ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8 of Part II of this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Please refer to the section in this Annual Report entitled "Cautionary Statement Regarding Forward-Looking Statements".
The following discussion contains references to the years ended December 31, 2024 and 2023. A discussion of the Company's results of operations comparing results for the years ended December 31, 2023 and 2022 is included under the section entitled "Results of Operations" in Item 7 of Part II of the Annual Report on Form 10-K for the year ended December 31, 2023, and is incorporated by reference into this Annual Report.
TABLE OF CONTENTS
Overview
We are a market leader in providing insurance for collector cars and enthusiast vehicles. Through our insurance model, we act as an MGA by underwriting, selling, and servicing collector car and enthusiast vehicle insurance policies. Due to our consistent track record of delivering strong underwriting results, we then reinsure approximately 80% of the risks written by our MGA subsidiaries through our wholly owned subsidiary, Hagerty Re. In addition, we offer HDC memberships, which are primarily bundled with our insurance policies and give subscribers access to an array of products and services, including emergency roadside assistance, Hagerty Drivers Club Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, and special vehicle-related discounts. We also offer a marketplace to complement our insurance and membership offerings where automotive enthusiasts can buy, sell, and finance collector cars and enthusiast vehicles. Through these offerings, our vision is to be the world's most trusted and preferred brand for automotive enthusiasts to protect, buy, sell, and enjoy their special cars.
Business Review
In 2023, we began a review of certain components of our operations which resulted in the sale or reorganization of certain businesses, including Hagerty Garage + Social, DriveShare, and Motorsport Reg ("MSR"). This initiative supports our strategy to prioritize investments and resources in the areas of our business that offer the strongest growth and profit potential. As a result of this review, in 2023, we recognized approximately $4.0 million of losses and impairments related to actions taken with respect to Hagerty Garage + Social and DriveShare. In addition, in 2024, we recognized a $0.1 million gain related to the sale of MSR. We may incur additional losses and/or impairment charges in future periods as a result of actions which we may take related to this review. Refer to Note 11 — Divestitures in Item 8 of Part II of this Annual Report for additional information.
Recent Developments
California Wildfires
In January 2025, Southern California experienced severe and destructive wildfires, notably the Palisades fire and the Eaton fire. We currently estimate that pre-tax losses resulting from these wildfires will be approximately $11.0 million, which is below our 2025 catastrophe reinsurance program per event retention of $28.0 million. There is inherent variability in estimates of early loss projections and claims severity, particularly in high-damage regions. Accordingly, our estimate may change as additional information emerges. Losses from the California wildfires will be reflected in our results for the three months ending March 31, 2025.
Financial Highlights
In 2024, we reported Net Income of $78.3 million, representing a $50.1 million, or 177.9%, increase compared to 2023 and Adjusted EBITDA (a non-GAAP financial measure) of $124.5 million, representing a $36.3 million, or 41.2%, increase compared to 2023. This improvement is primarily attributable to continued Written Premium growth (+$137.3 million), which drove a 15.8% increase in Commission and fee revenue earned by our MGA subsidiaries and a 21.0% increase in Earned premium at Hagerty Re. These revenue increases were partially offset by losses related to Hurricane Helene and Hurricane Milton, which totaled $26.7 million. Also significantly impacting our results for the period was a higher balance of investable assets, as well as the diversification of our investment portfolio to include higher yielding fixed maturity securities, which resulted in a $12.6 million, or 46.7%, increase in interest income.
41
TABLE OF CONTENTS
Key Performance Indicators
The tables below present a summary of our Key Performance Indicators, which include important operational metrics, as well as certain financial measures prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and non-GAAP financial measures. We use these Key Performance Indicators to evaluate our business, measure our performance, identify trends against planned initiatives, prepare financial projections, and make strategic decisions. We believe these Key Performance Indicators are useful in evaluating our performance when read together with our Consolidated Financial Statements prepared in accordance with GAAP.
Year ended December 31,
Operational Metrics dollars in thousands (except per share amounts)
Hagerty Re Loss Ratio (2) 46.4 % 41.5 % 4.9 % N/M
Hagerty Re Combined Ratio (3) 94.1 % 89.2 % 4.9 % N/M
GAAP Financial Measures
Non-GAAP Financial Measures
N/M = Not meaningful
December 31,
Operational Metrics
Policies in Force Retention (7) 89.0 % 88.7 % 0.3 % N/M
Net Promoter Score (10) 82 82 — — %
N/M = Not meaningful
(1) Total Written Premium is the total amount of insurance premium written by our MGA subsidiaries on behalf of our insurance carrier partners during the period. Total Written Premium reflects the direct economic benefit of our policy acquisition efforts and is closely correlated with the growth of insurance commission revenue generated by our MGA subsidiaries and earned premium generated by Hagerty Re.
(2) Hagerty Re Loss Ratio is the ratio of (i) Hagerty Re's losses and loss adjustment expenses to (ii) its earned premium. Hagerty Re Loss Ratio allows us to evaluate our historical loss patterns and make necessary and appropriate adjustments. Refer to "Losses and Loss Adjustment Expenses" below for additional information regarding the changes in Hagerty Re Loss Ratio between the current and prior year period.
(3) Hagerty Re Combined Ratio is the ratio of (i) Hagerty Re's losses, loss adjustment expenses, and underwriting expenses to (ii) its earned premium. Hagerty Re's underwriting expenses primarily include ceding commissions paid to insurance carrier partners and, to a lesser extent, certain administrative expenses. Hagerty Re Combined Ratio provides a benchmark to evaluate underwriting profitability, including expense trends. A combined ratio under 100% indicates underwriting income while a combined ratio exceeding 100% indicates an underwriting loss.
42
TABLE OF CONTENTS
(4) New Business Count represents the number of new insurance policies issued by our MGA subsidiaries during the period. New Business Count is an important metric to assess our financial performance because policy growth is critical to our success. While we benefit from strong policy retention through renewals, new policies more than offset those cancelled or non-renewed at expiration. New policies also often mean new relationships and an opportunity to sell additional products and services.
(5) Refer to "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP amount.
(6) Policies in Force ("PIF") represents the number of current and active insurance policies as of the end of the period. PIF is an important metric to assess our financial performance because policy growth drives revenue growth, increases brand awareness and market penetration, generates additional insight to improve the performance of our platform, and provides key data to assist us in strategic decision making.
(7) PIF Retention represents the percentage of expiring insurance policies that are renewed on the renewal effective date, calculated on a rolling twelve months basis. PIF Retention is an important measurement of the number of policies retained each year, which contributes to our recurring revenue streams including commissions earned by our MGA subsidiaries, HDC membership fees, and earned premium generated by Hagerty Re.
(8) Vehicles in Force represents the number of current insured vehicles as of the end of the period. Vehicles in Force is an important metric to assess our financial performance because insured vehicle growth drives our revenue growth and increases market penetration.
(9) HDC Paid Member Count represents the number of current Members who pay an annual membership subscription as of the end of the period. HDC Paid Member Count is an important metric 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.
(10) NPS is an important measure of 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, which currently excludes customers in our marketplace business, and is reported annually using an average of the two surveys. Often referred to as a barometer of brand loyalty and engagement, NPS is well-known in our industry as a strong indicator of growth and retention.
Components of Our Results of Operations
Revenue
Commission and fee revenue
We generate commission and fee revenue through our MGA subsidiaries, primarily from the underwriting, sale, and servicing of collector car and enthusiast vehicle insurance policies on behalf of our insurance carrier partners. Commissions are earned for both new and renewed policies. Commission and fee revenue is earned when the policy becomes effective, net of allowances for policy changes and cancellations.
Under the terms of our contracts with certain insurance carrier partners, we have the opportunity to earn a contingent underwriting commission based on the results of the book of business, including the level of written or earned premium and loss ratio. Contingent underwriting commissions are recognized in the period that the policy is issued based on our estimate of the amount that we will become entitled to receive during the calendar year such that a significant reversal of revenue is not probable.
Earned premium
Earned premium represents the earned portion of written premiums that Hagerty Re has assumed under quota share reinsurance agreements with our insurance carrier partners, net of premiums ceded to various reinsurers and the cost of catastrophe reinsurance coverage. Premiums assumed and ceded are recognized on a pro-rata basis over the term of the reinsured policies, which is generally 12 months. The cost of catastrophe reinsurance coverage is recognized over the contract period in proportion to the related earned premium.
Membership, marketplace and other revenue
We earn subscription revenue through HDC memberships, which are primarily bundled with our insurance policies and give subscribers access to an array of products and services, including emergency roadside assistance, Hagerty Drivers Club Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, and special vehicle-related discounts.
Revenue from the sale of HDC memberships is recognized ratably over the period of the membership. The membership is treated as a single performance obligation to provide access to stated Member benefits over the life of the membership, which is currently one year.
43
TABLE OF CONTENTS
Our marketplace business earns fee-based revenue primarily from the sale of collector cars and enthusiast vehicles through live auctions, time-based digital auctions, and brokered private sales. From time-to-time, we also earn revenue from the sale of collector cars and enthusiast vehicles that have been acquired opportunistically and placed in inventory.
In addition, we also earn finance revenue from loans made to qualified collectors and businesses secured by their collector cars.
Fee-based marketplace revenue is recognized when the underlying sale is completed, which is generally upon the matching of a seller and buyer in a legally binding auction or private sale transaction. Revenue from the sale of inventory is recognized at the point in time when title and control of the car is transferred to the buyer, which is generally upon collection of the full purchase price. Finance revenue is recognized over time as earned based on the amount of the outstanding loan, the applicable interest rate on the loan, and the length of time the loan was outstanding during the period.
Operating Expenses
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, as well as various forms of incentive compensation, including share-based compensation. Employee benefits primarily include the cost of our retirement, medical, dental, wellness, and severance plans. Costs related to employee education, training, and recruiting are included in employee development costs. Salaries and benefits are expensed as incurred except for costs that are required to be capitalized, which are then amortized over the useful life of the asset created, primarily internally developed software and software-as-a-service ("SaaS") implementation costs. Salaries and benefits are expected to increase in dollar amount over time as the business continues to grow but will likely decrease as a percent of revenue.
Ceding commissions, net
Ceding commissions, net represents the commissions paid by Hagerty Re to insurance carrier partners for the risk assumed under the quota share agreements with those carriers. These commissions represent Hagerty Re's pro-rata share of the carrier's costs including (i) policy acquisition costs, which consists of the commissions earned by our MGA subsidiaries, (ii) general and administrative costs, and (iii) other costs. Ceding commissions are recorded net of commissions received by Hagerty Re related to ceded reinsurance premiums. Ceding commissions, net is recognized ratably over the term of the related reinsurance policies, which is generally 12 months.
Losses and loss adjustment expenses
Losses and loss adjustment expenses represent our best estimate of the losses and associated settlement costs related to the risk assumed by Hagerty Re. Losses consist of claims paid, case reserves, and incurred but not reported costs, which are recorded net of estimated recoveries from reinsurance, salvage and subrogation. Loss adjustment expenses consist of the cost associated with processing and settling claims. The estimates utilized in determining the amount of losses and loss adjustment expenses recorded in a period are based on statistical analysis performed by our internal and external actuarial team. Reserves are reviewed regularly and adjusted, as necessary, to reflect our estimate of the ultimate cost of settlement.
Sales expense
Sales expense includes costs related to the sale and servicing of insurance policies, as well as costs related to our membership and marketplace offerings, such as broker expense, cost of sales, promotion expense, and travel and entertainment expenses. Broker expense is the compensation paid to our agent partners and national broker partners when an insurance policy is written by our MGA subsidiaries through a broker relationship. Broker expense generally tracks with written premium growth. Cost of sales includes payment processing fees, emergency roadside service costs, postage and other variable costs associated with the sale and servicing of a policy. Cost of sales also includes the cost of vehicles held in inventory and sold through our marketplace business, as well as interest expense and borrowing costs associated with the BAC credit facility ("BAC Credit Facility"). Promotion expense includes various costs related to branding, events, advertising, marketing, and customer acquisition. Sales expenses, in general, are expensed as incurred and will trend with revenue growth.
General and administrative expenses
General and administrative expenses primarily consists of expenses related to non-capitalized hardware and software, professional services, and occupancy costs. These costs are expensed as incurred. We expect this expense category to modestly increase in dollar amount over time as the business continues to grow but will likely decrease as a percentage of revenue over the next few years after we reach scale to handle incoming business from new partnerships.
44
TABLE OF CONTENTS
Depreciation and amortization
Depreciation and amortization reflects the recognition of the cost of our investments in various assets over their useful lives. Depreciation expense relates to hardware, furniture and equipment, and leasehold improvements. Amortization relates to internally developed software, SaaS implementation, and finite-lived intangible assets associated with acquisitions. Depreciation and amortization are expected to increase in dollar amount over time but will likely decrease as a percent of revenue as investments in platform technology reach scale.
Other Items
Gain (loss) related to warrant liabilities, net
In July 2024, we completed an exchange offer under which holders of our warrants were issued 3,876,201 shares of Class A Common Stock in exchange for 19,483,539 warrants, with a nominal cash settlement paid in lieu of fractional shares (the "Warrant Exchange"). No warrants remained outstanding following the completion of the Warrant Exchange.
Prior to the Warrant Exchange, our warrants were accounted for as liabilities and were measured at fair value each reporting period, with changes in fair value recognized as non-operating income (expense) in our Consolidated Statements of Operations. In general, under the fair value accounting model, in periods when our stock price increased, the warrant liability increased, and we recognized additional expense. In periods when our stock price decreased, the warrant liability decreased, and we recognized additional income. In addition, "Gain (loss) related to warrant liabilities, net" includes the loss on the Warrant Exchange recorded in the third quarter of 2024. Refer to Note 20 — Warrant Exchange in Item 8 of Part II of this Annual Report for additional information regarding the Company's Warrant Exchange.
Interest and other income (expense), net
Interest and other income (expense), net primarily includes interest income related to cash balances and fixed maturity securities, dividend income on equity securities, realized gains or losses from the sale of fixed maturity securities, and realized and unrealized gains and losses related to equity securities. Additionally, Interest and other income (expense), net includes interest expense related to outstanding borrowings, primarily related to the JPM Credit Facility (as defined in Note 17 — Long-Term Debt in Item 8 of Part II of this Annual Report) and changes in the value of the liability related to our TRA ("TRA Liability") with HHC and Markel. Refer to Note 23 — Taxation in Item 8 of Part II of this Annual Report for additional information related to the TRA.
Income tax expense
THG is taxed as a pass-through ownership structure under provisions of the IRC and a similar section of state income tax law. As such, any taxable income or loss generated by THG is passed through to and included in the taxable income or loss of THG 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 THG. Hagerty, Inc., Hagerty Insurance Holdings, Inc., Broad Arrow, Hagerty Radwood, Inc., and various foreign subsidiaries are treated as taxable entities and income taxes are provided where applicable. Hagerty Insurance Holdings, Inc. files a consolidated tax return with its wholly owned corporate subsidiaries Hagerty Re and Drivers Edge.
45
TABLE OF CONTENTS
Year Ended December 31, 2024 compared to the Year Ended December 31, 2023
The following table summarizes our results of operations for the years ended December 31, 2024 and 2023, and the dollar and percentage change between the two periods:
Year ended December 31,
REVENUE: in thousands (except percentages)
OPERATING EXPENSES:
Restructuring, impairment and related charges, net — 8,812 (8,812) (100.0) %
Revenue
Commission and fee revenue
Commission and fee revenue was $423.2 million for the year ended December 31, 2024, an increase of $57.7 million, or 15.8%, compared to 2023, consisting of increases of $46.7 million related to renewal policies and $11.0 million related to new policies.
The increase in revenue from renewal policies was primarily driven by a 16.2% increase in underlying policy premiums, as well as continued strong policy retention. The increase in revenue from new policies was primarily driven by a 13.4% increase in underlying policy premiums, as well as sustained year-over-year growth in New Business Count, which increased 9.5% in 2024.
The increase in underlying policy premiums for both policy renewals and new policies was a result of rate increases in several states due to inflation and higher vehicle repair costs, both of which contribute to higher premiums and, in turn, higher commission revenue. In addition, average premiums on newly issued policies increased as a result of writing policies with higher insured values at higher premium rates.
Commission and fee revenue from agent sources increased $32.5 million, or 16.2%, and Commission and fee revenue from direct sources increased $25.2 million, or 15.3%, during the year ended December 31, 2024. Commission rates vary based on geography, but do not differ by distribution channel (i.e., whether they are direct-sourced or agent-sourced).
46
TABLE OF CONTENTS
Earned premium
Earned premium at Hagerty Re was $643.3 million for the year ended December 31, 2024, an increase of $111.5 million, or 21.0%, compared to 2023. This increase was primarily due to continued growth of subject premiums written through our MGA subsidiaries, partially offset by an increase in ceded reinsurance premiums related to high-net-worth accounts in the U.S. In addition, effective January 1, 2024, Hagerty Re is no longer reinsuring the risks underwritten by its U.K. MGA affiliate, and the book is in run-off.
The following tables present premiums assumed by Hagerty Re and the related quota share percentages for the years ended December 31, 2024 and 2023:
U.S. Canada U.K. Total
in thousands (except percentages)
Reinsurance premiums ceded (50,541)
Change in unearned premiums (41,207)
Change in deferred reinsurance premiums 8,101
U.S. Canada U.K. Total
in thousands (except percentages)
Reinsurance premiums ceded (33,070)
Change in unearned premiums (81,813)
Change in deferred reinsurance premiums 10,383
Membership, marketplace and other revenue
Membership, marketplace and other revenue was $133.5 million for the year ended December 31, 2024, an increase of $30.6 million, or 29.8%, compared to 2023.
Membership fee revenue was $57.5 million for the year ended December 31, 2024, an increase of $5.1 million, or 9.7%, compared to 2023. This increase was primarily due to a $7.4 million, or 16.1%, increase in revenue attributable to new insurance policies issued with a bundled HDC membership, partially offset by a $1.6 million decrease in storage revenue as a result of fewer Hagerty Garage + Social locations in operation. For the years ended December 31, 2024 and 2023, membership fees were 43.1% and 51.0%, respectively, of total Membership, marketplace and other revenue.
Marketplace revenue was $54.3 million for the year ended December 31, 2024, an increase of $25.7 million, or 90.1%, compared to 2023. This improvement was primarily due an $18.8 million increase in inventory sales, a $4.2 million increase in revenues associated with stronger Broad Arrow auction results, and a $3.1 million increase in finance revenue associated with the growth of the BAC loan portfolio. For the years ended December 31, 2024 and 2023, Marketplace revenue was 40.7% and 27.8%, respectively, of total Membership, marketplace and other revenue.
47
TABLE OF CONTENTS
Other revenue, which primarily includes sponsorship, admission, advertising, valuation, and sublease revenue, was $21.6 million for the year ended December 31, 2024, a decrease of $0.2 million, or 0.9%, compared to 2023. This decrease was primarily attributable to the loss of registration fee revenue attributable to MSR, which was sold in the second quarter of 2024, partially offset by an increase sublease and advertising revenue. For the years ended December 31, 2024 and 2023, other revenue was 16.2% and 21.2%, respectively, of total Membership, marketplace and other revenue. Refer to Note 11 — Divestitures in Item 8 of Part II of this Annual Report for additional information related to the sale of MSR.
Costs and Expenses
Salaries and benefits
Salaries and benefits were $221.5 million for the year ended December 31, 2024, an increase of $4.6 million, or 2.1%, compared to 2023. This increase was primarily due to a higher level of base salaries as a result of annual merit increases, which occur in the second quarter of each year, as well as a higher level of expense associated with employee benefits. These increases were offset by a decrease in accrued incentive compensation as a result of a higher level of catastrophe losses in the current period, as discussed below.
Ceding commissions, net
Ceding commissions, net was $301.7 million for the year ended December 31, 2024, an increase of $49.9 million, or 19.8%, compared to 2023. This increase is primarily attributable to the 21.0% increase in Earned premium discussed above.
The following table summarizes the components of Ceding commissions, net for the years ended December 31, 2024 and 2023:
Year ended December 31,
in thousands (except percentages)
Ceding commission:
Ceding commission – reinsurance ceded (15,929) (4,195)
Percentage of earned premium 46.9 % 47.3 %
Losses and loss adjustment expenses
Losses and loss adjustment expenses were $298.6 million for the year ended December 31, 2024, an increase of $77.9 million, or 35.3%, compared to 2023. This increase was primarily driven by $23.0 million of estimated losses related to Hurricane Helene and $3.7 million of estimated losses related to Hurricane Milton, as well as the higher volume of assumed premium at Hagerty Re.
For the year ended December 31, 2024, our loss ratio was 46.4%, including the impact of catastrophe losses, which added 5.6% to our loss ratio. For the year ended December 31, 2023, our loss ratio was 41.5%, including the impact of catastrophe losses, which added 1.2% to our loss ratio. Excluding the impact of catastrophe losses, our loss ratio was 40.8% and 40.3% for the years ended December 31, 2024 and 2023, respectively.
Sales expense
Sales expense was $190.5 million for the year ended December 31, 2024, an increase of $34.1 million, or 21.8%, compared to 2023. This increase was due, in part, to a $23.8 million increase in cost of sales, primarily as a result of a higher level of marketplace inventory sales, as well as borrowing costs associated with the BAC Credit Facility, which was entered into in December 2023. In addition, broker expense increased $9.3 million, which is consistent with the written premium growth within the agent channel, and sales commissions increased $1.6 million, which is consistent with revenue growth within the marketplace business. Lastly, credit card processing fees increased, primarily due to a shift in customer preference towards credit cards as a payment method within our MGA subsidiaries.
48
TABLE OF CONTENTS
General and administrative expenses
General and administrative expenses were $82.5 million for the year ended December 31, 2024, a decrease of $2.9 million, or 3.4%, compared to 2023. This decrease was primarily driven by a $4.9 million reduction in occupancy costs as a result of fewer Hagerty Garage + Social locations in operation, as well as lower insurance costs. The overall decrease was partially offset by a $3.2 million increase in professional fees associated with various corporate initiatives, including $0.8 million of professional fees associated with the exchange offer related to our warrants. Refer to Note 20 — Warrant Exchange in Item 8 of Part II of this Annual Report for additional information with respect to the Warrant Exchange offer.
Depreciation and amortization
Depreciation and amortization expense was $38.9 million for the year ended December 31, 2024, a decrease of $6.9 million, or 15.1%, compared to 2023. This decrease was driven primarily by a $4.3 million impairment of digital media content assets recorded in the prior year period, which was the result of lower than anticipated advertising and sponsorship revenue associated with these assets. The remainder of the decrease was primarily driven by a smaller base of fixed assets and finite-lived intangible assets as of December 31, 2024, when compared to the same period in 2023.
Restructuring, impairment and related charges, net
In 2023, the Board approved a reduction in force (the "2023 RIF") following a strategic review of business processes as we focus on driving efficiencies in order to achieve growth and profitability goals. As a result of these actions, we recognized $5.4 million in employee severance-related expenses and a $0.4 million impairment charge to write-down the value of certain digital media content assets. Additionally, in 2023, we recognized $3.1 million of charges associated with operating lease right-of-use ("ROU") asset impairments and related leasehold disposals in connection with the Company's ongoing transition to a "remote-first" work model.
Refer to Note 16 — Restructuring, Impairment and Related Charges in Item 8 of Part II of this Annual Report for additional information with respect to our restructuring initiatives.
Gains, losses, and impairments related to divestitures
During the year ended December 31, 2024, we recognized a $0.1 million gain related to the sale of MSR. During the year ended December 31, 2023, we recognized $4.0 million of losses and impairments related to Hagerty Garage + Social and DriveShare. Refer to Note 11 — Divestitures in Item 8 of Part II of this Annual Report for additional information.
Gain (loss) related to warrant liabilities, net
During the year ended December 31, 2024, Gain (loss) related to warrant liabilities, net was an $8.5 million loss, compared to an $11.5 million gain in 2023. The $8.5 million loss in the current year period consists of a $2.0 million loss related the Warrant Exchange that was completed in July 2024 and a $6.5 million loss resulting from the change in fair value of our warrant liabilities prior to the completion of the Warrant Exchange. The $11.5 million gain during the year ended December 31, 2023 was a result of the change in fair value of our warrant liabilities. Refer to Note 4 — Fair Value Measurements and Note 20 — Warrant Exchange in Item 8 of Part II of this Annual Report for additional information with respect to our warrants.
49
TABLE OF CONTENTS
Interest and other income (expense), net
The following table summarizes the components of Interest and other income (expense), net for the years ended December 31, 2024 and 2023:
Year ended December 31,
in thousands (except percentages)
Net investment gains (losses) 2,223 — 2,223 N/M
N/M = Not meaningful
Interest and other income (expense), net increased $13.0 million, or 56.9%, during the year ended December 31, 2024, compared to 2023. This increase was primarily due to a higher balance of investable assets, as well as the diversification of our investment portfolio in the second quarter of 2024, which resulted in the opening of positions in higher yielding fixed maturity securities and, to a much lesser extent, equity securities.
Income tax expense
We are the sole managing member of THG, and as a result, consolidate its financial results. THG is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, THG is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by THG is passed through and included in the taxable income or loss of its members, including Hagerty, Inc., on a pro rata basis. Hagerty, Inc. is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income or loss of THG, as well as any of its stand-alone income or loss. In addition, Hagerty Insurance Holdings, Inc., Broad Arrow, Hagerty Radwood, Inc. and various foreign subsidiaries are treated as taxable entities. Hagerty Insurance Holdings, Inc. files a consolidated tax return with its wholly owned corporate subsidiaries Hagerty Re and Drivers Edge.
Our effective income tax rate for the year ended December 31, 2024 decreased to 17% from 37% in 2023. This decrease is primarily due to an increase in the earnings attributed to the non-controlling interest holders of THG, which are not included in the taxable income of Hagerty, Inc.
For the year ended December 31, 2024, income tax expense was $15.4 million, representing a decrease of $1.2 million, or 7.3%, compared to 2023. This decrease is primarily due to a decrease in pre-tax income of $8.8 million within Hagerty Re. Refer to Note 23 — Taxation in Item 8 of Part II of this Annual Report for additional information with respect to items affecting our effective tax rate.
Liquidity and Capital Resources
Maintaining a strong balance sheet and capital position is a top priority for us. As a holding company without direct operations, we manage liquidity globally and across all operating subsidiaries.
Sources and Uses of Liquidity
Our sources of liquidity include our: (i) balances of cash and cash equivalents; (ii) net working capital; (iii) cash flows from operations; (iv) borrowings from the JPM Credit Facility (as defined below) to fund the general corporate needs of THG and its subsidiaries; and (v) borrowings from the BAC Credit Facility (as defined below) to fund a portion of the lending activities of BAC.
Our primary liquidity needs and capital requirements include cash required for: (i) funding the business operations of THG and its subsidiaries; (ii) funding strategic investments and acquisitions; (iii) servicing and repayment of borrowings under the JPM Credit Facility, the BAC Credit Facility, and the unsecured term loan credit facility with State Farm (the "State Farm Term Loan"); (iv) funding potential cash dividend payments on the Series A Convertible Preferred Stock; (v) payment of income taxes; and (vi) funding payments under the TRA.
As of December 31, 2024, we believe that our sources of liquidity will be sufficient to provide an adequate level of capital to support our anticipated short and long-term commitments, operating needs, and capital requirements.
50
TABLE OF CONTENTS
Financing Arrangements
JPM Credit Facility
THG has a credit agreement with JPMorgan Chase Bank, N.A. ("JPM"), as administrative agent, and the other financial institutions party thereto from time to time as lenders, as amended (the "JPM Credit Agreement").
The JPM Credit Agreement provides for a revolving credit facility (the "JPM Credit Facility") with an aggregate borrowing capacity of $305.0 million. The JPM Credit Agreement matures in October 2026, but may be extended if agreed to by us and the lenders party thereto.
As of December 31, 2024, total outstanding borrowings under the JPM Credit Facility were $50.3 million. JPM Credit Facility borrowings are collateralized by the assets of and equity interests in THG and its consolidated subsidiaries, except for (i) the assets held by the special purpose entities related to the BAC Credit Facility and (ii) all or a portion of certain foreign and certain excluded or immaterial subsidiaries.
Under the JPM Credit Agreement, we are required, among other things, to meet certain financial covenants (as defined in the JPM Credit Agreement), including a fixed charge coverage ratio and a leverage ratio. We were in compliance with these financial covenants as of December 31, 2024.
BAC Credit Facility
In December 2023, BAC and its wholly owned subsidiary BAC Funding 2023-1, LLC, as borrower, entered into a revolving credit agreement with a certain lender (the "BAC Credit Agreement"). The BAC Credit Agreement provides for a revolving credit facility (the "BAC Credit Facility"), which has an aggregate borrowing capacity of $75.0 million and is subject to a borrowing base that is determined based on the carrying value of certain BAC notes receivable. As of December 31, 2024, the applicable borrowing base and outstanding borrowings for the BAC Credit Agreement were $30.2 million.
The revolving borrowing period provided by the BAC Credit Agreement expires in December 2025 and the BAC Credit Agreement matures in December 2026. The revolving borrowing period and the maturity date of the BAC Credit Agreement may be extended by one year if requested by BAC and agreed to by the administrative agent. BAC is not a borrower or guarantor of the BAC Credit Facility.
In connection with the BAC Credit Agreement, BAC and certain of its subsidiaries may transfer originated notes receivable to wholly owned, bankruptcy remote special purpose entities (each, an "SPE") to secure the borrowings. The assets transferred to SPEs are legally isolated from us and our other (non-SPE) subsidiaries. Accordingly, those assets are not available to satisfy our debts or other obligations and our recourse under the BAC Credit Agreement is limited.
Recourse to the Company and its subsidiaries that originated and transferred notes receivable that represent collateral under the BAC Credit Facility is limited to (i) an obligation of the applicable seller to repurchase a note receivable if it is determined that there was a breach of any representation or warranty relating to such note receivable as of the relevant date specified in the related transfer agreement and (ii) a limited guarantee covering certain liabilities that may result under certain foreign exchange hedging activity of one of the SPEs.
BAC and BAC Funding 2023-1, LLC are required, among other things, to meet certain financial covenants under the BAC Credit Agreement, including that BAC, as the servicer, maintain a minimum tangible net worth, minimum liquidity balances, and an indebtedness to tangible net worth ratio.As of December 31, 2024, we were in compliance with the financial covenants under the BAC Credit Agreement.
Refer to Note 17 — Long-Term Debt in Item 8 of Part II of this Annual Report for additional information related to the JPM Credit Agreement and BAC Credit Agreement.
Capital and Dividend Restrictions
We are a holding company with no material assets other than our ownership interest in THG and its operating subsidiaries. Accordingly, our ability to meet our cash requirements depends on THG's financial performance and the distributions we receive from THG. Our subsidiaries' ability to make distributions, pay dividends and make other payments may be regulated by the states and territories where they are domiciled.
For a discussion of the risks associated with our holding company structure, refer to Item 1A. Risk Factors — Risks Related to Tax — "We are a holding company, and our only material asset is our interest in THG, and we will therefore be dependent upon distributions made by THG to pay taxes, make payments under the TRA and pay other expenses." within Item IA of Part I — Risk Factors of this Annual Report.
51
TABLE OF CONTENTS
Capital Restrictions
Our reinsurance company, Hagerty Re, is subject to the Bermuda Solvency Capital Requirement ("BSCR"), which establishes a target capital level and enhanced capital requirements for each insurer. As of December 31, 2024, Hagerty Re maintained sufficient statutory capital and surplus to comply with the BSCR.
Similarly, our U.S. insurance company subsidiary, Drivers Edge, which holds certificates of authority in 38 states, is subject to state-specific minimum capital and surplus requirements, as well as risk-based capital ("RBC") requirements. RBC levels are reported on an annual basis. As of December 31, 2024, Drivers Edge maintained sufficient capital and surplus levels to comply with state insurance regulations.
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 Hagerty Re's proposed dividend payments would exceed 25% of its prior year-end total statutory capital and surplus. In 2025, Hagerty Re can pay approximately $68 million in dividends without prior BMA approval. As of December 31, 2024, there were no plans to issue dividends from Hagerty Re.
Similarly, state statutes restrict the amount of dividends that Drivers Edge may pay without prior approval of state insurance regulators. As of December 31, 2024, there were no plans to issue dividends from Drivers Edge and a change in such plans may require regulatory approval.
For additional information regarding capital and dividend restrictions, refer to Note 15 — Statutory Capital and Surplus in Item 8 of Part II of this Annual Report.
Comparative Cash Flows
The following table summarizes our cash flow data for the years ended December 31, 2024 and 2023:
Year ended December 31,
in thousands (except percentages)
N/M = Not meaningful
Operating Activities
Cash provided by operating activities primarily consists of Net income, adjusted for non-cash items, and changes in working capital balances. Net cash provided by operating activities for the years ended December 31, 2024 and 2023 is presented below:
Year ended December 31,
in thousands (except percentages)
Net cash provided by operating activities for the year ended December 31, 2024 was $177.0 million, an increase of $43.3 million, or 32.4%, compared to 2023. This increase was due to a $54.8 million increase in Net income, after excluding non-cash adjustments, partially offset by an $11.5 million decrease in cash from operating assets and liabilities.
52
TABLE OF CONTENTS
The increase in net cash provided by operating activities was primarily driven by revenue growth across all areas of our business, as well as higher overall business volume. Also favorably impacting net cash provided by operating activities is a higher level of CUC payments collected in the current year as a result of an amendment to our alliance agreement and associated agency agreement with Markel, which accelerated the timing of these payments. The overall increase in cash provided by operating activities was partially offset by a $16.8 million increase in prepaid SaaS implementation costs, as well as a higher level of Broad Arrow inventory acquisitions. Refer to Note 2 — Revenue in Item 8 of Part II of this Annual Report for additional information with respect to our amendment to our alliance agreement and associated agency agreement with Markel.
Investing Activities
Cash used in investing activities for the year ended December 31, 2024 increased $565.9 million when compared to 2023. This increase was primarily a driven by the diversification of our investment portfolio in the second quarter of 2024, which resulted in the purchase of investment-grade fixed maturity securities and, to a much lesser extent, equity securities. To a lesser extent, the year-over-year increase was due to $11.3 million in cash used to fund the acquisition of Drivers Edge in September 2024.
Financing Activities
During the year ended December 31, 2024, we utilized available liquidity to reduce outstanding borrowings by $28.8 million and pay a $5.6 million cash dividend on the Series A Convertible Preferred Stock. In addition, we funded $6.7 million in required distributions to THG non-controlling interest unit holders and $5.8 million in employee tax obligations relating to share-based compensation vestings.
During the years ended December 31, 2023, we took a number of actions to raise capital, including $79.2 million in net proceeds raised through the issuance of the Series A Convertible Preferred Stock. In addition, in 2023 Hagerty Re entered into the State Farm Term Loan resulting in net cash inflows of $24.4 million, after deducting issuance costs, and BAC, as initial servicer, and its wholly owned subsidiary BAC Funding 2023-1, LLC, as borrower, entered into the BAC Credit Agreement, resulting in net cash inflows of $22.9 million, after deducting issuance costs.
Tax Receivable Agreement
We expect to have adequate capital resources to meet the requirements and obligations under the TRA entered into with the Legacy Unit Holders. The TRA requires us to pay Legacy Unit Holders 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) the purchase of THG unitsfrom 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 THG units for shares of Class A Common Stock or (c) payments under the TRA and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the TRA.
Legacy Unit Holders may, subject to certain conditions and transfer restrictions as described in the Legacy Unit Holders Exchange Agreement executed in connection with the business combination that formed Hagerty, Inc. in 2021, redeem or exchange their Class V Common Stock and THG units for shares of Class A Common Stock of Hagerty, Inc. on a one-for-one basis. THG made an election under Section 754 of the IRC with the filing of its 2019 income tax return, which cannot be revoked without the permission of the IRS Commissioner and will be in place for any future exchange of THG units. The redemptions and exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of THG. These increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future. This payment obligation as a part of the TRA is an obligation of Hagerty, Inc. and not of THG. For purposes of the TRA, 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 THG as a result of the redemptions or exchanges and had Hagerty, Inc. not entered into the TRA. Estimating the amount of payments that may be made under the TRA is by nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements as of December 31, 2024.
53
TABLE OF CONTENTS
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make significant judgments, assumptions, and estimates that materially affect the amounts reported in the Company's Consolidated Financial Statements. Management's judgments, assumptions, and estimates are based on historical experience, future expectations, and other factors that are believed to be reasonable as of the date of the Consolidated Financial Statements. Actual results may ultimately differ from management's original estimates, as future events and circumstances sometimes do not develop as expected. The following is a discussion of the critical accounting estimates that may have a material impact on our Consolidated Financial Statements.
Provision for Unpaid Losses and Loss Adjustment Expenses
Description
The provision for unpaid losses and loss adjustment expenses is the difference between management's estimate of the ultimate cost of losses and loss adjustment expenses incurred by Hagerty Re and the amount of paid losses as of the reporting date. These reserves reflect management's best estimate of unpaid losses related to both reported claims and IBNR claims. These reserves also include management's best estimate of all expenses associated with processing and settling reported and unreported claims.
Reserves are reviewed by management quarterly and periodically throughout the year by combining historical results and current actual results to calculate new development factors. When estimating reserves, our actuarial reserving group utilizes several actuarial reserving methods which consider historical claim reporting patterns, claim cycle time, claim frequency and severity, claims settlement practices, adequacy of case reserves over time, the seasonality of our business, and current economic conditions. Reserve estimates produced by various actuarial reserving methods are further analyzed to determine the actuarial central estimate which represents the expected value over the range of reasonably possible outcomes.
The following table presents Hagerty Re's provision for losses and loss adjustment expenses, both gross and net of reinsurance recoverables, as of December 31, 2024 and 2023:
Gross % of Total Net % of Total
in thousands (except percentages)
Gross % of Total Net % of Total
in thousands (except percentages)
54
TABLE OF CONTENTS
The following table summarizes the (favorable) unfavorable development of management's estimate of gross and net ultimate losses and loss adjustment expenses for the 2020 to 2024 accident years:
in thousands
Judgments and Uncertainties
Estimating the ultimate cost of claims and claims expenses is an inherently complex and subjective process that involves many variables and a high degree of judgment. The factors considered by management in estimating the provision for unpaid losses and loss adjustment expenses include the following:
•the views of the Company's actuaries;
•historical trends in claim frequency and severity, including the impacts of adverse weather-related events;
•changes in claim cycle time and claim settlement practices;
•observed industry trends;
•the changing mix of business due to the large growth in modern collectible cars which carry a different risk profile than the risks associated with collector cars;
•inflation or deflation;
•retention limits under current catastrophe and treaty reinsurance programs; and
•legislative and judicial changes in the jurisdictions in which the Company operates.
Claims are analyzed and reported based on the year in which the loss occurred - i.e., on an accident year basis. Accident year data is classified and utilized within actuarial models to prepare estimates of required reserves for payments to be made in the future. The timing of claim settlement varies and depends on the type of claim being reported. Claims involving property damage are generally settled faster than bodily injury claims. Historical loss patterns are then applied to actual paid losses and reported losses by accident year to develop expectations of future claim payments. Implicit within the actuarial models are estimates of the impacts of inflation, especially for claims with longer expected cycle times. Refer to Note 13 — Provision for Unpaid Losses and Loss Adjustment Expenses in Item 8 of Part II of this Annual Report for additional information regarding the methodologies used to estimate loss and loss adjustment expense reserves.
Effect if Actual Results Differ From Estimates and Assumptions
Because actual experience can differ from key assumptions used in estimating reserves, there may be significant variation in the development of reserves and the amount of actual losses and loss adjustment expenses ultimately paid in the future. Any adjustments to the provision for losses and loss adjustment expenses are recognized in our Consolidated Statements of Operations in the period in which management determines that an adjustment is required.
55
TABLE OF CONTENTS
If the actual level of loss frequency and/or severity is higher or lower than our expectations, the ultimate cost of claims paid will differ from management's estimates. An illustration of the potential effect of higher or lower levels of loss frequency and severity on our ultimate cost of claims for the 2024 accident year is provided in the following table:
in thousands
Deferred Income Taxes
Description
Where applicable, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to (i) differences between the financial statement carrying values and tax bases of assets and liabilities and (ii) operating loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In determining the provision for income taxes for financial statement purposes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets, as well as our calculation of certain tax liabilities.
Judgments and Uncertainties
We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future taxable income, the time period over which temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods.
As of December 31, 2024, we have recorded deferred tax assets of $193.6 million, of which $148.1 million relates to the difference between the outside tax basis and book basis of our investment in the assets of THG. As of December 31, 2024, based on an assessment of all available positive and negative evidence, management believes it is more likely than not that certain deferred tax assets, including the deferred tax asset for the investment in the assets of THG, will not be realized. As a result, we have recorded a valuation allowance of $176.2 million against our deferred tax assets as of December 31, 2024.
Given our recent history of earnings and anticipated future earnings, we believe there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance recorded against our U.S. deferred tax assets will be reversed. Reversal of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period the reversal is recorded. In addition, a corresponding increase to the TRA Liability may be required to be recognized with the resulting expense recorded within "Interest and other income (expense), net" in the Consolidated Statements of Operations. The exact timing and amount of the valuation allowance reversal, and any corresponding increase to the TRA Liability, are subject to change on the basis of the level of profitability that is actually achieved.
56
TABLE OF CONTENTS
Effect if Actual Results Differ From Estimates and Assumptions
If management's projections of future taxable income and other positive evidence considered in evaluating the need for the valuation allowance prove, with the benefit of hindsight, to be inaccurate, it could prove more difficult to support the realization of the net deferred tax asset. As a result, an additional valuation allowance could be required, which would have an adverse impact on our effective income tax rate and results. Conversely, if management determines that sufficient positive evidence exists in the jurisdiction in which a valuation allowance is recorded, we may reverse all or a portion of the valuation allowance in that jurisdiction. In such situations, the adjustment made to the deferred tax asset would have a favorable impact on our effective income tax rate and results in the period such determination was made.
Liabilities under Tax Receivable Agreement
Description
In connection with the consummation of the business combination that formed Hagerty, Inc. in 2021, Hagerty, Inc. entered into a TRA with HHC and Markel ("Legacy Unit Holders"). The TRA provides for payment to the Legacy Unit Holders of 85% of the U.S. federal, state and local income tax savings realized by Hagerty, Inc. as a result of the increases in tax basis and certain other tax benefits as outlined in the Business Combination Agreement upon the exchange of THG units and shares of Hagerty, Inc. Class V Common Stock for shares of Hagerty, Inc. Class A Common Stock or cash. The Business Combination Agreement is provided as Exhibit 2.1 to this Annual Report, which is incorporated by reference within Item 15. Exhibits, Financial Statement Schedules. In connection with the filing of its 2019 income tax return THG made an election under Section 754 of the IRC for each taxable year in which TRA exchanges occur. This election cannot be revoked without the permission of the IRS Commissioner and will be in place for any future exchange of THG units. The remaining 15% cash tax savings resulting from the basis adjustments will be retained by Hagerty, Inc.
Judgments and Uncertainties
The amount and timing of any payments under the TRA will vary depending on a number of factors, including, but not limited to, the increase in tax basis of THG's assets, the timing of any future redemptions, exchanges or purchases of THG units held by Legacy Unit Holders, the price of Hagerty, Inc. Class A Common Stock at the time of the redemption, exchange or purchase, 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 TRA constituting imputed interest.
If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related payment under the TRA. Therefore, we only recognize a liability for the TRA if we determine it is probable that we will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires significant management judgment.
As of December 31, 2024, the TRA Liability was $2.2 million, of which $0.2 million was classified as a current liability within "Accounts payable, accrued expenses and other current liabilities" and $2.0 million was classified as a long-term liability within "Other long-term liabilities" on the Consolidated Balance Sheets.
Effect if Actual Results Differ From Estimates and Assumptions
Changes in the liability resulting from historical exchanges under the TRA may occur based on changes in anticipated future taxable income, changes in applicable tax rates, and other changes in tax attributes that may occur and impact the expected future tax benefits to be received. Any such changes in these factors or changes in our determination of the need for a valuation allowance related to the tax benefits acquired under the TRA could adjust the TRA Liability recognized on the Consolidated Balance Sheets. Subsequent changes in the projected liability under the TRA, as well as any interest accrued on the TRA between our annual tax filing date and the TRA payment date, are and will be recorded as a component of "Interest and other income (expense), net" each period. Actual taxable income may differ from estimates, which could significantly impact the liability under the TRA and our Consolidated Statements of Operations.
57
TABLE OF CONTENTS
Goodwill and Intangible Assets
Description
Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired in a business combination. Goodwill is not amortized, but is tested annually for impairment at the reporting unit level as of October 1 and between annual tests if indicators of potential impairment exist. These indicators could include a decline in our stock price and market capitalization, a significant change in the outlook for a reporting unit, lower than expected reporting unit operating results, increased competition, legal factors, or the sale or disposition of a significant portion of a reporting unit. For reporting units with goodwill, an impairment loss is recognized for the amount by which the reporting unit's carrying value, including goodwill, exceeds its fair value.
Our finite lived intangible assets are evaluated for impairment only when there is evidence that events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Indefinite lived intangible assets are tested annually for impairment and between annual tests if indicators of potential impairment exist.
Judgments and Uncertainties
Application of the goodwill impairment test requires judgment, including the identification of reporting units and the determination of the estimated fair value of reporting units. For reporting units with goodwill, we perform a qualitative analysis to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying amount. When assessing goodwill for impairment, our decision to perform a qualitative assessment for an individual reporting unit is based on a number of factors, including the carrying value of the reporting unit's goodwill, the amount of time in between quantitative fair value assessments, macro-economic conditions, industry, and market conditions and the operating performance of the reporting unit. If it is determined, based on qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed, in which we determine the estimated fair value of the reporting unit using a discounted cash flow analysis. This analysis requires significant judgment, including the estimation of future cash flows, which is dependent on internal forecasts, available industry and market data, the estimation of the long-term rate of growth for the reporting unit including expectations and assumptions regarding the impact of general economic conditions on the reporting unit, the estimation of the useful life over which cash flows will occur (including terminal multiples), the determination of the respective weighted average cost of capital and market participant assumptions. Changes in these estimates and assumptions could materially affect the determination of estimated fair value and potential impairment for each reporting unit.
As of December 31, 2024, the Company has recorded goodwill of $114.1 million, including $103.6 million attributable to the Marketplace reporting unit, and intangible assets of $90.1 million, consisting principally of internally developed software, renewal rights, trade names, and trademarks, as well as indefinite lived state insurance licenses.
Effect if Actual Results Differ from Estimates and Assumptions
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be an accurate prediction of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) failure to meet business plans; (ii) deterioration of the U.S. and global economies; (iii) an increase in competition; (iv) an increase in interest rates; or (v) other unanticipated events and circumstances that may decrease or delay the projected cash flows or increase the discount rates and could potentially result in an impairment charge.
While historical performance and current expectations have generally resulted in the conclusion that our goodwill is not impaired, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future. There can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment tests will prove to be an accurate prediction of the future.
New Accounting Standards
New accounting standards are described in Note 1 — Summary of Significant Accounting Policies and New Accounting Standards in Item 8 of Part II of this Annual Report, which are incorporated herein by reference.
58
TABLE OF CONTENTS
Non-GAAP Financial Measures
Adjusted EBITDA
We define Adjusted EBITDA as consolidated Net income, excluding net interest and other income (expense), income tax expense, and depreciation and amortization, further adjusted to exclude (i) net gains and losses related to our warrant liabilities; (ii) share-based compensation expense; and when applicable, (iii) restructuring, impairment and related charges; (iv) gains, losses and impairments related to divestitures; and (v) certain other unusual items.
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. We use Adjusted EBITDA as a measure of the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations.
By providing this non-GAAP financial measure, together with a reconciliation to Net income, which is the most 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 or other financial statement data presented in our Consolidated Financial Statements as indicators of financial performance. Our definition of Adjusted EBITDA may be different than similarly titled measures used by other companies in our industry, which could reduce the usefulness of this non-GAAP financial measure when comparing our performance to that of other companies.
The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is Net income:
Year ended December 31,
in thousands
Interest and other (income) expense, net (1) (2) (35,808) (22,821)
Restructuring, impairment and related charges, net — 8,812
(Gain) loss related to warrant liabilities, net 8,544 (11,543)
Gains, losses, and impairments related to divestitures (87) 4,013
(1) Excludes interest expense related to the BAC Credit Facility, which is recorded within "Sales expense" on the Consolidated Statements of Operations.
(2) Includes interest income and net investment income related to our investment portfolio, which was diversified in the second quarter of 2024 and resulted in opening positions in higher yielding fixed maturity securities, and, to a much lesser extent, equity securities.
(3) Other unusual items includes professional fees associated with the Warrant Exchange, as well as certain material severance expenses for the year ended December 31, 2024 and certain legal settlement expenses (net) recognized for the year ended December 31, 2023. Refer to Note 20 — Warrant Exchange in Item 8 of Part II of this Annual Report for additional information with respect to our warrants.
Adjusted EPS
We define Adjusted Earnings Per Share ("Adjusted EPS") as consolidated Net income, excluding net gains and losses related to our warrant liabilities, divided by our outstanding and total potentially dilutive securities, which includes (i) the weighted average issued and outstanding shares of Class A Common Stock; (ii) all issued and outstanding non-controlling interest units of THG;(iii) all issued and outstanding shares of our Series A Convertible Preferred Stock on an as-converted basis; (iv) all unissued share-based compensation awards; and (v) all unexercised warrants outstanding prior to the Warrant Exchange. Refer to Note 20 — Warrant Exchange in Item 8 of Part II of this Annual Report for additional information with respect to the Warrant Exchange.
The most directly comparable GAAP measure to Adjusted EPS is basic earnings per share ("Basic EPS"), which is calculated as Net income available to Class A Common Stockholders divided by the weighted average number of Class A Common Stock shares outstanding during the period.
59
TABLE OF CONTENTS
We present Adjusted EPS because we consider it to be an important supplemental measure of our operating performance and believe it is used by securities analysts, investors and other interested parties in evaluating the consolidated performance of other companies in our industry. We also believe that Adjusted EPS, which compares our consolidated Net income with our outstanding and potentially dilutive shares, provides useful information to investors regarding our performance on a fully consolidated and fully diluted basis.
Management uses Adjusted EPS:
•as a measurement of operating performance of our business on a fully consolidated and fully diluted basis;
•to evaluate the performance and effectiveness of our operational strategies; and
•as a preferred predictor of core operating performance, comparisons to prior periods and competitive positioning.
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.
The following table reconciles Adjusted EPS to the most directly comparable GAAP measure, which is Basic EPS:
Year ended December 31,
in thousands (except per share amounts)
Numerator:
Net income available to Class A Common Stockholders (1) $ 8,900 $ 15,881
Accretion of Series A Convertible Preferred Stock 7,427 3,677
Undistributed earnings allocated to Series A Convertible Preferred Stock 690 673
Net income attributable to non-controlling interest 61,286 7,948
(Gain) loss related to warrant liabilities, net 8,544 (11,543)
Denominator:
Weighted average shares of Class A Common Stock outstanding (1) 87,529 84,180
Total potentially dilutive securities outstanding:
Series A Convertible Preferred Stock, on an as-converted basis 6,785 6,785
Total unissued share-based compensation awards 7,980 8,385
Total warrants outstanding — 19,484
(1)Numerator and Denominator, respectively, of the GAAP measure Basic EPS
(2)Numerator and Denominator, respectively, of the non-GAAP measure Adjusted EPS
60
TABLE OF CONTENTS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as a result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices. In the normal course of our operations, the primary components of market risk affecting us are interest rate risk and credit risk.
Interest rate risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our available-for-sale securities, debt obligations, and loan portfolio secured by collector cars have interest rate risk.
Available-for-sale securities
The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. Fluctuations in interest rates have a direct effect on the market valuation of these securities. When market interest rates increase, the fair value of our fixed maturity securities decreases. Conversely, as interest rates decrease, the fair value of our fixed maturity securities increases. We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio. The target duration of our investment portfolio is two to four years.
As of December 31, 2024, we held fixed maturity securities with a fair value of $577.7 million. The table below illustrates the sensitivity of the value of our fixed maturity securities with hypothetical changes in interest rates as of December 31, 2024:
in thousands (except percentages)
Debt obligations
As of December 31, 2024, we had approximately $80.5 million of variable rate indebtedness, representing approximately 76% of our total debt outstanding, at an average interest rate during the year ended December 31, 2024 of approximately 6.75%. Based on variable-rate borrowings outstanding as of December 31, 2024, a 100-basis point (or 1.0%) change in our borrowing rates would result in our annual interest payments changing by approximately $0.8 million.
Loan portfolio
We also have a portfolio of loans secured by collector cars of approximately $57.0 million as of December 31, 2024, upon which interest is earned predominately at variable rates including the Prime Rate and Term Secured Overnight Financing Rate. Based on variable-rate loans outstanding as of December 31, 2024, a 100-basis point (or 1.0%) change in our variable rates would result in our annual interest income changing by approximately $0.5 million.
Credit risk
Available-for-sale securities
Credit risk is the potential loss resulting from adverse changes in an issuer's ability to repay its debt obligations. We have exposure to credit risk as a holder of fixed maturity securities. Our risk management strategy and investment policy are designed to invest in investment grade debt and to limit the amount of credit exposure with respect to a single issuer to no greater than 5%, except for the U.S. Federal Government. As of December 31, 2024, all fixed income securities in our investment portfolio were rated investment grade by at least one nationally recognized rating organization.
61
TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Financial Statements Page No.
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) 63
Consolidated Balance Sheets as of December 31, 2024 and 2023 66
Notes Accompanying the Consolidated Financial Statements 71
Financial Statement Schedules:
Schedule I: Condensed Financial Information of Registrant Parent Company 122
Schedule II: Valuation and Qualifying Accounts 126
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
62
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Hagerty, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hagerty, Inc. and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income (loss), changes in temporary and stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes and the schedules listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
March 4, 2025
We have served as the Company's auditor since 2019.
63
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Statements of Operations
Year ended December 31,
REVENUE: in thousands (except per share amounts)
OPERATING EXPENSES:
Restructuring, impairment and related charges, net — 8,812 18,324
Gains, losses, and impairments related to divestitures (87) 4,013 —
Revaluation gain on previously held equity method investment — — 34,735
Loss from equity method investment, net of tax — — (1,676)
Accretion of Series A Convertible Preferred Stock (7,427) (3,677) —
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCKHOLDERS $ 9,590 $ 16,554 $ 32,078
Earnings (loss) per share of Class A Common Stock:
Weighted average shares of Class A Common Stock outstanding:
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
64
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Statements of Comprehensive Income
Year ended December 31,
in thousands
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on available-for-sale investments (770) — —
Foreign currency translation adjustments (2,580) 1,564 (1,834)
Change in unrealized gain (loss) on interest rate swap (2,234) (1,060) 2,699
Accretion of Series A Convertible Preferred Stock (7,427) (3,677) —
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
65
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Balance Sheets
December 31,
ASSETS in thousands (except share amounts)
Current Assets:
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY
Current Liabilities:
Provision for unpaid losses and loss adjustment expenses 168,492 136,507
Warrant liabilities — 34,018
Commitments and Contingencies (Note 25) — —
TEMPORARY EQUITY
STOCKHOLDERS' EQUITY
Accumulated other comprehensive income (loss) (1,514) (88)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
66
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity
Temporary Equity Stockholders' Equity
in thousands Shares Amount Shares Amount Shares Amount
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
67
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity
Temporary Equity Stockholders' Equity
in thousands Shares Amount Shares Amount Shares Amount
Non-controlling interest capital issued — — — — — — — — — — 779 779
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
68
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity
Temporary Equity Stockholders' Equity
in thousands Shares Amount Shares Amount
Issuance of shares under employee plans — 37 — — — — — — — — —
Non-controlling interest capital issued — — — — — — — — — 1,700 1,700
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
69
TABLE OF CONTENTS
Hagerty, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
OPERATING ACTIVITIES: in thousands
Adjustments to reconcile net income to net cash from operating activities:
Revaluation gain on previously held equity method investment — — (34,735)
Impairment of operating lease right-of-use assets — 1,147 4,698
Loss on disposals of equipment, software and other assets 500 1,894 4,316
(Gain) loss related to warrant liabilities, net 8,544 (11,543) (41,899)
Realized (gain) loss on investments, net (2,223) — —
(Accretion) amortization of discount and premium, net (3,386) 34 196
Changes in operating assets and liabilities:
Provision for unpaid losses and loss adjustment expenses 31,985 24,766 36,872
Other assets and liabilities, net (see Note 1) (65,593) (9,958) (2,233)
INVESTING ACTIVITIES:
Purchase of previously held equity method investment — — (15,250)
Proceeds from sales of fixed maturity securities 64,827 — —
Proceeds from maturities of fixed maturity securities 48,389 7,468 1,216
Purchases of equity securities (10,861) — —
FINANCING ACTIVITIES:
Distributions paid to non-controlling interest unit holders (6,683) — —
Payment of Series A Convertible Preferred Stock dividends (5,600) — —
Other financing activities — 2,305 49
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 24 for information regarding Related-Party Transactions.
70
TABLE OF CONTENTS
Hagerty, Inc.
Notes To Consolidated Financial Statements
1 — Summary of Significant Accounting Policies and New Accounting Standards
In these Notes to the Consolidated Financial Statements, the terms "Hagerty," and the "Company" refer to Hagerty, Inc. and its consolidated subsidiaries, including The Hagerty Group, LLC ("THG"), unless the context requires otherwise. In addition, the Company's insurance policyholders and paid Hagerty Drivers Club ("HDC") subscribers are collectively referred to as "Members".
Description of Business — Hagerty is a market leader in providing insurance for collector cars and enthusiast vehicles. Through Hagerty's insurance model, the Company acts as a Managing General Agent ("MGA") by underwriting, selling, and servicing collector car and enthusiast vehicle insurance policies. The Company then reinsures approximately 80% of the risks written by its MGA subsidiaries through its wholly owned subsidiary, Hagerty Reinsurance Limited ("Hagerty Re"). In addition, Hagerty offers HDC memberships, which are primarily bundled with its insurance policies and give subscribers access to an array of products and services, including emergency roadside assistance, Hagerty Drivers Club Magazine, automotive enthusiast events, Hagerty's proprietary vehicle valuation tool, and special vehicle-related discounts. The Company also offers a marketplace to complement its insurance membership offerings where automotive enthusiasts can buy, sell, and finance collector cars and enthusiast vehicles.
Basis of Presentation — The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the regulations of the Securities and Exchange Commission and include the accounts of Hagerty, Inc., which is comprised of THG and its consolidated subsidiaries.
The Consolidated Financial Statements reflect all normal recurring adjustments and accruals that are, in the opinion of management, necessary for a fair statement of the Company's financial position and results of operations for periods presented.
Principles of Consolidation — The Consolidated Financial Statements contain the accounts of Hagerty, Inc. and its majority-owned or controlled subsidiaries.
As of December 31, 2024 and 2023, Hagerty, Inc. had economic ownership of 26.1% and 24.9%, respectively, of THG and is its sole managing member. Hagerty, Inc. reports a non-controlling interest representing the economic interest in THG held by other parties.
The financial statements of THG are consolidated by the Company under the voting interest method in accordance with Accounting Standards Codification ("ASC") Topic 810, Consolidations ("ASC 810"). Non-controlling interest is presented separately on the Consolidated Statements of Operations, the Consolidated Statements of Comprehensive Income, the Consolidated Balance Sheets, and the Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity.
All intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entities — Broad Arrow Capital LLC ("BAC") and certain of its subsidiaries transfer notes receivable to wholly owned, bankruptcy-remote, special purpose entities (each, an "SPE") to secure borrowings under the BAC Credit Agreement (as defined in Note 17 — Long-Term Debt).
These SPEs are considered to be variable interest entities (each, a "VIE") under GAAP and their financial statements are consolidated by BAC, which is the primary beneficiary of the SPEs and also a consolidated subsidiary of the Company. BAC is considered to be the primary beneficiary of the SPEs because it has (i) power over the significant activities of the SPEs through its role as servicer of the notes receivable used to secure borrowings under the BAC Credit Agreement and (ii) the obligation to absorb losses or the right to receive returns that could be significant through its interest in the residual cash flows of the SPEs.
Refer to Note 5 — Notes Receivable and Note 17 — Long-Term Debt for additional information.
71
TABLE OF CONTENTS
The following table presents the assets and liabilities of the Company's consolidated variable interest entities as of December 31, 2024 and 2023:
December 31, December 31,
ASSETS in thousands
Cash and cash equivalents $ 1,746 $ 83
Restricted cash and cash equivalents 1,221 961
Accounts receivable — 190
LIABILITIES
Accounts payable, accrued expenses and other current liabilities $ 999 $ 1,881
Emerging Growth Company — The Company currently qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 and can delay the adoption of new or revised accounting standards until those standards would apply to private companies.
The Company intends to avail itself of this extended transition period and, therefore, the Company may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or have opted out of using such extended transition period. As of December 31, 2024, the Company has not delayed the adoption of any new or revised accounting standards despite qualifying as an emerging growth company.
Reclassifications— In conjunction with the Company's investment diversification in the second quarter of 2024, prior period fixed maturity investment balances have been reclassified from "Other current assets" and "Other long-term assets" to "Investments" on the Consolidated Balance Sheets to conform to the current year presentation. Refer to Note 3 — Investments for additional information related to the Company's investment portfolio. This reclassification had no effect on the Company's previously reported operating income, net income, earnings per share, cash flows, or retained earnings.
Use of Estimates — The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the reporting period. Although the estimates are considered reasonable, actual results could materially differ from those estimates.
Significant estimates made by management include, but are not limited to: (i) the provision for unpaid losses and loss adjustment expenses, including incurred but not reported ("IBNR") claims (see Note 13); (ii) the valuation of the Company's deferred income tax assets (see Note 23); (iii) the amount of the liability associated with the Tax Receivable Agreement ("TRA") (see Note 23); (iv) the fair values of the reporting units used in assessing the recoverability of goodwill (see Note 12); (v) the valuation and useful lives of intangible assets (see Note 12); and (vi) the fair value of the Company's previous warrant liabilities (see Note 4 and Note 20). Although some variability is inherent in these estimates, management believes that the current estimates are reasonable in all material respects. These estimates are reviewed regularly and adjusted as necessary. Adjustments related to changes in estimates are reflected in the Company's results of operations in the period during which those estimates changed.
Segment Information — The Company has one operating segment and one reportable segment with the Chief Executive Officer ("CEO") acting as the Chief Operating Decision Maker ("CODM"). The Company's segment presentation reflects its business activities which place the automotive enthusiast at the center of operating and resource allocation decisions. Accordingly, the CODM evaluates performance and makes resource allocation decisions using a number of consolidated measures, including consolidated net income. The CODM is also regularly provided with information regarding the Company's significant expenses consistent with the level of information provided in the Consolidated Statements of Operations, as well as information regarding assets consistent with the level of detail provided in the Consolidated Balance Sheets. The CODM utilizes such consolidated financial information in connection with the Company's budgeting and forecasting process to monitor budget-to-actual variances when evaluating performance, allocating resources, and establishing management compensation.
72
TABLE OF CONTENTS
Foreign Currency Translation — The functional currency of the Company's entities operating outside of the United States ("U.S.") is the principal currency of the economic environment in which the entity primarily generates and expends cash, which is generally the local currency. The Company translates its foreign currency denominated assets and liabilities into U.S. dollars at current rates of exchange as of the balance sheet date, and foreign currency denominated income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in "Foreign currency translation adjustments", a component of "Accumulated other comprehensive income (loss)" on the Consolidated Balance Sheets. Foreign currency transaction gains and losses are recorded within "Interest and other income (expense), net" in the Consolidated Statements of Operations.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents — The Company holds unrestricted and restricted cash and cash equivalents at multiple financial institutions. The combined account balances at one or more of the institutions may exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage. The Company is subject to a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes the risk is not significant given the size and credit worthiness of the financial institutions at which the funds are held. The Company considers all highly liquid investments convertible to a known amount of cash and with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents that are restricted as to withdrawal or use are recorded as restricted cash and cash equivalents. The carrying value of the Company's restricted cash and cash equivalents approximates fair value. Refer to "Restricted Assets" below for additional information regarding the Company's restricted cash and cash equivalent balances.
The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2024 and 2023:
December 31,
in thousands
Investments — Fixed maturity securities are classified as available-for-sale and recorded on the Consolidated Balance Sheets at their fair value, with those having maturity dates within one year of the balance sheet date classified within current assets. On a quarterly basis, fixed maturity securities with unrealized losses are reviewed to determine whether the decline in fair value is attributable to a material credit loss. If a material credit loss is noted, an allowance is established and the credit loss is recorded in the Consolidated Statements of Operations.
Unrealized gains and losses on fixed maturity securities are recorded within "Change in net unrealized gain (loss) on available-for-sale investments", a component of "Accumulated other comprehensive income (loss)" on the Consolidated Balance Sheets. The Company uses the first in, first out method to determine the cost of the fixed maturity securities sold.Realized investment gains or losses from sales of available-for-sale investments are recorded within "Interest and other income (expense), net" in the Consolidated Statements of Operations.
Interest on fixed maturity securities is recorded within "Interest and other income (expense), net" in the Consolidated Statements of Operations. Premiums and discounts are amortized or accreted, respectively, over the lives of the related fixed maturity securities as an adjustment to the yield using the effective interest method.
Equity securities are recorded on the Consolidated Balance Sheets at their fair value and are classified within current assets. Dividend income, as well as realized and unrealized gains and losses on equity securities, are recorded within "Interest and other income (expense), net" in the Consolidated Statements of Operations.
Refer to Note 3 — Investments and Note 4 — Fair Value Measurements for additional information regarding the Company's investment portfolio.
Supplemental Balance Sheet Information
Restricted Assets — As discussed in more detail below, certain of the Company's subsidiaries hold assets in trust and/or that are restricted as to their use.
The Company's MGA subsidiaries collect premiums from insureds on behalf of insurance carriers. Prior to remittance to the insurance carrier, these funds are required to be held in trust for the benefit of the insurance carriers and segregated from the Company's operating cash.
73
TABLE OF CONTENTS
Hagerty Re maintains trust accounts for the benefit of various ceding insurers as security for its obligations for losses, loss expenses, unearned premium, and profit-sharing commissions.
On September 1, 2024, the Company acquired Consolidated National Insurance Company, which was subsequently renamed Drivers Edge Insurance Company ("Drivers Edge"). Drivers Edge maintains assets on deposit with a number of regulatory authorities to support its insurance operations. Refer to Note 10 — Acquisitions for additional information related to the Company's acquisition of Drivers Edge.
BAC and its consolidated subsidiaries maintain bank accounts that are required for the operation of the BAC Credit Facility (as defined in Note 17 — Long-Term Debt). The funds in these bank accounts represent security under the BAC Credit Facility and their use is restricted to the servicing of the debt outstanding under that facility.
The following table presents the components of the Company's restricted assets as of December 31, 2024 and 2023:
Balance Sheet Classification December 31,
in thousands
Equity securities Investments 11,839 —
Supplemental Cash Flow Information
The table below presents information regarding the Company's changes in other operating assets and liabilities for the years ended December 31, 2024, 2023, and 2022:
Year ended December 31,
in thousands
74
TABLE OF CONTENTS
The table below presents information regarding the Company's non-cash investing and financing activities, as well as the cash paid for interest and taxes for the years ended December 31, 2024, 2023, and 2022:
Year ended December 31,
Non-cash investing activities: in thousands
Collection of notes receivable (1) $ 8,084 $ 6,094 $ —
Broad Arrow acquisition $ — $ — $ 73,253
Other acquisitions and investments $ — $ 2,142 $ 8,273
Termination of MHH Joint Venture (Refer to Note 11) $ — $ 2,929 $ —
Non-cash financing activities:
Loss on Warrant Exchange (Refer to Note 20) $ 2,006 $ — $ —
Cash paid for:
(1) In certain situations, BAC makes loans to refinance accounts receivable balances generated by Broad Arrow Group, Inc. ("Broad Arrow") auction or private sale purchases. These loans are accounted for on the Consolidated Balance Sheets as non-cash reclassifications between "Accounts receivable" and "Notes receivable" and are not presented within Investing Activities in the Company's Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such loans is classified within Operating Activities in the Company's Consolidated Statements of Cash Flows.
Receivables — Accounts receivable primarily consists of payments due from customers for insurance policies sold by the Company's MGA subsidiaries. Premiums receivable consists of premiums due to Hagerty Re from insurance carriers. Commissions receivable consists of profit sharing commissions due to the Company's MGA subsidiaries from insurance carriers. As of December 31, 2024 and 2023, the allowance for expected credit losses related to the Company's receivable balances was not material based on management's quarterly risk assessment, which takes into consideration historical trends, the current economic environment, the creditworthiness of the debtor, and other relevant factors.
Notes Receivable — Notes receivable includes loans underwritten by BAC secured by collector cars. Notes receivable are recorded on the date the loan is funded based on the amount stipulated in the underlying agreement. Loans carry either a fixed or variable rate of interest and typically have an initial maturity of up to two years, often with an option for the borrower to renew for one year increments, provided the borrower remains in good standing. Finance revenue on the loans is recognized when earned based on the amount of the outstanding loan, the applicable interest rate on the loan, and the length of time the loan was outstanding during the period.
Notes receivable are recorded net of an allowance for expected credit losses, which is based on management's quarterly risk assessment and takes into consideration a number of factors including the level of historical losses for similar loans, the quality of the underlying collateral, the loan-to-value ("LTV") ratio of each loan, management's overall assessment of the current circumstances and risks related to each loan, and, to a lesser extent, the circumstances related to each borrower. The valuation of collector cars is inherently subjective, and the realizable value of collector cars often fluctuates over time. Refer to Note 5 — Notes Receivable for additional information.
Deferred Acquisition Costs, net — Deferred acquisition costs include the ceding commissions paid by Hagerty Re to insurance carriers for the risk assumed under quota share reinsurance agreements with those carriers. Deferred acquisition costs are recorded net of commissions received by Hagerty Re for the risk ceded to various reinsurers. Net acquisition costs are deferred and recognized ratably over the term of the related policies, which is generally 12 months.
Deferred acquisition costs are considered to be recoverable if the sum of expected future earned premiums exceeds expected future claims and expenses. Anticipated investment income is also a factor in the recoverability analysis. If, as a result of the recoverability analysis, a loss is determined to be probable, a premium deficiency reserve is recognized in the period in which such determination is made. At December 31, 2024 and 2023, deferred acquisition costs were considered fully recoverable and no premium deficiency reserve was recorded.
75
TABLE OF CONTENTS
Software-as-a-Service— Implementation costs related to software-as-a-service ("SaaS") arrangements are expensed as incurred to "Salaries and benefits" or "General and administrative expenses" on the Consolidated Statements of Operations during the preliminary project stage. Direct implementation costs related to SaaS arrangements are capitalized during the development phase and recorded within "Other current assets" or "Other long-term assets" on the Consolidated Balance Sheets. Capitalized SaaS implementation costs are amortized over the term of the underlying service agreement. The Company monitors SaaS implementation projects on an ongoing basis and capitalizes the costs of any major improvements or new functionality. Once the software is fully implemented, ongoing maintenance costs are expensed as incurred.
Inventory— Inventory primarily consists of vehicles that have been purchased opportunistically for resale by Broad Arrow. Inventory is valued on a specific identification basis at the lower of cost or the Company's estimate of net realizable value (i.e., the expected sale price upon disposition). Inventory is recorded within "Other current assets" on the Consolidated Balance Sheets. If there is evidence that the estimated net realizable value of a specific item held in inventory is less than its carrying value, a writedown is recorded within "Sales expense" in the Consolidated Statements of Operations to reflect a revised estimate of net realizable value on the Consolidated Balance Sheets.
Ceded Reinsurance— Hagerty Re purchases catastrophe reinsurance to protect its capital from large catastrophic events. In addition, Hagerty Re enters into quota share agreements with various reinsurers and purchases semi-automatic facultative reinsurance to cede a portion of the physical damage exposure related to certain policies and vehicles. Reinsurance recoverables are amounts due to Hagerty Re from reinsurers for paid and unpaid loss and loss adjustment expenses. The amount of any reinsurance recoverable is determined by applying the contract terms to incurred losses arising from a qualifying event. Reinsurance recoverables are recorded within "Other current assets" on the Consolidated Balance Sheets.
Deferred reinsurance premiums ceded consists of the unearned portion of premiums ceded by Hagerty Re to various reinsurers. Deferred reinsurance premiums are initially recorded within "Other current assets" on the Consolidated Balance Sheets and subsequently recognized on a pro-rata basis over the term of the related reinsured policies as a reduction to "Earned premium" in the Consolidated Statements of Operations. Refer to Note 14 — Reinsurance for additional information regarding the Company's reinsurance coverage.
Property and Equipment — Property and equipment are recorded at cost and depreciated over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of either the lease term or the estimated useful life of each improvement. Estimated useful lives range from two to ten years for computers, automobiles, and office furniture. Buildings and building improvements have an estimated useful life of 39 years. Upon sale or retirement, the cost and related accumulated depreciation of the assets disposed are derecognized, and any resulting gain or loss is reflected in the Consolidated Statements of Operations. Annual depreciation is calculated based on the straight-line method. Maintenance, repair costs and minor renovations are expensed as incurred, while expenditures that increase the asset's estimated useful life are capitalized.
Leases — The Company accounts for leases in accordance withASC Topic 842, Leases ("ASC 842").At inception, contracts are evaluated to determine whether they are or contain a lease. A contract is or contains a lease if it conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, leases are evaluated for classification as an operating lease or finance lease. Operating lease right-of-use ("ROU") assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term, discounted using the Company's incremental borrowing rate. The Company estimates the incremental borrowing rate based on qualitative factors including company specific credit rating, lease term, impact of collateral, general economics and the interest rate environment. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease ROU assets are recorded based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and previously recognized impairments. The Company does not recognize ROU assets and lease liabilities for short-term leases. The Company has real estate lease agreements that contain lease and non-lease components, which are accounted for as a single lease component.
The Company's leases often contain fixed rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. The Company also has lease agreements that are subject to annual changes in the Consumer Price Index ("CPI"). While lease liabilities are not remeasured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments has been incurred.
The Company's lease agreements may contain variable costs such as common area maintenance, operating expenses, real estate taxes or other costs. Variable lease costs are expensed as incurred within "General and administrative expenses" in the Consolidated Statements of Operations. The Company's lease agreements generally do not contain any residual value guarantees or restrictive covenants.
76
TABLE OF CONTENTS
The Company has the option to extend most of its lease agreements, with renewals ranging from one to 20 years. The Company includes renewal options in lease terms that are deemed reasonably certain of being exercised in the lease term. As it is not reasonably certain that the Company will exercise these renewal options, they are not included in the lease terms for purposes of calculating the Company's lease liability.
The Company's primary operating leases consist of office space. The Company's leases have remaining terms of one to 12 years. As of December 31, 2024 and 2023, the Company had not entered into any finance leases. Refer to Note 9 — Leases for additional information.
Intangible Assets — Intangible assets are recorded at cost and amortized over the estimated life of each intangible asset, unless the estimated life is deemed to be indefinite. Acquired intangible assets are initially recorded at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets primarily consist of insurance policy renewal rights, internally developed software, trade names, non-compete agreements, and customer relationships, as well as indefinite lived state insurance licenses. Amortization is recorded using the straight-line method over the estimated life of the intangible asset as it approximates the pattern over which economic benefits are realized. Insurance policy renewal rights, internally developed software, trade names, non-compete agreements, and customer relationships are amortized over three to 25 years. The Company expenses internally developed software costs incurred during the preliminary project stage and, upon management approval, capitalizes direct development costs including the associated payroll and related costs for employees working on development, as well as outside contractor costs.
Goodwill — Goodwill represents the excess of the cost of a business combination over the fair value of net assets acquired, including identifiable intangible assets. Goodwill is not amortized, but is tested annually for impairment at the reporting unit level as of October 1 and between annual tests if indicators of potential impairment exist.
For reporting units with goodwill, the Company performs a qualitative analysis to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying amount. When assessing goodwill for impairment, the Company's decision to perform a qualitative assessment for an individual reporting unit is based on a number of factors, including the carrying value of the reporting unit's goodwill, the amount of time in between quantitative fair value assessments, macro-economic conditions, industry and market conditions, and the operating performance of the reporting unit. If it is determined, based on qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed, in which the Company determines the estimated fair value of the reporting unit using a discounted cash flow analysis. This analysis requires significant judgment, including the estimation of future cash flows, which is dependent on internal forecasts, available industry and market data, the estimation of the long-term rate of growth for the reporting unit including expectations and assumptions regarding the impact of general economic conditions on the reporting unit, the estimation of the useful life over which cash flows will occur (including terminal multiples), the determination of the respective weighted average cost of capital, and market participant assumptions.
As of December 31, 2024, the Company has goodwill of $114.1 million, including $103.6 million attributable to the Marketplace reporting unit. The Company did not recognize any goodwill impairments during the years ended December 31, 2024, 2023, and 2022.
Impairment of Long-Lived Assets — The Company reviews all long-lived assets that have finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC Topic 360, Impairment and Disposal of Long-Lived Assets ("ASC 360"). If it is determined the carrying amount of the asset (or asset group) is not recoverable, an impairment loss is recognized within operating expenses in the Consolidated Statements of Operations in the period in which such determination is made.
The determination of the recoverability of a long-lived asset (or asset group) is based on an estimate of the undiscounted cash flows resulting from the use of the asset (or asset group) and its eventual disposition. If the carrying value of the long-lived asset (or asset group) is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset (or asset group). Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as necessary.
Losses Payable — Losses payable represents the amount due to insurance carriers by Hagerty Re for paid and billed losses as of the balance sheet date.
Provision for Unpaid Losses and Loss Adjustment Expenses — The provision for unpaid losses and loss adjustment expenses is the difference between management's estimate of the ultimate cost of losses and loss adjustment expenses incurred by Hagerty Re and the amount of paid losses as of the reporting date. These reserves reflect management's best estimate of unpaid losses related to both reported claims and IBNR claims, as well as processing and settlement expenses related to the claims.
77
TABLE OF CONTENTS
Estimating the ultimate cost of claims and claims expenses is an inherently complex and subjective process that involves many variables and a high degree of judgment. Reserves are reviewed by management quarterly and periodically throughout the year by combining historical results and current actual results to calculate new development factors. When estimating reserves, the Company's actuarial reserving group utilizes several actuarial reserving methods which consider historical claim reporting patterns, claim cycle time, claim frequency and severity, claims settlement practices, adequacy of case reserves over time, seasonality, 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 reserves and the amount of actual losses and loss adjustment expenses ultimately paid in the future. The Company does not discount its provision for unpaid losses and loss adjustment expenses to reflect the time value of money. Any adjustments to the provision for losses and loss adjustment expenses, and any related reinsurance recoverables, are recognized in the Consolidated Statements of Operations in the period in which management makes the determination that an adjustment is required.
Refer to Note 13 — Provision for Unpaid Losses and Loss Adjustment Expenses for additional information regarding the methodologies used to estimate loss and loss adjustment expense reserves.
Advance Premiums and Due to Insurers — Advance premiums represents the aggregate amount of gross written premium received by the Company's MGA subsidiaries prior to the effective date of the underlying policies. After a policy becomes effective, the amount of premium owed to the insurance carrier, net of the commission earned by the Company, is recorded within Due to insurers.
Warrant Liabilities — Prior to the warrant exchange transaction that was completed in the third quarter of 2024, which resulted in the settlement of all outstanding warrants, the Company accounted for its warrants in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). The warrants did not meet the criteria for equity treatment and as such, were recorded as a liability at their fair value. The warrant liability was subject to remeasurement each reporting period with the change in fair value between reporting periods recorded within "Gain (loss) related to warrant liabilities, net" in the Consolidated Statements of Operations. Refer to Note 20 — Warrant Exchange for additional information related to the Warrant Exchange.
Revenue Recognition — The Company recognizes revenue under ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), ASC Topic 944, Financial Services — Insurance ("ASC 944"), and ASC Topic 310, Receivables ("ASC 310").
Commission and fee revenue
The Company's MGA subsidiaries earn commission and fee revenue primarily from the underwriting, sale, and servicing of collector car and enthusiast vehicle insurance policies written on behalf of insurance carriers. Approximately 93% of the Company's commission and fee revenue is earned through the policies sold by its U.S. MGAs on behalf of a subsidiary of Markel Group, Inc. ("Markel"), which is a related party. Refer to Note 24 — Related-Party Transactions for additional information.
The Company has identified the insurance carrier as its customer and determined that the transaction price is the estimated commissions to be received over the term of the policy. The transaction price is determined based on an estimate of premiums written, net of a constraint for policy changes and cancellations. These commissions and fees, including those paid via installment plan, are earned when the policy becomes effective, as the Company's performance obligation is substantially complete when the policy is issued, all rights are passed to the insured, and the obligation to pay a claim resides with the carrier.
Under the terms of the contracts with certain insurance carriers, the Company has the opportunity to earn a contingent underwriting commission ("CUC") based on the results of the book of business, including the level of written or earned premium and loss ratio. Each insurance carrier partner contract and related CUC is calculated independently. The CUCs represent a form of variable consideration associated with the placement of insurance coverage. Under ASC 606, the Company must estimate the amount of consideration that it will become entitled to receive during the calendar year such that a significant reversal of revenue is not probable. As such, CUCs are recognized as a contract asset within "Commissions receivable" on the Consolidated Balance Sheets in the period that the policy is issued using the applicable premium and payout factors based on the estimated loss ratio from the contract.
Earned premium
Earned premium represents the earned portion of written premiums that Hagerty Re has assumed under quota share reinsurance agreements with the Company's insurance carrier partners, net of premiums ceded to various reinsurers and the cost of catastrophe reinsurance coverage. Premiums assumed and ceded are earned on a pro-rata basis over the term of the related insurance policies, which is generally 12 months, with the unearned portion recorded as "Unearned premiums" on the Consolidated Balance Sheets. The cost of catastrophe reinsurance coverage is recognized over the contract period in proportion to the related earned premium.
78
TABLE OF CONTENTS
Membership, marketplace and other revenue
Subscription revenue is earned through HDC memberships, which are primarily bundled with the Company's insurance policies and give subscribers access to an array of products and services, including emergency roadside assistance, Hagerty Drivers Club Magazine, automotive enthusiast events, Hagerty's proprietary vehicle valuation tool, and special vehicle-related discounts. The Company also earns fee-based revenue from Hagerty Garage + Social memberships, which include storage services in addition to the HDC Member benefits. Revenue from the sale of HDC and storage memberships is recognized ratably over the period of the membership. The membership is treated as a single performance obligation to provide access to stated Member benefits over the life of the membership, which is currently one year.
The Company's marketplace business earns fee-based revenue primarily from the sale of collector cars and enthusiast vehicles through live auctions, time-based digital auctions, and brokered private sales. From time-to-time, the marketplace business also earns revenue from the sale of collector cars and enthusiast vehicles that have been acquired opportunistically and placed in inventory. In addition, the marketplace business also earns finance revenue from loans made to qualified collectors and businesses secured by their collector cars.
Fee-based marketplace revenue is recognized when the underlying sale is completed, which is generally upon the matching of a seller and buyer in a legally binding auction or private sale transaction. Revenue from the sale of inventory is recognized at the point in time when title and control of the car is transferred to the buyer, which is generally upon collection of the full purchase price. Finance revenue is recognized over time as earned based on the amount of the outstanding loan, the applicable interest rate on the loan, and the length of time the loan was outstanding during the period.
Lastly, other revenue includes sponsorship, admission, advertising, valuation, registration, and sublease income. Other revenue is recognized when the performance obligation for the related product or service is satisfied.
Contract Assets
Contract assets includes amounts due to the Company's MGA subsidiaries for CUCs earned, but not yet billed. Contract assets are recorded within "Commissions receivable" on the Consolidated Balance Sheets.
Contract Liabilities
Contract liabilities primarily includes payments received by the Company in advance of fulfilling its contractual performance obligations.
Contract Costs
The Company accounts for contract costs under ASC Topic 340, Other Assets and Deferred Costs, ("ASC 340"), which requires the capitalization of certain costs incurred to obtain or fulfill customer contracts. The Company's contract costs primarily relate to commission payments made by its MGA subsidiaries on new policy sales. These capitalized costs are amortized to "Sales expense" in the Consolidated Statements of Operations based on the average expected life of the underlying insurance policy and are included within "Other current assets" on the Consolidated Balance Sheets.
Refer to Note 2 — Revenue for additional information.
Advertising — Advertising and sales promotion costs are expensed the first time the advertising or sales promotion takes place. Advertising costs were $25.9 million, $25.5 million, and $27.8 million for the years ended December 31, 2024, 2023, and 2022, respectively, and are reflected as a component of "Sales expense" in the Consolidated Statements of Operations.
Income Taxes — With the exception of certain U.S. corporate and foreign subsidiaries,THG is taxed as a pass-through ownership structure under the Internal Revenue Code ("IRC") and a similar section of state income tax law. As such, any taxable income or loss generated by THG is passed through to and included in the taxable income or loss of THG unit holders, including Hagerty, Inc.