Business context and reporting period
Hagerty, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. Hagerty combines specialty insurance and reinsurance for enthusiast vehicles with paid membership, collector-car marketplace and financing, and automotive media and events.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $787.6 million | $619.1 million |
| Operating income (loss) | $(67.6) million | $(10.1) million |
| Net income (loss), consolidated | $2.4 million | $(61.4) million |
| Adjusted EBITDA (non-GAAP) | $(1.9) million | $25.4 million |
| Operating cash flow | $55.3 million | $42.3 million |
| Investing cash flow | $(91.5) million | $(69.0) million |
| Financing cash flow | $(28.1) million | $332.1 million |
| Total debt | $108.3 million | $136.5 million |
Revenue rose 27.2%. Commission and fee revenue increased 13.1% to $307.2 million; earned premium rose 36.3% to $403.1 million; membership, marketplace and other revenue increased 49.5% to $77.3 million. The filing does not present a single gross-margin measure. Calculated from reported figures, operating margin was approximately -8.6% and consolidated net margin approximately 0.3%.
Reported net income included a $41.9 million gain from changes in warrant liabilities and a $34.7 million Broad Arrow remeasurement gain, which offset the operating loss. Basic EPS was $0.39, while diluted EPS was $(0.07); the filing attributes the difference to dilution-related adjustments, including non-controlling interests and warrants.
Insurance indicators: written premium was $776.7 million, up from $674.3 million; policies in force reached 1.316 million, up from 1.247 million; retention was 88.0% versus 89.1%; vehicles in force were 2.234 million versus 2.103 million; and HDC paid members were 752,754 versus 718,583. The loss ratio increased to 45.3% from 41.3%.
Material changes versus 2021
- Earned premium growth reflected both higher assumed premium and an increase in Hagerty Re’s U.S. quota share from 60% to 70%.
- Operating expenses grew 35.9%, faster than revenue. Losses and loss adjustment expenses rose 49.4%; general and administrative expense rose 38.0%; and salaries and benefits rose 16.1%.
- Hurricane Ian generated $10.0 million of net losses and added 2.5 percentage points to the loss ratio. A $6.5 million strengthening of U.S. auto-liability reserves added another 1.6 points. Excluding Hurricane Ian, the loss ratio was 42.8%.
- Hagerty acquired Broad Arrow, including its collector-car auctions and financing operations, and acquired Speed Digital. Broad Arrow contributed $10.8 million of revenue after acquisition; its purchase accounting included $98.6 million of goodwill.
- Cash from operations increased, but investing outflows also rose. Financing cash flow turned negative after the prior-year business-combination proceeds.
Liquidity, debt and outlook
At year-end, cash and cash equivalents were $95.2 million and restricted cash was $444.0 million, for combined cash and restricted cash of $539.2 million. Restricted balances include premium funds held for insurers and trust assets securing reinsurance obligations, and should not be treated as freely available operating liquidity. Hagerty Re separately reported approximately $398.8 million in cash and restricted cash.
Debt was $108.3 million, including $105.0 million outstanding on a $230.0 million revolving credit facility and $3.3 million of notes payable. The facility matures in October 2026; its effective borrowing rate was 6.57% at year-end, versus 1.61% a year earlier. The company reported compliance with its financial covenants. Management said available liquidity sources were expected to meet needs for at least 12 months. Hagerty Re met Bermuda capital requirements; dividends are restricted by solvency rules, with up to $32.9 million available in 2023 without prior Bermuda regulatory approval.
The filing provides no formal financial guidance. Management expected State Farm Classic+ services to begin in the second half of 2023, subject to regulatory approvals, and stated that U.S. and U.K. retained quota share would increase to at least 80% in 2023. Higher retention increases Hagerty Re’s exposure to underwriting results. Management cited continued investment in technology and partnership infrastructure, while 2022 restructuring included a voluntary retirement program, workforce reduction and office-space rationalization. The company recognized $18.3 million of restructuring, impairment and related charges.
Risks, contingencies and other notable items
- Insurance results depend on accurate pricing and reserves, claims severity and frequency, catastrophe exposure, regulatory approvals, and continued support from a limited number of carrier and distribution partners. Markel-related arrangements accounted for 95% of commission revenue in 2022, and Markel-affiliated carriers held 95% of amounts due to insurers.
- Inflation, higher interest rates, economic weakness, vehicle-value changes and foreign exchange movements could affect demand, borrowing costs, claims and investment values. Reinsurance counterparties may fail to pay, and catastrophe protection terms or pricing may change.
- Cybersecurity, privacy, fraud, technology reliability and regulatory compliance are material risks. Hagerty disclosed a 2021 unauthorized-access incident involving its online quote system; it said the issue was remediated, but litigation or regulatory action remains possible.
- Broad Arrow integration, marketplace competition, loan collateral values and the limited operating history of Broad Arrow Capital create execution and credit risks. At year-end, its loan portfolio was $37.4 million, with a 49.4% aggregate loan-to-value ratio and no reported past-due or impaired loans.
- The company has a dual-class structure and is controlled by Hagerty Holding Corp.; Class V shares carry ten votes each. The Tax Receivable Agreement generally entitles legacy holders to 85% of certain realized tax savings and may create significant or accelerated payment obligations in specified circumstances.
- Ordinary-course litigation was disclosed; management did not expect current matters to materially affect financial position, results, liquidity or capital resources. The filing reports no material off-balance-sheet financing arrangements.
Deloitte & Touche LLP issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not required to attest to internal-control effectiveness. Broad Arrow was excluded from management’s year-end internal-control assessment under the SEC’s acquired-business guidance.
Important facts for investors to verify
- Whether core operating performance improves, given the operating loss and negative Adjusted EBITDA despite revenue growth and consolidated net income.
- How much of future revenue and earnings growth comes from underlying policy and membership expansion versus higher reinsurance quota share and acquired businesses.
- Whether claims trends, U.S. auto-liability reserves and catastrophe losses stabilize, and whether reinsurance recoveries are collected as expected.
- How much reported cash is available for corporate needs after accounting for restricted insurance and trust balances, debt service, capital spending and possible TRA payments.
- Whether State Farm Classic+ launches as planned and delivers expected growth, and whether Broad Arrow integration and marketplace financing meet performance expectations.
- Potential dilution from exchangeable Hagerty Group Units, warrants and equity compensation, alongside the governance implications of concentrated voting control.