Hagerty, Inc. — Q2 2023 Form 10-Q
Business context and period. Hagerty provides enthusiast-vehicle insurance and related reinsurance, membership, marketplace, media, events and vehicle-storage services. This unaudited report covers the three and six months ended June 30, 2023; comparisons are with the same periods in 2022. Broad Arrow, acquired in August 2022, is included in 2023 results but not the comparable 2022 periods.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $261.2 million | $206.0 million | $479.6 million | $373.8 million |
| Operating income (loss) | $17.3 million | $2.4 million | $0.8 million | ($10.6) million |
| Consolidated net income (loss) | $15.5 million | ($5.5) million | $0.5 million | $10.3 million |
| Net income (loss) attributable to Class A stockholders | $2.4 million | ($5.5) million | $0.3 million | $22.0 million |
| Basic EPS | $0.03 | ($0.07) | Approximately $0.00 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $34.4 million | $16.1 million | $41.1 million | $10.1 million |
| Operating cash flow | Not separately stated | Not separately stated | $70.6 million | $59.9 million |
Amounts are in U.S. dollars. Operating margin was approximately 6.6% in Q2 2023 versus 1.2% in Q2 2022, and 0.2% in H1 2023 versus negative 2.8% in H1 2022. Adjusted EBITDA and Adjusted EPS are company-defined non-GAAP measures, not substitutes for GAAP results.
- Revenue drivers: Q2 revenue increased 26.8%; H1 increased 28.3%. H1 commission and fee revenue rose 17.0%, earned premium rose 33.6%, and membership, marketplace and other revenue rose 53.5%. Premium growth reflected business growth and a higher U.S. reinsurance quota share; marketplace growth also benefited from Broad Arrow’s inclusion.
- Insurance indicators: H1 total written premium was $458.7 million, up from $392.5 million. Policies in force reached 1.366 million, versus 1.316 million at year-end 2022; retention was 88%. Hagerty Drivers Club paid membership was 791,895, up from 752,754. The loss ratio was 42.0% in Q2 and 41.7% in H1, compared with 41.0% and 41.2% in 2022.
- Cash and liquidity: Cash and cash equivalents were $114.3 million and restricted cash was $518.1 million at June 30, 2023, totaling $632.4 million. The restricted portion is not equivalent to freely available corporate cash; Hagerty Re held approximately $396.7 million in cash and restricted cash. Operating cash flow was $70.6 million for H1.
- Debt: Total debt was $80.8 million, down from $108.3 million at December 31, 2022, including $75.0 million drawn on a $230 million revolving facility. The facility matures in October 2026; the six-month weighted-average borrowing rate was 7.38%. The company reported compliance with financial covenants. A separate $25 million State Farm term-loan commitment for Hagerty Re remained subject to regulatory approval and other conditions.
Material changes and notable items
- Q2 operating income improved to $17.3 million from $2.4 million, but H1 consolidated net income fell to $0.5 million from $10.3 million. A key comparison factor was the warrant-liability fair-value swing: a $2.3 million H1 loss in 2023 versus a $26.3 million gain in 2022. These non-cash fair-value changes affect reported earnings.
- On June 23, 2023, Hagerty raised $80 million gross, or $79.2 million net, through a private placement of Series A convertible preferred stock to investors including State Farm, Markel and persons related to the controlling stockholder. The preferred carries cumulative 7% annual dividends, compounded annually, and is convertible initially at $11.79 per Class A share. It is presented as temporary equity. The company estimated a maximum redemption value of $123.4 million at the earliest optional redemption date in 2028; certain transactions also trigger redemption rights.
- H1 restructuring, impairment and related charges totaled $8.4 million, including severance, office lease and leasehold-asset impairments, and digital-media asset impairment. Management continued its move to a remote-first model and reported office space vacated and listed for sublease.
- Management said it is reviewing certain business activities, which could lead to a sale or reorganization and further impairment charges. It provided no quantified revenue, earnings or cash-flow guidance in the text provided.
Risks, contingencies and management commentary
- Markel and its affiliates represented approximately 95% of commission revenue and 97% of assumed premium in H1 2023. The filing warns that disruption or termination of this relationship could materially harm results.
- Insurance profitability depends on claims frequency and severity, reserve estimates, reinsurance availability and counterparty performance. Hagerty Re remains primarily liable to ceding carriers if reinsurers do not perform.
- Broad Arrow’s collector-car loan portfolio was $42.9 million, with a 42.9% aggregate loan-to-value ratio; one borrower accounted for $11.6 million, or 27%, of the portfolio. Management reported no material past-due principal or non-accrual loans, but collateral values and the collector-car market could affect recoveries.
- The company accrued an immaterial estimated liability related to regulatory investigations concerning a 2021 unauthorized access to its online insurance quote feature. Potential ultimate fines or penalties could differ from the accrual and were not estimable.
- Other stated risks include interest-rate exposure, insurance regulation, technology and cybersecurity disruptions, competition, economic conditions, and litigation. Disclosure controls were concluded effective as of June 30, 2023; no material change in internal controls was reported.
Important facts for investors to verify
- Track whether revenue growth translates into durable operating profitability and cash generation, particularly as claims, ceding commissions and operating costs rise.
- Review the split between unrestricted and restricted cash, and the capital available at Hagerty Re under Bermuda solvency and dividend restrictions.
- Assess the economics, dilution and potential cash obligations of the preferred stock, including its cumulative 7% dividend, conversion terms and redemption provisions.
- Monitor Markel dependence, the rollout and performance of the State Farm insurance program, and the status of the $25 million State Farm financing commitment.
- Follow the business review, restructuring outcomes and any additional impairments or asset-sale decisions; no specific forward guidance is supplied here.
- Distinguish GAAP earnings from non-GAAP measures and non-cash warrant fair-value effects; also note consolidated results are substantially allocated to non-controlling interests.