Hagerty, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021, with 2020 as the comparable period. Hagerty completed its business combination and became publicly traded in December 2021; the filing reports the combined Hagerty business, with the transaction materially affecting reported earnings and balance-sheet presentation.
Business context
Hagerty provides specialty insurance for classic and enthusiast vehicles and operates an automotive enthusiast membership, media, events, and services platform. Insurance commissions and reinsurance premiums are its largest revenue sources. At year-end, it reported more than 2.4 million members and approximately 719,000 paid Hagerty Drivers Club members.
Financial and operating performance
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $619.1 million | $499.5 million |
| Operating income (loss) | $(10.1) million | $15.8 million |
| Net income (loss) | $(61.4) million | $10.0 million |
| Adjusted EBITDA (non-GAAP) | $25.4 million | $29.7 million |
| Operating cash flow | $42.3 million | $84.6 million |
| Investing cash flow | $(69.0) million | $(47.4) million |
| Financing cash flow | $332.1 million | $39.9 million |
- Revenue grew 23.9%: commission and fee revenue rose 14.9% to $271.6 million; earned premium rose 34.2% to $295.8 million; membership and other revenue rose 21.3% to $51.7 million.
- Operating margin was approximately negative 2%, versus positive 3% in 2020. Contribution margin was $159.6 million, with a 26% contribution margin ratio, versus $146.8 million and 29% the prior year. These are non-GAAP measures and exclude certain costs.
- The insurance loss ratio was 41.3%, unchanged year over year. Policies-in-force retention was 89.1%, versus 90.0%; total written premium increased to $674.3 million from $578.2 million.
- Fourth-quarter revenue was $154.4 million, versus $121.4 million. Fourth-quarter operating loss was $21.0 million and net loss was $66.5 million, compared with losses of $10.1 million and $11.6 million, respectively, in Q4 2020.
- Year-end cash and cash equivalents were $275.3 million, plus $328.6 million of restricted cash. Total debt was $136.5 million, including $135.5 million drawn under the revolving credit facility. The facility has $230 million in commitments and matures in October 2026; the company reported compliance with its covenants.
Changes, unusual items, and management outlook
- The net loss included a $42.5 million non-cash expense from the change in fair value of warrant liabilities. Q4 also included approximately $13.3 million, primarily from accelerated vesting of incentive plans related to the business combination. Adjusted EBITDA excludes specified items and should not be treated as cash flow or a substitute for GAAP earnings.
- Operating expenses increased 30.1%, faster than revenue growth, including higher staffing, ceding commissions, claims costs, sales and event expenses, and depreciation and amortization. Management also disclosed $31.0 million of pre-revenue costs in 2021 for scaling systems, staffing, and capabilities for State Farm and other partnerships and Marketplace initiatives; these costs were excluded from its Adjusted EBITDA reconciliation. They are expected to be substantially completed in 2023.
- Management said new-business growth returned to its pre-pandemic pace during 2021 and events resumed. It expects liquidity sources to meet needs for at least the next 12 months. The filing provides no numerical earnings or revenue guidance.
- Management expects the State Farm alliance to begin providing features and services in late 2022; the State Farm Classic+ policy is expected to be available in most states in 2023, subject to regulatory approvals. Markel quota share increased from 60% in 2021 to 70% in 2022 and is scheduled to reach 80% in 2023 and thereafter, increasing assumed premium and associated underwriting costs.
- In January 2022, Hagerty invested $15.25 million for approximately 40% of Broad Arrow Group, partnering to expand collector-car buying and selling services. Hagerty also amended its Exchange Agreement in March 2022 to limit cash settlement of exchanges to circumstances involving proceeds from a new permanent equity offering.
Risks and contingencies
- Insurance distribution and underwriting are concentrated: Markel-affiliated carriers accounted for approximately 90% of commission revenue and 95% of amounts due to insurers in 2021. The filing also identifies reliance on a limited number of carrier and distribution relationships.
- Results depend on retaining members, accurate underwriting and reserving, claims experience, reinsurance availability and counterparty performance, and regulatory approval of insurance rates and products. Seasonality typically makes commission and fee revenue lowest in Q4 and early Q1.
- The company disclosed unauthorized access to its online quote system in 2021 that exposed additional consumer data, including driver’s-license numbers. It said the issue was remediated and costs were not material, but noted potential litigation or regulatory action.
- The Up-C structure and Tax Receivable Agreement create obligations to pay legacy unit holders 85% of certain realized tax savings. The filing warns that payments, including accelerated payments in specified circumstances, could affect liquidity.
- HHC and other legacy holders retain substantial voting influence through the dual-class structure. Hagerty is a controlled company and intends to rely on certain NYSE governance exemptions. Potential dilution from warrants, equity plans, and future exchanges is also disclosed.
- Ordinary-course litigation is disclosed; management did not believe its resolution would materially affect the company. As a newly public emerging growth company, Hagerty’s auditor was not required to attest to internal control effectiveness, and no such opinion was provided.
Important facts for investors to verify
- Whether underlying operating performance improves after the 2021 expense growth and the unusual warrant and incentive-compensation charges; compare GAAP results with the company’s non-GAAP measures.
- Whether State Farm and Marketplace initiatives launch on schedule, achieve scale, and generate revenue sufficient to justify the disclosed pre-revenue investment.
- How the rising Markel quota share affects premium growth, ceding commissions, claims exposure, and capital requirements.
- The quality and development of loss reserves, including the effect of inflation, changing vehicle mix, and prior-year favorable reserve development.
- Available unrestricted liquidity versus restricted insurance cash, facility borrowings and covenants, lease commitments, and potential TRA payments.
- The effects of carrier concentration, the 2021 cyber incident, dual-class control, warrants, and potential share issuance on risk and public-stockholder dilution.