Hagerty, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Hagerty provides classic and enthusiast vehicle insurance, reinsurance, Hagerty Drivers Club memberships, and collector-car marketplace and financing services. Comparisons are with Q1 2023 unless noted. Dollar amounts are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $271.7 | $218.4 | +24.4% |
| Operating income (loss) | $12.2 | ($16.5) | +$28.7 |
| Operating margin | 4.5% | (7.5%) | Improved |
| Consolidated net income (loss) | $8.2 | ($15.0) | +$23.2 |
| Net income (loss) attributable to Class A common stockholders | ($3.2) | ($2.1) | Loss widened |
| GAAP diluted EPS | ($0.04) | ($0.03) | — |
| Adjusted EBITDA, non-GAAP | $27.3 | $6.7 | +$20.6 |
| Operating cash flow | $58.2 | $11.7 | +$46.5 |
- Revenue mix: Commission and fee revenue was $88.8 (+19.1%); earned premium was $151.6 (+29.3%); membership, marketplace and other revenue was $31.2 (+17.9%). Marketplace revenue increased 57.9%, to $10.5, supported by The Amelia auction, private sales and financing.
- Insurance growth: Total written premium rose 19.4%, to $218.3; policies in force increased to 1.42 million from 1.40 million at year-end 2023. New insurance business count rose to 59,286 from 51,762. Policy retention was 88.7%, unchanged year over year.
- Underwriting: Hagerty Re’s loss ratio was 41.1%, versus 41.3%. Losses and loss adjustment expenses increased 28.8% to $62.4, broadly tracking earned-premium growth. Ceding commissions, net, increased 28.0% to $70.9.
- Cash flow and liquidity: Operating cash flow improved to $58.2, including working-capital benefits from commission receivable collections and changes to Markel contingent-commission settlement timing. Investing cash outflow was $18.3 and financing cash outflow was $37.2, including substantial net debt repayments. Cash and cash equivalents were $131.2; restricted cash was $595.6, bringing combined cash and restricted cash to $726.8. Much of the restricted balance supports reinsurance obligations and is not freely available for general use.
- Debt: Total debt was $97.7 at March 31, versus $134.9 at December 31, 2023; long-term debt, net, was $91.5. Debt included $37.0 under the $230.0 JPMorgan facility, $29.2 under the borrowing-base BAC facility, a $25.0 State Farm term loan, and notes payable. Hagerty reported compliance with applicable debt covenants.
- Other items: A $6.1 non-cash warrant fair-value loss reduced pretax income. Income tax expense was $5.1. Series A preferred-stock accretion of $1.8 contributed to the loss attributable to Class A stockholders. The preferred stock carries cumulative dividends at 7% annually and had an estimated redemption value of $123.4 as of quarter-end.
Material changes and management commentary
- Revenue growth reflected higher policy premiums, continued retention, new-policy growth, rate increases in several states, and increased assumed premium. Management also cited cost containment and lower general and administrative and depreciation/amortization costs.
- The amended Markel arrangements increased the base commission rate on U.S. personal auto business to 37% and changed contingent commissions to a range of negative 5% to positive 5%. Starting in 2024, 80% of expected Markel contingent commissions are settled monthly, affecting receivables and cash-flow timing. Markel-related commission revenue represented approximately 95% of total commission revenue in Q1 2024.
- Effective January 1, 2024, Hagerty Re began ceding 100% of physical-damage exposure on specified U.S. high-net-worth accounts, compared with 70% in 2023; it also stopped reinsuring classic-auto risks produced by its U.K. MGA affiliate.
- Management said available liquidity sources are expected to be adequate for anticipated operating needs, commitments and capital requirements. The filing provides no numerical full-year revenue or earnings guidance. Hagerty expected to complete its approximately $18.4 million CNIC insurance-company acquisition in Q2 2024, subject to closing conditions and regulatory approval.
Risks, contingencies and unusual items
- Key exposures include insurance claims frequency and severity, loss-reserve estimates, catastrophe and reinsurance recoveries, reinsurer credit, and potential declines in collector-car collateral values. BAC’s loan portfolio was $60.9, with an aggregate loan-to-value ratio of 54.3%; two borrowers represented 40% of that portfolio.
- Hagerty relies heavily on Markel for underwriting and related arrangements. State Farm is also a significant related party, including as preferred-stock investor, lender and reinsurance counterparty. Related-party transactions and concentration merit attention.
- A 2021 unauthorized-access incident involving the online insurance quote feature remains subject to coordinated New York regulatory investigations. The company recorded an estimate it considers immaterial, but any eventual fines, penalties or settlements could differ and are not currently estimable.
- The company disclosed ordinary-course litigation and tax risks, including an IRS audit of THG’s 2021 tax year. The Tax Receivable Agreement entitles legacy holders to 85% of specified realized tax savings; future payments may be substantial, although timing depends on taxable income and other factors.
- The filing reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2024.
Important facts for investors to verify
- Whether revenue growth and improved operating profitability continue, and how much Q1 operating cash flow depended on working-capital and commission-collection timing.
- How the Markel agreement changes affect recurring commission economics, contingent commissions and counterparty concentration.
- Whether loss ratios and reserve estimates remain stable as premiums and the reinsured portfolio grow, including the effect of reinsurance changes.
- How much reported cash is available for corporate purposes after excluding restricted reinsurance cash, and how debt repayment and borrowing-base capacity evolve.
- The preferred stock’s cumulative 7% dividend, potential redemption obligations and conversion dilution, along with warrant-related fair-value volatility.
- The CNIC acquisition’s closing, final purchase price and regulatory approval, and any developments in the data-security investigations or tax matters.