Hagerty, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Hagerty operates an enthusiast-vehicle platform spanning insurance, reinsurance, memberships, events and collector-car marketplace services. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $275.6m | $216.8m | $755.2m | $590.6m |
| Operating income (loss) | $16.1m | $(21.2)m | $16.9m | $(31.8)m |
| Consolidated net income | $18.6m | $24.3m | $19.1m | $34.6m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $132.2m | $93.6m |
| Adjusted EBITDA (non-GAAP) | $37.4m | $(10.0)m | $78.4m | $0.1m |
- Q3 revenue increased 27.1%; operating margin was approximately 5.8%, versus a loss margin of approximately 9.8% a year earlier. Nine-month operating margin was approximately 2.2%, compared with a loss margin of approximately 5.4%.
- Q3 diluted EPS was $0.04, compared with $0.07; nine-month diluted EPS was $0.04, compared with $0.03. Basic EPS was $0.04 and $0.18 for Q3, and $0.04 and $0.44 for the nine-month periods, respectively. Per-share results reflect Hagerty’s ownership structure and potentially dilutive securities.
- Insurance growth was supported by premium growth and a higher U.S. reinsurance quota share. Q3 total written premium rose 15.1% to $255.6m; loss ratio improved to 41.1% from 56.4%. The prior-year comparison included $10.0m of Hurricane Ian losses.
- Q3 earned premium rose 30.0% to $139.8m; commission and fee revenue rose 20.7% to $103.2m; membership, marketplace and other revenue rose 37.0% to $32.6m. Marketplace growth partly reflects Broad Arrow, consolidated beginning in August 2022.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $90.7m and restricted cash was $594.9m, for combined cash of $685.6m. Restricted cash is substantial and includes funds held in trust for insurers; it should not be viewed as freely available corporate liquidity.
- Nine-month operating cash flow was $132.2m; investing cash outflow was $34.5m and financing cash inflow was $48.3m. Operating cash flow benefited from growth and working-capital movements.
- Total debt was $76.4m: $45.4m outstanding under a $230m revolving facility, a $25.0m State Farm term loan, and $6.0m of notes payable. Credit-facility borrowings carried an effective rate of 7.41% for the nine-month period. The facility matures in October 2026; the company reported covenant compliance.
- Hagerty issued $80.0m of Series A convertible preferred stock in June, receiving $79.2m net. It carries cumulative 7% annual dividends, compounded annually, and is convertible into Class A shares. The estimated redemption value was $123.4m as of September 30; potential preferred-stock cash payments are excluded from the contractual-obligations table.
Material changes, outlook and risks
- Compared with 2022, operating results improved substantially, but nine-month consolidated net income declined 44.7%. The prior-year period included a $34.7m Broad Arrow revaluation gain and a $37.9m gain from warrant-liability remeasurement; current-period warrant remeasurement was a $1.4m loss. These non-operating items make net-income comparisons less indicative of underlying operating trends.
- Management said liquidity sources should be sufficient for anticipated operating needs and commitments, and that Hagerty Re had adequate capital for at least the next 12 months. The filing provides no specific revenue, earnings or other numerical guidance.
- The company is prioritizing businesses with stronger growth and profit potential. It terminated the Hagerty Garage + Social joint venture, distributed two locations to its former partner and exited the Culver City lease; it also completed the DriveShare sale on October 9, 2023. Related Q3 losses and impairments totaled $4.1m. Further charges may arise from the ongoing review.
- Restructuring, impairment and related charges were $8.9m for the first nine months, including severance, office-space and digital-media impairments. Management attributed the $4.3m digital-media impairment to lower-than-anticipated advertising and sponsorship revenue.
- Concentration is significant: Markel-affiliated carriers accounted for approximately 95% of commission revenue and 97% of assumed premium for the first nine months. The filing identifies disruption of this relationship as a material risk.
- Other risks include insurance claims severity and reserve estimates, catastrophe exposure and reinsurer performance, interest rates, collector-car collateral values, and possible fines or litigation relating to a 2021 data-security incident. Management said the incident was remediated and the accrued liability was not material, but any ultimate fines or settlements are not currently estimable.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It did not believe pending legal matters would have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of reported cash is restricted or held to support insurance obligations, and what liquidity is available to the parent and operating businesses.
- Whether insurance growth, retention and the improved loss ratio persist, and how the higher reinsurance participation affects both premium growth and claims exposure.
- The durability of Markel-related carrier and reinsurance arrangements, given the reported revenue and premium concentration.
- The terms and potential economic cost of the preferred stock, including cumulative dividends, conversion dilution and redemption provisions.
- Whether Marketplace growth and the Garage + Social and DriveShare portfolio changes improve profitability, or lead to additional impairment or divestiture charges.
- Future development of loss reserves, catastrophe losses, the data-security investigation, tax positions and the Tax Receivable Agreement obligation.