Hagerty, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Reports unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Hagerty distributes classic and enthusiast vehicle insurance, assumes a portion of related risks through Hagerty Re, and operates membership and automotive enthusiast businesses. Following its December 2021 business combination, Hagerty has an Up-C structure; as of quarter-end, Hagerty, Inc. owned 24.7% of The Hagerty Group, with the remainder represented as non-controlling interests. Figures below are in U.S. dollars; “million” amounts are rounded.
Financial and operating performance
- Revenue: $167.8 million, up 29.9% year over year. Commission and fee revenue was $62.5 million (+14.9%); earned premium was $89.1 million (+41.0%); membership and other revenue was $16.2 million (+39.9%). Growth reflected renewal and premium increases, higher reinsurance quota share, and event-related revenue.
- Profitability: Operating loss widened to $13.0 million from $5.1 million; operating margin was approximately negative 8%, versus negative 4%. Consolidated net income was $15.9 million versus a $6.9 million loss, primarily because a $31.7 million non-cash warrant fair-value gain more than offset the operating loss. Net income attributable to controlling interest was $27.5 million. Basic Class A EPS was $0.33; diluted EPS was a loss of $0.01, reflecting the filing’s diluted-share calculation and warrant-related adjustments.
- Other performance measures: Adjusted EBITDA was negative $6.0 million versus positive $1.0 million. Contribution margin was $37.1 million, up from $31.1 million, but its ratio declined to 22% from 24%. These are non-GAAP measures and exclude specified costs or expenses.
- Insurance and membership indicators: Total written premium was $154.8 million (+15.8%); new insurance business count was 47,514 versus 51,799; policy retention was 88.9% versus 90.0%; loss ratio was unchanged at 41.4%. Paid Hagerty Drivers Club members increased to 727,010 from 666,609; NPS was 82 in both periods.
- Cash flow and liquidity: Operating cash flow was $9.0 million, down from $21.0 million. Investing used $31.8 million, including $15.3 million invested in Broad Arrow and $6.0 million for acquisitions; financing used $19.0 million. Cash and cash equivalents were $237.6 million and restricted cash was $324.6 million at quarter-end. Management said liquidity sources should cover needs for at least 12 months.
- Debt: Long-term credit-facility debt was $117.5 million, down from $135.5 million at year-end 2021; the facility matures in October 2026, had a 1.95% effective rate at quarter-end, and had $230 million of commitments. The company reported covenant compliance. Restricted cash should not be treated as freely available liquidity.
Material changes versus Q1 2021
- Revenue growth did not translate into improved operating results: operating expenses rose 34.6%, faster than revenue growth of 29.9%. Salaries, ceding commissions, losses, sales costs, general and administrative costs, and depreciation and amortization all increased.
- Higher earned premium primarily reflected organic growth and a higher U.S. quota share, which increased from 60% to 70%. Management said the quota share is scheduled to rise to 80% in 2023 and thereafter, increasing both premium revenue and related underwriting costs.
- Other revenue benefited from newly acquired events, including higher sponsorship and admission income. Paid membership grew, while insurance new-business count and retention declined year over year.
- Quarter-end cash and cash equivalents declined from $275.3 million at December 31, 2021, while total cash including restricted balances was $562.2 million. Cash-flow comparisons were affected by working-capital movements and the non-cash warrant gain.
- A March 23 amendment to the Exchange Agreement limited cash settlement of exchanges by legacy holders to cases where the company receives net proceeds from a new permanent equity offering. This removed redeemable non-controlling interest from temporary equity and reclassified it to permanent equity; the resulting accounting changes substantially affected reported equity balances.
Outlook, commentary, risks and unusual items
- No formal numeric revenue or earnings guidance is provided in the supplied filing text. Management expects liquidity to meet needs for at least 12 months and expects State Farm-related features and services to begin in late 2022, with the State Farm Classic+ policy expected to be available in most states in 2023, subject to regulatory review and approval.
- Management reported that new-business growth returned to pre-pandemic pace during the quarter, events were being held, and new initiatives were on track. It also described $9.3 million of quarterly pre-revenue costs for infrastructure, digital platforms, systems, staffing and State Farm/other partnership readiness; these costs were excluded from the Adjusted EBITDA reconciliation and were expected to be substantially completed in 2023.
- Key exposures include insurance claims and reserve-estimate uncertainty, the ability to price risk and retain members, regulatory and solvency requirements, technology or third-party disruptions, and execution of growth initiatives. Hagerty Re reported capital above 120% of its enhanced capital requirement; the company’s stated target is 130%. Bermuda dividend rules restrict distributions, and up to $26.8 million could be paid in 2022 without prior approval.
- Related-party and partner concentration merits attention: Markel-affiliated carriers generated 96% of commission revenue in Q1 2022, and 95% of quarter-end amounts due to insurers were owed to Markel affiliates. State Farm is a significant shareholder and strategic partner. The Broad Arrow investment also involves an executive relationship disclosed in the filing.
- Unusual accounting and transaction items include the $31.7 million warrant fair-value gain, which is non-cash and volatile; a $55.8 million quarter-end warrant liability; and material equity reclassification associated with the Exchange Agreement amendment. In April 2022, Hagerty acquired Speed Digital for $15.0 million from a company indirectly owned by a Hagerty director, and granted equity awards described in the filing.
- The company said ordinary-course claims and legal actions were not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of future earnings and EPS reflects core operations versus warrant remeasurement and Up-C/non-controlling-interest accounting.
- Whether membership, written-premium and renewal growth can continue while new-business count and retention remain below the prior-year quarter.
- Whether rising quota share improves returns after associated ceding commissions, losses and reserve requirements.
- How much of the reported $562.2 million in cash and restricted cash is operationally accessible, and the effect of insurance and regulatory capital restrictions.
- Execution, costs and revenue timing for State Farm, Hagerty Marketplace, Broad Arrow and other expansion initiatives, including whether pre-revenue spending declines as planned.
- Markel-related revenue and payable concentration, the terms and potential dilution of warrants and equity awards, and the timing and amount of potential Tax Receivable Agreement payments.