dedicated strategic plan, resources and investment to put behind it, but there would be an opportunity at some point.

Cross-referencing their public filings with Companies House data, a third to half of international losses came from the UK, where would the rest come from? 2021 showed a $10 million loss from an operating profit standpoint, but only $2.5 million of that was related to the UK.

No idea.

Perhaps it was some investment in Germany?

There was investment in Germany but not to that extent. I also know the German operation was turning a profit of a quarter million euros, so that $7.5 million I always refer to as Fredonomics.

You were there for the launch of Hagerty Re, their reinsurance piece, did the original investment from that come from the UK subsidiary?

They might have used the account, but it didn't touch the UK business.

I haven't heard anything about the UK showroom, what is it?

In the US, they invest in Cars & Coffee and it's a great place to hang out with your car. An old RAF bomber command center has been turned into a center of excellence for historic motoring and aviation and there are 40 businesses in this wonderfully historic business park. Their website is [bicesterheritage.co.uk](//bicesterheritage.co.uk). Hagerty took a space there, which I'm told costs £2 million. They're calling that their club house and it's where car clubs can meet and hang out at the Hagerty Club house. Their MD, Mark Grover, told me the intention is to have a coffee bar, a licensed bar, a meeting area and a showroom for clients to have their cars – in other words, storage – and there will be five or six desks as everyone will be working remotely. If you gave me the keys on the 1st of January, I would close that down immediately and get everyone in the office because you can't build culture with everyone apart. You need to build that culture back where everyone is helping and supporting each other, moving in the right direction. Telling everyone they no longer have a desk and if they want one, they need to book several weeks ahead, sends out the wrong messaging.

Is that £2 million upfront or annually?

That's what it costs for the initial lease and fit out. I don't know what the quarterly renewal will be; it will probably cost them £150,000 a year.

US Hagerty purchased a few bigger marquee shows and there's an argument that they were sponsoring them before, and six years of sponsorship bought the show, now it's profitable and you've cut off other advertisers. Is there a similar dynamic in the UK where it makes sense to purchase shows or physical auctions?

No one wants to partner with Hagerty in the auction world because of the Broad Arrow situation. As for events, I agree, being part of the community means you need a face at these events, you have to be active, doing something slightly different. When I was there, we always did a live valuation of cars. Our valuation experts would value the car, take some photos and someone would get a written report days later, and that worked well. My understanding is that the current team are not interested in attending events at weekends. Hagerty sponsor many events but they don't have a physical presence there, which is a lost opportunity that will come back to bite them. That speaks to the culture and shows the remote approach may not be the right one in the longer term. As for buying events, there are a handful you might want to acquire, but they would be super expensive and there wouldn't ever be an exclusive deal. Goodwood would be the only one, as other events wouldn't generate enough income to warrant a buyout. Maybe one of the UK concours but you could set up your own one.

I did some background into the acquisition of some of the US concours. They were paying a few hundred thousand dollars a year in sponsorships to those, and if you accelerate the spend it's profitable, but now sponsorship deals not only get you in the magazine, but also to all these events, so I can see the rationale.

There is an argument to buy an event, but you need the product and team to back that up so you can make the most of having that time with those consumers. Otherwise, take some hospitality, spend £10,000 on the event and enjoy yourself.

Do you know why Hagerty decided to go the public route?

One of the reasons I moved on is I had a long chat with McKeel. He and I were seeing someone in Lichtenstein and I told him I had been running his UK business for 15 years and wanted an opportunity to own some of the business; he said that would never happen. Within 18 months, there is the SPAC, maybe there was pressure from Markel to get on with things, because they owned 25% of the business then and maybe they saw an opportunity there. The announcement they made about State Farm having the Hagerty Plus business model coming into effect later next year, maybe they thought if we announce State Farm own 25% of the business, that would drive up the price. I know the business is currently not profitable and maybe it was a way of ascertaining what the opportunities were looking like, build enough funds then buy out one of the main competitors, which is why you do a SPAC in the first place.

You've had many interactions with the senior leadership team. If you were doing a profile on each of the main players, how would you categorize their strengths, weaknesses, and what you think they're doing right or wrong?

Fred would do anything to make the business look good. I would challenge McKeel to have questioned him more and to have got a third party to look at things. Being a family business meant no one challenged McKeel's vision or how he went about it. That said, he's done phenomenally well and he is a fantastic orator. He is a visionary and he knows how to drive a business forward. Those are huge weapons in his arsenal. With regards to his failings, his lack of dealing with confrontation is one. He would always give away the good news but wouldn't always manage the bad. That was one of his failings he would openly accept. He always wanted to be the smartest guy in the room, and often was, but he wanted that to be the case. 

Jack Butcher is a force for good. He's a great guy who I like enormously. Him stepping into Richard's role was a moment of inspiration and I was sorry that was announced two months after I resigned because he and I spoke after he got that appointment, and we both agreed we would have worked well together. Richard Hutchinson was nice but when we had meetings in London with underwriters, they would say Fred was dangerous and Richard was stupid. That's what the Lloyd's market thought of them. Coco is lovely; she got herself into a good position within the group to help drive the business forward. She took on the role of Kim Hagerty. Did you ever meet her?

I never met her, no.

In the early years, they would take over the Traverse City Theater to host their annual company day, and she always took huge interest in all the individuals. That was when the company was a relatively manageable size of 400 people. McKeel would stand up, say something amazing and everyone would clap, whereas Kim would walk onto the stage and everyone would stand up and start applauding. She was that sort of person and I feel Coco is trying to fit herself into that mold with the empathetic approach she has. I don't know much about Barbara Matthews, except she's a safe pair of hands. Soon is a dramatic conflict as she surrounds herself with sycophants who tell her she's fantastic but no one will say anything else because of who she is. McKeel is a visionary and I wish he and I had spoken more when I was MD of the group, and that he was more flexible in his longer-term approach for the UK.

The comment where underwriters called Fred dangerous, are there any examples you could give of what might have caused them to say something like that?

Fred always saw the underwriters as the enemy, whereas in the London, we see them as partners. He would always challenge their approach of working with Hagerty and would often be a threatening big Boston Bruiser. He would say we're doing great deals and we want you guys to be part of it, but if you don't want to play, and it was always the same, they had to dance to his tune as opposed to growing together. Richard didn't understand how the Lloyd's market worked, which is the stupid part.

Are there any other key personalities within the company outside of the general ones people would think of, who are important to keep an eye on or look into?

Nancy Flowers is a force for good and a good person to have on board. She understands the corporate structure as she has been there a long time. She's been overlooked too many times but keeps going strong, is presentable, smart and always learning. James Laclair shows he's keen to try move forward, perhaps because he was in charge of Canada. I'm not sure where his current role is but I felt he was pretty good. Those are two that stand out for me, but there's been many changes since I was there.

Do you have any insight into the Canadian business which seems like it's growing but meanders along?

No, I don't.

What was the ultimate decision which made you move on after 15 years? 

There were three things. There was never going to be any ownership, so there was no financial security. The way US companies work compared to the UK, one minute you're there and the next minute you can be gone, which is what happened to my predecessor. I'm not sure it was handled well, but it was handled the way it was, and that's water under the bridge. There was no financial security. I also found more decision was being made in Traverse City. As the managing director of the international business, I was having to get permission to get things done at an event in the UK from someone who'd never been outside the state of Michigan. I felt, all of a sudden, we had the tail wagging the dog. 

There were cultural differences between our businesses, and whilst I was very keen to implement the Hagerty business strategy, I was at pains to say that whilst it will work in some instances in the UK, some stuff they do in the US won't. Despite saying that until I was blue in the face, we were told you have to get on with it. Various business decisions were taken out of my hands. I made a particular comment in my final board meeting as the MD, about a new IT infrastructure coming in for which we had put out a tender. We'd obtained a license fee of a quarter million pounds for the full rebuild of our IT system, but the preferred option was a Californian company that was going to cost $3 million. I challenged the thinking behind that but was told you've made your point, shut up, move on. How was I supposed to run a business when I had no autonomy to make decisions which would have benefited the business. If it doesn't benefit the business, that's not a problem, but I need to understand why. In summary, it was ownership, long-term financial security and autonomy.

Is there anything about this business, either Hagerty overall or the UK operations specifically, that's important but we haven't spoken about?

I think we've covered it, but if I had the keys from the 1st of January, I would keep this simple. Let's do what we're good at and forget about all the articles. We need to ensure we do the best we can to build revenue for the business; the other stuff can follow, but focus on the revenue stream first and foremost. Becoming a lifestyle brand is taking away from your core business. As far as I understand it, no money comes in on the media side. Looking at the numbers and seeing State Farm have the majority share ownership of the business, McKeel and his family have made a sizable chunk of money. 

The UK company is losing money hand over fist, it's not particularly profitable. The US State Farm could swallow it all up and it wouldn't even be a line item in their financials. That leaves the UK very vulnerable to a buyout. I don't know if that's on anyone's radar but it's a terrific brand which I loved working on in the formative years. The hardest thing about businesses is managing growth, and by virtue of that, some people stay and some people go, and I was one that left. I had no hard feelings against any of the people there. I enjoyed my time enormously, and they've been hugely successful.

Is there anyone else you think would be an important person to talk to that could give more insights on the business?

From a UK standpoint or generally?

It could be both.

It might be worth speaking to Lee Mathewson, one of their actuaries. He has a reinsurance background and was employed as my successor. He was there for a year before being cast out because he overspent. He would have a different dynamic on the structure of the business and what the short, mid-term strategy is, post-Covid. He has an understanding of both the UK and US businesses. I'm not sure where he's currently based but is no longer within the group, but I'd recommend you talk to him.

I appreciate you taking the time.