HAGERTY, INC. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS – InsuranceNewsNet
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide the reader of the financial statements with a narrative from the perspective of management on the financial condition, results of operations, liquidity and certain other factors that may affect our operating results. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8 of Part II of this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed within "Risk Factors" in Item 1A of this report. Unless otherwise indicated or the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we", "our", "Hagerty" and "the Company" refer to the business and operations of
The Hagerty Group, LLCand its consolidated subsidiaries prior to the Business Combination and to Hagerty, Inc.and its consolidated subsidiaries, following the consummation of the Business Combination.
We are a global market leader in providing insurance for classic and enthusiast vehicles and we have built an industry-leading automotive enthusiast platform that engages, entertains, and connects with subscribing members. At Hagerty, everything begins and ends with the love of cars - an innate passion that fuels our unique membership model and cultivates deep, personal connections with more than 2.4 million members worldwide. Hagerty was founded in 1984, and initially focused on providing insurance coverage for antique boats. Today, our goal is to scale an organization capable of building an ecosystem of products, services, and entertainment for car lovers that catalyzes their passion for cars and driving. 49 -------------------------------------------------------------------------------- TABLE OF CONTENTS Recent Developments Affecting Comparability
December 2, 2021, The Hagerty Groupcompleted a business combination pursuant to the Business Combination Agreement with Aldel and Merger Sub. In connection with the Closing, Aldel changed its name from Aldel Financial Inc.to Hagerty, Inc.Following the Closing, Hagerty, Inc.is organized as a C corporation and owns an equity interest in The Hagerty Groupin what is commonly known as an "Up-C" structure. Under this structure, substantially all of Hagerty, Inc.'sassets and liabilities are held by The Hagerty Group. As of December 31, 2021, Hagerty, Inc.owned 24.7% of The Hagerty Group, HHC owned 52.8%, and Markel owned 23.4%. Refer to Note 1 - Summary of Significant Accounting Policies and New Accounting Standards and Note 6 - Business Combination in Item 8 of Part II of this Annual Report on Form 10-K for additional information on the Business Combination.
Impact of COVID-19
March 2020, the World Health Organizationdeclared COVID-19 a pandemic. The pandemic has impacted every geography in which we operate. Governments implemented various restrictions around the world, including closure of non-essential businesses, travel, shelter-in-place requirements for citizens and other restrictions. In response to COVID-19, we have taken several precautionary steps to safeguard our business and team members from COVID-19, including implementing travel restrictions, arranging work from home capabilities and flexible work policies. The safety and well-being of our team members continues to be the top priority. As restrictions were put in place, employees were able to transition to a work from home environment quickly and effectively due to the prior technology investments and the Company's focus on core values. Due to the restrictions and uncertainty caused by the pandemic, 2020 revenue growth was lower than expected primarily caused by lower levels of new business. Offsetting the 2020 revenue shortfall, expenses related to promotional events and travel were lower than anticipated. By the end of 2020, and through the year ended December 31, 2021, new business growth returned to pre-pandemic pace, events were being held and new initiatives were on track. Management will continue to follow and monitor guidelines in each jurisdiction and is working on a phased transition of employees returning to the office. 50 -------------------------------------------------------------------------------- TABLE OF CONTENTS Key Performance Indicators and Certain Non-GAAP Financial Measures In addition to the measures presented in our consolidated financial statements, we use the following key performance indicators and certain non-GAAP financial measures to evaluate our business, measure our performance, identify trends in our business against planned initiatives, prepare financial projections and make strategic decisions. In addition to our financial results prepared in accordance with GAAP, we believe these financial and operational measures are useful in evaluating our performance. The following table presents these metrics as of and for the periods presented: Year Ended December 31, 2021 2020 Total Revenue (in thousands) $619,079 $499,548New Business Count 244,478 236,665 Total Written Premium (in thousands) $674,305 $578,234Policies in Force Retention 89.1% 90.0% Loss Ratio 41.3% 41.3% HDC Paid Member Count 718,583 641,343 Net Promoter Score (NPS) 82.0 84.0 Net Income (Loss) (in thousands) $(61,354) $10,039Adjusted EBITDA (in thousands) $25,350 $29,693Earnings (Loss) Per Share $(0.56)N/A Adjusted Earnings Per Share $(0.17)N/A Operating income (loss) $(10,070) $15,846Contribution Margin $159,571 $146,754New Business Count New business count represents the number of new insurance policies issued during the applicable period. We view new business count as an important metric to assess our financial performance because it is critical to achieving our growth objectives. While Hagerty benefits from strong renewal retention, new business policies more than offset those cancelled or non-renewed at expiration. Often new policies mean new relationships and an opportunity to sell additional products and services.
Total written premium
Total Written Premium is the total amount of insurance premium written on policies that were bound by our insurance carrier partners during the applicable period. We view Total Written Premium as an important metric, as it most closely correlates with our growth in insurance commission revenue and Hagerty Re earned premium. Total Written Premium excludes the impact of premium assumed by unrelated third-party reinsurers and therefore reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we deploy.
Continuation of policies in force
Policies In Force (PIF) Retention is the percentage of current period policies that are renewed on the policy renewal date. We view PIF Retention as an important measurement of the number of policies retained each year, which contributes to recurring revenue streams from MGA commissions, membership fees and earned premiums. It also contributes to maintaining our NPS as discussed below. 51 -------------------------------------------------------------------------------- TABLE OF CONTENTS Loss Ratio Loss Ratio, expressed as a percentage, is the ratio of (a) losses and loss adjustment expenses incurred to (b) earned premium in Hagerty Re. We view Loss Ratio as an important metric because it is a powerful benchmark for profitability. The benchmark allows us to evaluate our historical loss patterns including incurred losses, reset insurance pricing dynamics and make necessary and appropriate adjustments. HDC Paid Member Count HDC Paid Member Count is the number of current members
whopay an annual membership subscription as of an applicable period end date. We view HDC Paid Member Count as important because it helps us measure membership revenue growth and provides an opportunity to customize our value proposition and benefits to specific types of enthusiasts, both by demographic and vehicle interest.
Net Promoter Score
Hagerty uses the NPS as a “measure of the North Star”, measuring the overall strength of
our relationship with members. The NPS is measured twice a year through a
online survey sent by e-mail invitation to a random sample of
members, and reported annually using an average of the two surveys. Often
called a barometer of brand loyalty and customer engagement, the NPS is
well known in our industry as a strong indicator of growth and retention.
We define Adjusted EBITDA as net income (loss) (the most directly comparable GAAP measure) before interest, income taxes, and depreciation and amortization (EBITDA), adjusted to exclude changes in fair value of warrant liabilities, accelerated vesting of incentive plans, gains and losses from asset disposals and certain other non-recurring gains and losses. We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we consider this metric to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations.
Management uses Adjusted EBITDA:
•as a measurement of operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations;
• for planning purposes, including the preparation of our internal annual report
operating budget and financial projections;
•assess the performance and effectiveness of our operational strategies;
•assess our ability to develop our business;
• as a performance factor in measuring performance under our leadership
compensation plan; and
• as a preferred predictor of baseline operational performance, comparisons with benchmarks
periods and competitive positioning.
By providing this non-GAAP financial measure, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net income (loss) or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are: 52
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• This measure does not reflect our cash expenditures or future needs for
capital expenditures or contractual commitments;
• this measure does not reflect changes in or cash requirements for our operations
• this measure does not reflect interest expense or cash requirements
necessary to service interest or principal payments on our debt;
• this measure does not reflect our tax burden or cash requirements to pay
our taxes; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measure does not reflect any cash requirements for such replacements; and other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures. Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementarily. Each of the adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.
The following table reconciles Adjusted EBITDA to the most directly comparable EBITDA
GAAP measure of net income (loss):
Year Ended December 31, 2021 2020 in thousands Net income (loss)
$ (61,354) $ 10,039Interest and other (income) expense 1,993 987 Income tax expense 6,751 4,820 Depreciation and amortization 22,144 11,800 Change in fair value of warrant liabilities 42,540
Accelerated vesting of incentive plans 9,321
Net (gain) loss from asset disposals 1,764
Other non-recurring (gains) losses (1) 2,191 - Adjusted EBITDA
$ 25,350 $ 29,693
(1) Other non-recurring (gains) losses mainly relate to expenses incurred
related to the Business Combination.
$31.0 millionand $17.8 millionduring the years ended December 31, 2021and 2020, respectively, for certain pre-revenue costs related to scaling our infrastructure, human resources, occupancy, newly-developed digital platforms and legacy systems to accommodate our alliance with State Farmand other potential distribution partnerships, as well as to staff and develop our recently announced Marketplace transactional platform. These costs were not included in the Adjusted EBITDA reconciliation above. Pursuant to a defined set of activities and objectives, these expenses are adding entirely new capabilities for us, integrating our new and legacy policyholder, membership and marketplace systems with State Farm'slegacy policy and agent management systems and other third-party platforms. In addition to onboarding a third-party project management related to these initiatives, we leased a new member service center in Dublin, Ohioand added several hundred new employees as of December 31, 2021to meet the expected transactional volume from these initiatives.
These costs began in 2020 and are expected to be largely completed in
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We define Adjusted Earnings Per Share ("Adjusted EPS") as consolidated net loss that is attributable to both our controlling and non-controlling interest of
$61.4 milliondivided by the outstanding and potentially dilutive shares of Hagerty, Inc.(353,366,922), which includes (i) all issued and outstanding shares of Class A Common Stock (82,327,466), (ii) all issued and outstanding shares of Class V Common Stock (251,033,906), and (iii) all un-exercised warrants (20,005,550). For the year ended December 31, 2021, our Adjusted EPS was $(0.17). The most directly comparable GAAP measure is earnings per share ("EPS"), which is calculated as net loss attributable to only controlling interest in Hagerty, Inc.of $46.4 milliondivided by the number of our outstanding shares representing such controlling interest (82,327,466) which, given the net loss for the year ended December 31, 2021, includes only our Class A Common Stock. For the year ended December 31, 2021, our EPS was $(0.56). We caution investors that Adjusted EPS is not a recognized measure under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, including EPS, and that Adjusted EPS, as we define it, may be defined or calculated differently by other companies. In addition, Adjusted EPS has limitations as an analytical tool and should not be considered as a measure of profit or loss per share. We present Adjusted EPS because we consider it to be an important supplemental measure of our operating performance and believe it is used by investors and securities analysts in evaluating the consolidated performance of other companies in our industry. We also believe that Adjusted EPS, which compares our consolidated net loss (which includes our controlling, non-controlling, and redeemable non-controlling interest) with our outstanding and potentially dilutive shares, provides useful information to investors regarding our performance on a fully consolidated basis. We further believe that investors' understanding of our performance across periods is enhanced by Adjusted EPS as a supplemental measure of our results of operations.
Our management uses Adjusted EPS:
•as a measure of the operational performance of our business on a
•assess the performance and effectiveness of our operational strategies;
•assess our ability to develop our business; and
• as a preferred predictor of baseline operational performance, comparisons with benchmarks
periods and competitive positioning.
54 -------------------------------------------------------------------------------- TABLE OF CONTENTS The following table reconciles Adjusted EPS to the most directly comparable GAAP measure, which is EPS: in thousands (except per share amounts) Numerator: Net income (loss) attributable to controlling interest**
$ (46,358)Net income (loss) attributable to non-controlling interest (398)
Net income (loss) attributable to redeemable non-controlling interests
(14,598) Consolidated net income (loss)*
Weighted average Class A common shares outstanding:
Basic and diluted**
82,327 Potentially dilutive shares outstanding: Class V Common Stock outstanding 251,034 Warrants outstanding 20,006 Potentially dilutive shares outstanding 271,040 Fully dilutive shares outstanding* 353,367
EPS = (Net profit (loss) attributable to controlling interest /
Weighted average number of Class A common shares outstanding)**
Adjusted EPS = (Consolidated net income (loss) / Fully dilutive shares outstanding)* $ (0.17)
*entries for non-GAAP measure – BPA adjusted **entries for GAAP measure – BPA
Contribution margin and contribution margin ratio
We define Contribution Margin as total revenue less operating expense adding back our fixed operating expenses such as depreciation and amortization, general and administrative costs and shared service salaries and benefits expenses. We define Contribution Margin Ratio as Contribution Margin divided by total revenue. For the year ended
December 31, 2021, our Contribution Margin was $159.6 millionand our Contribution Margin Ratio was 26%. We present Contribution Margin and Contribution Margin Ratio because we consider them to be important supplemental measures of our performance and believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results. We caution investors that Contribution Margin and Contribution Margin Ratio are not recognized measures under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and that Contribution Margin and Contribution Margin Ratio, as we define them, may be defined or calculated differently by other companies. In addition, both Contribution Margin and Contribution Margin Ratio have limitations as analytical tools because they exclude certain significant recurring expenses of our business. 55 -------------------------------------------------------------------------------- TABLE OF CONTENTS Management uses Contribution Margin and Contribution Margin Ratio:
•to analyze the relationship between cost, volume and profit as sales increase;
•to measure how much profit is made for any product or service sold; and
•to measure how different management actions might affect the Company’s total
revenues and associated cost levels.
The following table reconciles Contribution Margin and Contribution Margin Ratio to the most directly comparable GAAP measures, which are Operating income (loss) and Operating income (loss) margin (Operating income (loss) divided by Total revenue) respectively: Year Ended December 31, 2021 2020 in thousands (except percentages) Total revenue $ 619,079
$ 499,548Less: total operating expenses 629,149 483,702 Operating income (loss) $ (10,070) $ 15,846Operating income (loss) margin (2) % 3 % Add: fixed operating expenses $ 169,641 $ 130,908Contribution Margin $ 159,571 $ 146,754Contribution Margin Ratio 26 % 29 %
Main factors and trends affecting our operational performance
Our financial condition and results of operations have been and will continue
be, affected by a number of factors, including the following:
Our ability to attract members
Our long-term growth will depend, in large part, on our continued ability to attract new members to our platform. Our growth strategy is centered around accelerating our existing position in markets that we already serve, expanding into new markets domestically across the
U.S., internationally in Canadaand the U.K.and eventually the E.U., digital innovation and developing new strategic insurance and lifestyle partnerships with key players in the automotive industry.
Our ability to retain our members
Turning our members into lifetime fans is key to our success. We currently have over 2.4 million members, including approximately 719,000 paid subscribers ("HDC Members") and over 1.7 million
whopurchase insurance or interact with us but have yet to join HDC and receive additional club-level benefits. Our ability to retain members will depend on a number of factors including our NPS and members' satisfaction with our products, pricing and offerings of our competitors. 56 -------------------------------------------------------------------------------- TABLE OF CONTENTS Our Ability to Increase HDC Membership Subscriptions Our long-term growth will benefit from our ability to increase our HDC membership subscription base across the U.S., Canadaand into the U.K.and the E.U. We realize increasing value from each HDC Member whosigns up with us or is retained as a recurring revenue base, forming the basis for organic growth for our new product offerings and improving our loss ratios over time. One of our principal goals is to convert all of our members whoare not currently HDC Members to paid subscribers over time. We apply our highly scalable model, with a tailored approach to each enthusiast type across all demographic groups. We are also able to drive membership in HDC through our insurance distribution channels. Approximately 75% of new insurance policy holders purchase memberships in HDC.
Our ability to introduce new and innovative products
Our growth will depend on our ability to introduce new and innovative insurance and automotive lifestyle products that will drive organic growth from our existing member base as well as attract new customers. Our insurance offerings as well as our membership and marketplace technology platforms provide us with a foundation to expand our insurance and membership base, engage auto enthusiasts and provide innovative products to members globally.
Our ability to manage risk through our technology
Risk is managed through our technology, proprietary algorithms, underwriting and claims practices, data science and regulatory compliance capabilities, which we use to determine the risk profiles of our members. Our ability to manage risk is enhanced and controlled over time as data is continuously collected and analyzed by our algorithms with the objective of lowering our loss ratios over time. Our success depends on our ability to adequately and competitively price risk.
Our ability to manage growth related to our strategic alliances
We have strategic alliances with several insurance carriers that we expect to serve as a key driver in our growth in commission and fee revenue. For example, we expect
State Farmto begin offering our features and services to its customers in late 2022, which we expect will begin to drive additional commission and fee revenue.
Our ability to increase quota share
Hagerty Re's 2021 quota share of business assumed from Markel in the
U.S.and U.K.was 60%. The quota share percentage increased to 70% in 2022 and will increase to 80% in 2023 and the years thereafter under a contract with Markel. The increase in quota share will have the effect of increasing our revenue, which will partially be offset by increases in our underwriting costs.
Components of our operating results
We primarily generate revenue from the sale of automotive insurance policies and HDC membership subscriptions as well as from participating in the underwriting results on policies written by our insurance carrier partners. Our revenue model incorporates multiple components in the insurance and lifestyle value chains, built on data collection and member experience. 57 -------------------------------------------------------------------------------- TABLE OF CONTENTS Commission and fee revenue Our insurance affiliated intermediaries act as MGAs
who, among other things, write collector vehicle business on behalf of the insurance carrier partners. In exchange for commissions paid by the insurance carrier partners, we generally handle all sales, marketing, pricing, underwriting, policy administration and fulfillment, billing and claim services. In addition, we also manage all aspects of our omnichannel distribution, both direct and brokerage, including independent agencies, national sales accounts, large agency and broker networks and national partner relationships. We earn new and renewal commissions for the distribution and servicing of classic automobile and boat insurance policies written through personal and commercial lines with multiple insurance carrier partners in the U.S., Canadaand the U.K.Additionally, policyholders pay fees directly to us related to their insurance coverage. These commissions and fees are earned when the policy becomes effective, net of policy changes and cancellations. For policies that have elected to pay via installment plan, revenue is recognized on the policy effective date as the insured becomes fully entitled to the policy benefits, regardless of when payment is collected. Our performance obligation to the insurance carrier partner is complete when the policy is issued. Under the terms of many of its contracts with insurance carrier partners, we have the opportunity to earn an annual CUC, or profit-share, based on the calendar-year performance of the insurance book of business with each of those insurance carrier partners. Our CUC agreements are based on written or earned premium and loss ratio results. Each insurance carrier partner contract and related CUC is calculated independently. Revenue from CUC is accrued throughout the year and settled annually.
Reinsurance premiums are earned by our single cell captive reinsurance company, Hagerty Re. Hagerty Re reinsures the classic auto and marine risks written through our affiliated MGAs in the
U.S., Canadaand the U. K. Hagerty Reis a Bermuda-domiciled, Class 3A reinsurer. Hagerty Re was funded in December 2016and was granted a license by the BMA in March 2017.
Earned premiums represent the earned portion of gross written premiums which
Hagerty Re has assumed, under quota-share reinsurance agreements with our
insurance partners. Earned premiums are recognized over the term of the
policy, which is usually 12 months.
Membership and other income
We earn subscription revenue and other revenue through membership offerings and other automotive and lifestyle services sold to policyholders and classic vehicle enthusiasts. HDC memberships are sold as a bundled product which give members access to our products and services, including
HDC Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, emergency roadside services and special vehicle-related discounts. Hagerty Garage+ Social storage memberships include storage in addition to the HDC member benefits. Income from the sale of HDC and storage membership subscriptions is recognized ratably over the period of the membership, which is generally 12 months. Other revenue includes advertising sales, admission income, sponsorships, event registration fees, valuation services, merchandise sales and DriveShare rentals. Other revenue is recognized when the performance obligation for the related product or service is satisfied. Costs and Expenses
Our costs and expenses consist of salaries and benefits paid to employees,
assigning commissions, claims and claims settlement expenses paid to insurance companies
transport partners, commercial costs, general and administrative services,
depreciation and amortization, change in fair value of warrant liabilities and
income tax expense.
58 -------------------------------------------------------------------------------- TABLE OF CONTENTS Salaries and benefits Salaries and benefits consist primarily of costs related to employee compensation, payroll taxes, employee benefits and employee development costs. Employee compensation includes wages paid to employees as well as various incentive compensation plans. Employee benefits include the costs of various employee benefits plans including medical and dental insurance, wellness benefits and others. Costs related to employee education, training and recruiting are included in employee development costs. Salaries and benefits costs are expensed as incurred except for those costs which are required to be capitalized, which are then amortized over the useful life of the asset created (generally software or media content). Salaries and benefits are expected to increase over time as the business continues to grow, but will likely decrease as a percent of revenue. Ceding commission Ceding commission consists of the commission paid by Hagerty Re to our insurance carrier partners for our pro-rata share of acquisition costs (primarily our MGA commissions), general and administrative services and other costs. Hagerty Re pays a fixed rate ceding commission which varies by insurance carrier partner, averaging 48% of net earned premium. Ceding commission will change proportionately to earned premium assumed through our various quota share reinsurance agreements.
Claims and claims adjustment expenses
Losses and loss adjustment expenses consist of our portion of the net cost to settle claims submitted by insureds. Losses consist of claims paid, case reserves and losses, IBNR, net of estimated recoveries for reinsurance, salvage and subrogation. Loss adjustment expenses consist of the cost associated with the investigation and settling of claims. Losses and loss adjustment expenses represent management's best estimate of ultimate net loss at the financial statement date. Estimates are made using statistical analysis by our internal actuarial team. These reserves are reviewed regularly and adjusted as necessary to reflect management's estimate of the ultimate cost of losses and loss adjustment expenses. Losses and loss adjustment expenses represent our share of losses assumed through various reinsurance agreements entered by Hagerty Re and our insurance carrier partners. Our reinsurance contracts are quota share reinsurance agreements on the business underwritten by our MGAs. These expenses are expected to grow proportionately with written premium and increase as the quota share percentage contractually increases.
Sales expense includes costs related to the sales and servicing of a policy, primarily broker expense, cost of sales, promotion expense and travel and entertainment expenses. Cost of sales includes postage, document costs, payment processing fees, emergency roadside service costs and other variable costs associated with the sale and servicing of a policy. Broker expense is the compensation paid to our agent partners and national broker partners when an insurance policy is written through a broker relationship. Promotion expense includes various expenses related to branding, events, advertising, marketing, and acquisition. Sales expenses, in general, are expensed as incurred and will likely increase as we continue to grow. Broker expense and cost of sales will likely track with written premium growth, while promotion expense and travel and entertainment expense will decrease as a percent of revenue over the long-term.
General and administrative services
General and administrative services consist of occupancy costs, hardware and software, consulting services, legal and accounting services, community relations and non-income taxes. These costs are expensed as incurred. We expect this expense category to increase commensurate with our expected business volume and growth expectations and be managed lower as a percent of revenue over the next few years after we reach scale to handle incoming business from new partnerships. 59 -------------------------------------------------------------------------------- TABLE OF CONTENTS Depreciation and amortization Depreciation and amortization reflects the recognition of the cost of our investments in various assets over their useful life. Depreciation expense relates to leasehold improvements, furniture and equipment, vehicles, hardware and purchased software. Amortization relates to investments related to recent acquisitions, SaaS implementation, internal software development and investments made in digital media and content assets. Depreciation and amortization are expected to increase slightly in dollar amount over time but will likely decrease as a percent of revenue as investments in platform technology reach scale.
Change in fair value of warrant liabilities
Our warrants are accounted for as liabilities in accordance with Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging and are measured at fair value at inception each reporting period, with changes in fair value recognized as non-operating income (expense). In general, under the fair value accounting model, as our stock price increases, the warrant liability increases, and we recognize additional expense in our Consolidated Statements of Operations. As our stock price decreases, the warrant liability decreases, and we recognize additional income in our Consolidated Statements of Operations.
income tax expense
The Hagerty Groupis taxed as a pass-through ownership structure under provisions of the Internal Revenue Code ("IRC") and a similar section of state income tax law, except for Hagerty Re and various foreign subsidiaries. Any taxable income or loss generated by The Hagerty Groupis passed through to and included in the taxable income or loss of Hagerty Group Unit Holders, including Hagerty, Inc. Hagerty, Inc.is taxed as a corporation and pays corporate federal, state, and local taxes with respect to income allocated from The Hagerty Group. 60 --------------------------------------------------------------------------------
TABLE OF CONTENTS Results of Operations Summary The following table summarizes our results of operations for the years ended
December 31, 2021and 2020, and the dollar and percentage change between the two years: Year ended December 31, 2021 2020 $ Change % Change REVENUES: in thousands (except percentages) Commission and fee revenue $ 271,571 $ 236,443 $ 35,12814.9 % Earned premium 295,824 220,502 75,322 34.2 % Membership and other revenue 51,684 42,603 9,081 21.3 % Total revenues 619,079 499,548 119,531 23.9 % OPERATING EXPENSES: Salaries and benefits 171,901 137,508 34,393 25.0 % Ceding commission 140,983 105,974 35,009 33.0 % Losses and loss adjustment expenses 122,080 91,025 31,055 34.1 % Sales expense 107,483 86,207 21,276 24.7 % General and administrative services 64,558 51,188 13,370 26.1 % Depreciation and amortization 22,144 11,800 10,344 87.7 % Total operating expenses 629,149 483,702 145,447 30.1 % OPERATING INCOME (LOSS) (10,070) 15,846 (25,916) (163.5) % Change in fair value of warrant liabilities (42,540) - (42,540) (100.0) % Interest and other income (expense) (1,993) (987) (1,006) (101.9) % INCOME (LOSS) BEFORE INCOME TAX EXPENSE (54,603) 14,859 (69,462) (467.5) % Income tax expense (6,751) (4,820) (1,931) (40.1) % NET INCOME (LOSS) $ (61,354) $ 10,039 $ (71,393)(711.2) % Revenue Commission and fee revenue Commission and fee revenue was $271.6 millionfor the year ended December 31, 2021, an increase of $35.1 million, or 14.9%, compared to 2020. The increase was comprised of an increase of $6.1 millionin revenues from new policies and an increase of $29.0 millionin revenues from renewal policies. The increase is primarily due to new business policy count growth of 3.3% and an increase in new and renewal average premium of 10.8% and 3.4%, respectively. Commission and fee revenue from direct sources increased $19.6 million, or 18.3%, from $107.1 millionduring the year ended December 31, 2020to $126.7 millionduring the year ended December 31, 2021. Our commission and revenue from agent sources increased $15.5 million, or 12.0%, from $129.3 millionduring the year ended December 31, 2020to $144.9 millionduring the year ended December 31, 2021. The growth in our direct sources has been primarily attributable to increasingly strong performance in our direct sales channels as well as the entry into our alliance with Aviva in the first quarter of 2020, which shifted some of our business to direct sources. Commission rates, generating commission revenue, vary based on geography but do not differ by distribution channel (i.e., whether they are direct-sourced or agent-sourced). 61 -------------------------------------------------------------------------------- TABLE OF CONTENTS The following table presents the detail of our commission and fee revenues for the years ended December 31, 2021and 2020 by geography: U.S. Canada U.K. Total in thousands Year Ended December 31, 2021 Commission and fee revenue $ 193,520 $ 16,782 $ 3,934 $ 214,236Contingent commission 57,424 (383) 294 57,335 Total $ 250,944 $ 16,399 $ 4,228 $ 271,571Year Ended December 31, 2020 Commission and fee revenue $ 165,740 $ 13,274 $ 3,001 $ 182,015Contingent commission 51,820 1,741 867 54,428 Total $ 217,560 $ 15,015 $ 3,868 $ 236,443During the year ended December 31, 2021, we experienced consistent organic growth across all jurisdictions in commission and fee revenue. CUC growth of 10.8% in the U.S.was below commission and fee growth of 16.8% due to higher than anticipated loss ratio performance. CUC revenue decreased in Canadaand the U.K.due to changes in alliance agreements with carriers now participating in our reinsurance program rather than paying a CUC.
Earned premium revenue was
$295.8 millionfor the year ended December 31, 2021, an increase of $75.3 million, or 34.2%, compared to 2020. Organic growth added approximately $36.9 millionto earned premium revenue and the increase in U.S.quota share percentage added approximately $27.9 millionto earned premium during the year ended December 31, 2021. Additionally, the Aviva reinsurance agreement, entered in the first quarter of 2020, contributed $9.2 million, and the U.K.reinsurance agreement, entered in the first quarter of 2021, contributed $1.2 millionto the increase in earned premium in 2021. This increase in earned premium generally correlates with an increase in written premiums assumed by the Company of $103.4 millionfrom $250.6 millionfor the year ended December 31, 2020to $353.9 millionfor the year ended December 31, 2021. Membership and other revenue Membership and other revenue was $51.7 millionfor the year ended December 31, 2021, an increase of $9.1 million, or 21.3%, compared to 2020. Membership fee revenue was $40.6 millionfor the year ended December 31, 2021, an increase of $4.3 million, or 11.9%, compared 2020, which was primarily attributable to the increase in the issuance of new policies bundled with an HDC membership, as well as growth of new stand-alone HDC subscriptions (i.e., HDC subscriptions sold to members without insurance policies). For the year ended December 31, 2021, membership fees were 78.6% of the Membership and other revenue total. Other revenue was $11.1 millionfor the year ended December 31, 2021, an increase of $4.8 million, or 75.2%, compared to 2020, primarily due to newly acquired business lines in motorsports registration and events, driving increases of $1.1 millionand $1.3 millionin admission income and motorsport registration income, respectively, for the year ended December 31, 2021compared to 2020. DriveShare rentals, event sponsorship and media advertising created cumulative growth of $1.8 millionin for the year ended December 31, 2021compared to 2020. Other revenue includes advertising, valuation and registration income, and accounts for 21.4% of the membership and other revenue total. 62 --------------------------------------------------------------------------------
TABLE OF CONTENTS Costs and Expenses Salaries and benefits Salaries and benefits expenses were
$171.9 millionfor the year ended December 31, 2021, an increase of $34.4 million, or 25.0%, compared to 2020. The increase was primarily attributable to a net increase of greater than 200 employees in our sales, member services, technology and distribution units, an increase of over 15.0% year over year. Headcount increased to support current and anticipated growth, such as the additions of several new large national insurance partnerships and our continued development of new systems and digital transformation technology investments, as well as several acquisitions primarily in the event and lifestyle business.
Ceding commission expense was
$141.0 millionfor the year ended December 31, 2021, an increase of $35.0 million, or 33.0%, compared to 2020. The increase was primarily attributable to higher U.S.premium volume ceded to Hagerty Re from our insurance carrier partners, which added approximately $17.5 million, and an increase in our U.S.quota share percentage from 50% in 2020 to 60% in 2021, which accounted for $13.2 million. In Canada, which began ceding premium in the first quarter of 2020, commissions increased $3.9 millionfor the year ended December 31, 2021, compared to 2020. Hagerty Re pays a fixed rate ceding commission which varies by insurance carrier partner, averaging 48% of net earned premium.
The following table shows the amount of premiums ceded and the share
percentages for completed years
U.S. Canada U.K. Total in thousands (except percentages) Year Ended December 31, 2021 Subject premium
$ 558,297 $ 43,844 $ 6,003 $ 608,144Quota share percentage 60.0 % 35.0 % 60.0 % 58.2 % Assumed premium in Hagerty Re $ 334,978 $ 15,345 $ 3,602 $ 353,925Net ceding commission $ 134,469 $ 6,037 $ 477 $ 140,983Year Ended December 31, 2020 Subject premium $ 478,527 $ 32,700$ - $ 511,227Quota share percentage 50.0 % 35.0 % - % 49.0 % Assumed premium in Hagerty Re $ 239,263 $ 11,294$ - $ 250,557Net ceding commission $ 103,908 $ 2,066$ - $ 105,974In the U.S., the increase in premiums assumed in Hagerty Re during the year ended December 31, 2021compared to 2020 was primarily due to Hagerty Re's U.S.quota share increasing from 50% in 2020 to 60% in 2021. In Canada, the increase in premiums assumed by Hagerty Re from December 31, 2020to December 31, 2021was primarily due to our reinsurance agreement with Aviva, which became effective during the first quarter of 2021. In the U.K., the increase in premiums assumed in Hagerty Re from December 31, 2020to December 31, 2021was primarily due to the entry into the U.K.reinsurance agreement, which became effective during the first quarter of 2021. 63 -------------------------------------------------------------------------------- TABLE OF CONTENTS Losses and loss adjustment expenses Losses and loss adjustment expenses were $122.1 millionfor the year ended December 31, 2021, an increase of $31.1 million, or 34.1%, compared to 2020. The increase was primarily driven by higher premium volume ceded to Hagerty Re from our insurance carrier partners. The loss ratio, including catastrophe losses, was 41.3%, for both the years ended December 31, 2021and December 31, 2020.
Sales expense was
$107.5 millionfor the year ended December 31, 2021, an increase of $21.3 million, or 24.7%, compared to 2020. The increase was primarily due to additional premium volume across our agent and direct distribution channels of $6.3 million, increased roadside costs from our towing provider of $3.2 million, and increased promotion and travel costs for events reopening in 2021 of $9.8 million.
General and administrative services
General and administrative services expenses were
$64.6 millionfor the year ended December 31, 2021, an increase of $13.4 million, or 26.1%, compared to 2020. The increase was primarily driven by $6.1 millionin higher software subscription and hardware costs and $4.2 millionin consulting services, primarily related to digital innovation initiatives and digital platform optimization.
Depreciation and amortization
Depreciation and amortization expense was
$22.1 millionfor the year ended December 31, 2021, an increase of $10.3 million, or 87.7%, compared to 2020. The increase was primarily attributable to a higher base of capital assets from our digital platform development investment. Amortization on these capital assets increased by $8.5 million.
Change in fair value of warrant liabilities
During the year ended
December 31, 2021, the change in fair value of warrant liabilities was $42.5 million, which represents the change in our warrant liabilities after the Business Combination. We did not have warrants as of December 31, 2020. Refer to Note 17 - Warrant Liabilities in Item 8 of Part II of this Annual Report on Form 10-K for additional information with respect to our warrants. Income tax expense Income tax expense was $6.8 millionfor the year ended December 31, 2021, an increase of $1.9 million, or 40.1%, compared to 2020. The increase in income tax expense for the year ended December 31, 2021compared to 2020 was primarily due to an increase in income before income tax expense of $9.0 millionwithin Hagerty Re, which is taxed as a corporation. Refer to Note 21 - Taxation in Item 8 of Part II of this Annual Report on Form 10-K for additional information with respect to items affecting our effective tax rate.
Cash and capital resources
Maintaining a strong balance sheet and capital position is a top priority. We manage liquidity globally and across all operating subsidiaries, making use of our working capital, equity proceeds from the Business Combination and our credit facility (as defined below) when needed. Through our reinsurance subsidiary, Hagerty Re, we reinsure the same personal lines risks that are underwritten by our affiliated MGA subsidiaries on behalf of our insurance carrier partners. Our reinsurance operations are self-funded primarily through existing capital and net cash flows from operations. As of
December 31, 2021, Hagerty Re had approximately $291.6 millionin cash and cash equivalents and municipal securities. Our MGA operations are financed primarily through the commissions and fees received from our insurance carrier partners and, if necessary, proceeds from our existing credit facility. Our membership-related subsidiaries finance their operations from the sale of HDC Member subscriptions, as well as proceeds, if necessary, from our existing credit facility. 64 -------------------------------------------------------------------------------- TABLE OF CONTENTS We, particularly Hagerty Re, pays close attention to the underlying underwriting and reserving risks by monitoring the pricing and loss development of the underlying business written through its affiliated MGAs. Additionally, Hagerty Re seeks to minimize its investment risk by investing in low yield cash, money market accounts and investment grade municipal securities.
Bermuda, Hagerty Re is subject to the BSCR administered by the BMA. No regulatory action is taken by the BMA if an insurer's capital and surplus is equal to or in excess of their enhanced capital requirement as determined by the BSCR model. In addition, the BMA has established a target capital level for each insurer which is 120% of the enhanced capital requirement. To ensure compliance with BSCR standards, Hagerty Re's target is 130% of the enhanced capital requirement. As of December 31, 2021, Hagerty Re's actual performance relative to the enhanced capital requirement was in excess of 120%.
Bermudalaw, Hagerty Re is prohibited from declaring or issuing a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. Prior approval from the BMA is also required if the Hagerty Re's proposed dividend payments would exceed 25% of its prior year-end total statutory capital and surplus. The amount of dividends which could be paid by Hagerty Re in 2022 without prior approval is $26.8 million. Regulation relating to insurer solvency is generally for the protection of the policyholders rather than for the benefit of the stockholders of an insurance company. We believe that our existing cash and cash equivalents and municipal securities and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our reinsurance premium growth rate, renewal rates, the introduction of new and enhanced products, entry into, and successful entry in new geographic markets, and the continuing market adoption of our product offerings.
Comparative cash flows
The following table summarizes our cash flow data for the years ended
December 31, 2021and 2020: Year Ended December 31, 2021 2020 $ Change % Change in thousands (except percentages) Net cash provided by operating activities $ 42,281 $ 84,572 $ (42,291)(50.0) % Net cash used in investing activities $ (68,994) $ (47,388) $ (21,606)(45.6) % Net cash provided by financing activities $ 332,071 $ 39,948 $ 292,123731.3 % Operating Activities
Cash flow generated by operating activities consists mainly of adjusted net income
for non-cash items and changes in working capital balances.
65 -------------------------------------------------------------------------------- TABLE OF CONTENTS Net cash provided by operating activities is presented below: Year Ended December 31, 2021 2020 $ Change % Change in thousands (except percentages) Net income (loss)
$ (61,354) $ 10,039 $ (71,393)(711.2) % Non-cash adjustments to net income (loss) 70,302 16,684 53,618 321.4 % Changes in operating assets and liabilities 33,333 57,849
Net cash flow generated by operating activities
Net cash provided by operating activities for the year ended
December 31, 2021was $42.3 million. Cash provided during the period included $8.9 millionfrom net income (loss) after non-cash expenses are excluded. Non-cash expenses included the change in fair value of warrant liabilities of $42.5 million, depreciation and amortization expense of $22.1 million, an increase in our provision for deferred taxes of $3.0 millionand loss on disposal of assets of $2.4 million. Changes and growth in operating assets and liabilities provided $33.3 millionof operating cash. The increase in cash from changes in operating assets and liabilities was primarily attributable to increases in unearned premiums of $50.5 million, provision for unpaid losses and loss adjustment expenses of $19.9 million, commission payable of $16.8 millionand losses payable of $12.5 million, partially offset by increases in deferred acquisition costs of $23.0 million, premiums receivable of $22.7 million, and prepaid expenses and other assets of $18.5 million. These increases in operating assets and liabilities are related to the growth we experienced in 2021. Net cash provided by operating activities for the year ended December 31, 2020was $84.6 million. Cash provided during this period included $26.7 millionfrom net income (loss) after non-cash expenses are excluded. Non-cash expenses included depreciation and amortization expense of $11.8 million, loss on disposal of software development of $2.6 millionand an increase in our provision for deferred taxes of $1.5 million. The increase in cash from changes in our operating assets and liabilities was primarily attributable to increases in unearned premiums of $25.6 million, provision for unpaid losses and loss adjustment expenses of $22.4 millionand contract liabilities of $22.2 million, driven by advanced commission from new carrier partner, partially offset by an increase in accounts receivable of $14.5 million.
During the year ended
December 31, 2021, we invested approximately $43.4 millionin property, equipment and software (excluding acquisitions), an increase of $5.1 millioncompared to 2020. Our primary capital expenditures included a $20.4 millioninvestment in the scaling of digital platforms to support growth driven by strategic alliances, a $12.2 millioninvestment in development of membership and marketplace technology platforms, and a $7.0 millioninvestment in core operations infrastructure to support headcount growth. Additionally, we had acquisitions totaling $14.6 millionduring the year ended December 31, 2021, an increase of $5.7 millioncompared to 2020. For additional information regarding our 2021 and 2020 acquisitions, refer to Note 7 - Acquisitions in Item 8 of Part II of this Annual Report on Form 10-K. Lastly, during the year ended December 31, 2021, Hagerty Re invested in fixed income securities in connection with our reinsurance agreement with Aviva. Hagerty Re had no such fixed income securities during the year ended December 31, 2020. For additional information regarding our fixed income securities, refer to Note 1 - Summary of Significant Accounting Policies and New Accounting Standards in Item 8 of Part II of this Annual Report on Form 10-K. 66 -------------------------------------------------------------------------------- TABLE OF CONTENTS Financing Activities Cash provided by financing activities for the year ended December 31, 2021increased $292.1 millioncompared to 2020, primarily due to the Business Combination and an increase in outstanding debt under our credit facility. There were net total cash inflows of $269.0 millionrelated to the Business Combination, including proceeds of $789.7 million, offset by $489.7 millionof distributions to the Legacy Unit Holders and $31.0 millionof capitalized transaction costs in 2021. Refer to Note 6 - Business Combination in Item 8 of Part II of this Annual Report on Form 10-K. There were total net cash inflows of $67.5 millionrelated to draws under our credit facility during the year ended December 31, 2021, compared to $43.9 millionduring the year ended December 31, 2020.
Sources and future uses of liquidity
Our initial sources of liquidity will be (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our credit facility. Based on our current expectations, we believe that these sources of liquidity will be sufficient to meet our needs for at least the next 12 months.
We anticipate that our primary cash requirements will include cash used for (1)
facilitate the organic growth of our business, (2) pay operating expenses,
including cash compensation for our employees, (3) fund the growth of our
membership and market initiatives, (4) pay interest and principal due on
borrowings under our credit agreement, (5) pay income taxes and (6) make
payments under the Tax Receivables Agreement.
Multi-bank credit facility
Credit Agreement (the “Credit Agreement”), which amended the terms of our
revolving credit facility (the “Credit Facility”) with
N / A
from time to time as lenders.
The aggregate amount of commitments available to us under the Credit Facility is
$230.0 million. The Credit Agreement also provides for an uncommitted incremental component of the facility under which we may request one or more increases in the amount of the commitments available under the Credit Facility in an aggregate amount not to exceed $50.0 million. Additionally, the Credit Agreement also provides for the issuance of letters of credit and the making of discretionary swing line loans, with sublimits of $25.0 millionand $3.0 million, respectively, or lesser amounts in the event the available aggregate commitments are less than such sublimits.
The current term of the credit agreement expires in
extended for one year on an annual basis if agreed between us and the lending party
to this one. Any outstanding balance on the credit facility is due when due.
We may elect that borrowings made under the Credit Facility bear interest at a rate per annum equal to either (i) a base rate equal to the greatest of (a) the prime rate published by the
Wall Street Journal, (b) the greater of (1) the federal funds effective rate and (2) the overnight bank funding rate, in either case, plus 0.5%, and (c) a one-month adjusted London Inter-bank Offered Rate ("LIBOR") plus 1.0% or (ii) an adjusted LIBOR rate equal to the LIBOR rate multiplied by the statutory reserve rate, plus, in either case, an applicable margin based on a leverage ratio calculated based on our financial statements for its four most recent fiscal quarters. The Credit Agreement also contains customary LIBOR replacement provisions in the event LIBOR reference rates are no longer available. The Credit Facility borrowings are collateralized by our assets, except for the assets of our U.K., Bermudaand German subsidiaries as well as the assets of the Hagerty Events, LLCand the non-wholly owned subsidiaries of MHH. 67 -------------------------------------------------------------------------------- TABLE OF CONTENTS Under the Credit Agreement, we are required, among other things, to meet certain financial covenants, including a fixed charge coverage ratio and a leverage ratio. We were in compliance with these covenants as of December 31, 2021.
Interest rate swap
Interest rate swap agreements are contracts to exchange floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense. The purpose of the interest rate swap agreement is to fix the interest rate on a portion of our existing variable rate debt in order to reduce exposure to interest rate fluctuations. Under such agreements, we pay the counterparty interest at a fixed rate. In exchange, the counterparty pays us interest at a variable rate, adjusted quarterly and based on LIBOR or the alternative replacement of LIBOR. The amount exchanged is calculated based on the notional amount. The significant inputs, primarily the LIBOR forward curve, used to determine the fair value are considered Level 2 observable market inputs. We monitor the credit and nonperformance risk associated with its counterparty and believes the risk to be insignificant at
December 31, 2021.
initial notional amount of
initial notional amount of
Agreement on tax claims
Hagerty, Inc.expects to have adequate capital resources to meet requirements and obligations under the Tax Receivable Agreement entered into with the Legacy Unit Holders on December 2, 2021that provides for the payment by Hagerty, Inc.to the Legacy Unit Holders of 85% of the amount of cash savings, if any, under U.S.federal, state and local income tax or franchise tax realized as a result of (i) any increase in tax basis of Hagerty, Inc.'sassets resulting from (a) purchase of Hagerty Group Units from any of the Legacy Unit Holders using the net proceeds from any future offering, (b) redemptions or exchanges by the Legacy Unit Holders of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock or (c) payments under the Tax Receivable Agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement. Legacy Unit Holders may, subject to certain conditions and transfer restrictions described above, redeem or exchange their Class V Common Stock and Hagerty GroupUnits for shares of Class A Common Stock of Hagerty, Inc.on a one-for-one basis. The Hagerty Groupmade an election under Section 754 of the IRC of 1986, as amended, and the regulations thereunder (the "Code") effective for each taxable year in which a redemption or exchange of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock occurs, which is expected to result in increases to the tax basis of the assets of The Hagerty Groupat the time of a redemption or exchange of Hagerty Group Units. The redemptions and exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of The Hagerty Group. These increases in tax basis may reduce the amount of tax that Hagerty, Inc.would otherwise be required to pay in the future. This payment obligation as a part of the Tax Receivable Agreement is an obligation of Hagerty, Inc.and not of The Hagerty Group. For purposes of the Tax Receivable Agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Hagerty, Inc.(calculated with certain assumptions) to the amount of such taxes that Hagerty, Inc.would have been required to pay had there been no increase to the tax basis of the assets of The Hagerty Groupas a result of the redemptions or exchanges and had Hagerty, Inc.not entered into the Tax Receivable Agreement. Estimating the amount of payments that may be made under the Tax Receivable Agreement is by nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. 68 -------------------------------------------------------------------------------- TABLE OF CONTENTS Contractual Obligations
The following table summarizes the main contractual and other obligations
Total 2022 2023 2024 2025 2026 Thereafter in thousands Debt
$ 136,500 $ 1,000$ - $ - $ - $ 135,500$ - Interest payments 1,182 363 273 273 273 - - Operating leases 96,765 9,068 8,783 8,587 8,451 7,936 53,940 Purchase commitments 8,775 4,607 4,168 - - - - Total $ 243,222 $ 15,038 $ 13,224 $ 8,860 $ 8,724 $ 143,436 $ 53,940
Interest payments exclude interest payments on floating rate debt and commitment
fees related to our credit facility.
Significant Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies and New Accounting Standards, in Item 8 of Part II of this Annual Report on Form 10-K. Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of Consolidated Financial Statements requires management to make assumptions and estimates that affect the reported results of operations and financial position, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. The following is a discussion of the accounting policies, estimates and judgments that management believes are most significant in the application of GAAP used in the preparation of our Consolidated Financial Statements. These accounting policies, among others, may involve a high degree of complexity and judgment on the part of management. Further, these estimates and other factors could have significant adverse impact to our financial condition, results of operations and cash flows. We evaluate our significant estimates on an ongoing basis and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Unpaid Losses and Claims Adjustment Expenses
Unpaid losses and loss adjustment expenses are the difference between the estimated cost of losses incurred and the amount of paid losses as of the reporting date. These reserves reflect our management's best estimate for both reported claims and IBNR claims. The reserves also include estimates of all expenses associated with processing and settling all reported and unreported claims. We regularly review the provision estimates and updates those estimates as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Updates made to reserve estimates based on new information may cause changes in prior reserve estimates. These changes are recorded as losses and loss adjustment expenses in the period such changes are determined. Estimating the ultimate cost of claims and claims expenses is an inherently complex process that involves a high degree of judgment. The inputs requiring management judgement in the estimate of the provision for unpaid losses and loss adjustment expenses include:
•uncertainty around inflationary costs, both economic and social;
•estimates of expected losses through the use of historical loss data;
• change in the mix of activities due to the strong growth of modern collectibles that bear
a risk profile different from the traditional portfolio of the Company;
• legislative and judicial changes in the jurisdictions in which the company
takes out insurance, and
69 -------------------------------------------------------------------------------- TABLE OF CONTENTS •industry experience. Claims are analyzed and reported based on the accident year or the year in which the claims occurred. Accident year data is classified and utilized within actuarial models to prepare estimates of required reserves for payments to be made in the future. Timing for claim settlement varies and depends on the type of claim being reported (i.e. property damage as compared to personal injury claims). Claims involving property damage are generally settled faster than personal injury claims. Historical loss patterns are then applied to actual paid losses and reported losses by accident year to develop expectations of future payments. Implicit within the actuarial models are the impacts of inflation, especially for claims with longer expected cycle times. Refer to Note 10 - Provision for Unpaid Losses and Loss Adjustment Expenses in Item 8 of Part II of this Annual Report on Form 10-K for additional information regarding the methodologies used to estimate loss and loss adjustment expense reserves. Given the inherent complexity and uncertainty surrounding the estimation of our ultimate cost of settling claims, reserves are reviewed quarterly and periodically throughout the year by combining historical results and current actual results to calculate new development factors. In estimating loss and loss adjustment expense reserves, our actuarial reserving group considers claim cycle time, claims settlement practices, adequacy of case reserves over time, and current economic conditions. Because actual experience can differ from key assumptions used in estimating reserves, there may be significant variation in the development of these reserves and the actual losses and loss adjustment expenses ultimately paid in the future. These adjustments to the loss and loss adjustment expense reserves are recognized in our Consolidated Statements of Operations in the period in which the change occurs.
The following table presents our gross and net provisions for losses and losses
Gross % of Total Net % of Total in
thousands (except percentages)
As of December 31, 2021 Outstanding losses reported
$ 38,20751.0 % $ 38,20751.0 % IBNR 36,662 49.0 % 36,662 49.0 % Total unpaid losses and loss adjustment expenses $ 74,869100.0 % $ 74,869100.0 % As of December 31, 2020 Outstanding losses reported $ 22,71041.3 % $ 22,71041.3 % IBNR 32,278 58.7 % 32,278 58.7 % Total unpaid losses and loss adjustment expenses $ 54,988100.0 % $ 54,988100.0 % 70
-------------------------------------------------------------------------------- TABLE OF CONTENTS The following table summarizes our gross losses and loss adjustment expenses, and net losses and loss adjustment expenses by accident years as of
December 31, 2021and 2020: Gross Ultimate Loss & Loss Adjustment Expenses Net Ultimate Loss & Loss Adjustment Expenses Accident Year 2021 2020 Change 2021 2020 Change in thousands 2017 $ 18,592 $ 18,792 $ (200) $ 18,592 $ 18,792 $ (200)2018 38,405 41,100 (2,695) 38,005 40,724 (2,719) 2019 60,495 64,535 (4,040) 60,495 64,535 (4,040) 2020 87,583 91,025 (3,442) 87,583 91,025 (3,442) 2021 132,497 N/A N/A 132,497 N/A N/A Total $ 337,572 $ 215,452 $ (10,377) $ 337,172 $ 215,076 $ (10,401)
Responsibilities Related to Warrants
Our warrants are accounted for in accordance with ASC 815. The warrants do not meet the criteria for equity treatment and as such, are recorded at fair value as a non-cash liability. This liability is subject to remeasurement each reporting period.
Our public warrants are Level 1 in the fair value hierarchy. The audience
Warrants are valued using market prices.
We determined that our Private Placement Warrants, OTM Warrants, Underwriter Warrants and PIPE Warrants are Level 3 within the fair value hierarchy. We utilize a Monte Carlo simulation model to measure the fair value of these warrants. Our Monte Carlo simulation model includes assumptions related to the expected stock-price volatility, expected term, dividend yield and risk-free interest rate. Refer to Note 13 - Fair Value Measurements, in Item 8 of Part II of this Annual Report on Form 10-K, for additional information related to the significant inputs to the Monte Carlo simulation model.
The change in the fair value of the warrants is recognized in the consolidated financial statements
Income statements for each reporting period.
Debts under the agreement on tax claims
In connection with the Business Combination,
Hagerty, Inc.entered into a tax receivable agreement with the Legacy Unit Holders. The amount and timing of any payments under the Tax Receivable Agreement will vary depending on a number of factors, including, but not limited to, the increase in tax basis of The Hagerty Group'sassets, the timing of any future redemptions, exchanges or purchases of Hagerty Group Units held by Legacy Unit Holders, the price of Class A Common Stock at the time of the purchase, redemption or exchange, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that Hagerty, Inc.generates in the future, the tax rates then applicable and the portion of the payments under the Tax Receivable Agreement constituting imputed interest.
Hagerty Group Units,
71 -------------------------------------------------------------------------------- TABLE OF CONTENTS Redeemable Non-Controlling Interest As of
December 31, 2021, redeemable non-controlling interest represents the economic interests of Legacy Unit Holders. Income or loss is attributed to the redeemable non-controlling interest based on the weighted average ownership of the Hagerty Group Units outstanding during the period held by Legacy Unit Holders. In connection with the Business Combination, Hagerty, Inc.entered into an Exchange Agreement with the Legacy Unit Holders. The Exchange Agreement permits the Legacy Unit Holders to exchange Class V Common Stock and associated Hagerty Group Units for an equivalent amount of Class A Common Stock, or at the option of the Company, for cash. Because the Company has the option to redeem the non-controlling interest for cash and the Company is controlled by the Legacy Unit Holders through their voting control, the non-controlling interest is considered redeemable outside the Company's control. The redeemable non-controlling interest is measured at the greater of the initial fair value or the redemption value and is required to be presented as temporary equity on the Consolidated Balance Sheets.
The Exchange Agreement was amended as of
Subsequent Events, in item 8 of Part II of this Annual Report on Form 10-K for
New Accounting Standards
The new accounting standards are described in Note 1 – Summary of the main
Accounting methods and new accounting standards, in point 8 of Part II of this
Annual Report on Form 10-K.