Hagerty, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Hagerty provides classic and enthusiast vehicle insurance and an automotive enthusiast membership and services platform. Results are unaudited and presented on a consolidated basis.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $206.0m | $167.4m | $373.8m | $296.6m |
| Operating income (loss) | $2.4m | $14.3m | ($10.6m) | $9.2m |
| Net income (loss) | ($5.5m) | $12.5m | $10.3m | $5.7m |
| Adjusted EBITDA (non-GAAP) | $16.1m | $19.3m | $10.1m | $20.3m |
| Operating cash flow | — | $59.9m | $68.1m |
Revenue grew 23.1% in Q2 and 26.0% for the first half. Q2 operating margin was 1% versus 9%; first-half operating margin was negative 3% versus positive 3%. The first-half net profit included a $26.3m non-cash gain from the change in fair value of warrant liabilities; excluding that item, operating performance was loss-making. Q2 included a $5.4m warrant remeasurement loss. Class A basic EPS was ($0.07) for Q2 and $0.27 for the first half; first-half diluted EPS was ($0.02). Adjusted EPS, a non-GAAP measure, was ($0.02) and $0.03, respectively.
At June 30, cash and cash equivalents were $180.2m, with an additional $381.3m restricted; combined cash and restricted cash totaled $561.4m. The filing notes that restricted cash supports insurance-related obligations. Debt was $87.0m, down from $136.5m at year-end 2021; the $230m revolving facility matures in October 2026, and the company was in compliance with its covenants. The effective borrowing rate was 3.60%. Management said available liquidity sources are expected to meet needs for at least 12 months.
Material changes versus comparable periods
- Q2 revenue growth reflected commission and fee revenue up 14.5%, earned premium up 33.6%, and membership and other revenue up 21.3%. For the first half, the respective increases were 14.6%, 37.1%, and 29.9%.
- Operating expenses grew faster than revenue: up 33.0% in Q2 and 33.8% for the first half. Higher staffing, ceding commissions, losses, sales and marketing, public-company costs, and depreciation and amortization contributed.
- First-half operating cash flow declined 12.0% year over year. Investing used $53.2m, including $21.5m for property, equipment and software, $13.5m for acquisitions, and $15.3m for the Broad Arrow investment. Financing used $48.5m, principally reflecting net debt repayments.
- Policies in force rose to 1.292m from 1.247m at December 31, 2021; paid Hagerty Drivers Club members increased to 742,825 from 718,583. Policy retention was 88.2% versus 89.1% at year-end; NPS remained 82.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects liquidity to cover at least the next 12 months and identifies growth investment, operating costs, debt service, taxes and potential Tax Receivable Agreement payments as liquidity needs.
- Management reported that new-business growth had returned to pre-pandemic pace during the first half. The U.S. and U.K. reinsurance quota share increased from 60% in 2021 to 70% in 2022 and is scheduled to rise to 80% in 2023 and thereafter, increasing both earned premium and underwriting exposure/costs.
- Operating results are seasonal, with commission and fee revenue typically peaking in the second quarter. Risks discussed include member acquisition and retention, carrier relationships, insurance pricing and claims, economic conditions and inflation, technology disruption, regulatory compliance, and litigation.
- Hagerty Re reported approximately $291.5m in cash and restricted cash. Its actual capital relative to Bermuda’s enhanced capital requirement exceeded 120%; dividends are subject to solvency rules and regulatory approval thresholds.
- On August 9, 2022, after quarter-end, Hagerty agreed to acquire the remaining 60% of Broad Arrow for $64.8m in Class A shares and exchangeable Hagerty Group Units. Speed Digital, acquired in April for $15.0m, was a related-party transaction: the seller was indirectly wholly owned by a Hagerty director.
- Other notable items: the March 2022 Exchange Agreement amendment changed cash settlement of legacy-unit exchanges so it is allowed only if proceeds come from a new permanent equity offering; the filing recorded $4.3m of first-half stock-based compensation, including a CEO performance award with $19.2m grant-date fair value. Hagerty expects to recognize a material right-of-use asset and lease liability when it adopts lease accounting in its 2022 annual statements.
- The company disclosed substantial dependence on Markel-affiliated carriers: 93% of Q2 commission revenue came from Markel affiliates, and 90% of amounts due to insurers at quarter-end related to them. Management did not believe ordinary-course litigation would materially harm the company; no material risk-factor changes were reported.
Important facts for investors to verify
- How core operating margins and adjusted results develop as revenue expands, given operating expenses grew faster than revenue and warrant remeasurement materially affected reported earnings.
- Whether policy growth, retention, new-business volumes and membership growth sustain revenue, particularly amid inflation and a stronger vehicle resale market.
- Claims experience, reserve adequacy, loss ratios and the earnings/capital impact of the planned quota-share increase to 80% in 2023.
- Availability of unrestricted liquidity after insurance-related cash restrictions, debt repayments, investment spending and the Broad Arrow acquisition; also monitor borrowing rates and covenant compliance.
- Markel carrier concentration and related-party arrangements, including the Speed Digital purchase and Broad Arrow transaction; review subsequent filings for acquisition terms and consolidated results.
- Potential dilution from warrants, Class V exchanges and equity awards, and the timing and amount of any payments under the Tax Receivable Agreement.