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, LLC and its consolidated subsidiaries prior
to the Business Combination and to Hagerty, Inc. and its consolidated
subsidiaries, following the consummation of the Business Combination.

Overview

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.
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Recent Developments Affecting Comparability

Trade suit

On December 2, 2021, The Hagerty Group completed 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 Group in what is commonly known as an "Up-C"
structure. Under this structure, substantially all of Hagerty, Inc.'s assets 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

In March 2020, the World Health Organization declared 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.

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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                $499,548
New Business Count                       244,478                236,665
Total Written Premium (in thousands)    $674,305                $578,234
Policies 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)               $10,039
Adjusted EBITDA (in thousands)           $25,350                $29,693
Earnings (Loss) Per Share                $(0.56)                  N/A
Adjusted Earnings Per Share              $(0.17)                  N/A
Operating income (loss)                 $(10,070)               $15,846
Contribution Margin                     $159,571                $146,754



New 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.

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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 who pay 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.

Adjusted EBITDA

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:
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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
capital requirements;

• 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)           $ 10,039
Interest 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             

2,047

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.

We incurred $31.0 million and $17.8 million during the years ended December 31,
2021 and 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 Farm and
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's legacy 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, Ohio and added several hundred new
employees as of December 31, 2021 to meet the expected transactional volume from
these initiatives.

These costs began in 2020 and are expected to be largely completed in
2023.

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Adjusted EPS

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 million divided 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 million divided 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
consolidated basis;

•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.

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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)*                                             

($61,354)

Denominator:

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)**

$(0.56)

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 million and 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.

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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             $ 499,548
Less: total operating expenses             629,149               483,702
Operating income (loss)          $         (10,070)            $  15,846
Operating income (loss) margin                        (2) %            3 %

Add: fixed operating expenses    $         169,641             $ 130,908
Contribution Margin              $         159,571             $ 146,754
Contribution 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 Canada and 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 who purchase 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.

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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., Canada and into the U.K. and the
E.U. We realize increasing value from each HDC Member who signs 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 who are 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 Farm to 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

Income

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.

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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., Canada
and 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.

Premium earned

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., Canada and the U.K. Hagerty Re is a
Bermuda-domiciled, Class 3A reinsurer. Hagerty Re was funded in December 2016
and 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.

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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.

Selling fees

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.

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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 Group is 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 Group is 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.

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Results of Operations

Summary

The following table summarizes our results of operations for the years ended
December 31, 2021 and 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      $  35,128         14.9  %
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 million for 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 million in revenues from new policies and an
increase of $29.0 million in 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 million during the year ended December 31, 2020 to $126.7
million during the year ended December 31, 2021. Our commission and revenue from
agent sources increased $15.5 million, or 12.0%, from $129.3 million during the
year ended December 31, 2020 to $144.9 million during 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).

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The following table presents the detail of our commission and fee revenues for
the years ended December 31, 2021 and 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      $ 214,236
Contingent commission            57,424          (383)         294         57,335
Total                         $ 250,944      $ 16,399      $ 4,228      $ 271,571

                                          Year Ended December 31, 2020
Commission and fee revenue    $ 165,740      $ 13,274      $ 3,001      $ 182,015
Contingent commission            51,820         1,741          867         54,428
Total                         $ 217,560      $ 15,015      $ 3,868      $ 236,443



During 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 Canada and the
U.K. due to changes in alliance agreements with carriers now participating in
our reinsurance program rather than paying a CUC.

Premium earned

Earned premium revenue was $295.8 million for the year ended December 31, 2021,
an increase of $75.3 million, or 34.2%, compared to 2020. Organic growth added
approximately $36.9 million to earned premium revenue and the increase in U.S.
quota share percentage added approximately $27.9 million to 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 million to 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 million from $250.6 million for the
year ended December 31, 2020 to $353.9 million for the year ended December 31,
2021.

Membership and other revenue

Membership and other revenue was $51.7 million for the year ended December 31,
2021, an increase of $9.1 million, or 21.3%, compared to 2020. Membership fee
revenue was $40.6 million for 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 million for 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 million and $1.3 million in admission income and motorsport
registration income, respectively, for the year ended December 31, 2021 compared
to 2020. DriveShare rentals, event sponsorship and media advertising created
cumulative growth of $1.8 million in for the year ended December 31, 2021
compared to 2020. Other revenue includes advertising, valuation and registration
income, and accounts for 21.4% of the membership and other revenue total.

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Costs and Expenses

Salaries and benefits

Salaries and benefits expenses were $171.9 million for 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.

Disposal fee

Ceding commission expense was $141.0 million for 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 million for 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 December 31, 2021 and 2020:

                                     U.S.          Canada          U.K.          Total
                                             in thousands (except percentages)
                                               Year Ended December 31, 2021
Subject premium                  $ 558,297       $ 43,844       $ 6,003       $ 608,144
Quota share percentage                60.0  %        35.0  %       60.0  %         58.2  %
Assumed premium in Hagerty Re    $ 334,978       $ 15,345       $ 3,602       $ 353,925
Net ceding commission            $ 134,469       $  6,037       $   477       $ 140,983

                                               Year Ended December 31, 2020
Subject premium                  $ 478,527       $ 32,700       $     -       $ 511,227
Quota share percentage                50.0  %        35.0  %          -  %         49.0  %
Assumed premium in Hagerty Re    $ 239,263       $ 11,294       $     -       $ 250,557
Net ceding commission            $ 103,908       $  2,066       $     -       $ 105,974



In the U.S., the increase in premiums assumed in Hagerty Re during the year
ended December 31, 2021 compared 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, 2020 to December 31, 2021
was 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, 2020 to December 31, 2021 was
primarily due to the entry into the U.K. reinsurance agreement, which became
effective during the first quarter of 2021.

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Losses and loss adjustment expenses

Losses and loss adjustment expenses were $122.1 million for 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, 2021 and December 31, 2020.

Selling fees

Sales expense was $107.5 million for 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 million for 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 million in higher software
subscription and hardware costs and $4.2 million in consulting services,
primarily related to digital innovation initiatives and digital platform
optimization.

Depreciation and amortization

Depreciation and amortization expense was $22.1 million for 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 million for 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, 2021 compared to 2020 was primarily due
to an increase in income before income tax expense of $9.0 million within
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 million in 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.

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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.

Capital restrictions

In 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%.

Dividend Restrictions

Under Bermuda law, 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, 2021 and 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      $ 292,123        731.3  %


Operating Activities

Cash flow generated by operating activities consists mainly of adjusted net income
for non-cash items and changes in working capital balances.

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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       

(24,516) (42.4)%
Net cash flow generated by operating activities $42,281 $84,572 ($42,291) (50.0)%


Net cash provided by operating activities for the year ended December 31, 2021
was $42.3 million. Cash provided during the period included $8.9 million from
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 million and loss on disposal of assets of
$2.4 million. Changes and growth in operating assets and liabilities provided
$33.3 million of 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 million and 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, 2020
was $84.6 million. Cash provided during this period included $26.7 million from
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 million and 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 million and 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.

Investing activities

During the year ended December 31, 2021, we invested approximately $43.4 million
in property, equipment and software (excluding acquisitions), an increase of
$5.1 million compared to 2020. Our primary capital expenditures included a $20.4
million investment in the scaling of digital platforms to support growth driven
by strategic alliances, a $12.2 million investment in development of membership
and marketplace technology platforms, and a $7.0 million investment in core
operations infrastructure to support headcount growth. Additionally, we had
acquisitions totaling $14.6 million during the year ended December 31, 2021, an
increase of $5.7 million compared 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.

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Financing Activities

Cash provided by financing activities for the year ended December 31, 2021
increased $292.1 million compared 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 million related to the Business
Combination, including proceeds of $789.7 million, offset by $489.7 million of
distributions to the Legacy Unit Holders and $31.0 million of 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 million related to draws under our credit facility during the year ended
December 31, 2021, compared to $43.9 million during 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.

Financing modalities

Multi-bank credit facility

In October 2021we concluded a third amendment to the amended and reworded version
Credit Agreement (the “Credit Agreement”), which amended the terms of our
revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank,
N / A
., as administrative agent, and the other part of the financial institutions
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 million and
$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 October 2026 and maybe
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., Bermuda and German subsidiaries as well as the assets of the
Hagerty Events, LLC and the non-wholly owned subsidiaries of MHH.

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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.

In March 2017we entered into a 5-year interest rate swap contract with a
initial notional amount of $15.0 million at a fixed swap rate of 2.20%.

In December 2020we entered into a 5-year interest rate swap contract with a
initial notional amount of $35.0 million at a fixed swap rate of 0.78%.

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, 2021 that 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.'s assets 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 Group
Units for shares of Class A Common Stock of Hagerty, Inc. on a one-for-one
basis. The Hagerty Group made 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 Group at
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 Group as 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.

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Contractual Obligations

The following table summarizes the main contractual and other obligations
commitments from December 31, 2021:

                          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

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•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
regularization fees December 31, 2021 and 2020:

                                                 Gross              % of Total                Net               % of Total
                                                                      in 

thousands (except percentages)

                                                                           As of December 31, 2021
Outstanding losses reported                   $ 38,207                      51.0  %       $ 38,207                      51.0  %
IBNR                                            36,662                      49.0  %         36,662                      49.0  %
Total unpaid losses and loss adjustment
expenses                                      $ 74,869                     100.0  %       $ 74,869                     100.0  %

                                                                           As of December 31, 2020
Outstanding losses reported                   $ 22,710                      41.3  %       $ 22,710                      41.3  %
IBNR                                            32,278                      58.7  %         32,278                      58.7  %
Total unpaid losses and loss adjustment
expenses                                      $ 54,988                     100.0  %       $ 54,988                     100.0  %



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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,
2021 and 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's assets, 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.

From December 31, 2021following the Business Combination and the acquisition
Hagerty Group Units, Hagerty, Inc. recognized liabilities totaling
$3.5 million relating to obligations under the Tax Debt Agreement.

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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 March 23, 2022. See Note 25 –
Subsequent Events, in item 8 of Part II of this Annual Report on Form 10-K for
Further information.

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.

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