HAGERTY, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Condensed Consolidated Financial Statements and related Notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q. 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 Part II, Item 1A -"Risk Factors" in this Quarterly Report on Form 10-Q and in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10K for the year endedDecember 31, 2021 , filed onMarch 24, 2022 . 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 ofThe Hagerty Group, LLC and its consolidated subsidiaries prior to the Business Combination and toHagerty, 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 2.5 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.
Recent Developments Affecting Comparability
Business Combination
OnDecember 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 fromAldel Financial Inc. toHagerty, Inc. Following the Closing,Hagerty, Inc. is organized as a C corporation and owns an equity interest inThe Hagerty Group in what is commonly known as an "Up-C" structure. Under this structure, substantially all ofHagerty, Inc.'s assets and liabilities are held byThe Hagerty Group . As ofJune 30, 2022 ,Hagerty, Inc. owned 24.7% ofThe 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 4 - Business Combination in Item 1 of Part I of this
Quarterly Report on Form 10-Q for additional information on the Business
Combination.
Impact of COVID-19
The global spread of the COVID-19 pandemic, including the spread of recent variants, continues to evolve, and to date has led to the implementation of various containment efforts. While conditions appear to be improving, particularly as more people get vaccinated, governments may re-implement restrictive measures to protect against further spread of any new variants. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society. In response to the COVID-19 pandemic, we have taken several precautionary steps to safeguard our business and team members from COVID-19 and the recent variants of the virus. While the impact of COVID-19 appears to be easing, the safety and well-being of our team members continues to be our top priority. Our office facilities are now open for those who want to work in those spaces, subject to certain restrictions, but a significant number of our personnel continue to work from home. During the six months endedJune 30, 2022 , 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. 38 -------------------------------------------------------------------------------- TABLE OF CONTENTS Key Performance Indicators and Certain Non-GAAP Financial Measures
Key Performance Indicators
In addition to the measures presented in our Condensed 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. We believe these financial and
operational measures are useful in evaluating our performance when read together
with our financial results prepared in accordance with GAAP. The following
tables present these metrics as of and for the periods presented:
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Total Revenue (in thousands) $206,017 $167,409 $373,828 $296,609
New Business Count (Insurance) 74,922 77,013 122,436 128,812
Total Written Premium (in thousands) $237,697 $208,091 $392,487 $341,798
Loss Ratio 41.0% 41.4% 41.2% 41.4%
Operating Income (Loss) (in thousands) $2,387 $14,274 $(10,617) $9,178
Contribution Margin (in thousands) $61,032 $53,466 $98,178 $84,546
Net Income (Loss) (in thousands) $(5,543) $12,503 $10,323 $5,652
Adjusted EBITDA (in thousands) $16,065 $19,299 $10,106 $20,338
Basic Earnings (Loss) Per Share $(0.07) N/A $0.27 N/A
Adjusted Earnings (Loss) Per Share $(0.02) N/A $0.03 N/A
June 30,
2022 December 31, 2021
Policies in Force 1,292,138 1,247,056
Policies in Force Retention 88.2% 89.1%
HDC Paid Member Count 742,825 718,583
Net Promoter Score (NPS) 82.0 82.0
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.
Loss Ratio
Loss Ratio, expressed as a percentage, is the ratio of (1) losses and loss
adjustment expenses incurred to (2) 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.
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Policies in Force
Policies in Force ("PIF") are the number of current and active insurance
policies as of the applicable period end date. We view Policies in Force as an
important metric to assess our financial performance because policy growth
drives our revenue growth, increases brand awareness and market penetration,
generates additional insight to improve the performance of our platform, and
provides key data to assist strategic decision making for the Company.
Policies in Force Retention
PIF Retention is the percentage of expiring policies that are renewed on the renewal effective 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.
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
We use NPS as our "north star metric," measuring the overall strength of our relationship with members. NPS is measured twice annually through a web-based survey sent by email invitation to a random sample of existing members, and reported annually using an average of the two surveys. Often referred to as a barometer of brand loyalty and customer engagement, NPS is well-known in our industry as a strong indicator of growth and retention.
Non-GAAP Financial Measures
Contribution Margin
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. 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.
Our management uses Contribution Margin and Contribution Margin Ratio to:
•analyze the relationship between cost, volume and profit as revenue grows;
•measure how much profit is earned for any product or service sold; and
•measure how different management actions could affect the Company's total
revenue and related cost levels.
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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:
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
in thousands (except percentages)
Total revenue $ 206,017 $ 167,409 $ 373,828 $ 296,609
Less: total operating expenses 203,630 153,135 384,445
287,431
Operating income (loss)
$ 9,178 Operating income (loss) margin 1 % 9 % (3) % 3 %
Add: fixed operating expenses
$ 75,368 Contribution Margin$ 61,032 $ 53,466 $ 98,178 $ 84,546 Contribution Margin Ratio 30 % 32 % 26 % 29 % 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, stock-based compensation expense, gains and losses from asset disposals and certain other non-recurring gains and losses. We present Adjusted EBITDA because we consider it 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.
Our 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
operating budget and financial projections;
•to evaluate the performance and effectiveness of our operational strategies;
•to evaluate our capacity to expand our business;
•as a performance factor in measuring performance under our executive
compensation plan; and
•as a preferred predictor of core operating performance, comparisons to prior
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. However, 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 Condensed Consolidated Financial Statements as indicators of financial performance. Some of these limitations include:
•Adjusted EBITDA does not reflect our cash expenditures, or future requirements
for capital expenditures, or contractual commitments;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
•Adjusted EBITDA does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our debt;
•Adjusted EBITDA does not reflect our tax expense or the 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 measures does not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate Adjusted EBITDA differently than
we do, limiting its usefulness as a comparative measure.
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Due to these limitations, Adjusted EBITDA 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 Condensed Consolidated Financial
Statements as indicators of financial performance. The following table
reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which
is Net income (loss):
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
in thousands
Net income (loss) $ (5,543) $ 12,503 $ 10,323 $ 5,652
Interest and other (income) expense 353 187 1,037 624
Income tax expense 2,138 1,584 4,168 2,902
Depreciation and amortization 8,300 5,025 15,447 9,396
Change in fair value of warrant liabilities 5,400 - (26,286) -
Stock-based compensation expense 4,307 - 4,307 -
Net (gain) loss from asset disposals - - - 1,764
Other non-recurring (gains) losses (1) 1,110 - 1,110 -
Adjusted EBITDA $ 16,065 $ 19,299 $ 10,106 $ 20,338
(1) Other non-recurring (gains) losses relates to severance expense recognized
in the three months ended
We incurred$8.8 million and$8.7 million during the three months endedJune 30, 2022 and 2021, respectively, and$18.1 million and$15.7 million during the six months endedJune 30, 2022 and 2021, respectively, for certain pre-revenue costs related to scaling our infrastructure, newly-developed digital platforms and legacy systems, human resources and occupancy to accommodate our alliance withState Farm and other potential distribution partnerships as well as to further develop ourHagerty 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 andHagerty Marketplace systems withState 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 inDublin, Ohio and added several hundred new employees as ofJune 30, 2022 to meet the expected transactional volume from these initiatives.
These costs commenced in 2020 and are expected to be substantially completed in
2023.
Adjusted EPS
We define Adjusted Earnings (Loss) Per Share ("Adjusted EPS") as consolidated
Net income (loss) that is attributable to both our controlling and
non-controlling interest. Adjusted EPS for the three and six months ended
June 30, 2022 includes both our controlling and non-controlling interest net
income (loss) of $(5.5) million and $10.3 million , respectively, divided by the
outstanding and potentially dilutive shares of Hagerty, Inc. (359.8 million
shares) which includes (1) the weighted-average issued and outstanding shares of
Class A Common Stock, (2) all issued and outstanding shares of Class V Common
Stock, (3) all unexercised warrants and (4) all unvested stock-based
compensation awards.
The most directly comparable GAAP measure is basic earnings per share ("Basic
EPS"), which is calculated as Net income (loss) attributable to only controlling
interest in Hagerty, Inc. Basic EPS for the three and six months ended June 30,
2022 includes Net income (loss) attributable to only controlling interest of
$(5.5) million and $22.0 million , respectively, divided by the weighted-average
issued and outstanding shares of Class A Common Stock (82.5 million and 82.4
million shares, respectively).
In accordance with ASC 260, for periods in which we report a net loss to
stockholders, diluted EPS would be the same as Basic EPS, because dilutive
common shares are not assumed to have been issued if their effect is
anti-dilutive. As a result, in periods where we report a net loss attributable
to controlling interest, such as for the three months ended June 30, 2022 , EPS
did not need to be differentiated between basic or diluted EPS because both
basic and diluted EPS were the same. In periods where we report net income
attributable to controlling interest, such as for the six months ended June 30,
2022 , we believe that Basic EPS is the most comparable GAAP measure to Adjusted
EPS.
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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 Basic 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 and non-controlling
interest) with our outstanding and potentially dilutive shares, provides useful
information to investors regarding our performance on a fully consolidated
basis.
Our management uses Adjusted EPS:
•as a measurement of operating performance of our business on a fully
consolidated basis;
•to evaluate the performance and effectiveness of our operational strategies;
•to evaluate our capacity to expand our business; and
•as a preferred predictor of core operating performance, comparisons to prior
periods and competitive positioning.
The following table reconciles Adjusted EPS to the most directly comparable GAAP
measure, which is Basic EPS:


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