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As filed with the Securities and Exchange Commission on April 6, 2022
Registration
No. 333-261810
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C
. 20549
 
 
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM
S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
HAGERTY, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
6331
 
86-1213144
(State or Other Jurisdiction of
Incorporation or Organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification No.)
 
 
121 Drivers Edge
Traverse City, Michigan 49684
(800)
922-4050
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Barbara E. Matthews
General Counsel and Corporate Secretary
121 Drivers Edge
Traverse City, Michigan 49684
(800)
922-4050
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
 
Copies to:
Kevin Criddle
Andrew Ledbetter
DLA Piper LLP (US)
2525 E. Camelback Road, Suite 1000
Phoenix, Arizona 85016-4232
Tel: (480)
606-5100
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this registration statement.
 
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.  ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
under the Securities Exchange Act of 1934:
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated filer
     Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐
 
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

EXPLANATORY NOTE
This Post-Effective Amendment No. 1 (“Post-Effective Amendment No. 1”) to the Registration Statement on
Form S-1
(File
No. 333-261810)
(the “Registration Statement”), as originally declared effective by the Securities and Exchange Commission (the “SEC”) on December 30, 2021, is being filed to include information contained in the registrant’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2021, which was filed with the SEC on March 24, 2022, and to update certain other information in the Registration Statement.
No additional securities are being registered under this Post-Effective Amendment No. 1. All applicable registration fees were paid at the time of the original filing of the Registration Statement on December 21, 2021.

The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling securityholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 6, 2022
344,871,956 Shares of Class A Common Stock
Up to 12,669,300 PIPE Warrants
Up to 1,300,000 OTM Warrants
Up to 257,500 Private Placement Warrants
Up to 28,750 Underwriter Warrants
 
 
This prospectus relates to (i) the resale by the selling securityholders named in this prospectus (the “Selling Securityholders”) of up to 73,832,500 shares of Class A common stock, par value $0.0001 per share, of the Company (“Class A Common Stock”), (ii) the issuance by us of up to 5,750,000 shares of Class A Common Stock upon exercise of the warrants issued to the public as part of the units in Aldel’s initial public offering (the “Public Warrants”), (iii) the issuance by us and resale by the Selling Securityholders of up to (A) 12,669,300 shares of Class A Common Stock upon exercise of the warrants (the “PIPE Warrants”) that were issued to certain qualified institutional buyers and accredited investors pursuant to subscription agreements dated as of August 17, 2021, (B) 1,300,000 shares of Class A Common Stock upon exercise of the warrants (the “OTM Warrants”) originally issued to Aldel Investors LLC and FG SPAC Partners LP in a private placement in connection with the initial public offering of Aldel (as defined below), (C) 28,750 shares of Class A Common Stock upon exercise of the warrants (the “Underwriter Warrants”) originally issued to ThinkEquity LLC in connection with the initial public offering of Aldel, and (D) 257,500 shares of Class A Common Stock upon exercise of the warrants (the “Private Placement Warrants” and, together with the Public Warrants, the PIPE Warrants, the OTM Warrants and the Underwriter Warrants, the “Warrants”) originally issued in a private placement in connection with the initial public offering of Aldel, (iv) the issuance by us and resale by the Selling Securityholders of up to 251,033,906 shares of Class A Common Stock issuable upon exchange of shares of Class V common stock of the Company and Hagerty Group Units, and (v) the resale by the Selling Securityholders of up to 12,669,300 PIPE Warrants, 1,300,000 OTM Warrants, 257,500 Private Placement Warrants, and 28,750 Underwriter Warrants. We will not receive any proceeds from the sale of shares of Class A Common Stock or Warrants by the Selling Securityholders pursuant to this prospectus.
We are registering the securities for resale pursuant to the Selling Securityholders’ registration rights under certain agreements between us and the Selling Securityholders. Our registration of the securities covered by this prospectus does not mean that the Selling Securityholders will offer or sell any of the shares of Class A Common Stock or Warrants. The Selling Securityholders may offer, sell or distribute all or a portion of their shares of Class A Common Stock or Warrants publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any proceeds from the sale of shares of Class A Common Stock or Warrants by the Selling Securityholders pursuant to this prospectus. We provide more information about how the Selling Securityholders may sell shares of Class A Common Stock or Warrants in the section entitled “
Plan of Distribution
.”
Our Class A Common Stock and our Public Warrants are listed on the New York Stock Exchange (“NYSE”) under the symbols “HGTY” and “HGTY.WT,” respectively. On April 5, 2022, the closing price of our Class A Common Stock was $11.11 and the closing price for our Public Warrants was $2.69.
 
 
We are an “emerging growth company” under federal securities laws and are subject to reduced public company reporting requirements.
Investing in our Class A Common Stock involves a high degree of risk. See the section entitled “
beginning on page 5 of this prospectus to read about factors you should consider before buying our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is             , 2022.

TABLE OF CONTENTS
 
 
  
Page
 
  
 
ii
 
  
 
iii
 
  
 
1
 
  
 
4
 
  
 
5
 
  
 
36
 
  
 
37
 
  
 
38
 
  
 
39
 
  
 
60
 
  
 
72
 
  
 
82
 
  
 
86
 
  
 
92
 
  
 
95
 
  
 
102
 
  
 
110
 
  
 
114
 
  
 
120
 
  
 
120
 
  
 
120
 
  
 
121
 
  
 
F-1
 
You should rely only on the information provided in this prospectus and any applicable prospectus supplement. Neither we nor the Selling Securityholders have authorized anyone to provide you with different information. Neither we nor the Selling Securityholders are making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any applicable prospectus supplement is accurate as of any date other than the date of the applicable document. Since such dates, our business, financial condition, results of operations and prospects may have changed.
Unless the context indicates otherwise, references in this prospectus to the “Company,” “Hagerty,” “we,” “us,” “our” and similar terms refer to Hagerty, Inc. (f/k/a Aldel Financial Inc.), a Delaware corporation, and its consolidated subsidiaries. References to “Aldel” refer to the Company prior to the consummation of the Business Combination (as defined herein).
 
i

ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form
S-1
that we filed with the SEC using the “shelf” registration process. Under this shelf registration process, the Selling Securityholders may, from time to time, sell the securities offered by them described in this prospectus. We will not receive any proceeds from the sale by such Selling Securityholders of the securities offered by them described in this prospectus. This prospectus also relates to the issuance by us of the shares of Class A Common Stock issuable upon the exercise of any Warrants. We will receive proceeds from any exercise of the Warrants for cash.
Neither we nor the Selling Securityholders have authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus or any applicable prospectus supplement or any free writing prospectuses prepared by or on behalf of us or to which we have referred you. Neither we nor the Selling Securityholders take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we nor the Selling Securityholders will offer or sell these securities in any jurisdiction where the offer or sale is not permitted.
We may also provide a prospectus supplement or post-effective amendment to the registration statement to add information to, or update or change information contained in, this prospectus. You should read both this prospectus and any applicable prospectus supplement or post-effective amendment to the registration statement together with the additional information to which we refer you in the section of this prospectus entitled “
Where You Can Find More Information
.”
 
ii

GLOSSARY OF TERMS
The following is a glossary of selected terms used throughout this prospectus that are technical in nature:
Adjusted EBITDA
 Net income (loss) (the most directly comparable GAAP measure) before interest, income taxes, and depreciation and amortization (EBITDA), adjusted to exclude changes in fair value of warrant liabilities, accelerated vesting of incentive plans, gains and losses from asset disposals and certain other non-recurring gains and losses. Adjusted EBITDA is a non-GAAP measure. For a discussion of the uses and limitations of non-GAAP financial measures, including Adjusted EBITDA, refer to the section titled 
Key Performance Indicators and Certain Non-GAAP Financial Measures” 
within Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ASU
 Accounting Standards Update. The Financial Accounting Standards Board (“FASB”) issues an ASU to communicate changes to the FASB Codification.
BMA
 Bermuda Monetary Authority, established under the Bermuda Monetary Authority Act of 1969, the Authority supervises, regulates and inspects financial institutions operating from within its jurisdiction.
Book of Business
 Insurance policies bound by us with our Carriers (as defined below) on behalf of our clients.
Business Combination 
The business combination that was completed on December 2, 2021, pursuant to the Business Combination Agreement (as defined below).
Business Combination Agreement 
The agreement dated as of August 17, 2021, by and among Aldel, Aldel Merger Sub and The Hagerty Group. The Business Combination Agreement is provided as Exhibit 2.1, incorporated by reference within 
Item 15. Exhibits, Financial Statement Schedules
, in this Annual Report on Form 10-K.
BSCR
 Bermuda Solvency Capital Requirement, which is the Bermuda Monetary Authority’s risk-based capital model that was developed to enhance the capital adequacy framework for the insurance sector.
Carrier
 An insurance company.
CUC
 Contingent Underwriting Commission, a profit-share based on the calendar-year performance of the insurance book of business with a Carrier.
Exchange Agreement
 An agreement between the Company, HHC and Markel. Under the Exchange Agreement, HHC and Markel (both as defined below) have the right to exchange their Hagerty Group Units and Class V Common Stock for, at the option of the Company, Class A Common Stock or cash. The Exchange Agreement was amended and restated on March 23, 2022. The amended Exchange Agreement is provided as Exhibit 10.8, incorporated by reference within 
Item 15. Exhibits, Financial Statement Schedules
, in this Annual Report on Form 10-K.
GAAP
 Accounting principles generally accepted in the United States of America.
Hagerty Re
 Hagerty Reinsurance Limited, our wholly owned single cell captive reinsurance subsidiary.
Hagerty Group Units
 A unit of economic interests of The Hagerty Group held by Hagerty Group Unit Holders (as defined below). As part of the Business Combination Agreement, all of the legacy equity interests of The Hagerty Group held by HHC and Markel were exchanged for Hagerty Group Units in The Hagerty Group.
 
iii

Hagerty Group Unit Holders 
HHC, Markel and Hagerty, Inc. following the consummation of the Business Combination.
HDC
 Hagerty Drivers Club membership program.
HHC
 Hagerty Holding Corp., a close corporation under Delaware law.
HVT
 Hagerty Valuation Tool.
IBNR
 Incurred but not reported, a reserve account used as a provision for claims and/or events that have transpired but have not yet been reported to the insurance carrier.
Legacy Unit Holders 
HHC and Markel, the economic owners of The Hagerty Group, prior to the consummation of the Business Combination.
Loss Ratio
 Expressed as a percentage, the ratio of (a) losses and loss adjustment expenses incurred to (b) earned premium in Hagerty Re.
Markel 
Markel Corporation, a holding company for insurance, reinsurance and investments operations, headquartered in Richmond, Virginia.
MGA
 Managing General Agent, an insurance agent or broker that has been granted underwriting authority by an insurer.
MHH
 Member Hubs Holding, LLC is a joint venture formed on March 31, 2020 to create Hagerty Garage + Social between Hagerty Ventures LLC, a wholly owned subsidiary of The Hagerty Group, and HGS Hub Holdings LLC.
Motorsport Reg 
A motorsport membership, licensing and event online management system that automates event listings, registration, and payment processing for all types of motorsport events ranging from small social gatherings to large participatory motorsport events.
NPS
 Net Promoter Score, which we use as our “north star metric,” measuring the overall strength of our relationship with our members.
Omnichannel
 A multichannel approach to sales that focuses on providing a seamless customer experience.
PIF
 Policies in Force, which is the number of current and active insurance policies as of the applicable period end date.
SaaS
 Software as a Service, a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.
Written Premium
 The amount of total insurance premium written on policies that were bound by our insurance carrier partners during the applicable period.
TRA
 Tax Receivable Agreement, a contract between the Legacy Unit Holders
 
for payment from Hagerty, Inc. of 85% of the cash tax savings that results from the step-up in basis from the exchange of Hagerty Group Units and Class V Common Stock for Class A Common Stock of Hagerty, Inc.
 
iv


SUMMARY
This summary highlights selected information appearing elsewhere in this prospectus. Because it is a summary, it may not contain all of the information that may be important to you. To understand this offering fully, you should carefully read this entire prospectus and the registration statement of which this prospectus is a part, including the information set forth under the heading “Risk Factors” and our financial statements.
Our Business
Company Overview
We are a global market leader in providing insurance for classic and enthusiast vehicles and we have built an industry-leading automotive enthusiast platform that engages, entertains, and connects with subscribing members. At Hagerty, everything begins and ends with the love of cars – an innate passion that fuels our unique membership model and cultivates deep, personal connections with more than 2.4 million members worldwide.
Hagerty was founded in 1984, and initially focused on providing insurance coverage for antique boats. Today, our goal is to scale an organization capable of building an ecosystem of products, services, and entertainment for car lovers that catalyzes their passion for cars and driving.
Business Combination
On December 2, 2021, through The Hagerty Group, LLC, a Delaware limited liability company (“The Hagerty Group”), we completed the Business Combination pursuant to the Business Combination Agreement with Aldel Financial Inc. (“Aldel”) and Aldel Merger Sub LLC (“Merger Sub”), with The Hagerty Group surviving as our wholly owned subsidiary immediately following the Business Combination. In connection with the closing of the Business Combination, we changed our name from Aldel Financial Inc. to Hagerty, Inc.
Pursuant to the terms of the Business Combination Agreement, (a) Merger Sub was merged with and into The Hagerty Group, where upon the separate limited liability company existence of Merger Sub ceased to exist and The Hagerty Group became the surviving company and continues to exist under the Delaware Limited Liability Company Act and (b) the existing limited liability company agreement of The Hagerty Group was amended and restated to, among other things, make Aldel a member of The Hagerty Group.
Also on December 2, 2021, we sold to a number of purchasers (each, a “Subscriber”) an aggregate of 70,385,000 shares of Aldel Common Stock (the “PIPE Shares”) and an aggregate of 12,669,300 warrants to purchase shares of Aldel Class A Common Stock (the “PIPE Warrants” and, together with the PIPE Shares, the “PIPE Securities”) for an aggregate purchase price of $703.9 million (the “PIPE Financing”), pursuant to separate subscription agreements entered into effective as of August 17, 2021 (each, a “Subscription Agreement”). Pursuant to the Subscription Agreements, we gave certain registration rights to the Subscribers with respect to the PIPE Securities.
Our Class A Common Stock and our Public Warrants are currently listed on the NYSE under the symbols “HGTY” and “HGTY.WT,” respectively.
The rights of holders of our Class A Common Stock and Warrants are governed by our second amended and restated certificate of incorporation (the “Amended and Restated Charter”), our amended and restated bylaws (the “Amended and Restated Bylaws”) and the Delaware General Corporation Law (the “DGCL”), and in the case of the Public Warrants, OTM Warrants, Underwriter Warrants and Private Placement Warrants, the Warrant
 
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Agreement dated as of April 8, 2021, between us and Continental Stock Transfer & Trust Company, as warrant agent, and in the case of the PIPE Warrants, the Warrant Agreement dated as of December 2, 2021, between us and Continental Stock Transfer & Trust Company, as warrant agent. See the section entitled “
Description of Securities
.”
Risk Factors Summary
An investment in our Class A Common Stock involves substantial risk. The occurrence of one or more of the events described in the section entitled “
Risk Factors
,” may have a material adverse effect on our business, cash flows, financial condition and results of operations. Principal factors and risks that could cause actual results to differ materially from those in the forward-looking statements include, among others, the following:
 
   
our ability to compete effectively within our industry and attract and retain members;
 
   
our dependence on a limited number of insurance distribution and underwriting carrier partners;
 
   
our ability to prevent, monitor and detect fraudulent activity, including our reliance on a limited number of payment processing services;
 
   
disruptions, interruptions, outages or other issues with our technology platforms or our use of third-party services;
 
   
our reliance on a highly skilled and diverse management team and workforce and a unique culture;
 
   
the limited operating history of some or our membership products and the success of any new insurance programs and products we offer;
 
   
our susceptibility to interest rate fluctuations;
 
   
our ability to continue to develop, implement, and maintain the confidentiality of our proprietary technology and prevent the misappropriation of our data;
 
   
adverse impacts from the
COVID-19
pandemic and current and future variants of the virus;
 
   
the cyclical nature of the insurance business and our dependence on our ability to collect vehicle usage and driving data;
 
   
unexpected increases in the frequency or severity of claims;
 
   
our reinsurers may not pay claims on a timely basis, or at all, which may materially adversely affect our business, financial condition, and results of operations;
 
   
unexpected changes in the interpretation of our coverage or provisions, including loss limitations and exclusions;
 
   
compliance with the numerous laws and regulations applicable to our business, including state, federal and foreign laws relating to insurance and rate increases, privacy, the internet and accounting matters;
 
   
our only material asset is our interest in The Hagerty Group, and, accordingly, we will depend on distributions from The Hagerty Group to pay our taxes, including payments under the TRA;
 
   
whether investors or securities analysts view our stock structure unfavorably, particularly our dual-class structure;
 
   
HHC controls us, and its interests may conflict with ours or yours in the future;
 
   
we will be a “controlled company” within the meaning of the NYSE listing requirements, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements; and
 
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our common stock, including trading price declines from missed earnings guidance, trading volatility, lack of dividends, and anti-takeover provisions in our governing documents.
Corporate Information
The first Hagerty company was founded in 1984 under the name Hagerty Marine Insurance Agency, Inc., and initially focused on providing insurance coverage for antique boats. The Hagerty Group, LLC was formed in 2009 and completed the Business Combination with Aldel in 2021 pursuant to which The Hagerty Group succeeded to its reporting obligations and Aldel changed its name to Hagerty, Inc. Our principal executive offices are located at 121 Drivers Edge, Traverse City, Michigan 49684, and our telephone number is (800)
922-4050.
Our website address is
Hagerty.com
. Information contained on our website or connected thereto does not constitute part of, and is not incorporated by reference into, this prospectus or the registration statement of which it is a part.
We own various U.S. federal trademarks and unregistered trademarks, including our company name, logo and solution names and other trade or service marks. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the symbols
®
and
, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:
 
   
reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data;
 
   
an exemption from compliance with the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;
 
   
reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and
 
   
exemptions from the requirements of
holding non-binding advisory
votes on executive compensation or golden parachute arrangements.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to avail ourselves of this extended transition period and, accordingly, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or that have opted out of using such extended transition period, which may make comparison of our financial statements with those of other public companies more difficult.
We may take advantage of this relief until we no longer qualify as an emerging growth company or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out of using the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of Class A Common Stock that is held by
non-affiliates
exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (iii) the date on which we have issued more than $1 billion in
non-convertible
debt during the previous three years; and (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Aldel common stock in Aldel’s initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens.
 
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THE OFFERING
 
Issuer
Hagerty, Inc.
 
Shares of Class A Common Stock offered by us
271,039,456 shares of Class A Common Stock issuable upon exercise of the Warrants and upon exchange of shares of Class V common stock and Hagerty Group Units.
 
Shares of Class A Common Stock offered by the Selling Securityholders
Up to 344,871,956 shares of Class A Common Stock.
 
Warrants Offered by the Selling Securityholders
Up to 12,669,300 PIPE Warrants, up to 257,500 Private Placement Warrants, up to 1,300,000 OTM Warrants, and up to 28,750 Underwriter Warrants.
 
Shares of Class A Common Stock outstanding
82,452,214 shares of Class A Common Stock (as of March 1, 2022).
 
Shares of Class V Common Stock outstanding
251,033,906 shares of Class V Common Stock (as of March 1, 2022).
 
Fully-Diluted Shares of Class A Common Stock outstanding assuming exercise of all Warrants and exchange of all shares of Class V Common Stock and Hagerty Group Units on a
one-for-one
basis
353,491,670 (based on total shares outstanding as of March 1, 2022).
 
Use of Proceeds
We will not receive any proceeds from the sale of shares of Class A Common Stock or Warrants by the Selling Securityholders. We will receive up to an aggregate of approximately $234.6 million from the exercise of the Warrants, assuming the exercise in full of all of the Warrants for cash. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes, which may include temporary or permanent repayment of our outstanding indebtedness. See “
Use of Proceeds
.”
 
Redemption
The Warrants are redeemable in certain circumstances. See “
Description of Securities—Warrants
” for further discussion.
 
Market for Common Stock and Warrants
Our Class A Common Stock and Public Warrants are currently traded on the NYSE under the symbols “HGTY” and “HGTY.WT,” respectively.
 
Risk Factors
See “
Risk Factors
” and other information included in this prospectus for a discussion of factors you should consider before investing in our securities.
 
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RISK FACTORS
Investing in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of operations. As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this prospectus, any prospectus supplement or in any document incorporated by reference herein or therein are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business.
Risks Related to Our Business
We have experienced significant member growth over the past several years, and our continued business and revenue growth are dependent on our ability to continuously attract and retain members and we cannot be sure we will be successful in these efforts, or that member retention levels will not materially decline.
If consumers do not perceive our service offerings to be of value, including if we introduce new or adjust existing features, adjust pricing, coverage or service offerings, or change the mix of offerings in a manner that is not favorably received by consumers, we may not be able to attract and retain members. We may, from time to time, adjust the pricing or the pricing model itself, which may not be well received by consumers, and which may result in existing members canceling their membership or obtaining services from a competitor and may result in fewer new members joining our programs. In addition, many of our members are referred to us through
word-of-mouth
from existing members. If our efforts to satisfy our existing members are not successful, we may not be able to attract members, and as a result, our ability to maintain and/or grow our business will be adversely affected.
A large percentage of our revenues are derived from sales through
direct-to-consumer
sales, including through digital channels. If we fail to meet consumer expectations for the customer experience through digital or other sales channels, our growth may be impacted through the loss of existing members or inability to attract new members
A large percentage of our products and services are distributed through a few relationships and the loss of business provided by any one of them could have an adverse effect on us.
In addition to our direct sales efforts and independent channels, we market our insurance products through several insurance distribution partners. For the year ended December 31, 2021, approximately 16% of our commission revenues globally were attributable to four distribution partner marketing relationships. For two of these distribution partners, we have
10-year
arrangements, one of which has an expiration date in 2029 and the other in 2030. The other relationships have shorter durations. Upon expiration or termination of these agreements, these partners may decide not to continue to distribute our products and services or may be unwilling to do so on terms acceptable to us. For a more complete discussion of our distribution partnerships, see “
Business
 — Distribution, Marketing and Strategic Relationships
.” If we are not successful in maintaining existing relationships and in continuing to expand our distribution relationships, or if we encounter regulatory, technological, or other impediments to delivering our services to members through these relationships, our ability to retain members and grow our business could be adversely impacted. In addition, the broker/agent relationships many of the partners we work with may change and their own internal strategy about how products are marketed may change, and, where we do not have exclusivity, we face competition by providers who seek to build or strengthen the relationships without distribution partners, which could cause a loss of focus on or exposure to our products and services, adversely impacting new sales.
 
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The
COVID-19
pandemic has caused, and may continue to cause, a disruption to our operations and may impact our business, key metrics, and results of operations in numerous ways that remain unpredictable.
The effects of the
COVID-19
pandemic, and current and future variants of the virus, and U.S. and international responses, are wide-ranging, costly, disruptive and rapidly changing.
COVID-19
has had, and may continue to have, material effects on our operations. Factors that give rise, or may give rise, to those effects include, or may include, the following, as well as others that we cannot predict:
 
   
Executive, legislative or regulatory mandates or judicial decisions which are unknown to us that may require increased levels of insurance or may extend the scope of insurance coverages.
 
   
Regulatory actions such as:
 
   
prohibiting or postponing the cancellation or
non-renewal
of insurance policies in accordance with policy terms or requiring renewals on current terms, conditions, previous rates, or at a rate decrease;
 
   
requiring the coverage of losses irrespective of policy terms or exclusions;
 
   
requiring or encouraging premium refunds;
 
   
granting extended grace periods for premium payments; and
 
   
extending due dates to pay past due premiums.
 
   
Disruptions, delays, and increased costs and risks related to working remotely, having limited or no access to our facilities, workplace
re-entry,
employee safety concerns, and reductions or interruptions of critical or essential services. Those effects may include, among others:
 
   
exposure to additional and increased risks related to internal controls, data security, and information privacy, for both us and for our suppliers, vendors, and other third-parties with whom we do business;
 
   
illnesses suffered by key employees, or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers, or outsourcing providers, which could prevent or delay the performance of critical business functions;
 
   
illnesses suffered by employees who have continued to work, or who have or will return to work, in our facilities may expose us to increased risk of employment related claims and litigation;
 
   
reduced demand for our insurance and
non-insurance
products, events, and services due to reduced global economic activity, which could adversely impact our revenues and cash flows; adverse impacts on our revenues and cash flows due to premium refunds or delayed receipt of premium payments or delayed payment of reinsurance recoverables; and
 
   
expedited claims payments in response to regulatory requirements.
 
   
Increases in the number of potential fraudulent claims made under insurance policies due to the economic hardships experienced by companies and individuals as a result of
COVID-19.
 
   
Increases in local, state, and federal taxes to pay for costs incurred by governmental expenditures associated with
COVID-19.
One or more of these factors resulting from the
COVID-19
pandemic, and others we cannot anticipate, could have material adverse effects on our financial condition and results of operations; and the extent of these effects will depend, at least in part, on the scope, severity, duration, and subsequent recurrences of the pandemic. In addition, we may take steps to mitigate potential risks or liabilities that may arise from
COVID-19
and related developments, and some of those steps may have a material adverse effect on our financial condition and results of operations. Even if an unfavorable outcome does not materialize, these factors and actions we may take in response may have a material adverse impact on our reputation and result in substantial expense and disruption.
 
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In addition,
COVID-19
may have the effect of triggering or intensifying many of the risks or uncertainties described elsewhere in this prospectus.
We may not be able to prevent, monitor, or detect fraudulent activity, including transactions with insurance policies or payments of claims.
If we fail to maintain adequate systems and processes to prevent, monitor, and detect fraud, including employee fraud, agent fraud, fraudulent policy acquisitions, vendor fraud, fraudulent claims activity, or if an inadvertent error occurs because of human or system error, our business could be materially adversely impacted. Fraud schemes have become increasingly more sophisticated and are ever evolving into different avenues of fraudulent activity. While we believe that any past incidents of fraudulent activity have been relatively isolated, we cannot be certain that our systems and processes will always be adequate as fraudulent activity and schemes continue to evolve. Our employees are required to take anti-fraud training, and we use a variety of tools to protect against fraud, but the trainings and these tools may not always be successful at preventing fraud.
Instances of fraud may result in increased costs, including possible settlement and litigation expenses, and could have a material adverse effect on our business and reputation. In addition, failure to monitor and detect fraud and otherwise comply with state Special Investigation Unit requirements can result in regulatory fines or penalties.
We rely on the expertise of our Chief Executive Officer, senior management team, and other key employees. If we are unable to attract, retain, or motivate key personnel, our business may be severely impacted.
Our success depends on the ability to attract, retain, and motivate a highly skilled and diverse management team and workforce. Our Chief Executive Officer is well known and respected in our industry. He is an integral part of our brand and his departure would likely create difficulty with respect to both the perception and execution of our business. Additionally, the loss of a member of our senior management team, specialized insurance experts or key personnel might significantly delay or prevent the achievement of our strategic business objectives and could harm our business. We rely on a small number of highly-specialized insurance experts, the loss of any one of whom could have a disproportionate impact on our business. Our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Moreover, if and when our equity awards are substantially vested, employees under such equity arrangements may be more likely to leave, particularly if the underlying shares have seen a value appreciation.
Our inability to ensure that we have the depth and breadth of management and personnel with the necessary skills and experience could impede our ability to deliver growth objectives and execute our operational strategy. As we continue to expand and grow, we will need to promote or hire additional staff, and it may be difficult to attract or retain such individuals in a timely manner and without incurring significant additional costs. Furthermore, several members of our management team were hired recently. If we are not able to integrate these new team members or if they do not perform adequately, our business may be harmed.
Our unique culture has contributed to our success, and if we are not able to maintain this culture in the future, our business could be harmed.
Our culture supports a high level of employee engagement, which translates into a service model that produces a high level of customer satisfaction and retention. We face a number of challenges that may affect our ability to sustain our culture, including:
 
   
failure to identify, attract, reward, and retain people in leadership positions in our organization who share and further our culture, values, and mission;
 
   
the increasing size and geographic diversity of our workforce and our ability to promote a uniform and consistent culture across all our offices and employees;
 
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competitive pressures to move in directions that may divert us from our mission, vision, and values;
 
   
the continued challenges of a rapidly evolving industry; and
 
   
the increasing need to develop expertise in new areas of business needed to execute our growth plans and strategy.
If we are not successful in instilling our culture in new employees, or maintaining our culture as we grow, our operations may be disrupted and our financial performance may suffer.
Our future growth and profitability may be affected by new entrants into the market or current competitors developing preferred offerings.
Our business is rapidly growing and evolving, and we have many competitors across our different offerings. The markets in which we operate are highly competitive and we may not continue to compete effectively within our industry. We face competition from large, well-capitalized national and international companies, including other insurance providers, technology companies, automotive media companies, other well-financed companies seeking new opportunities, or new competitors with technological or other innovations. Many of our competitors have substantial resources, experienced management, strong marketing, underwriting and pricing capabilities. Because collector auto insurance constitutes a significant portion of our overall business, we may be more sensitive than other providers of insurance to, and more adversely affected by, trends that could decrease auto insurance rates or reduce demand for auto insurance over time, such as industry advances in mileage-based or usage-based insurance offerings, changes in vehicle technology, autonomous or semi-autonomous vehicles, or vehicle sharing arrangements. In addition, there are limited barriers to entry in the automotive lifestyle business. Accordingly, more established brands with significantly more resources may compete against us in the automotive lifestyle business in the future. If we are unable to compete effectively, we may not be able to grow our business and our financial condition and results of operations may be adversely affected.
As a result of a number of factors, including increasing competition, negative brand or reputational impact, changes in geographic mix or product mix, and the continued expansion of our business into a variety of new areas, we may not be able to continue to grow our revenues at a high rate or at all. We may also experience a decline in our revenue growth rate as our revenues increase to higher levels. Our revenue growth may be impacted if there is a deceleration or decline in demand for our products and services due to changing market dynamics or demographic shifts.
Future acquisitions or investments contain inherent strategic, execution, and compliance risks that could disrupt our business and harm our financial condition.
We may pursue acquisitions or investments to grow our business in line with our strategic objectives. Any acquisition or investment (whether for internal technology or products used or for external uses) may not achieve the desired return sought. These acquisitions or investments may also result in unforeseen liabilities or expenses, such as higher than expected costs due to market competition, regulatory approval requirements, delays in implementation, lost opportunities that could have been pursued with cash being used, litigation or regulatory enforcement post-acquisition or investment, contingent liabilities, implementation cost, misalignment of culture, loss of technology through theft or trade secrets exchanged, loss of key partners/vendors, currency exchange rate for foreign investment, timing within overall economic environment, carrying costs, and tax liabilities. Additionally, the risks from future acquisitions or investments could result in impairment charges against goodwill or increases in the liabilities on our Consolidated Balance Sheets, as well as missed earnings results.
As we continue to grow through partnerships, acquisitions, and the execution of events, we may be inherently absorbing or taking on additional risk.
Our continued involvement in event acquisitions and partnerships may give rise to increased brand and reputational risk. If we are unable to successfully onboard associated employees, contractors, and volunteers and
 
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incorporate them into our culture, we may fail to maintain continuity of experience across our event offerings. We may experience an increase in financial liability and potential litigation due to a heightened exposure inherent in the operation of public events.
We may be subject to cyberattacks, and our reliance on third party providers for technology and service mean our operations could be disrupted due to the lack of resiliency in the operations of other companies, or a breach in their obligations to us, and could impair the operability of our website and other technology-based operations.
Cyberattacks,
denial-of-service
attacks, ransomware attacks, business email compromises, computer malware, viruses, social engineering (including phishing) and other malicious internet-based activity are prevalent in our industry and such attacks continue to increase. We also utilize third-party providers to host, transmit, or otherwise process electronic data in connection with our business activities. We or our vendors and business partners may experience attacks, unavailable systems, unauthorized access or disclosure due to employee or other theft or misuse,
denial-of-service
attacks, sophisticated attacks by nation-state and nation-state supported actors, and advanced persistent threat intrusions. Despite our efforts to ensure the security, privacy, integrity, confidentiality, availability, and authenticity of information technology networks and systems, processing and information, we may not be able to anticipate, or to implement, preventive and remedial measures effective against all data security and privacy threats. The recovery systems, security protocols, network protection mechanisms, and other security measures that we have integrated into our systems, networks, and physical facilities, may not be adequate to prevent or detect service interruption, system failure, data loss or theft, or other material adverse consequences. No security solution, strategy, or measures can address all possible security threats or block all methods of penetrating a network or otherwise perpetrating a security incident. The risk of unauthorized circumvention of our security measures, or those of our third-party providers, clients, and partners has been heightened by advances in computer and software capabilities and the increasing sophistication of hackers who employ complex techniques, including without limitation, the theft or misuse of personal and financial information, counterfeiting, “phishing” or social engineering incidents, ransomware, extortion, publicly announcing security breaches, account takeover attacks, denial or degradation of service attacks, malware, fraudulent payment, and identity theft.
For example, we experienced an unauthorized access into our online insurance quote system in 2021 whereby attackers used personal information already in their possession to obtain additional consumer data, including driver’s license numbers, through Hagerty’s Instant Quote feature. The issue has been remediated. While none of our systems or databases were compromised or significantly disrupted as part of this incident and the costs associated with the incident and our remediation efforts were not material, we could be subject to litigation or regulatory enforcement actions, including fines or other penalties from state regulatory agencies related to this event or other cyber-attacks in the future.
If cyberattacks on our systems occur in the future our reputation could suffer irreparable harm, causing our current and prospective customers to decline to use our services. Further, we may be required to expend significant financial and operational resources in response to a security breach, including repairing system damage, increasing security protection costs by deploying additional personnel and protection technologies, and defending against and resolving legal and regulatory claims, all of which could be costly and divert resources and the attention of our management and key personnel away from our business operations.
Some of our membership products are newer and have limited operating history, which makes it difficult to forecast operating results. We may not show profitability from these newer products as quickly as we anticipate or at all.
The success of new product and service introductions depends on a number of factors, including timely and successful development, market acceptance, our ability to manage the risks associated with new product production
ramp-up
issues, the availability of application software for new products, the effective management of purchase commitments and vendor relationships in line with anticipated product demand, the availability of
 
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products in appropriate quantities and at expected costs to meet anticipated demand, and the risk that new products and services may have quality or other defects or deficiencies. Accordingly, we cannot determine in advance the ultimate effect of new product and service introductions and transitions. If our new products or services are not well received, or if we are unable to introduce them in a cost-effective manner, we may not be able to realize a profit on those products and services and may, in fact, recognize losses for some time. This could have an adverse effect on our financial condition and results of operations.
We are subject to payment processing risks which could adversely affect our results of operations.
We currently rely on a limited number of payment processing services, including the processing of payments from credit cards and debit cards, and our business would be disrupted if any of the vendors become unwilling or unable to provide these services to us, and we are unable to find a suitable replacement on a timely basis. If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’ credit cards on a timely basis, or at all, our business, financial condition and results of operations could be harmed.
The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to, or exploit weaknesses that may exist in the payment systems. There are potential legal, contractual, and regulatory risks if we are not able to properly process payments. If we are unable to comply with applicable rules or requirements for the payment methods that we accept, or if payment-related data is compromised due to an incident or a breach, we may be liable for significant costs incurred by payment card issuing banks and other third parties, subject to fines and higher transaction fees, subject to potential litigation or enforcement action, or our ability to accept or facilitate certain types of payments may be impaired.
In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit card transactions, we could face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, financial condition and results of operations.
As we continue to grow operations in different geographic locations, additional risk related to foreign currencies may have an impact on revenue and our results of operations.
We have foreign operations, and in some instances, collect from customers in foreign currencies. The exchange rates we use to consolidate our foreign entities may be less favorable to us than the actual exchange rates used to convert the funds into U.S. dollars. These foreign exchange risks could have a material negative impact on our financial condition and results of operations.
Our technology platforms may not function properly, which might subject us to loss of business and revenue, breach of contractual obligations, and place us out of compliance with state and federal rules and regulations.
We utilize numerous technology platforms throughout our business for various functions, including to gather customer data in order to determine whether or not to write and how to price our insurance products, to process many of our claims, to issues and service our membership products, and to provide valuation services. Our technology platforms are expensive and complex. The continuous development, maintenance, and operation of our technology platforms may entail unforeseen difficulties, including material performance problems or undetected defects or errors. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our technology from operating properly. If our platforms do not function reliably, we may incorrectly select our customers, bill our customers, price insurance products, or incorrectly pay or deny insurance claims made by our customers. These errors could result in inadequate insurance premiums
 
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paid relative to claims made, resulting in increased financial losses. These errors could also cause customer dissatisfaction with us, which could cause customers to cancel or fail to renew their insurance policies with us or make it less likely that prospective customers obtain new insurance policies from us. Additionally, technology platform errors may lead to unintentional bias and discrimination in the underwriting process, which could subject us to legal or regulatory liability and harm our brand and reputation. Any of these eventualities could result in a material adverse effect on our business, financial condition and results of operations.
Our future success depends on the ability to continue to develop and implement technology, and to maintain the confidentiality of this technology.
Our future success depends on our ability to continue to develop, implement, and maintain the confidentiality of our proprietary technology. Changes to existing laws, their interpretation or implementation, or the introduction of new laws could impede our use of this technology or require that we disclose our proprietary technology to our competitors, which could negatively impact our competitive position and result in a material adverse effect on our business, financial condition and results of operations. In most jurisdictions, government regulatory authorities have the power to interpret and amend laws and regulations applicable to the processing of data. Such authorities may require us to incur substantial costs in order to comply with such laws and regulations. Regulatory statutes are broad in scope and subject to differing interpretation. In some areas of our business, we act on the basis of our own or the industry’s interpretations of applicable laws or regulations, which may conflict from jurisdiction to jurisdiction. In the event those interpretations eventually prove different from the interpretations of regulatory authorities, we may be penalized or precluded from carrying on our previous activities. Our errors and omissions in insurance coverage covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all liabilities we may incur.
We may not be able to prevent or address the misappropriation of Hagerty-owned data.
From time to time, third parties may misappropriate our data through website scraping, bots, or other means and aggregate this data on their websites with data from other companies. In addition, copycat websites or mobile apps may misappropriate data and attempt to imitate our brand or the functionality of our website or our mobile app. If we become aware of such websites or mobile apps, we intend to employ technological or legal measures in an attempt to halt their operations. However, we may be unable to detect all such websites or mobile apps in a timely manner and, even if we could, technological and legal measures may be insufficient to halt their operations.
In some cases, particularly in the case of websites operating outside of the U.S., our available remedies may not be adequate to protect us against the effect of the operation of such websites or mobile apps. Regardless of whether we can successfully enforce our rights against the operators of these websites or mobile apps, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, financial condition or results of operations. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business could be harmed.
Changes in social attitudes may make ownership of collector vehicles less desirable, leading to a drop in demand for our products and services.
Changing consumer preferences and social attitude toward options such as electric vehicles and/or autonomous driving could have a material impact on our business. The traditional business model of car sales is starting to be complemented by a range of diverse,
on-demand
mobility solutions, especially in dense urban environments that proactively discourage
private-car
use. This shift, along with a significant rise in the annual growth of car sharing members and autonomous and electric vehicles in the markets we currently conduct business, could have a trickle-down effect to the collector car space and create a drop in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations.
 
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An inadequate strategy to address and respond to issues of diversity, equity, and inclusion could leave us insufficiently prepared for significant cultural shifts affecting our marketplace and may create a negative brand image, leading to the alienation of our employees and clients.
Companies must achieve diversity if they want to acquire and retain talent, build employee engagement, and improve business performance. Diversity, equity, and inclusion have been shown to drive higher innovation, enhanced job performance, less employee turnover, and greater profits. If there is not a focus on developing a cohesive strategy to create a sense of belonging with clear and impactful diversity, equity, and inclusion initiatives, we could potentially put ourselves in a position where our brand and/or sales are impacted as a result of a failure to create a successful strategy.
In recent years, interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our net investment income, particularly as it relates to fixed income securities and short-term investments, which, in turn, may adversely affect our operating results.
Future decreases in interest rates could cause the values of our fixed income securities portfolios to decline, with the magnitude of the decline depending on the maturity of the securities included in our portfolio and the amount by which interest rates decrease. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments.
Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include, but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality. We cannot be certain that our investment objectives will be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. We may also encounter difficulty in obtaining funds to meet our commitments.
We are exposed to the credit risk, or liquidity risk, through our banking partners. If we were to experience operating losses and are not able to generate additional liquidity through a capital raise or other cash infusion, we may need to secure additional sources of funds, which may or may not be available. Additionally, a failure to generate additional liquidity could negatively impact our ability to operate our business.
To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds. We also may be required to liquidate fixed maturity securities, which may result in realized investment losses. Any further sources of capital, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to us. Our access to additional sources of capital will depend on a variety of factors, such as market conditions, the general availability of credit, the availability of credit to the industries in which we operate, our financial condition, results of operations, credit ratings and credit capacity, as well as pending litigation or regulatory investigations. Our ability to borrow under our revolving credit facility and letter of credit facilities is contingent on our compliance with the covenants and other requirements under those facilities. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Additionally, to reduce the risk of a bank failure, we engage only with high-quality counterparties with high credit ratings. Our inability to obtain adequate capital when needed could have a negative impact on our ability to invest in, or take advantage of opportunities to expand our businesses, such as possible acquisitions or the creation of new ventures, and inhibit our ability to refinance our existing indebtedness on terms acceptable to us. Any of these effects could have a material adverse effect on our financial condition and results of operations.
 
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Our
day-to-day
operations create transactions, events, and conditions that may give rise to the need for accounting estimates to be recognized or disclosed in the financial statements. There is a risk that these estimates could create a material misstatement for accounting purposes.
The preparation of the financial statements requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to estimates related to provision for unpaid for losses and loss adjustment expenses, change in fair value of warrant liabilities, and payments due under the TRA. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Significant estimates that are susceptible to notable changes in the near term relate to provisions for unpaid losses and loss adjustment expenses (including IBNR), significant inputs in the warrant fair value valuation model and tax estimates within the TRA liability. Although some variability is inherent in these estimates, we believe 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 our results of operations in the period in which those estimates changed.
Risks Related to Our Insurance Services
The insurance products that we develop and sell for our underwriting carriers are subject to regulatory approval, and we may incur significant expenses in connection with the development and filing of new products before revenue is generated from new products.
The insurance products that we develop and sell require regulatory approvals in each respective jurisdiction. This product development and filing cycle can take time. The product development and filing process can be challenging and expensive. The process can also be delayed, given the unknown timelines in which insurance departments might take to review and approve filings. Questions and objections from insurance departments can also delay the product launch date. Moreover, there could be an inability to obtain regulatory approval on a product filing.
The nature of the product development and filing cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we generate revenues, if any, from the new products. If we spend a significant amount of resources on research and development, and our efforts do not lead to the successful introduction or improvement of products that are competitive in the marketplace, this could materially and adversely affect our business and results of operations.
Additionally, there could be a change in the anticipated customer demand for a product we are developing before the product is released. Customer demand could decrease after the development cycle has begun. A decrease in customer demand for a new or improved product could cause us to fall short of our sales targets, and we might not be able to avoid the substantial costs associated with the product’s development or improvement. If we are unable to complete product development and filing cycles successfully, in a timely manner, that meets customer demand for new or improved products, and generate revenues from these future products, the growth of our business could be harmed.
As a managing general agency/underwriter, we operate in a highly regulated environment for our insurance product distribution and face risks associated with compliance requirements, some of which cause us to make judgment calls that could have an adverse effect on us.
The insurance industry in which we operate is subject to extensive regulation. We are subject to regulation and supervision both federally and in each applicable local state or provincial jurisdiction. In general, these
 
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regulations are designed to protect members, policyholders, and insureds and to protect the integrity of the financial markets, rather than to protect stockholders or creditors. Our ability to conduct business in these jurisdictions depends on our compliance with the rules and regulations promulgated by federal and state or provincial regulatory bodies and other regulatory authorities. Maintaining compliance with rules and regulations is often complex and challenging, and it sometimes requires us to make determinations that require judgments regarding uncertain issues that ultimately be resolved differently than we have determined, which could have an adverse effect on us.
We may not be able to adapt effectively and timely to any changes in law.
A failure to comply with regulatory requirements, or changes in regulatory requirements or interpretations, can result in actions by regulators, potentially leading to penalties and enforcement actions, and in extreme cases, revocation of an authority to do business in one or more jurisdictions. This could result in adverse publicity and potential damage to our brand and reputation in the marketplace. In addition, we could face lawsuits by members, insureds, and other parties for alleged violations of these laws and regulations.
State insurance laws grant supervisory agencies, including state insurance departments, broad administrative authority. Canadian, Bermuda, and U.K. insurance regulators and, in the U.S., state insurance regulators and the National Association of Insurance Commissioners continually review existing laws and regulations, some of which affect our business. These supervisory agencies regulate many aspects of the insurance business, including the licensing of insurance brokers and agents and other insurance intermediaries; the handling of third-party funds held in a fiduciary capacity; and trade practices, such as marketing, advertising, and compensation arrangements entered into by insurance brokers and agents. Individuals who engage in the solicitation, negotiation, or sale of insurance, or provide certain other insurance services, generally are required to be licensed individually. Insurance laws and regulations govern whether licensees may share commissions with unlicensed entities and individuals. We believe that generally any payments we make to third parties are in compliance with applicable laws. However, should any regulatory agency take a contrary position and prevail, we will be required to change the manner in which we pay fees to individuals and entities for placing insurance policies through us.
Regulatory review or the issuance of interpretations of existing laws and regulations may result in the enactment of new laws and regulations that could adversely affect our operations or our ability to conduct business profitably. It is difficult to predict whether, and to what degree, changes resulting from new laws and regulations will affect the industry or our business.
We do business with a limited number of key underwriting carrier partners in our insurance markets, and we may not be able to find suitable replacements for our existing carriers.
We work with a limited number of carriers in the U.S., Canada, and the U.K. for our personal lines insurance products, and there is a risk that if one or more of the carriers becomes impaired or terminates its relationship with us that our profitability may be adversely affected. If a carrier partner relationship terminates or there is loss of strategic support or alignment, we may be unable to transition to a new relationship without disruption, increased cost, lost profits, or lost market share, or a combination of the foregoing.
We derive a large portion of our revenue from commissions and quota share reinsurance on the sale of personal lines insurance products in the U.S. through our exclusive relationship with Essentia, in Canada through our relationship with Aviva’s Canadian subsidiary, Elite Insurance Company, and in the U.K., primarily through our relationship with Markel. If these carriers were to experience liquidity problems or other financial (such as rating agency downgrades) or operational difficulties, we could encounter business disruptions as a result, and our results of operations may suffer.
Our contract with Markel, and our contract with State Farm Mutual Automobile Insurance Company (“State Farm”) regarding the upcoming State Farm Classic+ program, contain provisions that allow those partners to terminate our agreements with them at any time upon the occurrence of a change of control. One of the events
 
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triggering a change of control would occur if the Hagerty family ceases to own shares representing a majority of our voting power. Accordingly, if we experience a change of control, including as a result of the Hagerty family’s sale of a sufficient number of shares to result in their controlling less than a majority of their voting power, we could lose our agreements with one or both of these partners, which could have a material adverse effect on our business, operations and financial results.
A regulatory environment that requires rate increases to be approved and that can dictate underwriting and pricing and mandate participation in loss sharing arrangements may adversely affect our financial condition and results of operations.
Political events and positions can affect the insurance market on occasion, including efforts to reduce rates to a level that may prevent us from being profitable or may not allow us to reach our goals. If the loss ratio for the insurance programs that we administer is favorable to that of the industry, regulatory authorities could impose rate restrictions, require payment of premium refunds to policyholders, or could challenge or delay efforts to raise rates. Rate changes may be required for us to achieve our goals related to profitability and return on equity. If we were to experience challenges in obtaining approvals for rate changes, that could limit us in reaching our targeted goals and profitability. For example, with
COVID-19,
state regulators and legislators were under increased political pressure to provide financial relief to policyholders, and several states did require premium relief/refunds, depending on loss severity and frequency, while other states highly recommended that premium relief/refunds be given to policyholders. Additionally, certain states have enacted laws that require an insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities, and joint underwriting associations. Certain states also require insurers to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge. Laws and regulations of many states also limit an insurer’s ability to withdraw from one or more lines of insurance there, except pursuant to a plan that is approved by the state insurance department. This limitation can prolong and provide additional challenges for strategic business plans related to conversions, transfers, and book rolls. Although we are not an insurer, our business, financial condition or results of operations could be adversely affected by any of these factors, as they are applicable to the insurance programs we administer.
The underwriting companies that we work with, and our insurance agencies, are periodically subject to examinations and audits by insurance regulators, which could result in adverse findings, enforcement actions, require payments of fines or penalties, and necessitate remedial actions.
In the U.S., our insurance agencies operate as an MGA for Essentia. Essentia is currently domiciled in Missouri and has a classic auto insurance program and a classic boat insurance program in all 50 United States, plus the District of Columbia. We operate as the MGA for the programs in all 51 jurisdictions. We also operate a similar auto insurance program in Canada (underwritten by Elite Insurance Company) and in the U.K. (primarily underwritten by Markel International Insurance Company Limited, a wholly owned subsidiary of Markel).
Additionally, under its license as a Class 3A insurer, Hagerty Re must meet and maintain the relevant solvency margin, and liquidity and other ratios applicable under Bermuda law. Hagerty Re’s license limits it to accepting only business produced through our managing general agency/underwriters that is underwritten by carriers rated
A-
or better by A.M. Best or similar rating agency.
Insurance regulators periodically subject the underwriting companies that we work with to do audits and examinations to assess compliance with applicable laws and regulations, financial condition, and the conduct of regulated activities. These examinations and audits may be conducted during a jurisdiction’s normal review cycle, or because of a targeted investigation. our insurance agencies can also be subject to regulatory audits and exams. A formal examination or audit provides insurance regulators with a significant opportunity to review and scrutinize the underwriting companies we work with, the insurance programs we administer, and our operations.
As a result of an examination or an audit, an insurance regulator could determine that an underwriting company’s financial condition or capital resources are less than satisfactory. An insurance regulator could also
 
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determine that there are other aspects of either the underwriting company or our operations that are less than satisfactory, or that either us or the underwriting company that we work with are in violation of applicable laws or regulations. These types of examination or audit findings could lead an insurance regulator to require either us or the underwriting company that we work with to take one or more remedial actions or otherwise subject us to regulatory scrutiny, impose fines and penalties, or take further actions.
We cannot predict with precision the likelihood, nature, or extent, including the associated costs, of any necessary remedial actions, or any financial impact that could result from an examination or audit. Any regulatory or enforcement action or any regulatory order imposing remedial, injunctive, or other corrective action against us or any of the underwriting companies we work with resulting from these examinations or audits could have a material adverse effect on our business, reputation, financial condition and results of operations.
We rely on external data and our digital platform to collect and evaluate information that we utilize in producing, pricing, and underwriting insurance policies (in accordance with the rates, rules, and forms filed with regulators, where required), managing claims and customer support, and improving business processes. Any future legal or regulatory requirements that might restrict our ability to collect or utilize this data could potentially have an adverse effect on our business, financial condition, and prospects.
We use our digital platform to collect data points that we evaluate in pricing and underwriting insurance policies, managing claims and customer support, and improving business processes. Our business model is dependent on our ability to collect vehicle usage and driving data. If federal, state, or international regulators were to determine that the type of data we collect, the process we use for collecting this data, or how we use it, unfairly discriminates against a protected class of people, regulators could move to prohibit or restrict our collection or use of this data. In addition, if legislation were to restrict our ability to collect driving data, it could impair our capacity to underwrite insurance cost effectively, negatively impacting our revenue and earnings.
The insurance business, including the market for property and casualty insurance, is historically cyclical in nature, and there may be periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.
We operate primarily in North America and the seasonality of driving in that region has caused a large portion of our revenue to be generated in the spring and summer months of each year. This in turn impacts operational cash flows and could produce volatility in our earnings. Fluctuations in our operating results could be due to a number of other factors, many of which may be outside of our control, including competition, frequency, and severity of catastrophic events, levels of capacity, adverse litigation trends, regulatory constraints, general economic conditions, and other factors. The supply of insurance is related to prevailing prices, the level of insured losses, and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the auto insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity, as well as periods when shortages of capacity increased premium levels. We operate in a specialty sector of the auto insurance market and need to be mindful of these and other factors which could impact our operations. Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers, and general economic conditions. All of these factors fluctuate and may contribute to price declines generally in the insurance industry. We cannot predict with certainty whether market conditions affecting the auto insurance market and the insurance market in general will improve, remain constant, or deteriorate. Negative market conditions may impair our ability to underwrite insurance at rates we consider appropriate and commensurate relative to the risk assumed. Additionally, negative market conditions could result in a decline in policies sold, an increase in the frequency or severity of claims and premium defaults, and an uptick in the frequency of fraud, including the falsification of claims. If we cannot underwrite insurance at appropriate rates, our ability to transact business will be materially and adversely affected. Any of these factors could lead to an adverse effect on our business, financial condition and results of operations.
 
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The reinsurance that Hagerty Re purchases to protect against catastrophic and large losses may be unavailable at current coverage terms, limits, or pricing.
The business that Hagerty Re reinsures is exposed to catastrophic events that are inherently unpredictable and may cause capacity in the reinsurance market to become scarcer leading to rate increases or changes in coverage terms, or a combination of both. This in turn may cause Hagerty Re to retain more risk, be unable to accept risk and grow, or require greater capital investment that may not be available, in each case resulting in lower profits, as well as a material effect on our financial condition and results of operations.
Unexpected increases in the frequency or severity of claims may adversely affect our operations and financial condition.
We may experience increases in claim frequency on occasion. Short-term trends with an increase in claim frequency may not continue over the longer term. Any changes in claim frequency might be derived from changes in miles driven, driving behaviors, macroeconomics, weather-related events, or other factors. A significant increase in claim frequency could have an adverse effect on our financial condition and results of operations.
We could also experience increases in the severity of claims. Changes in bodily injury claim severity can be impacted by inflation in medical costs, litigation trends and precedents, regulation, and the overall safety of automobile travel. Changes in auto property damage claim severity can be driven by inflation in the cost to repair vehicles, including parts and labor rates, the mix of vehicles that are declared total losses, the availability of parts to repair vehicles, and an increase in value for collector vehicles. Unanticipated increases in claim severity can arise from events that are inherently difficult to predict. Although we pursue various loss management initiatives to mitigate future increases in claim severity, these initiatives may not successfully identify or reduce the effect of future increases in claim severity. A significant increase in claim severity could have an adverse effect on our financial condition and results of operations.
Severe weather events, catastrophes, and unnatural events are unpredictable, and we may experience losses or disruptions from these events.
Our business may be exposed to catastrophic events such as tornadoes, tsunamis, tropical storms (including hurricanes), earthquakes, windstorms, hailstorms, severe thunderstorms, wildfires and other fires, as well as
non-natural
events such as explosions, riots, pandemics, terrorism, or war, which could cause operating results to vary significantly from one period to the next. We may incur catastrophe losses in our business in excess of: (1) those experienced in prior years, (2) the average expected level used in pricing, (3) current reinsurance coverage limits, or (4) loss estimates from external tornado, hail, hurricane, and earthquake models at various levels of probability. In addition, we are subject to customer insurance claims arising from weather events such as winter storms, rain, hail, and high winds.
The incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the frequency and severity of customer insurance claims when severe weather conditions occur. The incidence and severity of severe weather conditions and catastrophes are inherently unpredictable and the occurrence of one catastrophe does not render the possibility of another catastrophe greater or lower. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. In particular, severe weather and other catastrophes could significantly increase our costs due to a surge in claims following such events and/or legal and regulatory changes in response to catastrophes that may impair our ability to limit our liability under our policies. Severe weather conditions and catastrophes can cause greater losses, which can cause our liquidity and financial condition to deteriorate. In addition, reinsurance placed in the market also carries some counterparty credit risk.
Climate change may affect the occurrence of certain natural events, such as an increase in the frequency or severity of wind and thunderstorm events, eruptions of volcanoes, and tornado or hailstorm events due to increased convection in the atmosphere; more frequent wildfires and subsequent landslides in certain
 
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geographies; higher incidence of deluge flooding and the potential for an increase in severity of the hurricane events due to higher sea surface temperatures. Additionally, climate change may cause an impact on the demand, price and availability of insurance, as well as the value of our investment portfolio. Due to significant variability associated with future changing climate conditions, we are unable to predict the impact climate change will have on our business.
If the risks within the insurance programs that we offer on behalf of our underwriting carriers are not priced and underwritten accurately with competitive, yet profitable, rates, our business and financial condition could be adversely affected.
As an MGA for Essentia, we operate under delegated underwriting authority in the U.S. In general, the premiums for the insurance policies in our program are established at the time a policy is issued and, therefore, before all of the underlying costs are known. The accuracy of the pricing is subject to our ability to adequately assess risks, estimate losses, and comply with insurance laws and regulations. Like others in the industry, we rely on estimates and assumptions in setting the premium rates. We also utilize the data that we gather through our interactions with customers.
Establishing adequate premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, loss adjustment expenses, and other costs. If we do not accurately assess the risks that are underwritten, adequate premiums may not be charged to cover losses and expenses, which would adversely affect our results of operations and our profitability. Moreover, if we determine that the prices are too low, insurance regulations may prevent
non-renewing
insurance contracts,
non-renewing
customers, or raising prices. Alternatively, we could set the premiums too high, which could reduce our competitiveness and lead to lower revenues, which could have a material adverse effect on our business, financial condition and results of operations.
Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs, expenses, and inflation trends, among other factors, for each of the products in multiple risk levels and many different markets. In order to accurately price the policies, we must, among other factors:
 
   
collect and properly and accurately analyze a substantial volume of data from our customers;
 
   
develop, test, and apply appropriate actuarial projections and rating formulas;
 
   
review and evaluate competitive product offerings and pricing dynamics;
 
   
closely monitor and timely recognize changes in trends;
 
   
project both frequency and severity of our customers’ losses with reasonable accuracy; and
 
   
in many jurisdictions, obtain regulatory approval for the resulting rates.
We may not have success in implementing a pricing methodology accurately in accordance with our assumptions. Our ability to accurately price policies is subject to a number of risks and uncertainties, including, but not limited to:
 
   
insufficient, inaccurate, or unreliable data;
 
   
incorrect or incomplete analysis of available data;
 
   
uncertainties generally inherent in estimates and assumptions;
 
   
our inability to implement appropriate actuarial projections and rating formulas or other pricing methodologies;
 
   
incorrect or incomplete analysis of the competitive environment;
 
   
regulatory constraints on rate increases or coverage limitations;
 
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our inability to accurately estimate investment yields and the duration of our liability for loss and loss adjustment expenses; and
 
   
unanticipated litigation, court decisions, and legislative or regulatory actions or changes to the existing regulatory landscape.
To address the potential errors or desired or required changes in our current business model, we may be compelled to increase the amount allocated to cover policy claims, or to address other economic factors resulting in an increase in future premium rates, or to additionally or alternatively adopt different underwriting standards. Any of these changes may result in a decline in new business and renewals and, as a result, have a material adverse effect on our business, results of operations and financial condition.
Reinsurance subjects Hagerty Re to counterparty risk where reinsurers fail to pay or timely pay claims due to insolvency or otherwise fail to honor their obligations.
Hagerty Re is legally obligated to pay claims under the reinsurance agreements where Hagerty Re has assumed risk, regardless of whether Hagerty Re is able to secure its own reinsurance for ceded reinsurance coverages. Reinsurer insolvency or payment default by one of Hagerty Re’s ceded reinsurance when reimbursement is sought by Hagerty Re for such coverage may have a material effect on Hagerty Re’s profitability and financial situation and its ability to accept risk or may cause it to require capital investments that may not be available.
Unexpected changes in the interpretation of coverage or provisions, including loss limitations and exclusions, in the insurance policies we sell and service could have a material adverse effect on our financial condition and operations.
We have specifically negotiated loss limitations and exclusions in the policies we sell and service, and these limitations and exclusions may not be enforceable in the manner we intend. As industry practices and legal, judicial, social, and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. While these limitations and exclusions help us assess and mitigate our loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion, or legislation could be enacted modifying or barring the use of such limitations or exclusions. These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition or results of operations. In addition, court decisions have eliminated long standing coverage limitations by a narrow reading of policy exclusions. Under the insurance laws, the insurer typically has the burden of proving an exclusion applies and any ambiguities in the terms of a loss limitation or exclusion provision are typically construed against the insurer. These types of cases and the issues they raise may adversely affect our business by either broadening coverage beyond our underwriting intent or by increasing the frequency or severity of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under the insurance contract may not be known for many years after a contract is issued. There could also be additional exposure with claims for other household vehicles that are not covered under an insurance policy issued by us, such as for someone’s regular use vehicle. It is possible that our underwriting companies that we write business through may share in liability with these types of claims on certain instances.
Hagerty Re’s actual ultimate loss liability could potentially be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition and results of operations.
Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us, and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise
 
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involving many variables and subjective judgments. This process may also become more difficult if we experience a period of rising inflation. As part of the reserving process, we review historical data and consider the impact of such factors as:
 
   
trends in claim frequency and severity;
 
   
changes in operations;
 
   
emerging economic and social trends;
 
   
trends in insurance rates;
 
   
inflation or deflation; and
 
   
changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves for our underwriting operations will, and for our program’s services operations may, result in additional charges to earnings, which may be material. Our estimates could prove to be inadequate, and this underestimation could have a material adverse effect on our financial condition.
Hagerty Re is required to maintain its reserves and financial condition in accordance with Bermuda law and the BSCR administered by the BMA. Inadequate reserves may adversely affect earnings, as well as the ability to continue to accept risk, and Hagerty Re’s ability to maintain its financial condition and meet solvency requirements with possible loss of its license in Bermuda. Under Bermuda law, Hagerty Re is prohibited from declaring or making payment of 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.
Our expansion into different insurance products and jurisdictions may subject us to additional costs and expenses, and our plans might not be as profitable as projected.
We believe that the growth of our business and revenue depends in part upon our ability to: (i) retain our existing customers and add new customers in our current, as well as new, geographic markets; (ii) add new insurance programs and products; and (iii) add to and continue to grow our offering of
non-insurance
automotive enthusiast-related products.
Expanding into new geographic markets and introducing new products takes time, requires us to navigate and comply with extensive regulations, and may happen more slowly than we expect or than it has occurred in the past. If we were to lose customers, our value might diminish. A future loss of customers could lead to higher loss ratios, loss ratios that cease to decline, or declining revenue, any of which would adversely impact our profitability. If we are unable to remain competitive on customer experience, pricing, or insurance coverage options, our ability to grow and retain our business may also be adversely affected. In addition, we might not be able to accurately predict risk segmentation of new and renewal customers or potential customers, which could also reduce our profitability.
While a key part of our business strategy is to retain and add customers in our existing markets, we may also seek to expand our operations into new markets and new products. In doing so, we may incur losses or otherwise not be successful in entering new markets or introducing new products. Our expansion into new markets and new products may place us in unfamiliar competitive environments and involve various risks, including competition, government regulation, the need to invest significant resources, and the possibility that returns on such investments might not be achieved for several years, or at all.
 
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We may not be successful in these efforts, and even if we are successful, these efforts may increase or create the following risks, among others:
 
   
we might not be able to effectively use search engines, social media platforms, content-based online advertising, and other online sources for generating traffic to our website;
 
   
potential customers in a particular marketplace could generally not meet the underwriting guidelines;
 
   
demand for new products or expansion into new markets may not meet our expectations;
 
   
new products and expansion into new markets may increase or change our risk exposures, and the data and models we use to manage those exposures may not be as effective as those we use in existing markets or with existing products;
 
   
models underlying automated underwriting and pricing decisions may not be effective;
 
   
efforts to develop new products or expand into new markets or to change commission terms may create or increase distribution channel conflicts;
 
   
in connection with the conversion of existing policyholders to a new product, some policyholders’ pricing may increase while the pricing for other policyholders may decrease, the net impact of which could negatively impact retention and profit margins;
 
   
changes to our business processes or workflow, including the use of new technologies, may give rise to execution risk;
 
   
our products might not be competitive in terms of customer experience, pricing, or insurance coverage options;
 
   
there could be barriers in obtaining the governmental and regulatory approvals, licenses, or other authorizations necessary for expansion into new markets or in relation to our products (such as line, form, underwriting, and rating approvals), or such approvals contain conditions that impose restrictions on our operations (such as limitations on growth);
 
   
our digital platform might experience disruptions;
 
   
we could suffer reputational harm to our brand resulting from negative publicity, whether accurate or inaccurate;
 
   
we may not be able to offer new and competitive products, to provide effective updates to our existing products, or to keep pace with technological improvements in our industry;
 
   
we might not be able to maintain traditional retail agent relationships;
 
   
customers may have difficulty installing, updating, or otherwise accessing our website on mobile devices or web browsers as a result of actions by us or third parties;
 
   
customers may be unable or unwilling to adopt or embrace new technology;
 
   
technical or other problems may frustrate the customer experience, particularly if those problems prevent us from generating quotes or paying claims in a fast and reliable manner;
 
   
we might not be able to address customer concerns regarding the content, data privacy, and security generally or for our digital platform specifically;
 
   
we may not identify or enter joint ventures with strategic partners or we may enter into joint ventures that do not produce the desired results; or
 
   
there may be challenges in, and the cost of, complying with various laws and regulatory standards, including with respect to the insurance business and insurance distribution, capital and outsourcing requirements, data privacy, tax, and regulatory restrictions.
These efforts may require additional investments by us, some of which could be significant. These costs may also include hiring additional personnel, as well as engaging third-party service providers, and other
 
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research and development costs. If we grow our geographic footprint or product offering at a slower rate than expected, or if we are unable to overcome the challenges listed above, our business, financial condition and results of operations could be materially and adversely affected.
Our reliance on technology and intellectual property from third parties for pricing and underwriting insurance policies, handling claims, and maximizing automation, could cause an adverse impact on our business and operations if these third parties become unavailable or provide us with inaccurate information.
We use data, technology, and intellectual property licensed from unaffiliated third parties in certain components of our products, including insurance industry proprietary information that we license, and we may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all. Also, should a company refuse to license its proprietary information to us on the same terms that it offers to our competitors, we could be placed at a significant competitive disadvantage. If any technology and intellectual property we license from others becomes unavailable, we may not be able to find replacement technologies at a reasonable cost or at all, which could materially harm our business and results of operations.
Denial of claims or the failure to accurately and timely pay claims on behalf of our underwriting carriers could have an adverse impact on our own business, financial condition and prospects.
We must accurately and timely evaluate and pay claims that are made under the insurance policies in our program. There are many factors that could affect our ability to pay claims accurately and timely, including the efficiency of our claims processing, the training and experience of our claim’s adjusters, and our ability to develop or select and implement appropriate procedures and systems to support our claims functions.
The risks included in our insurance programs are typically those of an antique, classic, or collectable nature. Adjusting claims on these types of risks often require specialized knowledge of collector vehicles, so our claims staff is trained to have collectable expertise to provide an efficient, yet comprehensive, claims experience. The manner in how we handle claims is a differentiating factor for our business, and an inability to be able to continue to offer a timely and comprehensive claims experience could undermine our brand and position in the insurance marketplace. Additionally, any failure to pay claims accurately or timely could also lead to regulatory and administrative actions or material litigation, loss or reduction in reinsurance recoverable, or result in damage to our reputation, any one of which could materially and adversely affect our business, financial condition, results of operations and prospects.
If our claims adjusters are unable to effectively process our volume of claims in the manner that our customers expect, our ability to grow our business while maintaining high levels of customer satisfaction could be compromised, which in turn, could adversely affect our reputation, financial condition and results of operations.
A downward change in Essentia’s financial strength rating may adversely affect our ability to conduct business as currently conducted.
Essentia’s ability to underwrite business is dependent upon its financial strength rating as evaluated by independent rating agencies. In the event that Essentia is downgraded, we believe our ability to write business through Essentia would be adversely affected. In the normal course of business, we evaluate Essentia’s capital needs to support the amount of business it writes in order to maintain its financial strength ratings.
Hagerty Re is subject to regulatory requirements to maintain its license in Bermuda as a Class 3A insurer.
Hagerty Re is registered as a Class 3A insurer under the Bermuda Insurance Act. The BMA issues regulations and other guidance prescribing requirements that Bermuda-licensed insurance companies, like
 
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Hagerty Re, are required to comply with. For example, the BMA requires Bermuda-licensed insurers to maintain a minimum level of capital and surplus, comply with restrictions on dividends, make financial statement filings, prepare a financial condition report, maintain a head office in Bermuda from which insurance business is directed and managed and allow for the performance of certain periodic examinations of financial condition. These statutes and regulations may restrict Hagerty Re’s ability to write reinsurance policies, distribute funds and pursue its investment strategy.
Under its license as a Class 3A insurer, Hagerty Re must meet and maintain the relevant solvency margin, and liquidity and other ratios applicable under Bermuda law. For example, Hagerty Re’s license limits it to reinsuring business that is underwritten by carriers rated
A-
or better by A.M. Best or similar rating agencies. Additional operational requirements for Hagerty Re in Bermuda include:
 
   
complying with economic substance requirements which include maintaining a principal office in Bermuda and having a certain number of Bermuda-domiciled managers involved in overseeing operations;
 
   
obtaining prior approval for changes in ownership / transfers of shares;
 
   
having restrictions on dividends;
 
   
complying with Bermuda know-your-customer and anti-bribery type laws;
 
   
having audited financial statements and being subject to BMA examination; and
 
   
carrying out operations in accordance with its filed and approved business plan.
Failure to operate properly in accordance with Bermuda law could cause Hagerty Re’s license to be restricted or revoked along with possible supervisory control of Hagerty Re and its assets and termination of reinsurance agreements with its ceding carriers. Additionally, Bermuda insurance statutes, regulations and the policies of the BMA are less restrictive than U.S. insurance statutes and regulations. Insurance supervisors in the U.S. may review Hagerty Re’s activities and determine that Hagerty Re is subject to a U.S. jurisdiction’s licensing requirements or determine that our U.S.-domiciled underwriting partners cannot transact business with us. Any such determination would have an adverse impact on Hagerty Re’s operations and financial condition.
Risks Related to Legal, Regulatory and Political Matters
The legal and regulatory requirements applicable to our business are extensive. If we are not able to comply, it could have an adverse effect on us. Extensive regulation and potential further restrictive regulation could increase our operating costs and limit our growth.
We are subject to extensive laws, regulations, and supervision in the jurisdictions in which we transact business. These laws are complex and subject to change. Changes can sometimes lead to additional expenses, increased legal exposure, increased required capital and surplus, delays in implementing desired rate increases or business operations, and additional limits on our ability to grow or achieve targeted goals and profitability. Our business is highly dependent on the ability to engage on a daily basis in financial and operational activities, many of which are highly complex, including, but not limited to, insurance underwriting, claim processing, and providing products and services to businesses and consumers in a hospitable and efficient manner. These activities are subject to internal guidelines and policies, as well as legal and regulatory requirements, including, but not limited to, those related to:
 
   
privacy regulation and data security;
 
   
anti-corruption and anti-bribery;
 
   
restrictions on advertising and marketing;
 
   
restrictions on rebating and inducements related to insurance transactions;
 
   
restrictions on sharing insurance commissions and payments of referral fees;
 
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restrictions related to underwriting and pricing of insurance;
 
   
approval of policy forms and premiums;
 
   
restrictions on the adjustment and settlement of insurance claims;
 
   
restrictions on the sale, solicitation, and negotiation of insurance;
 
   
rules regarding licensing, affiliations, and appointments;
 
   
state-mandated premium rebates, refunds, or reductions as a result of potentially lower risk exposure due to
COVID-19
and related emergency orders;
 
   
regulation of corporate governance and risk management; and
 
   
periodic examinations of operations, finances, market conduct and claims practices.
While we believe that we have adopted adequate and effective risk management and compliance programs, compliance risks remain, especially as we become subject to additional rules and regulations. The requirement to oversee and monitor the increasing speed and volume of regulatory changes could hinder our ability to appropriately review, analyze, and implement processes to ensure compliance in a timely manner. Failure to comply with, or to obtain, appropriate authorizations or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business. Any such failure could also subject us to fines, penalties, equitable relief, and changes to our business practices.
Future regulatory changes could limit or impact our business model.
Compliance with applicable laws and regulations is time consuming and personnel- and systems-intensive. The current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and compliance obligations. Any changes in, or the enactment of new, applicable laws and regulations may increase the complexity of the regulatory environment in which we operate, which could materially increase our direct and indirect compliance costs and other expenses of doing business and have a material adverse effect on financial condition and results of operations. Although state insurance regulators have primary responsibility for administering and enforcing insurance regulations in the U.S., such laws and regulations are further administered and enforced by a number of additional governmental authorities, each of which exercises a degree of interpretive latitude, including state securities administrators; state attorneys general, as well as federal agencies including the SEC, the Financial Industry Regulatory Authority, the Federal Reserve Board, the Federal Insurance Office, the U.S. Department of Labor, the U.S. Department of Justice, and the National Labor Relations Board. Similarly, there are governmental authorities in U.K., such as the Financial Conduct Authority; the BMA in Bermuda; and numerous federal and provincial governmental and oversight organizations in Canada. Consequently, compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. Such regulations or enforcement actions are often responsive to current consumer and political sensitivities, which may arise after a major event. Such rules and regulations may result in rate suppression, limit our ability to manage our exposure to unprofitable or volatile risks, or lead to fines, premium refunds, or other adverse consequences.
The federal government may also regulate aspects of our business, such as the protection of consumer confidential information or the use of consumer insurance (credit) scores to underwrite and assess the risk of customers under the Fair Credit Reporting Act (“FCRA”) in the U.S. Among other things, for insurance purposes, the FCRA requires that (i) there is a permissible purpose before obtaining and using a consumer report for underwriting purposes, and (ii) there is compliance with related notice and recordkeeping requirements. Failure to comply with federal requirements under the FCRA or any other applicable federal laws could subject us to regulatory fines and other sanctions. In addition, there is risk that a particular regulator’s or enforcement authority’s interpretation of a legal issue or the scope of a regulator’s authority may change over time to our
 
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detriment. There is also a risk that changes in the overall legal environment may cause us to change our views regarding the actions we need to take from a legal risk management perspective. This would necessitate changes to our practices that may adversely impact our business.
In some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. State insurance laws and regulations are generally intended to protect the interests of purchasers or users of insurance products, rather than our stockholders. Failure to comply with state insurance laws and regulations in the future could also have a material adverse effect on our business, financial condition and results of operations.
Additionally, changes in the regulatory landscape, whether it be on a state, federal, or global level, related to autonomous vehicles and regulations around petroleum-based vehicles could significantly alter our core insurance model, and we may have to make changes to our insurance program to comply with regulatory changes in this space. This would require changes to our operations, which could adversely impact our business.
Furthermore, the federal government could pass a law expanding its authority to regulate the insurance industry, expanding federal regulation over our business to our detriment. These laws and regulations may limit our ability to grow, to raise additional capital, or to improve the profitability of our business.
New legislation or legal requirements impacting the internet and the applicable use of mobile applications may affect how we communicate with our customers and could have an adverse effect on our business model, financial condition and operations.
We rely on our mobile application to execute our business strategy. We are subject to general business regulations and laws, as well as federal and state regulations and laws specifically governing the internet and the use of mobile applications in particular. Existing and future laws and regulations may impede the growth of the internet or other online services and increase the cost of providing online services. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, electronic signatures and consents, consumer protection, and social media marketing. It is at times not clear how existing laws governing issues such as property ownership, sales, and other taxes and consumer privacy apply to the internet and the use of mobile applications in particular, as the vast majority of these laws were adopted prior to the advent of the internet and the use of mobile applications and do not contemplate or address the unique issues raised by the internet. It is possible that general business regulations and laws, or those specifically governing the internet and the use of mobile applications in particular, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, currently comply, or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business, and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, and decrease the use of our mobile application or website by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of
non-compliance
with any such laws or regulations.
Our intellectual property rights are extremely valuable and if they are not properly protected, our products, services, and brand could be adversely impacted.
As we continue expanding our development of intellectual property across all channels, we may be unable to adequately protect and/or obtain appropriate rights, leading to increased risk. Competitors may target certain products or services and seek to assert competing rights. If appropriate contractual measures are not maintained, employees, contractors, and vendors may divulge trade secrets or claim ownership over our intellectual property.
 
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New legislation or legal requirements impacting the use of petroleum-based and/or supporting autonomous vehicles could significantly challenge and impact our core insurance model and company purpose.
A significant majority of our members currently drive
gas-powered
vehicles and engage in automotive enthusiast activities where they are able to drive and enjoy their vehicles. Changes in the law that create higher barriers to the use and enjoyment of their vehicles may in turn reduce the need or desire for many of our products and services, leading to lost revenue and lower profits and the inability to deliver on our purpose in an impactful manner.
Risks Related to Ownership of Our Securities
Our stock may be diluted by future issuances of additional Class A Common Stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market or the expectations that such sales may occur could lower our stock price.
We may issue additional shares of Class A Common Stock in several ways:
 
   
By the Board
. Our Amended and Restated Charter authorizes us to issue shares of our Class A Common Stock and options, rights, warrants and appreciation rights relating to our Class A Common Stock or the consideration of and on the terms and conditions established by our board of directors (the “Board”) in its sole discretion, whether in connection with acquisitions or otherwise.
 
   
Under the 2021 Equity Incentive Plan
. We have reserved 38,317,399 shares of Class A Common Stock for issuance under our equity incentive plan (the “2021 Equity Incentive Plan”). As of December 31, 2021, we have not yet issued any shares under the 2021 Equity Incentive Plan.
 
   
Under the 2021 Employee Stock Purchase Plan.
We have reserved 11,495,220 shares of Class A Common Stock for issuance under our employee stock purchase plan (the “2021 Employee Stock Purchase Plan”). As of December 31, 2021, we have not yet issued any shares under the 2021 Employee Stock Purchase Plan.
Any new shares of Class A Common Stock that we issue would dilute the percentage ownership held by the investors who purchase Class A Common Stock. The market price of shares of our Class A Common Stock could decline as a result of such issuances, or the perception that such issuances may occur. A decline in the price of our Class A Common Stock might impede our ability to raise capital through the issuance of additional shares of Class A Common Stock or other equity securities.
Substantial blocks of our total outstanding shares may be sold into the market. If there are substantial sales of shares of our Class A Common Stock, the price of our Class A Common Stock could decline.
The price of our Class A Common Stock could decline if there are substantial sales of our Class A Common Stock, particularly sales by our directors, executive officers, and significant stockholders, or if there is a large number of shares of our Class A Common Stock available for sale. As of March 1, 2022, we have 82,452,214 shares of our Class A Common Stock outstanding. All of the shares of Class A Common Stock sold at the completion of our Business Combination are available for sale in the public market, other than shares held by affiliates within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Resales of such securities are being registered by the registration statement of which this prospectus forms a part, subject to various vesting agreements.
The market price of the shares of our Class A Common Stock could decline as a result of the sale of a substantial number of our shares of Class A Common Stock in the public market or the perception in the market that the holders of a large number of such shares intend to sell their shares.
 
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Certain warrants to purchase our Class A Common Stock are now exercisable and will become exercisable in 2022 and 2023, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
PIPE Warrants to purchase an aggregate of 12,669,300 shares of Class A Common Stock became exercisable on the 30th day following the closing of the Business Combination in accordance with the terms of the warrant agreement governing those securities. In addition, Public Warrants to purchase an aggregate of 5,750,000 shares of Class A Common Stock will become exercisable on April 12, 2022 in accordance with the warrant agreement covering those securities. Each such PIPE Warrant and Public Warrant entitles its holder to purchase one share of Class A Common Stock at an exercise price of $11.50 per share and will expire at 5:00 p.m., New York time, five years after the closing of the Business Combination or earlier upon redemption or our liquidation. In addition, pursuant to the Sponsor Warrant
Lock-up
Agreement that was entered into in connection with the closing of the Business Combination (the “Sponsor Warrant Lock-up Agreement”), the Private Placement Warrants and OTM Warrants will become exercisable beginning on December 2, 2022 as certain conditions outlined within the agreements covering these warrants are met. To the extent warrants are exercised, additional shares of Class A Common Stock will be issued, which will result in dilution to our then existing stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could depress the market price of our common stock.
We qualify as an “emerging growth company” within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, it could make our securities less attractive to investors and may make it more difficult to compare our performance to the performance of other public companies.
We qualify as an “emerging growth company” as defined in the JOBS Act. As such, we may take advantage of relief from various reporting requirements and other burdens that are otherwise applicable generally to public companies, including (i) reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data, (ii) an exemption from compliance with the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, (iii) reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements, and (iv) exemptions from the requirements of holding
non-binding
advisory votes on executive compensation or golden parachute arrangements. In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards would apply to private companies. We intend to avail ourselves of such extended transition period and, accordingly, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or that have opted out of using such extended transition period., which may make comparison of our financial statements with those of other public companies more difficult. Investors may find the Class A Common Stock less attractive because we will rely on these exemptions, which may result in a less active trading market for the Class A Common Stock and its price may be more volatile.
We may take advantage of this relief until we no longer qualify as an emerging growth company or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out of using the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of Class A Common Stock that is held by
non-affiliates
exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more, (iii) the date on which we have issued more than $1 billion in
non-convertible
debt during the prior three years, and (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Aldel common stock in Aldel’s initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens.
 
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We qualify as, and intend to elect to be treated as, a “controlled company” within the meaning of the NYSE listing standards and, as a result, our stockholders may not have certain corporate governance protections that are available to stockholders of companies that are not controlled companies.
So long as more than 50% of the voting power for the election of directors is held by an individual, a group, or another company, we will qualify as a “controlled company” under the NYSE listing requirements. As of the consummation of the Business Combination, HHC controls approximately 67.9% of the voting power of our outstanding capital stock. As a result, we qualify as, and intend to elect to be treated as, a “controlled company” under the NYSE listing standards and will not be subject to the requirements that would otherwise require us to have: (i) a majority of “independent directors,” as defined under the listing standards of the NYSE; (ii) a nominating committee comprised solely of independent directors; (iii) compensation of our executive officers determined by a majority of the independent directors or a compensation committee comprised solely of independent directors; and (iv) director nominees selected, or recommended for the board of directors’ selection, either by a majority of the independent directors or a nominating committee comprised solely of independent directors.
We currently take exemption only to the rule requiring us to have a nominating/corporate governance committee composed entirely of independent directors as our Nominating and Governance Committee is made up of three independent directors and one management director. In the event we choose to rely on more of these exemptions in the future, our stockholders would not have the same protections afforded to stockholders of companies that are subject to all of the applicable NYSE listing rules.
HHC may have its interest diluted due to future equity issuances or its own actions in selling shares of common stock, in each case, which could result in a loss of the “controlled company” exemption under the NYSE listing rules. We would then be required to comply with those provisions of the NYSE listing requirements.
The dual class structure of our common stock may adversely affect the trading market for our Class A Common Stock.
S&P Dow Jones and FTSE Russell limit their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, namely, to exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several stockholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A Common Stock in such indices and may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A Common Stock. Any actions or publications by stockholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A Common Stock.
The dual class structure of our common stock will have the effect of concentrating voting power with two stockholders, which will limit your ability to influence the outcome of important transactions, including a change in control.
Our Class V Common Stock has 10 votes per share and our Class A Common Stock has one vote per share. Markel and HHC, who currently hold all of the Class V Common Stock, together will hold a substantial majority of the voting power of our outstanding capital stock. Because of the
10-to-1
voting ratio between our Class V and Class A Common Stock, the holders of our Class V Common Stock will, collectively control a majority of the combined voting power of common stock and therefore will be able to control all matters submitted to our stockholders until the earlier of (i) 15 years from the date of the consummation of the Business Combination and (ii) the date on which such share of Class V Common Stock is transferred other than pursuant to a Qualified Transfer (as defined in our Amended and Restated Charter). This concentrated control will limit or preclude your ability to influence the outcome of important corporate matters, including a change in control, for the foreseeable future.
Transfers by holders of Class V Common Stock will generally result in those shares losing their super voting rights, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes.
 
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Our three largest stockholders hold significant voting power, have the right to designate directors to our Board and are entitled to preemptive rights with respect to the issuance of new Class A Common Stock, which provides these stockholders with significant power to influence our business and affairs.
Our three largest stockholders are HHC, Markel and State Farm. HHC controls approximately 67.9% of the voting power, Markel controls approximately 29.0% of the voting power, and State Farm controls approximately 1.9% of the voting power. Pursuant to the terms of the Investor Rights Agreement among HHC, Markel and State Farm, HHC designated two directors to our Board, and Markel and State Farm each designated one director to our Board. Pursuant to the Investor Rights Agreement, each of HHC, Markel and State Farm has agreed to vote for the election of any director nominated by HHC, Markel and State Farm in furtherance of the director designation rights described above. As a consequence, we expect the four directors designated by HHC, Markel and State Farm to be
re-elected
in 2022.
Moreover, under the terms of the Investor Rights Agreement, each of HHC, Markel and State Farm has a contractual preemptive right. Specifically, under the terms of the Investor Rights Agreement, for so long as HHC, Markel and State Farm, as applicable, are entitled to nominate a director, each of HHC, Markel and State Farm, as applicable, subject to certain conditions, has a preemptive right to purchase up to the amount of any new securities we propose to issue or sell as is necessary to maintain the relative pro rata ownership position (determined on a fully diluted basis at the time of determination) of HHC, Markel and State Farm, as applicable. Therefore, while other holders of our stock would risk suffering a reduction in percentage ownership in connection with a new issuance of securities by us, HHC, Markel and State Farm would, through this preemptive right, have the opportunity to avoid a reduction in percentage ownership. As long as HHC, Markel and State Farm continue to hold a significant portion of our outstanding common stock, each will have the ability to influence the vote in any election of directors and over decisions that require stockholder approval.
By virtue of their voting power and Board designation rights, preemptive right to purchase additional equity securities in future stock offerings and approval rights, HHC, Markel and State Farm, collectively and separately, have the power to significantly influence our business and affairs and the outcome of matters required to be submitted to stockholders for approval, including the election of our directors, amendments to our charter, mergers, or sales of assets. Their influence over our business and affairs may not be consistent with the interests of some or all of our other stockholders and might negatively affect the market price of our common stock.
We may redeem unexpired warrants prior to their exercise at a time that is disadvantageous to the holders of such warrants, thereby making such warrants worthless.
We have the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of Class A Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30
trading-day
period commencing once the warrants become exercisable and ending on the third trading day prior to the date on which we give proper notice of such redemption and provided certain other conditions are met. If and when the warrants become redeemable by us, we may not exercise our redemption right if the issuance of shares of Class A Common Stock upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws or we are unable to effect such registration or qualification. We will use our best efforts to register or qualify such shares of Class A Common Stock under the blue sky laws of the state of residence in those states in which the warrants were offered. Redemption of the outstanding warrants could force you (i) to exercise your Public Warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then-current market price when you might otherwise wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants. None of the Private Placement Warrants or Underwriter Warrants are redeemable by us so long as they are held by the Sponsor, FG SPAC Partners LP, the underwriter in Aldel’s initial public offering, or their permitted transferees.
 
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Because there are no current plans to pay cash dividends on the Class A Common Stock for the foreseeable future, you may not receive any return on investment unless you sell your Class A Common Stock for a price greater than that which you paid for it.
We intend to retain future earnings, if any, for future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of our Class A Common Stock will be at the sole discretion of our Board. Our Board may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax, and regulatory restrictions, implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our Board may deem relevant. In addition, our ability to pay dividends is limited by covenants of our existing and outstanding indebtedness and may be limited by covenants of any future indebtedness we incur. As a result, you may not receive any return on an investment in our Class A Common Stock unless you sell our Class A Common Stock for a price greater than that which you paid for it.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our Amended and Restated Charter and Amended and Restated Bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
 
   
the ability of our Board to issue one or more series of preferred stock;
 
   
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;
 
   
certain limitations on convening special stockholder meetings; and
 
   
limiting the ability of stockholders to act by written consent;
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
Our Amended and Restated Charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our Amended and Restated Charter provides that, subject to limited exceptions, any (1) derivative action or proceeding brought on behalf of us under Delaware law, (2) action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, or other employee to us or our stockholders, (3) action asserting a claim against us, our directors, officers or other employees arising under the DGCL, our Amended and Restated Charter or our Amended and Restated Bylaws (in each case, as may be amended from time to time), (4) action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine of the State of Delaware or (5) other action asserting an “internal corporate claim,” as defined in Section 115 of the DGCL, in all cases subject to the court having personal jurisdiction over all indispensable parties named as defendants shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, another state
 
30

or federal court located within the State of Delaware. Unless a majority of the Board, acting on behalf of Hagerty, consents in writing to the selection of an alternative forum (which consent may be given at any time, including during the pendency of litigation), the federal district courts of the United States of America, to the fullest extent permitted by law, is the sole and exclusive forum for the resolution of any action asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our Amended and Restated Charter described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our Amended and Restated Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
Risks Related to Tax
We are a holding company and our only material asset is our interest in The Hagerty Group, and we will therefore be dependent upon distributions made by The Hagerty Group to pay taxes, make payments under the Tax Receivable Agreement and pay other expenses.
We are a holding company with no material assets other than our ownership of Hagerty Group units and our managing member interest in The Hagerty Group. As a result, we will have no independent means of generating revenue or cash flow. Our ability to pay taxes, make payments under the TRA and pay dividends (in the event that any dividends are declared) and other expenses will depend on the financial results and cash flows of The Hagerty Group and the distributions we receive from The Hagerty Group. Deterioration in the financial condition, earnings or cash flow of The Hagerty Group for any reason could limit or impair The Hagerty Group’s ability to pay such distributions. Additionally, to the extent that we need funds and The Hagerty Group is restricted from making such distributions under applicable law or regulation or under the terms of any financing arrangements, or The Hagerty Group is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.
The Hagerty Group will be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, the taxable income of The Hagerty Group will be allocated to the members of The Hagerty Group, including us. Accordingly, we will be required to pay income taxes on our allocable share of any net taxable income of The Hagerty Group. Under the terms of The Hagerty Group LLC Agreement, The Hagerty Group is obligated to make tax distributions to the members of The Hagerty Group (including us) calculated at certain assumed tax rates. In addition to tax expenses, we will also incur expenses related to our operations, including payment obligations under the TRA (and the cost of administering such payment obligations), which could be significant. We intend to cause The Hagerty Group to make distributions to the members of The Hagerty Group in amounts sufficient to cover all applicable taxes (calculated at assumed tax rates) and payments under the TRA. However, The Hagerty Group’s ability to make such distributions may be subject to various limitations and restrictions including, but not limited to, restrictions on distributions that would either violate any contract or agreement to which The Hagerty Group is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering The Hagerty Group insolvent. If our cash resources are insufficient to meet our obligations under the TRA and to fund our obligations, we may be required to incur additional indebtedness to provide the liquidity needed to make such payments, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the TRA for any reason, such payments will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.
 
31

Hagerty, Inc. is required to pay Legacy Unit Holders and any other persons that become parties to the TRA for certain tax benefits we may receive and the amounts payable may be substantial.
In connection with the consummation of the Business Combination, Hagerty, Inc. entered into a TRA with Legacy Unit Holders. The Hagerty Group intends to have in effect an election under Section 754 of the Code for each taxable year in which TRA exchanges occur, which is expected to result in adjustments to the tax basis of the assets of The Hagerty Group as a result of such TRA exchanges. The TRA generally provides for the payment by Hagerty, Inc. to Legacy Unit Holders of 85% of the cash tax benefits, if any, realized as a result of (i) tax basis adjustments resulting from TRA exchanges in connection with or following the Business Combination, (ii) certain other tax benefits related to entering into the TRA, including tax benefits attributable to making payments under the TRA. We expect that the payments required under the TRA could be substantial. Estimating the amount and timing of realization of tax benefits subject to the TRA is by its nature imprecise.
Payments under the TRA will be based on the tax reporting positions determined, and the IRS or another tax authority may challenge all or a part of the existing tax basis, tax basis increases, or other tax attributes subject to the TRA, and a court could sustain such challenge. The parties to the TRA will not reimburse Hagerty, Inc. for any payments previously made if such tax basis or other tax benefits are subsequently disallowed, except that any excess payments made to a party under the TRA will be netted against future payments otherwise to be made under the TRA, if any, after the determination of such excess. In addition, the TRA provides that if (1) Hagerty, Inc. breaches any material obligations under the TRA (including in the event payments are more than three months late under the TRA, subject to certain exceptions), (2) Hagerty, Inc. is subject to certain bankruptcy, insolvency or similar proceedings, or (3) at any time, Hagerty, Inc. may elect an early termination of the TRA, the obligations under the TRA (with respect to all Hagerty Group Units, whether or not such Hagerty Group Units have been exchanged or redeemed before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that Hagerty, Inc. would have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the TRA.
The TRA also provides that, upon certain changes of control or other significant transactions, in the discretion of the Legacy Unit Holders, obligations under the TRA may be accelerated and become payable in a lump sum as described above. Such acceleration would be based on certain assumptions, including that Hagerty, Inc. would have sufficient taxable income to fully utilize the increased tax deductions and tax basis and other benefits covered by the TRA. As a result, upon any acceleration of the obligations under the TRA (including a change of control), Hagerty, Inc. could be required to make payments under the TRA that are greater than 85% of actual cash tax savings, which could negatively impact liquidity. The change of control provisions in the TRA may also result in situations where the Legacy Unit Holders have interests that differ from or are in addition to those of our Class A stockholders.
To the extent we receive tax distributions in excess of our actual tax liabilities and retains such excess cash, the Legacy Unit Holders may benefit from such accumulated cash balances if they exercise their exchange rights
.
Under the terms of The Hagerty Group LLC Agreement, The Hagerty Group is obligated to make tax distributions to the members of The Hagerty Group calculated at certain assumed tax rates. Because tax distributions will be made pro rata based on ownership and due to, among other items, differences between the tax rates applicable to us and the assumed individual income tax rate used in the calculation and requirements under the applicable tax rules that The Hagerty Group’s net taxable income be allocated disproportionately to its unit holders in certain circumstances, tax distributions may significantly exceed the actual tax liability for certain The Hagerty Group unit holders. If Hagerty, Inc. retains the excess cash we receive, Markel and HHC could benefit from any value attributable to such accumulated cash balances as a result of their rights under the Exchange Agreement.
If The Hagerty Group were to become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, we and The Hagerty Group might be subject to potentially significant tax inefficiencies,
 
32

and we would not be able to recover payments previously made by us under the TRA even if the corresponding tax benefits were subsequently determined to have been unavailable due to such status.
The Hagerty Group intends to operate such that it does not become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. A “publicly traded partnership” is a partnership the interests of which are listed for trading on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. Applicable U.S. Treasury regulations provide for certain safe harbors from treatment as a publicly traded partnership, and The Hagerty Group intends to operate such that it will qualify for one or more of such safe harbors, although it may be unable to do so.
If The Hagerty Group were to become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, significant tax inefficiencies might result for Hagerty, Inc. and for The Hagerty Group, for example, if Hagerty, Inc. is not able to file a consolidated U.S. federal income tax return with The Hagerty Group. In addition, Hagerty, Inc. may not be able to realize tax benefits covered under the TRA, and Hagerty, Inc. would not be able to recover any payments previously made under the TRA, even if the corresponding tax benefits (including any claimed increase in the tax basis of The Hagerty Group’s assets) were subsequently determined to have been unavailable.
Increases in applicable tax rates, changes in applicable tax laws or disagreements with tax authorities can adversely affect our business, financial condition and results of operations.
Hagerty, Inc. will have no material assets other than the interest in The Hagerty Group, which holds, directly or indirectly, all of the operating assets of The Hagerty Group’s business. The Hagerty Group generally will not be subject to U.S. federal income tax. Hagerty, Inc. is a U.S. corporation that will be subject to U.S. corporate income tax on our worldwide operations, including a share of income of The Hagerty Group. We will be subject to various U.S. federal, state and local taxes, in addition to taxes in other countries.
New U.S. laws and policy relating to taxes may have an adverse effect on our business and future profitability. Further, existing U.S. tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. Increases in income tax rates or other changes in income tax laws in any particular jurisdiction in which we operate or is otherwise subject to tax can reduce our
after-tax
income from such jurisdiction and adversely affect our business, financial condition or results of operations. Existing tax laws have been and could in the future be subject to significant change.
We will be subject to reviews, examinations and audits by the IRS and other taxing authorities with respect to income and
non-income-based
taxes. Economic and political pressures to increase tax revenues in jurisdictions in which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult and the final resolution of tax audits and any related litigation can differ from The Hagerty Group’s historical provisions and accruals, resulting in an adverse impact on our business, financial condition or results of operations.
General Risk Factors
The price of our securities may be volatile or may decline regardless of our operating performance and you could lose all or part of your investment as a result.
The trading price of our common stock and warrants is likely to be volatile. The stock market recently has experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. You may not be able to resell your shares or Warrants at an attractive price due to a number of factors such as those listed in “—
 General Risks Related Hagerty’s Business
” and the following:
 
   
results of operations that vary from the expectations of securities analysts and investors;
 
   
results of operations that vary from those of our competitors;
 
33

   
the impact of pandemics, including
COVID-19,
and their effect on our business and financial condition;
 
   
changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;
 
   
declines in the market prices of stocks generally;
 
   
strategic actions by us or our competitors;
 
   
announcements by us or our competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;
 
   
any significant change in our management;
 
   
changes in general economic or market conditions or trends in our industry or markets;
 
   
changes in business or regulatory conditions, including new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
 
   
future sales of our Common Stock or other securities;
 
   
investor perceptions or the investment opportunity associated with our Common Stock relative to other investment alternatives;
 
   
the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;
 
   
litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
 
   
guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;
 
   
the development and sustainability of an active trading market for our Common Stock;
 
   
actions by institutional or activist stockholders;
 
   
changes in accounting standards, policies, guidelines, interpretations or principles; and
 
   
other events or factors, including those resulting from natural disasters, war, acts of terrorism or responses to these events.
These broad market and industry fluctuations may adversely affect the market price of our Class A Common Stock and Public Warrants, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of the Class A Common Stock and Public Warrants is low.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
Future sales, or the perception of future sales, by us or our stockholders in the public market could cause the market price for the our Class A Common Stock to decline.
The sale of shares of our Class A Common Stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The initial stockholders of Aldel agreed not to transfer, assign or sell any of the shares of Class A Common Stock into which the Founder Shares converted (except to certain permitted transferees) until, with respect to
 
34

50% of such shares, the earlier of (i) twelve months after the date of the consummation of the Business Combination, or (ii) the date on which the closing price of our Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any
30-trading
day period commencing after the Business Combination, with respect to the remaining 50% of such shares, 12 months after the date of the consummation of the Business Combination, or earlier, in each case, if, we consummate a liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their public shares for cash, securities or other property. In addition, each of Markel and HHC executed lockup agreements pursuant to which such parties agreed not to sell, transfer or take certain other actions with respect to units in The Hagerty Group and shares of Class V Common Stock received in the Business Combination for a period from closing of the Business Combination through the earlier of (a) 180 days after the closing of the Business Combination, subject to certain customary exceptions and (b) the date on which the closing price of our Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any
30-trading
day period commencing after the consummation of the Business Combination.
As restrictions on resale end, the market price of our Common Stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of Common Stock or other securities.
In addition, Common Stock reserved for future issuance under our equity incentive plans will become eligible for sale in the public market once those shares are issued, subject to provisions relating to various vesting agreements,
lock-up
agreements and, in some cases, limitations on volume and manner of sale applicable to affiliates under Rule 144, as applicable. The aggregate number of shares of Class A Common Stock reserved for future issuance under the 2021 Equity Incentive Plan is 38,317,399. The aggregate number of shares of Class A Common Stock reserved for future issuance under the 2021 Employee Stock Purchase Plan is 11,495,220. The compensation committee of our Board may determine the exact number of shares to be reserved for future issuance under its equity incentive plans at its discretion. We will file one or more registration statements on Form
S-8
under the Securities Act to register shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock issued pursuant to our equity incentive plans. Any such Form
S-8
registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.
If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.
The trading market for our Class A Common Stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We will not control these analysts. In addition, some financial analysts may have limited expertise with our business model and operations. Furthermore, if one or more of the analysts who do cover us downgrade our stock or industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on it regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
 
35

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement or amendment may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although we believe the plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we may not achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning our possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. Examples of forward-looking statements include, among others, statements we make regarding our ability to:
 
   
compete effectively within our industry and attract and retain members;
 
   
maintain key strategic relationships with our insurance distribution and underwriting carrier partners;
 
   
prevent, monitor and detect fraudulent activity;
 
   
manage risks associated with disruptions, interruptions, outages or other issues with our technology platforms or our use of third-party services;
 
   
accelerate the adoption of our membership products as well as any new insurance programs and products we offer;
 
   
anticipate and address impacts from the coronavirus pandemic
(“COVID-19”)
and current and future variants of the virus;
 
   
manage the cyclical nature of the insurance business and our ability to collect vehicle usage and driving data;
 
   
address unexpected increases in the frequency or severity of claims;
 
   
comply with the numerous laws and regulations applicable to our business, including state, federal and foreign laws relating to insurance and rate increases, privacy, the internet, and accounting matters;
 
   
manage risks associated with being a controlled company; and
 
   
successfully defend any litigation, government inquiries, and investigations.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this prospectus are more fully described in the “
Risk Factors
” section. The risks described in “
Risk Factors
” are not exhaustive. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
36

USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of Class A Common Stock or Warrants by the Selling Securityholders. We will receive up to an aggregate of approximately $234.6 million from the exercise of the Warrants, assuming the exercise in full of all of the Warrants for cash. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes, which may include temporary or permanent repayment of our outstanding indebtedness.
The Selling Securityholders will pay any underwriting fees, discounts and selling commissions incurred by such Selling Securityholders in disposing of their Class A Common Stock. Pursuant to a registration rights agreement entered into by us and certain other of our stockholders, we will bear all other costs, fees and expenses incurred in effecting the registration of the Class A Common Stock covered by this prospectus, including, without limitation, all registration and filing fees, NYSE listing fees and fees and expenses of counsel and independent registered public accountants.
 
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MARKET INFORMATION FOR COMMON STOCK AND DIVIDEND POLICY
Market Information
Our Class A Common Stock and Public Warrants are traded on the NYSE under the symbols “HGTY” and “HGTY.WT”, respectively. Prior to the consummation of the Business Combination, Aldel’s common stock and warrants were listed on the NYSE under the symbols “ADF.U”, “ADF”, and ADF.WT”, respectively. As of March 25, 2022, there were 31 record holders of our Class A Common Stock and two record holders of our Class V Common Stock. Additionally, there were 30 record holders of our PIPE Warrants, two record holders of our OTM Warrants and 13 record holders of our Public Warrants, Private Placement Warrants and Underwriter Warrants, in the aggregate, as of March 25, 2022. The number of record holders does not include persons who held shares of our common stock or warrants in nominee or “street name” accounts through brokers.
Dividend Policy
Subject to funds being legally available, we intend to cause The Hagerty Group to make pro rata distributions to the Hagerty Group Unit Holders and us in an amount at least sufficient to allow us and the Hagerty Group Unit Holders to pay all applicable taxes, to make payments under the Tax Receivable Agreement we entered into with the Hagerty Group Unit Holders and to pay our corporate and other overhead expenses.
The declaration and payment of any dividends by Hagerty, Inc. will be at the sole discretion of our Board, which may change our dividend policy at any time. Our Board will take into account:
 
   
general economic and business conditions;
 
   
our results of operations and financial condition;
 
   
our available cash and current and anticipated cash needs;
 
   
our capital requirements;
 
   
contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries (including The Hagerty Group) to us; and
 
   
such other factors as our Board may deem relevant.
We are a holding company and do not have material assets other than our ownership of Hagerty Group Units in The Hagerty Group, and as a consequence, our ability to declare and pay dividends to the holders of our Class A Common Stock is subject to the ability of The Hagerty Group to provide distributions to us. If The Hagerty Group makes such distributions, Hagerty Group Unit Holders will be entitled to receive
pro-rata
distributions from The Hagerty Group. However, because we must pay taxes, make payments under the Tax Receivable Agreement, and pay our expenses, amounts ultimately distributed as dividends to holders of our Class A Common Stock are expected to be less than the amounts distributed by The Hagerty Group to the Hagerty Group Unit Holders on a per share basis.
Assuming The Hagerty Group makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, Tax Receivable Agreement payments and expenses (any such portion, an “excess distribution”) will be made by our Board. Because our Board may determine to pay or not pay dividends to our Class A common stockholders, our Class A common stockholders may not necessarily receive dividend distributions relating to excess distributions, even if The Hagerty Group makes such distributions to us.
 
38

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our consolidated results of operations and financial condition together with our consolidated financial statements and related notes and other information included elsewhere in this prospectus. In addition to historical financial information, this discussion contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. Unless otherwise indicated or the context otherwise require, references included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “Hagerty,” “we,” “us,” “our” and the “Company” refer to The Hagerty Group, LLC and its subsidiaries.
Overview
We are a global market leader in providing insurance for classic and enthusiast vehicles and we have built an industry-leading automotive enthusiast platform that engages, entertains, and connects with subscribing members. At Hagerty, everything begins and ends with the love of cars — an innate passion that fuels our unique membership model and cultivates deep, personal connections with more than 2.4 million members worldwide.
Hagerty was founded in 1984, and initially focused on providing insurance coverage for antique boats. Today, our goal is to scale an organization capable of building an ecosystem of products, services, and entertainment for car lovers that catalyzes their passion for cars and driving.
Recent Developments Affecting Comparability
Business Combination
On December 2, 2021, The Hagerty Group completed a business combination pursuant to the Business Combination Agreement with Aldel and Merger Sub. In connection with the Closing, Aldel changed its name from Aldel Financial Inc. to Hagerty, Inc.
Following the Closing, Hagerty, Inc. is organized as a C corporation and owns an equity interest in The Hagerty Group in what is commonly known as an
“Up-C”
structure. Under this structure, substantially all of Hagerty, Inc.’s assets and liabilities are held by The Hagerty Group. As of December 31, 2021, Hagerty, Inc. owned 24.7% of The Hagerty Group, HHC owned 52.8%, and Markel owned 23.4%.
Impact of
COVID-19
In March 2020, the World Health Organization declared
COVID-19
a pandemic. The pandemic has impacted every geography in which we operate. Governments implemented various restrictions around the world, including closure of
non-essential
businesses, travel,
shelter-in-place
requirements for citizens and other restrictions.
In response to
COVID-19,
we have taken several precautionary steps to safeguard our business and team members from
COVID-19,
including implementing travel restrictions, arranging work from home capabilities and flexible work policies. The safety and well-being of our team members continues to be the top priority. As restrictions were put in place, employees were able to transition to a work from home environment quickly and effectively due to the prior technology investments and the Company’s focus on core values. Due to the
 
39

restrictions and uncertainty caused by the pandemic, 2020 revenue growth was lower than expected primarily caused by lower levels of new business. Offsetting the 2020 revenue shortfall, expenses related to promotional events and travel were lower than anticipated. By the end of 2020, and through the year ended December 31, 2021, new business growth returned to
pre-pandemic
pace, events were being held and new initiatives were on track. Management will continue to follow and monitor guidelines in each jurisdiction and is working on a phased transition of employees returning to the office.
Key Performance Indicators and Certain
Non-GAAP
Financial Measures
In addition to the measures presented in our consolidated financial statements, we use the following key performance indicators and certain
non-GAAP
financial measures to evaluate our business, measure our performance, identify trends in our business against planned initiatives, prepare financial projections and make strategic decisions. In addition to our financial results prepared in accordance with GAAP, we believe these financial and operational measures are useful in evaluating our performance. The following table presents these metrics as of and for the periods presented:
 
     Year Ended December 31,  
     2021     2020  
Total Revenue
(in thousands)
   $ 619,079     $ 499,548  
New Business Count
     244,478       236,665  
Total Written Premium
(in thousands)
   $ 674,305     $ 578,234  
Policies in Force Retention
     89.1     90.0
Loss Ratio
     41.3     41.3
HDC Paid Member Count
     718,583       641,343  
Net Promoter Score (NPS)
     82.0       84.0  
Net Income (Loss)
(in thousands)
   $ (61,354   $ 10,039  
Adjusted EBITDA
(in thousands)
   $ 25,350     $ 29,693  
Earnings (Loss) Per Share
   $ (0.56     N/A  
Adjusted Earnings Per Share
   $ (0.17     N/A  
Operating income (loss)
(in thousands)
   $ (10,070   $ 15,846  
Contribution Margin
(in thousands)
   $ 159,571     $ 146,754  
New Business Count
New business count represents the number of new insurance policies issued during the applicable period. We view new business count as an important metric to assess our financial performance because it is critical to achieving our growth objectives. While Hagerty benefits from strong renewal retention, new business policies more than offset those cancelled or
non-renewed
at expiration. Often new policies mean new relationships and an opportunity to sell additional products and services.
Total Written Premium
Total Written Premium is the total amount of insurance premium written on policies that were bound by our insurance carrier partners during the applicable period. We view Total Written Premium as an important metric, as it most closely correlates with our growth in insurance commission revenue and Hagerty Re earned premium. Total Written Premium excludes the impact of premium assumed by unrelated third-party reinsurers and therefore reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we deploy.
 
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Policies In Force Retention
Policies In Force Retention is the percentage of current period policies that are renewed on the policy renewal date. We view PIF Retention as an important measurement of the number of policies retained each year, which contributes to recurring revenue streams from MGA commissions, membership fees and earned premiums. It also contributes to maintaining our NPS as discussed below.
Loss Ratio
Loss Ratio, expressed as a percentage, is the ratio of (a) losses and loss adjustment expenses incurred to (b) earned premium in Hagerty Re. We view Loss Ratio as an important metric because it is a powerful benchmark for profitability. The benchmark allows us to evaluate our historical loss patterns including incurred losses, reset insurance pricing dynamics and make necessary and appropriate adjustments.
HDC Paid Member Count
HDC Paid Member Count is the number of current members who pay an annual membership subscription as of an applicable period end date. We view HDC Paid Member Count as important because it helps us measure membership revenue growth and provides an opportunity to customize our value proposition and benefits to specific types of enthusiasts, both by demographic and vehicle interest.
Net Promoter Score
Hagerty uses NPS as our “north star metric,” measuring the overall strength of our relationship with members. NPS is measured twice annually through a
web-based
survey sent by email invitation to a random sample of existing members, and reported annually using an average of the two surveys. Often referred to as a barometer of brand loyalty and customer engagement, NPS is well-known in our industry as a strong indicator of growth and retention.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) (the most directly comparable GAAP measure) before interest, income taxes, and depreciation and amortization (“EBITDA”), adjusted to exclude changes in fair value of warrant liabilities, accelerated vesting of incentive plans, gains and losses from asset disposals and certain other
non-recurring
gains and losses. We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we consider this metric to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including this
non-GAAP
financial measure as a reasonable basis for comparing our ongoing results of operations.
Management uses Adjusted EBITDA:
 
   
as a measurement of operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations;
 
   
for planning purposes, including the preparation of our internal annual operating budget and financial projections;
 
   
to evaluate the performance and effectiveness of our operational strategies;
 
   
to evaluate our capacity to expand our business;
 
41

   
as a performance factor in measuring performance under our executive compensation plan; and
 
   
as a preferred predictor of core operating performance, comparisons to prior periods and competitive positioning.
By providing this
non-GAAP
financial measure, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net income (loss) or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:
 
   
such measure does not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments;
 
   
such measure does not reflect changes in, or cash requirements for, our working capital needs;
 
   
such measure does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
 
   
such measure does not reflect our tax expense or the cash requirements to pay our taxes; and
 
   
although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future and such measure does not reflect any cash requirements for such replacements; and other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these
non-GAAP
measures only supplementarily. Each of the adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to
day-to-day
operations.
The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is Net income (loss):
 
     Year Ended December 31,  
     2021      2020  
    
in thousands
 
Net income (loss)
   $ (61,354    $ 10,039  
Interest and other (income) expense
     1,993        987  
Income tax expense
     6,751        4,820  
Depreciation and amortization
     22,144        11,800  
Change in fair value of warrant liabilities
     42,540        —    
Accelerated vesting of incentive plans
     9,321        —    
Net (gain) loss from asset disposals
     1,764        2,047  
Other
non-recurring
(gains) losses
(1)
     2,191        —    
  
 
 
    
 
 
 
Adjusted EBITDA
   $ 25,350      $ 29,693  
  
 
 
    
 
 
 
 
(1)
 
Other
non-recurring
(gains) losses primarily relates to expenses incurred related to the Business Combination.
 
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We incurred $31.0 million and $17.8 million during the years ended December 31, 2021 and 2020, respectively, for certain
pre-revenue
costs related to scaling our infrastructure, human resources, occupancy, newly-developed digital platforms and legacy systems to accommodate our alliance with State Farm and other potential distribution partnerships, as well as to staff and develop our recently announced Marketplace transactional platform. These costs were not included in the Adjusted EBITDA reconciliation above.
Pursuant to a defined set of activities and objectives, these expenses are adding entirely new capabilities for us, integrating our new and legacy policyholder, membership and marketplace systems with State Farm’s legacy policy and agent management systems and other third-party platforms. In addition to onboarding a third-party project management related to these initiatives, we leased a new member service center in Dublin, Ohio and added several hundred new employees as of December 31, 2021 to meet the expected transactional volume from these initiatives.
These costs commenced in 2020 and are expected to be substantially completed in 2023.
Adjusted EPS
We define Adjusted Earnings Per Share (“Adjusted EPS”) as consolidated net loss that is attributable to both our controlling and
non-controlling
interest of $61.4 million for the year ended December 31, 2021, divided by the outstanding and potentially dilutive shares of Hagerty, Inc. (353,366,922), which includes (i) all issued and outstanding shares of Class A Common Stock (82,327,466), (ii) all issued and outstanding shares of Class V Common Stock (251,033,906), and (iii) all
un-exercised
warrants (20,005,550). For the year ended December 31, 2021, our Adjusted EPS was $(0.17).
The most directly comparable GAAP measure is earnings per share (“EPS”), which is calculated as net loss attributable to only controlling interest in Hagerty, Inc. of $46.4 million for the year ended December 31, 2021, divided by the number of our outstanding shares representing such controlling interest (82,327,466) which, given the net loss for the year ended December 31, 2021, includes only our Class A Common Stock. For the year ended December 31, 2021, our EPS was $(0.56).
We caution investors that Adjusted EPS is not a recognized measure under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, including EPS, and that Adjusted EPS, as we define it, may be defined or calculated differently by other companies. In addition, Adjusted EPS has limitations as an analytical tool and should not be considered as a measure of profit or loss per share.
We present Adjusted EPS because we consider it to be an important supplemental measure of our operating performance and believe it is used by investors and securities analysts in evaluating the consolidated performance of other companies in our industry. We also believe that Adjusted EPS, which compares our consolidated net loss (which includes our controlling,
non-controlling,
and redeemable
non-controlling
interest) with our outstanding and potentially dilutive shares, provides useful information to investors regarding our performance on a fully consolidated basis. We further believe that investors’ understanding of our performance across periods is enhanced by Adjusted EPS as a supplemental measure of our results of operations.
Our management uses Adjusted EPS:
 
   
as a measurement of operating performance of our business on a fully consolidated basis;
 
   
to evaluate the performance and effectiveness of our operational strategies;
 
   
to evaluate our capacity to expand our business; and
 
   
as a preferred predictor of core operating performance, comparisons to prior periods and competitive positioning.
 
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The following table reconciles Adjusted EPS for the year ended December 31, 2021 to the most directly comparable GAAP measure, which is EPS:
 
    
in thousands
(except per share
amounts)
 
Numerator:
  
Net income (loss) attributable to controlling interest**
   $ (46,358
Net income (loss) attributable to
non-controlling
interest
     (398
Net income (loss) attributable to redeemable
non-controlling
interest
     (14,598
  
 
 
 
Consolidated net income (loss)*
   $ (61,354
Denominator:
  
Weighted-average shares of Class A Common Stock outstanding:
  
Basic and diluted**
     82,327  
Potentially dilutive shares outstanding:
  
Class V Common Stock outstanding
     251,034  
Warrants outstanding
     20,006  
  
 
 
 
Potentially dilutive shares outstanding
     271,040  
  
 
 
 
Fully dilutive shares outstanding*
     353,367  
  
 
 
 
EPS = (Net income (loss) attributable to controlling interest / Weighted-average shares of Class A Common Stock outstanding)**
   $ (0.56
Adjusted EPS = (Consolidated net income (loss) / Fully dilutive shares outstanding)*
   $ (0.17
 
*
inputs for
non-GAAP
measure — Adjusted EPS    
**inputs for GAAP measure — EPS
Contribution Margin and Contribution Margin Ratio
We define Contribution Margin as total revenue less operating expense adding back our fixed operating expenses such as depreciation and amortization, general and administrative costs and shared service salaries and benefits expenses. We define Contribution Margin Ratio as Contribution Margin divided by total revenue. For the year ended December 31, 2021, our Contribution Margin was $159.6 million and our Contribution Margin Ratio was 26%.
We present Contribution Margin and Contribution Margin Ratio because we consider them to be important supplemental measures of our performance and believe that these
non-GAAP
financial measures are useful to investors for
period-to-period
comparisons of our business and in understanding and evaluating our operating results.
We caution investors that Contribution Margin and Contribution Margin Ratio are not recognized measures under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and that Contribution Margin and Contribution Margin Ratio, as we define them, may be defined or calculated differently by other companies. In addition, both Contribution Margin and Contribution Margin Ratio have limitations as analytical tools because they exclude certain significant recurring expenses of our business.
 
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Management uses Contribution Margin and Contribution Margin Ratio:
 
   
to analyze the relationship between cost, volume and profit as revenue grows;
 
   
to measure how much profit is earned for any product or service sold; and
 
   
to measure how different management actions could affect the Company’s total revenue and related cost levels.
The following table reconciles Contribution Margin and Contribution Margin Ratio to the most directly comparable GAAP measures, which are Operating income (loss) and Operating income (loss) margin (Operating income (loss) divided by Total revenue) respectively:
 
     Year Ended December 31,  
     2021     2020  
    
in thousands (except percentages)
 
Total revenue
   $ 619,079     $ 499,548  
Less: total operating expenses
     629,149       483,702  
  
 
 
   
 
 
 
Operating income (loss)
   $ (10,070   $ 15,846  
Operating income (loss) margin
     (2 )%      3
Add: fixed operating expenses
   $ 169,641     $ 130,908  
  
 
 
   
 
 
 
Contribution Margin
   $ 159,571     $ 146,754  
Contribution Margin Ratio
     26     29
Key Factors and Trends Affecting our Operating Performance
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:
Our Ability to Attract Members
Our long-term growth will depend, in large part, on our continued ability to attract new members to our platform. Our growth strategy is centered around accelerating our existing position in markets that we already serve, expanding into new markets domestically across the U.S., internationally in Canada and the United Kingdom (“U.K.”) and eventually the European Union (“E.U.”), digital innovation and developing new strategic insurance and lifestyle partnerships with key players in the automotive industry.
Our Ability to Retain Members
Turning our members into lifetime fans is key to our success. We currently have over 2.4 million members, including approximately 719,000 paid subscribers (“HDC Members”) and over 1.7 million who purchase insurance or interact with us but have yet to join HDC and receive additional club-level benefits. Our ability to retain members will depend on a number of factors including our NPS and members’ satisfaction with our products, pricing and offerings of our competitors.
Our Ability to Increase HDC Membership Subscriptions
Our long-term growth will benefit from our ability to increase our HDC membership subscription base across the U.S., Canada and into the U.K. and the E.U. We realize increasing value from each HDC Member who signs up with us or is retained as a recurring revenue base, forming the basis for organic growth for our new product offerings and improving our loss ratios over time. One of our principal goals is to convert all of our members who are not currently HDC Members to paid subscribers over time. We apply our highly scalable model, with a tailored approach to each enthusiast type across all demographic groups.
 
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We are also able to drive membership in HDC through our insurance distribution channels. Approximately 75% of new insurance policy holders purchase memberships in HDC.
Our Ability to Introduce New and Innovative Products
Our growth will depend on our ability to introduce new and innovative insurance and automotive lifestyle products that will drive organic growth from our existing member base as well as attract new customers. Our insurance offerings as well as our membership and marketplace technology platforms provide us with a foundation to expand our insurance and membership base, engage auto enthusiasts and provide innovative products to members globally.
Our Ability to Manage Risk Through Our Technology
Risk is managed through our technology, proprietary algorithms, underwriting and claims practices, data science and regulatory compliance capabilities, which we use to determine the risk profiles of our members. Our ability to manage risk is enhanced and controlled over time as data is continuously collected and analyzed by our algorithms with the objective of lowering our loss ratios over time. Our success depends on our ability to adequately and competitively price risk.
Our Ability to Manage Growth Related to Our Strategic Alliances
We have strategic alliances with several insurance carriers that we expect to serve as a key driver in our growth in commission and fee revenue. For example, we expect State Farm to begin offering our features and services to its customers in late 2022, which we expect will begin to drive additional commission and fee revenue.
Our Ability to Grow Quota Share
Hagerty Re’s 2021 quota share of business assumed from Markel in the U.S. and U.K. was 60%. The quota share percentage increased to 70% in 2022 and will increase to 80% in 2023 and the years thereafter under a contract with Markel. The increase in quota share will have the effect of increasing our revenue, which will partially be offset by increases in our underwriting costs.
Components of Our Results of Operations
Revenue
We primarily generate revenue from the sale of automotive insurance policies and HDC membership subscriptions as well as from participating in the underwriting results on policies written by our insurance carrier partners. Our revenue model incorporates multiple components in the insurance and lifestyle value chains, built on data collection and member experience.
Commission and fee revenue
Our insurance affiliated intermediaries act as MGAs who, among other things, write collector vehicle business on behalf of the insurance carrier partners. In exchange for commissions paid by the insurance carrier partners, we generally handle all sales, marketing, pricing, underwriting, policy administration and fulfillment, billing and claim services. In addition, we also manage all aspects of our omnichannel distribution, both direct and brokerage, including independent agencies, national sales accounts, large agency and broker networks and national partner relationships.
We earn new and renewal commissions for the distribution and servicing of classic automobile and boat insurance policies written through personal and commercial lines with multiple insurance carrier partners in the
 
46

U.S., Canada and the U.K. Additionally, policyholders pay fees directly to us related to their insurance coverage. These commissions and fees are earned when the policy becomes effective, net of policy changes and cancellations.
For policies that have elected to pay via installment plan, revenue is recognized on the policy effective date as the insured becomes fully entitled to the policy benefits, regardless of when payment is collected. Our performance obligation to the insurance carrier partner is complete when the policy is issued.
Under the terms of many of its contracts with insurance carrier partners, we have the opportunity to earn an annual CUC, or profit-share, based on the calendar-year performance of the insurance book of business with each of those insurance carrier partners. Our CUC agreements are based on written or earned premium and loss ratio results. Each insurance carrier partner contract and related CUC is calculated independently. Revenue from CUC is accrued throughout the year and settled annually.
Earned premium
Reinsurance premiums are earned by our single cell captive reinsurance company, Hagerty Re. Hagerty Re reinsures the classic auto and marine risks written through our affiliated MGAs in the U.S., Canada and the U.K. Hagerty Re is a Bermuda-domiciled, Class 3A reinsurer. Hagerty Re was funded in December 2016 and was granted a license by the BMA in March 2017.
Earned premium represents the earned portion of gross written premiums that Hagerty Re has assumed under quota share reinsurance agreements with our insurance carrier partners. Earned premium is recognized over the term of the policy, which is generally 12 months.
Membership and other revenue
We earn subscription revenue and other revenue through membership offerings and other automotive and lifestyle services sold to policyholders and classic vehicle enthusiasts. HDC memberships are sold as a bundled product which give members access to our products and services, including HDC Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, emergency roadside services and special vehicle-related discounts. Hagerty Garage + Social storage memberships include storage in addition to the HDC member benefits. Income from the sale of HDC and storage membership subscriptions is recognized ratably over the period of the membership, which is generally 12 months. Other revenue includes advertising sales, admission income, sponsorships, event registration fees, valuation services, merchandise sales and DriveShare rentals. Other revenue is recognized when the performance obligation for the related product or service is satisfied.
Costs and Expenses
Our costs and expenses consist of salaries and benefits paid to employees, ceding commissions, losses and loss adjustment expenses paid to insurance carrier partners, sales expenses, general and administrative services, depreciation and amortization, change in fair value of warrant liabilities and income tax expense.
Salaries and benefits
Salaries and benefits consist primarily of costs related to employee compensation, payroll taxes, employee benefits and employee development costs. Employee compensation includes wages paid to employees as well as various incentive compensation plans. Employee benefits include the costs of various employee benefits plans including medical and dental insurance, wellness benefits and others. Costs related to employee education, training and recruiting are included in employee development costs. Salaries and benefits costs are expensed as incurred except for those costs which are required to be capitalized, which are then amortized over the useful life of the asset created (generally software or media content). Salaries and benefits are expected to increase over time as the business continues to grow, but will likely decrease as a percent of revenue.
 
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Ceding commission
Ceding commission consists of the commission paid by Hagerty Re to our insurance carrier partners for our
pro-rata
share of acquisition costs (primarily our MGA commissions), general and administrative services and other costs. Hagerty Re pays a fixed rate ceding commission which varies by insurance carrier partner, averaging 48% of net earned premium. Ceding commission will change proportionately to earned premium assumed through our various quota share reinsurance agreements.
Losses and loss adjustment expenses
Losses and loss adjustment expenses consist of our portion of the net cost to settle claims submitted by insureds. Losses consist of claims paid, case reserves and losses, IBNR, net of estimated recoveries for reinsurance, salvage and subrogation. Loss adjustment expenses consist of the cost associated with the investigation and settling of claims. Losses and loss adjustment expenses represent management’s best estimate of ultimate net loss at the financial statement date. Estimates are made using statistical analysis by our internal actuarial team. These reserves are reviewed regularly and adjusted as necessary to reflect management’s estimate of the ultimate cost of losses and loss adjustment expenses.
Losses and loss adjustment expenses represent our share of losses assumed through various reinsurance agreements entered by Hagerty Re and our insurance carrier partners. Our reinsurance contracts are quota share reinsurance agreements on the business underwritten by our MGAs. These expenses are expected to grow proportionately with written premium and increase as the quota share percentage contractually increases.
Sales expense
Sales expense includes costs related to the sales and servicing of a policy, primarily broker expense, cost of sales, promotion expense and travel and entertainment expenses. Cost of sales includes postage, document costs, payment processing fees, emergency roadside service costs and other variable costs associated with the sale and servicing of a policy. Broker expense is the compensation paid to our agent partners and national broker partners when an insurance policy is written through a broker relationship. Promotion expense includes various expenses related to branding, events, advertising, marketing, and acquisition. Sales expenses, in general, are expensed as incurred and will likely increase as we continue to grow. Broker expense and cost of sales will likely track with written premium growth, while promotion expense and travel and entertainment expense will decrease as a percent of revenue over the long-term.
General and administrative services
General and administrative services consist of occupancy costs, hardware and software, consulting services, legal and accounting services, community relations and
non-income
taxes. These costs are expensed as incurred. We expect this expense category to increase commensurate with our expected business volume and growth expectations and be managed lower as a percent of revenue over the next few years after we reach scale to handle incoming business from new partnerships.
Depreciation and amortization
Depreciation and amortization reflects the recognition of the cost of our investments in various assets over their useful life. Depreciation expense relates to leasehold improvements, furniture and equipment, vehicles, hardware and purchased software. Amortization relates to investments related to recent acquisitions, SaaS implementation, internal software development and investments made in digital media and content assets. Depreciation and amortization are expected to increase slightly in dollar amount over time but will likely decrease as a percent of revenue as investments in platform technology reach scale.
 
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Change in fair value of warrant liabilities
Our warrants are accounted for as liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 815,
Derivatives and Hedging
and are measured at fair value at inception each reporting period, with changes in fair value recognized as
non-operating
income (expense). In general, under the fair value accounting model, as our stock price increases, the warrant liability increases, and we recognize additional expense in our Consolidated Statements of Operations. As our stock price decreases, the warrant liability decreases, and we recognize additional income in our Consolidated Statements of Operations.
Income tax expense
The Hagerty Group is taxed as a pass-through ownership structure under provisions of the Internal Revenue Code (“IRC”) and a similar section of state income tax law, except for Hagerty Re and various foreign subsidiaries. Any taxable income or loss generated by The Hagerty Group is passed through to and included in the taxable income or loss of Hagerty Group Unit Holders
,
including Hagerty, Inc. Hagerty, Inc. is taxed as a corporation and pays corporate federal, state, and local taxes with respect to income allocated from The Hagerty Group.
Results of Operations
Summary
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020, and the dollar and percentage change between the two years:
 
     Year Ended December 31,  
     2021      2020      $ Change      % Change  
    
in thousands (except percentages)
 
REVENUES:
  
Commission and fee revenue
   $ 271,571      $ 236,443      $ 35,128        14.9
Earned premium
     295,824        220,502        75,322        34.2
Membership and other revenue
     51,684        42,603        9,081        21.3
  
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues
     619,079        499,548        119,531        23.9
  
 
 
    
 
 
    
 
 
    
 
 
 
OPERATING EXPENSES:
           
Salaries and benefits
     171,901        137,508        34,393        25.0
Ceding commission
     140,983        105,974        35,009        33.0
Losses and loss adjustment expenses
     122,080        91,025        31,055        34.1
Sales expense
     107,483        86,207        21,276        24.7
General and administrative services
     64,558        51,188        13,370        26.1
Depreciation and amortization
     22,144        11,800        10,344        87.7
  
 
 
    
 
 
    
 
 
    
 
 
 
Total operating expenses
     629,149        483,702        145,447        30.1
  
 
 
    
 
 
    
 
 
    
 
 
 
OPERATING INCOME (LOSS)
     (10,070      15,846        (25,916      (163.5 )% 
Change in fair value of warrant liabilities
     (42,540      —          (42,540      (100.0 )% 
Interest and other income (expense)
     (1,993      (987      (1,006      (101.9 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
     (54,603      14,859        (69,462      (467.5 )% 
Income tax expense
     (6,751      (4,820      (1,931      (40.1 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
NET INCOME (LOSS)
   $ (61,354    $ 10,039      $ (71,393      (711.2 )% 
 
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Revenue
Commission and fee revenue
Commission and fee revenue was $271.6 million for the year ended December 31, 2021, an increase of $35.1 million, or 14.9%, compared to 2020. The increase was comprised of an increase of $6.1 million in revenues from new policies and an increase of $29.0 million in revenues from renewal policies. The increase is primarily due to new business policy count growth of 3.3% and an increase in new and renewal average premium of 10.8% and 3.4%, respectively.
Commission and fee revenue from direct sources increased $19.6 million, or 18.3%, from $107.1 million during the year ended December 31, 2020 to $126.7 million during the year ended December 31, 2021. Our commission and revenue from agent sources increased $15.5 million, or 12.0%, from $129.3 million during the year ended December 31, 2020 to $144.9 million during the year ended December 31, 2021. The growth in our direct sources has been primarily attributable to increasingly strong performance in our direct sales channels as well as the entry into our alliance with Aviva in the first quarter of 2020, which shifted some of our business to direct sources. Commission rates, generating commission revenue, vary based on geography but do not differ by distribution channel (i.e., whether they are direct-sourced or agent-sourced).
The following table presents the detail of our commission and fee revenues for the years ended December 31, 2021 and 2020 by geography:
 
     U.S.      Canada      U.K.      Total  
    
in thousands
 
     Year Ended December 31, 2021  
Commission and fee revenue
   $ 193,520      $ 16,782      $ 3,934      $ 214,236  
Contingent commission
     57,424        (383      294        57,335  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 250,944      $ 16,399      $ 4,228      $ 271,571  
     Year Ended December 31, 2020  
Commission and fee revenue
   $ 165,740      $ 13,274      $ 3,001      $ 182,015  
Contingent commission
     51,820        1,741        867        54,428  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 217,560      $ 15,015      $ 3,868      $ 236,443  
During the year ended December 31, 2021, we experienced consistent organic growth across all jurisdictions in commission and fee revenue. CUC growth of 10.8% in the U.S. was below commission and fee growth of 16.8% due to higher than anticipated loss ratio performance. CUC revenue decreased in Canada and the U.K. due to changes in alliance agreements with carriers now participating in our reinsurance program rather than paying a CUC.
Earned premium
Earned premium revenue was $295.8 million for the year ended December 31, 2021, an increase of $75.3 million, or 34.2%, compared to 2020. Organic growth added approximately $36.9 million to earned premium revenue and the increase in U.S. quota share percentage added approximately $27.9 million to earned premium during the year ended December 31, 2021. Additionally, the Aviva reinsurance agreement, entered in the first quarter of 2020, contributed $9.2 million, and the U.K. reinsurance agreement, entered in the first quarter of 2021, contributed $1.2 million to the increase in earned premium in 2021. This increase in earned premium generally correlates with an increase in written premiums assumed by the Company of $103.4 million from $250.6 million for the year ended December 31, 2020 to $353.9 million for the year ended December 31, 2021.
Membership and other revenue
Membership and other revenue was $51.7 million for the year ended December 31, 2021, an increase of $9.1 million, or 21.3%, compared to 2020. Membership fee revenue was $40.6 million for the year ended
 
50

December 31, 2021, an increase of $4.3 million, or 11.9%, compared 2020, which was primarily attributable to the increase in the issuance of new policies bundled with an HDC membership, as well as growth of new stand-alone HDC subscriptions (i.e., HDC subscriptions sold to members without insurance policies). For the year ended December 31, 2021, membership fees were 78.6% of the Membership and other revenue total.
Other revenue was $11.1 million for the year ended December 31, 2021, an increase of $4.8 million, or 75.2%, compared to 2020, primarily due to newly acquired business lines in motorsports registration and events, driving increases of $1.1 million and $1.3 million in admission income and motorsport registration income, respectively, for the year ended December 31, 2021 compared to 2020. DriveShare rentals, event sponsorship and media advertising created cumulative growth of $1.8 million in for the year ended December 31, 2021 compared to 2020. Other revenue includes advertising, valuation and registration income, and accounts for 21.4% of the membership and other revenue total.
Costs and Expenses
Salaries and benefits
Salaries and benefits expenses were $171.9 million for the year ended December 31, 2021, an increase of $34.4 million, or 25.0%, compared to 2020. The increase was primarily attributable to a net increase of greater than 200 employees in our sales, member services, technology and distribution units, an increase of over 15.0% year over year. Headcount increased to support current and anticipated growth, such as the additions of several new large national insurance partnerships and our continued development of new systems and digital transformation technology investments, as well as several acquisitions primarily in the event and lifestyle business.
Ceding commission
Ceding commission expense was $141.0 million for the year ended December 31, 2021, an increase of $35.0 million, or 33.0%, compared to 2020. The increase was primarily attributable to higher U.S. premium volume ceded to Hagerty Re from our insurance carrier partners, which added approximately $17.5 million, and an increase in our U.S. quota share percentage from 50% in 2020 to 60% in 2021, which accounted for $13.2 million. In Canada, which began ceding premium in the first quarter of 2020, commissions increased $3.9 million for the year ended December 31, 2021, compared to 2020. Hagerty Re pays a fixed rate ceding commission which varies by insurance carrier partner, averaging 48% of net earned premium.
The following table presents the amount of premiums ceded and the quota share percentages for the years ended December 31, 2021 and 2020:
 
     U.S.     Canada     U.K.     Total  
    
in thousands (except percentages)
 
     Year Ended December 31, 2021  
Subject premium
   $ 558,297     $ 43,844     $ 6,003     $ 608,144  
Quota share percentage
     60.0     35.0     60.0     58.2
Assumed premium in Hagerty Re
   $ 334,978     $ 15,345     $ 3,602     $ 353,925  
Net ceding commission
   $ 134,469     $ 6,037     $ 477     $ 140,983  
     Year Ended December 31, 2020  
Subject premium
   $ 478,527     $ 32,700     $ —       $ 511,227  
Quota share percentage
     50.0     35.0     —       49.0
Assumed premium in Hagerty Re
   $ 239,263     $ 11,294     $ —       $ 250,557  
Net ceding commission
   $ 103,908     $ 2,066     $ —       $ 105,974  
In the U.S., the increase in premiums assumed in Hagerty Re during the year ended December 31, 2021 compared to 2020 was primarily due to Hagerty Re’s U.S. quota share increasing from 50% in 2020 to 60% in
 
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2021. In Canada, the increase in premiums assumed by Hagerty Re from December 31, 2020 to December 31, 2021 was primarily due to our reinsurance agreement with Aviva, which became effective during the first quarter of 2021. In the U.K., the increase in premiums assumed in Hagerty Re from December 31, 2020 to December 31, 2021 was primarily due to the entry into the U.K. reinsurance agreement, which became effective during the first quarter of 2021.
Losses and loss adjustment expenses
Losses and loss adjustment expenses were $122.1 million for the year ended December 31, 2021, an increase of $31.1 million, or 34.1%, compared to 2020. The increase was primarily driven by higher premium volume ceded to Hagerty Re from our insurance carrier partners. The loss ratio, including catastrophe losses, was 41.3%, for both the years ended December 31, 2021 and December 31, 2020.
Sales expense
Sales expense was $107.5 million for the year ended December 31, 2021, an increase of $21.3 million, or 24.7%, compared to 2020. The increase was primarily due to additional premium volume across our agent and direct distribution channels of $6.3 million, increased roadside costs from our towing provider of $3.2 million, and increased promotion and travel costs for events reopening in 2021 of $9.8 million.
General and administrative services
General and administrative services expenses were $64.6 million for the year ended December 31, 2021, an increase of $13.4 million, or 26.1%, compared to 2020. The increase was primarily driven by $6.1 million in higher software subscription and hardware costs and $4.2 million in consulting services, primarily related to digital innovation initiatives and digital platform optimization.
Depreciation and amortization
Depreciation and amortization expense was $22.1 million for the year ended December 31, 2021, an increase of $10.3 million, or 87.7%, compared to 2020. The increase was primarily attributable to a higher base of capital assets from our digital platform development investment. Amortization on these capital assets increased by $8.5 million.
Change in fair value of warrant liabilities
During the year ended December 31, 2021, the change in fair value of warrant liabilities was $42.5 million, which represents the change in our warrant liabilities after the Business Combination. We did not have warrants as of December 31, 2020. Refer to Note 17 — Warrant Liabilities to our consolidated financial statements included elsewhere in this prospectus additional information with respect to our warrants.
Income tax expense
Income tax expense was $6.8 million for the year ended December 31, 2021, an increase of $1.9 million, or 40.1%, compared to 2020. The increase in income tax expense for the year ended December 31, 2021 compared to 2020 was primarily due to an increase in income before income tax expense of $9.0 million within Hagerty Re, which is taxed as a corporation. Refer to Note 21 — Taxation to our consolidated financial statements included elsewhere in this prospectus 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. We manage liquidity globally and across all operating subsidiaries, making use of our working capital, equity proceeds from the Business Combination and our credit facility when needed.
 
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Through our reinsurance subsidiary, Hagerty Re, we reinsure the same personal lines risks that are underwritten by our affiliated MGA subsidiaries on behalf of our insurance carrier partners. Our reinsurance operations are self-funded primarily through existing capital and net cash flows from operations. As of December 31, 2021, Hagerty Re had approximately $291.6 million in cash and cash equivalents and municipal securities. Our MGA operations are financed primarily through the commissions and fees received from our insurance carrier partners and, if necessary, proceeds from our credit facility. Our membership-related subsidiaries finance their operations from the sale of HDC Member subscriptions, as well as proceeds, if necessary, from our credit facility.
We, particularly through Hagerty Re, pay close attention to the underlying underwriting and reserving risks by monitoring the pricing and loss development of the underlying business written through our affiliated MGAs. Additionally, Hagerty Re seeks to minimize its investment risk by investing in low yield cash and money market accounts, as well as investment grade municipal securities.
Capital restrictions
In Bermuda, Hagerty Re is subject to the BSCR administered by the BMA. No regulatory action is taken by the BMA if an insurer’s capital and surplus is equal to or in excess of their enhanced capital requirement as determined by the BSCR model. In addition, the BMA has established a target capital level for each insurer which is 120% of the enhanced capital requirement. To ensure compliance with BSCR standards, Hagerty Re’s target is 130% of the enhanced capital requirement. As of December 31, 2021, Hagerty Re’s actual performance relative to the enhanced capital requirement was in excess of 120%.
Dividend restrictions
Under Bermuda law, Hagerty Re is prohibited from declaring or issuing a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. Prior approval from the BMA is also required if the Hagerty Re’s proposed dividend payments would exceed 25% of its prior
year-end
total statutory capital and surplus. The amount of dividends which could be paid by Hagerty Re in 2022 without prior approval is $26.8 million.
Regulation relating to insurer solvency is generally for the protection of the policyholders rather than for the benefit of the stockholders of an insurance company. We believe that our existing cash and cash equivalents and municipal securities and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our reinsurance premium growth rate, renewal rates, the introduction of new and enhanced products, entry into, and successful entry in new geographic markets, and the continuing market adoption of our product offerings.
Comparative Cash Flows
The following table summarizes our cash flow data for the years ended December 31, 2021 and 2020:
 
     Year Ended December 31,  
     2021      2020      $ Change      % Change  
    
in thousands (except percentages)
 
Net cash provided by operating activities
   $ 42,281      $ 84,572      $ (42,291      (50.0 )% 
Net cash used in investing activities
   $ (68,994    $ (47,388    $ (21,606      (45.6 )% 
Net cash provided by financing activities
   $ 332,071      $ 39,948      $ 292,123        731.3
Operating activities
Cash provided by operating activities primarily consists of net income (loss) adjusted for
non-cash
items and changes in working capital balances.
 
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Net cash provided by operating activities is presented below:
 
     Year Ended December 31,  
     2021      2020      $ Change      % Change  
    
in thousands (except percentages)
 
Net income (loss)
   $ (61,354    $ 10,039      $ (71,393      (711.2 )% 
Non-cash
adjustments to net income (loss)
     70,302        16,684        53,618        321.4
Changes in operating assets and liabilities
     33,333        57,849        (24,516      (42.4 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
Net cash provided by operating activities
   $ 42,281      $ 84,572      $ (42,291      (50.0 )% 
Net cash provided by operating activities for the year ended December 31, 2021 was $42.3 million. Cash provided during the period included $8.9 million from net income (loss) after
non-cash
expenses are excluded.
Non-cash
expenses included the change in fair value of warrant liabilities of $42.5 million, depreciation and amortization expense of $22.1 million, an increase in our provision for deferred taxes of $3.0 million and loss on disposal of assets of $2.4 million. Changes and growth in operating assets and liabilities provided $33.3 million of operating cash. The increase in cash from changes in operating assets and liabilities was primarily attributable to increases in unearned premiums of $50.5 million, provision for unpaid losses and loss adjustment expenses of $19.9 million, commission payable of $16.8 million and losses payable of $12.5 million, partially offset by increases in deferred acquisition costs of $23.0 million, premiums receivable of $22.7 million, and prepaid expenses and other assets of $18.5 million. These increases in operating assets and liabilities are related to the growth we experienced in 2021.
Net cash provided by operating activities for the year ended December 31, 2020 was $84.6 million. Cash provided during this period included $26.7 million from net income (loss) after
non-cash
expenses are excluded.
Non-cash
expenses included depreciation and amortization expense of $11.8 million, loss on disposal of software development of $2.6 million and an increase in our provision for deferred taxes of $1.5 million. The increase in cash from changes in our operating assets and liabilities was primarily attributable to increases in unearned premiums of $25.6 million, provision for unpaid losses and loss adjustment expenses of $22.4 million and contract liabilities of $22.2 million, driven by advanced commission from new carrier partner, partially offset by an increase in accounts receivable of $14.5 million.
Investing activities
During the year ended December 31, 2021, we invested approximately $43.4 million in property, equipment and software (excluding acquisitions), an increase of $5.1 million compared to 2020. Our primary capital expenditures included a $20.4 million investment in the scaling of digital platforms to support growth driven by strategic alliances, a $12.2 million investment in development of membership and marketplace technology platforms, and a $7.0 million investment in core operations infrastructure to support headcount growth. Additionally, we had acquisitions totaling $14.6 million during the year ended December 31, 2021, an increase of $5.7 million compared to 2020. For additional information regarding our 2021 and 2020 acquisitions, refer to Note 7 — Acquisitions to our consolidated financial statements included elsewhere in this prospectus. Lastly, during the year ended December 31, 2021, Hagerty Re invested in fixed income securities in connection with our reinsurance agreement with Aviva. Hagerty Re had no such fixed income securities during the year ended December 31, 2020. For additional information regarding our fixed income securities, refer to Note 1 — Summary of Significant Accounting Policies and New Accounting Standards to our consolidated financial statements included elsewhere in this prospectus.
Financing activities
Cash provided by financing activities for the year ended December 31, 2021 increased $292.1 million compared to 2020, primarily due to the Business Combination and an increase in outstanding debt under our credit facility. There were net total cash inflows of $269.0 million related to the Business Combination, including
 
54

proceeds of $789.7 million, offset by $489.7 million of distributions to the Legacy Unit Holders and $31.0 million of capitalized transaction costs in 2021. There were total net cash inflows of $67.5 million related to draws under our credit facility during the year ended December 31, 2021, compared to $43.9 million during the year ended December 31, 2020.
Future Sources and Uses of Liquidity
Our sources of liquidity include our (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our credit facility. Based on our current expectations, we believe that these sources of liquidity will be sufficient to meet our needs for at least the next 12 months.
We expect that our primary liquidity needs will include cash used to (1) facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) fund the growth of our membership and Marketplace initiatives, (4) pay interest and principal due on borrowings under our credit agreement, (5) pay income taxes and (6) make payments under the Tax Receivable Agreement.
Financing Arrangements
Multi-bank Credit Facility
In October 2021, we entered into a Third Amendment to the Amended and Restated Credit Agreement (the “Credit Agreement”), which amended the terms of our revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto from time to time as lenders.
The aggregate amount of commitments available to us under the Credit Facility is $230.0 million. The Credit Agreement also provides for an uncommitted incremental component of the facility under which we may request one or more increases in the amount of the commitments available under the Credit Facility in an aggregate amount not to exceed $50.0 million. Additionally, the Credit Agreement also provides for the issuance of letters of credit and the making of discretionary swing line loans, with sublimits of $25.0 million and $3.0 million, respectively, or lesser amounts in the event the available aggregate commitments are less than such sublimits.
The current term of the Credit Agreement expires in October 2026 and may be extended by one year on an annual basis if agreed to by us and the lenders party thereto. Any unpaid balance on the Credit Facility is due at maturity.
We may elect that borrowings made under the Credit Facility bear interest at a rate per annum equal to either (i) a base rate equal to the greatest of (a) the prime rate published by the Wall Street Journal, (b) the greater of (1) the federal funds effective rate and (2) the overnight bank funding rate, in either case, plus 0.5%, and (c) a
one-month
adjusted London Inter-bank Offered Rate (“LIBOR”) plus 1.0% or (ii) an adjusted LIBOR rate equal to the LIBOR rate multiplied by the statutory reserve rate, plus, in either case, an applicable margin based on a leverage ratio calculated based on our financial statements for its four most recent fiscal quarters. The Credit Agreement also contains customary LIBOR replacement provisions in the event LIBOR reference rates are no longer available.
The Credit Facility borrowings are collateralized by our assets, except for the assets of our U.K., Bermuda and German subsidiaries as well as the assets of the Hagerty Events, LLC and the
non-wholly
owned subsidiaries of MHH.
Under the Credit Agreement, we are required, among other things, to meet certain financial covenants, including a fixed charge coverage ratio and a leverage ratio. We were in compliance with these covenants as of December 31, 2021.
 
55

Interest rate swaps
Interest rate swap agreements are contracts to exchange floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
The purpose of interest rate swap agreements is to fix the interest rate on a portion of our existing variable rate debt in order to reduce exposure to interest rate fluctuations. Under such agreements, we pay the counterparty interest at a fixed rate. In exchange, the counterparty pays us interest at a variable rate, adjusted quarterly and based on LIBOR or the alternative replacement of LIBOR. The amount exchanged is calculated based on the notional amount. The significant inputs, primarily the LIBOR forward curve, used to determine the fair value are considered Level 2 observable market inputs. We monitor the credit and nonperformance risk associated with our counterparty and believe the risk to be insignificant at December 31, 2021.
In March 2017, we entered into a
5-year
interest rate swap agreement with an original notional amount of $15.0 million at a fixed swap rate of 2.20%.
In December 2020, we entered into a
5-year
interest rate swap agreement with an original notional amount of $35.0 million at a fixed swap rate of 0.78%.
Tax Receivable Agreement
Hagerty, Inc. expects to have adequate capital resources to meet requirements and obligations under the Tax Receivable Agreement entered into with the Legacy Unit Holders on December 2, 2021 that provides for the payment by Hagerty, Inc. to the Legacy Unit Holders of 85% of the amount of cash savings, if any, under U.S. federal, state and local income tax or franchise tax realized as a result of (i) any increase in tax basis of Hagerty, Inc.’s assets resulting from (a) purchase of Hagerty Group Units
from any of the Legacy Unit Holders using the net proceeds from any future offering, (b) redemptions or exchanges by the Legacy Unit Holders of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock or (c) payments under the Tax Receivable Agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement.
Legacy Unit Holders may, subject to certain conditions and transfer restrictions described above, redeem or exchange their Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock of Hagerty, Inc. on a
one-for-one
basis. The Hagerty Group made an election under Section 754 of the IRC of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock occurs, which is expected to result in increases to the tax basis of the assets of The Hagerty Group at the time of a redemption or exchange of Hagerty Group Units. The redemptions and exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of The Hagerty Group. These increases in tax basis may reduce the amount of tax that Hagerty, Inc. would otherwise be required to pay in the future. This payment obligation as a part of the Tax Receivable Agreement is an obligation of Hagerty, Inc. and not of The Hagerty Group. For purposes of the Tax Receivable Agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Hagerty, Inc. (calculated with certain assumptions) to the amount of such taxes that Hagerty, Inc. would have been required to pay had there been no increase to the tax basis of the assets of The Hagerty Group as a result of the redemptions or exchanges and had Hagerty, Inc. not entered into the Tax Receivable Agreement. Estimating the amount of payments that may be made under the Tax Receivable Agreement is by nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors.
 
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Contractual Obligations
The following table summarizes of significant contractual obligations and other commitments as of December 31, 2021:
 
     Total      2022      2023      2024      2025      2026      Thereafter  
    
in thousands
 
Debt
   $ 136,500      $ 1,000      $ —        $ —        $ —        $ 135,500      $ —    
Interest payments
     1,182        363        273        273        273        —          —    
Operating leases
     96,765        9,068        8,783        8,587        8,451        7,936        53,940  
Purchase commitments
     8,775        4,607        4,168        —          —          —          —    
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 243,222      $ 15,038      $ 13,224      $ 8,860      $ 8,724      $ 143,436      $ 53,940  
Interest payments excludes variable rate debt interest payments and commitment fees related to our Credit Facility.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 — Summary of Significant Accounting Policies and New Accounting Standards to our consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared in accordance with GAAP. The preparation of consolidated financial statements requires management to make assumptions and estimates that affect the reported results of operations and financial position, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. The following is a discussion of the accounting policies, estimates and judgments that management believes are most significant in the application of GAAP used in the preparation of our consolidated financial statements. These accounting policies, among others, may involve a high degree of complexity and judgment on the part of management. Further, these estimates and other factors could have significant adverse impact to our financial condition, results of operations and cash flows. We evaluate our significant estimates on an ongoing basis and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Unpaid Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses are the difference between the estimated cost of losses incurred and the amount of paid losses as of the reporting date. These reserves reflect our management’s best estimate for both reported claims and IBNR claims. The reserves also include estimates of all expenses associated with processing and settling all reported and unreported claims. We regularly review the provision estimates and updates those estimates as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Updates made to reserve estimates based on new information may cause changes in prior reserve estimates. These changes are recorded as losses and loss adjustment expenses in the period such changes are determined. Estimating the ultimate cost of claims and claims expenses is an inherently complex process that involves a high degree of judgment. The inputs requiring management judgement in the estimate of the provision for unpaid losses and loss adjustment expenses include:
 
   
uncertainty around inflationary costs, both economic and social inflation;
 
   
estimates of expected losses through the use of historical loss data;
 
   
changing mix of business due to large growth in modern collectibles which carry a different risk profile than the Company’s classic book;
 
   
legislative and judicial changes in the jurisdictions in which the company writes insurance, and
 
   
industry experience.
 
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Claims are analyzed and reported based on the accident year or the year in which the claims occurred. Accident year data is classified and utilized within actuarial models to prepare estimates of required reserves for payments to be made in the future. Timing for claim settlement varies and depends on the type of claim being reported (
i.e.
property damage as compared to personal injury claims). Claims involving property damage are generally settled faster than personal injury claims. Historical loss patterns are then applied to actual paid losses and reported losses by accident year to develop expectations of future payments. Implicit within the actuarial models are the impacts of inflation, especially for claims with longer expected cycle times. Refer to Note 10 — Provision for Unpaid Losses and Loss Adjustment Expenses to our consolidated financial statements included elsewhere in this prospectus for additional information regarding the methodologies used to estimate loss and loss adjustment expense reserves.
Given the inherent complexity and uncertainty surrounding the estimation of our ultimate cost of settling claims, reserves are reviewed quarterly and periodically throughout the year by combining historical results and current actual results to calculate new development factors. In estimating loss and loss adjustment expense reserves, our actuarial reserving group considers claim cycle time, claims settlement practices, adequacy of case reserves over time, and current economic conditions. Because actual experience can differ from key assumptions used in estimating reserves, there may be significant variation in the development of these reserves and the actual losses and loss adjustment expenses ultimately paid in the future. These adjustments to the loss and loss adjustment expense reserves are recognized in our consolidated statements of operations in the period in which the change occurs.
The following table presents our gross and net provision for losses and loss adjustment expenses as of December 31, 2021 and 2020:
 
     Gross      % of Total     Net      % of Total  
    
in thousands (except percentages)
 
     As of December 31, 2021  
Outstanding losses reported
   $ 38,207        51.0   $ 38,207        51.0
IBNR
     36,662        49.0     36,662        49.0
  
 
 
    
 
 
   
 
 
    
 
 
 
Total unpaid losses and loss adjustment expenses
   $ 74,869        100.0   $ 74,869        100.0
  
 
 
    
 
 
   
 
 
    
 
 
 
     As of December 31, 2020  
Outstanding losses reported
   $ 22,710        41.3   $ 22,710        41.3
IBNR
     32,278        58.7     32,278        58.7
  
 
 
    
 
 
   
 
 
    
 
 
 
Total unpaid losses and loss adjustment expenses
   $ 54,988        100.0   $ 54,988        100.0
  
 
 
    
 
 
   
 
 
    
 
 
 
The following table summarizes our gross losses and loss adjustment expenses, and net losses and loss adjustment expenses by accident years as of December 31, 2021 and 2020:
 
     Gross Ultimate Loss & Loss Adjustment Expenses     Net Ultimate Loss & Loss Adjustment Expenses  
Accident Year
   2021     2020     Change     2021     2020     Change  
    
in thousands
 
2017
   $ 18,592     $ 18,792     $ (200   $ 18,592     $ 18,792     $ (200
2018
     38,405       41,100       (2,695     38,005       40,724       (2,719
2019
     60,495       64,535       (4,040     60,495       64,535       (4,040
2020
     87,583       91,025       (3,442     87,583       91,025       (3,442
2021
     132,497       N/A       N/A       132,497       N/A       N/A  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 337,572     $ 215,452     $ (10,377   $ 337,172     $ 215,076     $ (10,401
 
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Warrant Liabilities
Our warrants are accounted for in accordance with ASC 815. The warrants do not meet the criteria for equity treatment and as such, are recorded at fair value as a
non-cash
liability. This liability is subject to remeasurement each reporting period.
Our Public Warrants are Level 1 within the fair value hierarchy. The Public Warrants are measured utilizing quoted market prices.
We determined that our Private Placement Warrants, OTM Warrants, Underwriter Warrants and PIPE Warrants are Level 3 within the fair value hierarchy. We utilize a Monte Carlo simulation model to measure the fair value of these warrants. Our Monte Carlo simulation model includes assumptions related to the expected stock-price volatility, expected term, dividend yield and risk-free interest rate. Refer to Note 13 — Fair Value Measurements to our consolidated financial statements included elsewhere in this prospectus, for additional information related to the significant inputs to the Monte Carlo simulation model.
The change in the fair value of the warrants is recognized in the Consolidated Statements of Operations each reporting period.
Liabilities under the Tax Receivable Agreement
In connection with the Business Combination, Hagerty, Inc. entered into a tax receivable agreement with the Legacy Unit Holders. The amount and timing of any payments under the Tax Receivable Agreement will vary depending on a number of factors, including, but not limited to, the increase in tax basis of The Hagerty Group’s assets, the timing of any future redemptions, exchanges or purchases of Hagerty Group Units held by Legacy Unit Holders, the price of Class A Common Stock at the time of the purchase, redemption or exchange, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that Hagerty, Inc. generates in the future, the tax rates then applicable and the portion of the payments under the Tax Receivable Agreement constituting imputed interest.
As of December 31, 2021, as a result of the Business Combination and redemption of Hagerty Group Units, Hagerty, Inc. recognized liabilities totaling $3.5 million relating to obligations under the Tax Receivable Agreement.
Redeemable
Non-Controlling
Interest
As of December 31, 2021, redeemable
non-controlling
interest represents the economic interests of Legacy Unit Holders. Income or loss is attributed to the redeemable
non-controlling
interest based on the weighted average ownership of the Hagerty Group Units outstanding during the period held by Legacy Unit Holders. In connection with the Business Combination, Hagerty, Inc. entered into an Exchange Agreement with the Legacy Unit Holders. The Exchange Agreement permits the Legacy Unit Holders to exchange Class V Common Stock and associated Hagerty Group Units for an equivalent amount of Class A Common Stock, or at the option of the Company, for cash. Because the Company has the option to redeem the
non-controlling
interest for cash and the Company is controlled by the Legacy Unit Holders through their voting control, the
non-controlling
interest is considered redeemable outside the Company’s control. The redeemable
non-controlling
interest is measured at the greater of the initial fair value or the redemption value and is required to be presented as temporary equity on the Consolidated Balance Sheets.
The Exchange Agreement was amended as of March 23, 2022. Refer to Note 25 — Subsequent Events to our consolidated financial statements included elsewhere in this prospectus additional information with respect to the Exchange Agreement amendment.
New Accounting Standards
See Note 1 — Summary of Significant Accounting Policies and New Accounting Standards to our consolidated financial statements included elsewhere in this prospectus.
 
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BUSINESS
We are a global market leader in providing insurance for classic and enthusiast vehicles and we have built an industry-leading automotive enthusiast platform that engages, entertains, and connects with subscribing members. At Hagerty, everything begins and ends with the love of cars — an innate passion that fuels our unique membership model and cultivates deep, personal connections with more than 2.4 million members worldwide.
Hagerty was founded in 1984, and initially focused on providing insurance coverage for antique boats. Today, our goal is to scale an organization capable of building an ecosystem of products, services, and entertainment for car lovers that catalyzes their passion for cars and driving.
Our ecosystem starts with insurance. People take good care of things they love and we take great pride in protecting and preserving our members’ treasured vehicles. Over the past 37 years, we have grown our insurance business to protect more than two million classic and enthusiast vehicles worldwide.
Our insurance offerings are centered around our “Guaranteed Value” insurance policy which differentiates our coverage from the standard market. Our insurance products are also unique due to our omnichannel approach — meaning we sell to our insurance members wherever they need us. Further, we also generate value in insurance underwriting by taking measured risk against our high retention rates and low loss ratios.
At Hagerty, insurance is only the beginning. Our market data has always informed our strategic decisions. Years ago, we made the decision to follow the data insights we were gathering from our insurance business to design and build additional offerings for car enthusiasts. These products monetize our shared love of cars and include: Hagerty Media, Hagerty Drivers Club, Hagerty Valuation Tool, Hagerty Events, DriveShare, Motorsport Reg, Garage + Social, and Hagerty Marketplace.
We have built a platform that engages, entertains and connects with car lovers at various stages of their passion — digitally, on the track, in the garage, at an event or on the road. We believe the combination of insurance and these offerings creates an ecosystem of products generating multiple points of monetization, resulting in an attractive recurring revenue business model. We believe the success of this integrated ecosystem is demonstrated in part by our revenue growth — an average 27% compound annual growth rate (“CAGR”) over the last three years.
As we look ahead and continue to grow, we believe our digitally driven thinking will continue to enhance member engagement and reduce transaction friction. Our systems must be highly integrated, whether to issue an insurance policy or to sell a ticket to a car event. That is why we are investing in
state-of-the-art
digital platforms and interfaces where member problems and opportunities are met with design thinking, mobile-first and cloud-based products. We are thinking long-term. We believe the combination of these types of activities has and will position us to grow from a single product company with a few
add-ons
to a multi-dimensional ecosystem catering to a large and expanding market.
Industry and Market Opportunity
We love cars and we are not alone. The collector vehicle market is large and growing. According to our data, there are more than 500 million people around the globe who express an interest in cars and approximately 69 million in the U.S. alone who declare themselves automotive enthusiasts. We estimate that there are nearly 73 million collector vehicles globally with an estimated market value of $1.4 trillion, including over 43 million insurable collector vehicles in the U.S. alone, of which approximately 10.8 million are
pre-1981
and 32.2 million are post-1980 collectibles. We estimate that the U.S. market translates into
$12-$15 billion
of annual insurance premium based on an average vehicle premium of $300 per year. While we are one of the leading providers of collector insurance, we estimate our market penetration in this market is less than 4%.
 
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Car lovers also spend a lot of time and money on their passion. How much money? Our 2020 Hagerty Drivers Club magazine reader survey suggests an average annual car hobby spend of more than $13,000 per enthusiast.
Growth in the collector vehicle market, as evidenced by recent sales activity and increased values, is being enhanced by several factors, including:
 
   
Cars manufactured in the early 2000s are becoming modern collectibles.
 
   
Increasing focus on collectible cars as an asset class for investment. These cars have an
8-9%
historical annual appreciation. Per our estimates, approximately 72% of the vehicles in our data base increased in value in 2021.
 
   
Demographic factors such as Baby Boomer retirements and millennial household formations are driving up demand for collector vehicles.
 
   
Expanding automotive subcultures are adding to the automotive enthusiast community.
 
   
The supply of cars is continuing to expand as premium luxury cars are being built in greater numbers than ever before.
 
   
COVID-19
has impacted supply chain dynamics and availability of new and used vehicles, parts and supplies.
We believe we are well positioned to capture a larger share of this growing market. In order to fully capitalize on this opportunity, we apply a granular and data driven customer and vehicle segmentation approach that combines an understanding of vehicle ownership data, demographic data, and vehicle usage. Based upon this approach, we are able to summarize key vehicle markets, explore additional opportunities within these markets, overlay demographic and usage data to enrich our approach and leverage the information to better serve the auto enthusiast community.
Business Model and Competitive Strengths
We have developed an affinity driven insurance model.
We enjoy a recurring revenue model based on the affinity and passion of the automotive enthusiast. Through our membership-based model and diverse product offering, we achieve higher affinity than traditional insurance business relationships.
Our insurance offerings are centered around our “Guaranteed Value” insurance policy, which means the market value of a vehicle is agreed to at the time a policy is issued. We help people keep this value current by connecting them with our valuation resources. If something terrible happens and a car experiences a covered total loss, we pay the full amount of the car’s insured value without any depreciation.
Our insurance products are also unique due to our omnichannel approach — meaning we sell to our insurance members wherever they need us. We sell directly to consumers, through agents and brokers, as well as through the largest automobile insurance companies. In the U.S. alone, we currently partner with nine of the top ten largest automotive insurance companies (as ranked by S&P Global Market intelligence based upon 2020 direct premiums written) to bring Hagerty branded products to their loyal and in some cases, most valuable customers.
Further, we also generate value in insurance underwriting by taking measured risk against our high retention rates and low loss ratios. Our Hagerty Reinsurance, Ltd. company, formed in Bermuda in 2017, shares in increasing amounts of the underwriting profit generated by our distribution. Importantly, we also handle the claims for our programs so that we can ensure our members are receiving high levels of service that are focused on the unique requirements of repairing vintage and rare vehicles. This entire insurance stack works together to help us grow and to substantially share in the profits we generate.
 
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Typical insurance businesses engage with their customers only at the point of purchase and renewal, averaging approximately six points of contact annually with customers. With our diverse product offering, we deploy an entire ecosystem of engagement, including both physical (through HDC events, social functions and more) and digital platforms (through media content, social media engagement, market news, valuation data and more) that can result in hundreds of touchpoints annually with members.
We believe that consumers who feel part of a community and a club are more engaged and have higher renewal and retention rates than those who simply purchase a good or service. Our average policy life expectancy is approximately 10 years. We have an NPS of 82. This is a significant competitive advantage over competitors who, without strong affinity or engagement, are left to define their competitive edge based on price. Our community of engaged automotive enthusiasts is a stark differentiator from our competitors who, in our eyes, have a transactional, price-based relationship with their customers.
We have a diverse product offering.
While the majority of our current revenue is based on the premiums generated from our insurance offerings, we provide a diverse range of integrated automotive enthusiast products and services that generate meaningful incremental revenue and builds community engagement and overall brand loyalty. These products and services include:
 
   
Hagerty Media
features the work of the nation’s top automotive writers, photographers and videographers who bring the world of cars to life in exciting and unexpected ways with both online and
in-print
content. Hagerty Media’s publishing and livestream capabilities present exclusive content to our members, as well as to the automotive enthusiast audience at large. Hagerty Media’s capabilities are delivered through the HDC Magazine (the second largest circulation auto enthusiast magazine globally based on audited circulation data), video content which delivered approximately 7.2 million hours watched by enthusiasts in 2021, and a robust YouTube channel boasting approximately 1.9 million subscribers. With an embedded content team covering entertainment, news, market information and valuation data, Hagerty Media serves as an audience generator that creates and brings new customers into our ecosystem. We plan to expand our media properties across the digital landscape and integrate them with our other assets.
 
   
HDC
, which provides its approximately 719,000 paid members (“HDC Members”) exclusive offers, expert support, member experiences, emergency service and original content. A subscription to HDC gives members access to our products and services, including HDC Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, emergency roadside services and special vehicle-related discounts. Approximately three-quarters of new insurance customers purchase a subscription to HDC.
 
   
HVT
, our valuation tool, is used by over three million people each year to access current and historic pricing data on more than 40,000 collector car, truck, SUV, and motorcycle models. With our robust proprietary database of Hagerty Price Guide values dating as far back as 2006, and approximately 400,000 auction sales results spanning decades, HVT has not only become the
go-to
source for enthusiasts to research the market about the cars they love but also a unique competitive advantage for us in terms of data analytics and valuable content for HDC Members and integration with other Hagerty assets.
 
   
Hagerty Events
, an eclectic mix of small and large events where people share cars and camaraderie, whether these are small, casual touring events or exclusive drives with some of the finest cars in the world. Our team operates some of the marquee Concours d’Elegance events in the U.S. These include the Greenwich Concours, the Concours of America and The Amelia. We also own and operate the California Mille, RADwood, Concours d’Lemons, and McCall’s Motorworks Revival at Pebble Beach. These events provide us with a distinctive ability to present ourselves to hundreds of thousands of automotive enthusiasts and extend media, activations, and social opportunities.
 
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DriveShare
is the first
peer-to-peer
rental platform for collector and cool vehicles from all eras. Founded in 2017, DriveShare provides a source of income for owners and gives renters an affordable way to drive the cars of their dreams. DriveShare has become an ideal way for us to reach a younger generation, as well. The largest segment of renters on the platform is 25 to 29 years old.
 
   
Motorsport Reg
, acquired in 2019, is another example of a revenue generating business that complements our ecosystem by expanding our relevance into an adjacent automotive market (motorsports events), while diversifying revenue streams. Motorsport Reg is a motorsport membership, licensing and event online management system that automates event listings, registration, and payment processing for all types of motorsport events ranging from small social gatherings to large participatory motorsport events.
 
   
Hagerty Garage + Social
is a growing nationwide platform of premium, climate-controlled clubhouses and car storage facilities. This platform gives us a physical brand experience capability across six strategic markets in the U.S. and Canada. Garage + Social locations are currently in Bedford Hills, New York; Chicago, Illinois; Miami, Florida; Del Ray Beach, Florida; Redmond, Washington; and Burlington, Ontario. At these locations, members can store their collector vehicles, admire other car lovers’ stored vehicles and interact with similarly-minded automotive enthusiasts, and experience events, activations and content in a branded, controlled unique setting.
 
   
Hagerty Marketplace
, recently announced in January 2022, will expand and centralize our portfolio of automotive-focused offerings, including HVT and DriveShare. The Marketplace team will serve car enthusiasts by offering new services for buying and selling collector cars. New product launches are expected later this year. The market for buying and selling collectible cars is substantial, encompassing live and time-based digital auctions, private dealer sales, financing, and
for-sale-by-owner
classifieds. The global vehicle market is about 73 million, with 43 million in the U.S. alone. In 2021, we observed 280,000 buy/sell vehicle transactions representing $9.5 billion in total value trading hands in our U.S. insurance book, or approximately 1% of the U.S. market value. We believe we can differentiate from other platforms and services by injecting a higher level of trust into this marketplace.
This array of products and services serves not only as part of our growth strategy and market expansion but also to diversify revenue streams for the future.
We serve enthusiasts how and where they wish to be served.
We are always there for our members
— As evidenced by our exceptional NPS of 82, our high-engagement insurance model surprises and delights members. Whether through our call center, our geographic field distribution team, or online, our members know that we are always there for them, wherever and however they wish.
We deliver value
— While many people come to us for our specialty insurance and protection programs, we uncover many other opportunities to deliver value that no other insurance organization does, including
peer-to-peer
collector car rentals; collector car storage, social membership experiences; exclusive experiences, and more. All of these membership benefits place our insurance offerings in a competitively distinctive position relative to our competitors.
We’re enthusiasts, too
— At Hagerty, we engage collectors all year long on show fields, at tracks, and at events that are centered around our members’ passions — cars and driving. Our team’s own passion and knowledge about cars creates a shared affinity with members. In this way, we also become of greater value to agents and brokers by serving as a relationship connector.
We have a strategic approach to partnerships that drives growth.
Our focused market discipline reduces competitive threats
— Most insurance companies offer and compete for multi-line insurance: auto, property, liability, yacht, aircraft, and other exclusive collectables. Our focus on
 
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collector vehicle products and services reduces competitive threats for partners and raises their confidence in trading with us. Furthermore, we focus our investments on developing capabilities that serve the interests of the car enthusiast market. This depth and discipline of focus has enabled us to maintain a “neutral” and
non-threatening
partner of choice position with the highest quality automobile insurance companies in the market.
Our approach to partnerships enables mutual and complimentary growth
— Partners tell us that our focus on the collector car space allows them to focus on other parts of their business portfolios. We then align financial interests so both parties enjoy a gain-share approach to the relationship, which creates more intimate institutional bonds. When our partners win and grow, we do as well. We take great care to build partnerships with firms who share our cultural principles and intense focus on customer service. Feedback from and growth rates with our largest partners suggest this approach works for them.
Agents and brokers gain client intimacy capability with us
— One of the greatest competitive threats agents and brokers face is the battle against “ordinary.” With over 45,000 independent agent and brokers in the U.S. alone, it can be challenging for these firms to create a memorable or distinctive experience for insurance buyers. We are often told by agents and brokers that partnering with us to bring value and joy to their enthusiast clients is unmatched in the marketplace. Our high-engagement and experiential approach to the market is often
co-branded
by our agents/brokers to deliver enthusiasts an experience the agent/broker could not deliver themselves. As a result, both brands benefit together in longer-lasting and more intimate client relationships.
We have robust data science capabilities created from our proprietary first-party data.
We have a number of proprietary data capabilities that allow us to fully understand our membership base and to leverage data for the benefit of our members. Our data also allows us to identify and create new value streams for the enthusiast community. Our Automotive Intelligence is a capability that encompasses sale and auction data to create the HVT and our Hagerty Insider market intelligence reports and content. HVT and Hagerty Insider are the benchmarks of the industry in collector vehicle valuation, market intelligence reports and buyers’ guides. In addition, Hagerty Insider and HVT are among the top lead generation pipes for the insurance premium revenue stream of our business.
HVT includes more than 16 years of pricing and vehicle data for approximately 40,000 collector cars, trucks, vans, and motorcycles from the
post-war
era to present. As a result, we have trusted and dynamic valuation data. From live auctions to historical data, we believe we are the
go-to
source for auto enthusiasts looking to value their current car or their dream car. Enthusiasts are able to see current and past values for a vehicle in order to understand not just what a car is worth today, but also where it may be headed in the future.
The Hagerty Media site, DriveShare, Hagerty Insider site and other owned digital properties serve as robust collectors of data centered on the engagement of auto enthusiasts for both existing and prospective members, allowing us to efficiently and effectively recruit new members to its ecosystem. This, combined with the detailed data involved in writing insurance policies, provides us with an insightful view of the consumer, their interests, and their needs, allowing for effective and efficient marketing of its product and services.
Our Technology Platforms
Our proprietary technology platforms are a key competitive advantage. Unlike many other companies, we have developed our core technologies
in-house.
This includes our policy management system and product definition and rating engine. This enables us to respond to market opportunities as rapidly as possible, without roadmap dependency on third-party policy management systems. With this capability, we can deploy a range of risk scenarios to have full control over our object models and data model. We are also able to integrate with a wide variety of
best-in-class
third-party technologies on our own terms.
 
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For our membership offerings, we have developed a bespoke, cloud-native platform (“Omni”) that manages all aspects of member tiering and benefits. This system is designed to sync with our customer relationship management implementation and our core insurance platform. This primary technology capability allows us to continue to drive a robust “affinity experience” that is a key competitive advantage. Omni offers modern RESTful APIs for building applications across any channel, including our mobile applications.
We have significantly invested in our data infrastructure, including an Amazon Web Services-based enterprise data hub and Snowflake data lake. We utilize our data to improve, in real-time, how our employees interact with our members, how we digitally interact with our members, and how we use data to enhance our digital products to make them more compelling. This infrastructure is a key component of our marketing technology capability and can power a range of scenarios and features. For targeted
marketing/re-marketing,
all touch-points from across the organization can be fed to our customer data platform. This includes impressions and conversions from marketing tools. This data can be used to enable data-driven effective and efficient marketing to ensure we are sending relevant content to our members and prospects.
Our mobile app was noted by Google as being a marquee example of Flutter. Flutter is Google’s UI toolkit for building natively compiled applications for mobile, web, desktop, and embedded devices from a single codebase. Members get a rich, native experience while our developers all work from within a single code project, mitigating the need to have redundant iOS and Android teams developing duplicates of the same functionality. Today, the Flutter app allows customers to search vehicle valuations and live auction results. In active development are robust roadside support capabilities and member management features. Push notification capability allows us to programmatically interact with members based on a wide range of marketing scenarios.
We have developed supporting technologies that further drive our competitive advantage as an automotive enthusiast brand leader. To support our investments in auto shows and popular Concours events, we have developed a digital platform that allows entrants to digitally submit their vehicles for consideration while allowing administrators the ability to manage the entire acceptance workflow. To support our entry into the
peer-to-peer
commercial environment and facilitate the experience of driving a classic car, we have developed an innovative
two-sided
marketplace called DriveShare. This platform enables owners to share and profit from their classic car investments while fueling the automotive hobby for enthusiasts who want to enjoy driving fun and different cars that aren’t available anywhere else. All scheduling, booking, listing, billing, and administration are supported within the platform.
Competition
We believe that our business model and ecosystem of integrated products is unique. While there are a number of other specialty insurance companies that offer collector vehicle insurance, we do not view these companies as significant competitors. We experience some competition in the larger standard auto insurance market. However, in lieu of competing with standard auto insurance carriers, we have formed relationships with them to offer their customers our membership subscription model coupled with our specialty insurance products. Through relationships with auto insurance carriers, we provide a high-touchpoint experience resulting in more appropriate levels of cost coverage and higher overall service satisfaction of members. We are also able to offer our insurance carrier partners incremental growth, protection of the insurance bundle, specialized claims handling, and valuation expertise.
Our Operating Model
In order to maximize our competitive advantage, our operating model keeps people that love cars like we do at the center of all we do. We focus on five specific dimensions that we knit together to create our Flywheel Effect. This is our model for how we think and act long-term and operate on a daily basis. These five dimensions include:
 
   
H-Factor
Hospitality—We treat our members, fans, and investors like family;
 
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Collaborate to Win—We strive to build alliances to deliver exponential growth;
 
   
Engaging Experiences—We create lifelong fans by creating new and better physical and digital products for people who love cars like we do;
 
   
Digitally Driven Thinking—Our design-based thinking and user-centric focus helps us stay agile and resilient; and
 
   
Growth Mindset Culture—We invest in the personal and professional growth of our team, which in turn makes us a better company.
 
Our operating model drives loyalty and retention by engaging, entertaining, and connecting with members in many more ways than through a regular insurance transaction. We measure this in part by our overall NPS of 82, which is more than double the insurance industry average. We also measure loyalty through our member retention rate. Retention is a measure of how many of our members continue to do business with us year over year. We have maintained an average retention rate of 90% over the past ten years, which is more than 10% above the insurance industry average.
We believe our digitally driven thinking further drives member loyalty and engagement and reduces user friction. We are investing in
state-of-the-art
digital user experience platforms and interfaces to support our growing membership base. We are pairing the digital and physical worlds by integrating our approach to both of those worlds. We are investing in new programs that further enhance our membership experience and provide additional member value. For example, in 2017, we launched DriveShare; in 2019, as part of our ongoing commitment to investing in and growing the world of motorsports, we acquired Motorsport Reg; in 2020 we formed a joint venture to build out Hagerty Garage + Social; and in 2022, we invested in a joint venture to create a marketplace leadership team to both expand, integrate, and centralize our portfolio of automotive-focused offerings, including HVT and DriveShare.
We believe we are positioned well to serve the large and growing market of automotive enthusiasts by leveraging our visionary thought leadership, genuine car culture, industry leading business model and omnichannel distribution.
 
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Our Growth Strategy
Our growth strategy builds on our strengths of creating high-engagement and high-trust interactions and combining them with our numerous data driven advantages. The combination of our scalable omnichannel distribution strategy and innovative membership model has supported a strong rate of growth. Our average revenue three year CAGR was approximately 27%.
We estimate that in the U.S. alone there are 43 million insurable collectible vehicles. Globally, we provide insurance for more than two million vehicles and interact with more than 2.4 million members. Our insurance business model positions us to control the pricing and underwriting of the subject insurance policies, benefit from steady
fee-based
income, and engage directly with consumers, with our broker and agent partners, or through our strategic insurance partners. We believe our capabilities position us to capture more of the large and growing enthusiast market.
Our omnichannel distribution of our insurance services is a strategic advantage that allows us to unlock the entire total available market and engage with our members. Our distribution model has three components — direct distribution, agency and broker distribution and distribution through our national insurance partners. Approximately 45% of our sales are generated through direct distribution, where our membership model initiates a significant percentage of new business flow. Approximately 32% of sales are generated through our agency and broker channel through our relationships with over 45,000 independent brokers and agents, including 10 of the top 10 brokers in the U.S. by revenue. The remaining 23% of sales are generated through our national insurance partners. We maintain partnerships with nine of the top 10 insurance carriers in the U.S. We believe the percentage of sales generated from our national insurance partner relationships will grow over time as we begin to earn revenue from newly formed partnerships such as the recently announced alliance with State Farm.
For our national insurance partners, our business model is attractive because we offer a full-service solution for their specialty customers and their specialty cars. We handle product development and pricing, sales and service, underwriting and claims services on behalf of our underwriting carriers, and we offer member benefits tailored to the enthusiast all through our proprietary technology and by our sales and service teams.
This approach results in a strong economic model with fees generated as an MGA and earned premium from our wholly owned single cell captive reinsurance subsidiary, Hagerty Re. Our reinsurance capabilities allow us to efficiently deploy capital and create steady, consistent underwriting results. Our deliberate approach to managing risk and employing actuarial discipline to the underwriting process results in an attractive average Loss Ratio of 41% over the last three years. This compares extremely favorably to the overall auto insurance average of 71%.
Revenue from subscriptions and memberships creates multiple points of economic capture, a recurring revenue stream, and an immersive platform to engage with enthusiasts and promote the passion for driving. As of December 31, 2021, HDC had approximately 719,000 paid members. We sponsor, own or create more than 2,500 automotive events annually.
Seasonality
Due to our significant North American footprint, our revenue streams, and in particular, commission and fee revenue, exhibit seasonality peaking in the middle of the second calendar quarter and diminishing through the rest of the year, with the lowest relative level of commission and fee revenue expected to occur in the fourth calendar quarter and beginning of the first calendar quarter. We expect to experience seasonal and other fluctuations in our quarterly operating results, which may not fully reflect the underlying performance of our business. Refer to Note 24 — Quarterly Financial Information (unaudited) to our consolidated financial statements included elsewhere in this prospectus.
 
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Investments
Our portfolio of investable assets is primarily held in cash, short-term investments, and Canadian Sovereign and Provincial fixed income securities. We manage the portfolio in accordance with investment policies and guidelines approved by our Board, in consultation with legal counsel and as may be required to be approved by applicable regulatory authorities. We have designed our investment policy and guidelines to provide a balance between current yield, conservation of capital, and liquidity requirements of our operations setting guidelines that provide for an investment portfolio that is compliant with insurance regulations applicable to jurisdictions in which we operate.
Intellectual Property
We believe our intellectual property rights are valuable and important to our business. We rely on trademarks, patents, copyrights, trade secrets, license agreements, intellectual property assignment agreements, confidentiality procedures,
non-disclosure
agreements, and electronic and physical security measures to establish and protect our proprietary rights. Though we rely in part upon these legal, contractual, and other protections, we believe that factors such as the skill and ingenuity of our employees and the functionality and frequent enhancements to our platform are large contributors to our success in the marketplace. We intend to pursue additional intellectual property protection on such enhancements to the extent we believe it would be beneficial and cost-effective.
As of December 31, 2021, we have one issued patent in the U.S. and one in Canada. The issued patents generally relate to our vehicle information number decoder, which allows us to determine vehicle configuration details and associated vehicle values. The issued patents are expected to expire between August 2030 and May 2031. We continually review our development efforts to assess the existence and the ability to protect new intellectual property.
We have trademark rights in our name, our logo, and other brand indicia, and have trademark registrations for select marks in the U.S., Canada, the U.K., the E.U. and Australia. We have copyrights for our media and entertainment content and registered copyrights for our vehicle information tools in the U.S. We also have registered various domain names related to our brand for websites that we use in our business, including Hagerty.com.
Although we believe our intellectual property rights are valuable and strong, intellectual property rights are sometimes subject to invalidation or circumvention. Refer to the section titled “
Risk Factors
 
 
Risks Related to Our Business
 
 
Our intellectual property rights are extremely valuable and if they are not properly protected, our products, services, and brand could be adversely impacted.
Distribution, Marketing and Strategic Relationships
Distribution Partnerships
In addition to our direct sales efforts and independent channels, we market our insurance products through several insurance distribution partners. For the year ended December 31, 2021, approximately 16% of our commission revenues globally were attributable to four of our distribution partners. For two of these distribution partners, we have
10-year
arrangements, one of which has an expiration date in 2029 and the other in 2030. The other two distribution partnerships have shorter durations. Under three of these arrangements, we generally make our specialty classic and collector motor vehicle insurance products and related services available to the carrier’s brokers and producers either directly or through an intermediary brokerage. The carrier’s brokers then refer or present to us the brokers’ clients who cannot obtain through the carrier itself the types of specialty classic or collector motor vehicle insurance products and services the client needs or wants. We pay the carrier’s brokers/producers a direct commission for business placed with the carrier and pays an additional administrative fee in
 
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circumstances where an intermediary brokerage refers the business to the carrier. Under the other distribution partner relationship, we serve as the carrier’s exclusive managing general underwriter for classic and collector motor vehicle insurance products written through the carrier in Canada. The carrier’s broker network submits business to us to underwrite and administer for the carrier, or we process direct business for the carrier.
Alliance Agreements
Markel Alliance
Markel is the ultimate parent company for Essentia Insurance Company (“Essentia”), which serves as the dedicated carrier for our affiliated U.S. and U.K MGA subsidiaries specialty classic and collector vehicle insurance program. Essentia writes no other business and is exclusive to our MGAs. Under this arrangement, we are licensed and appointed as Essentia’s MGA and is authorized to develop product, market, produce, underwrite, service, and perform claims services for the policies written through Essentia. State laws govern many of the activities under this relationship and, in addition to appropriate carrier licensing requirements, our MGAs must maintain the appropriate licensing as a producer and, where required, as an MGA, plus additional requirements in some states for claims adjusting.
Essentia cedes risk through quota share reinsurance agreements to our key insurance distribution partners with the retained premium being 100% ceded to its affiliate, Evanston Insurance Company (“Evanston”). Evanston, in turn, cedes a portion of this business it reinsures from Essentia, to Hagerty Re. For Evanston to take credit for reinsurance under applicable state law, Hagerty Re maintains funds in trust for the benefit of Evanston. The Markel and Hagerty agreements governing the relationship expire at the end of 2030 and include extension periods.
Aviva Canada Alliance
In 2020, Hagerty Canada and Aviva Canada Inc. (“Aviva”) revised their existing relationship, that was started in 2013, by entering into a new alliance agreement where we would continue to provide managing general underwriting services for Aviva’s Canadian subsidiary, Elite Insurance Company. As part of that agreement, Hagerty Canada purchased certain policies from an Aviva controlled agency. The relationship with Aviva in Canada is exclusive except that in the Quebec province, the business is produced through a third-party insurance agency that carries the appropriate licenses and authority to submit business to Elite Insurance Company. Hagerty Canada receives compensation in the form of a broker commission. Hagerty Canada also is paid a commission for commercial business. In connection with the new alliance agreement, Elite Insurance Company and Hagerty Re entered into a quota share reinsurance agreement. The initial term of the agreements with Aviva expire in 2030 and include a
5-year
extension. Canadian provincial laws govern many of the activities under this relationship and, in addition to appropriate carrier licensing requirements, Hagerty Canada must maintain the appropriate licensing.
State Farm Alliance
We entered into a long-term master alliance agreement with State Farm in 2020 to establish an alliance insurance program where State Farm’s customers, through the State Farm agents, would have access to our features and services beginning in 2022. The State Farm Classic+ policy will be offered through State Farm Classic Insurance Company, a new wholly owned subsidiary of State Farm dedicated to the alliance, subject to any applicable state regulatory review and approval. The State Farm Classic+ policy is expected to be available in most states in 2023. Hagerty Insurance Agency, LLC will be paid a commission under the managing general underwriter agreement and ancillary agreements for servicing the State Farm Classic+ policies along with fee revenue for HDC connected with our membership products and services that, in connection with the State Farm Classic+ policy, will be made available to State Farm customers. The State Farm agreements governing the relationship will expire 10 years after our insurance program is underway and includes a
5-year
extension.
 
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Employees and Human Capital Resources
Our culture is shaped by our people and is a strategic advantage for us. Our strategy involves surrounding our teams with great people, providing challenging and meaningful work, and investing in their growth to become their best selves. We seek to hire the best and set them up for success with individualized training and career development. Our objectives include effectively identifying, recruiting, retaining, incentivizing, and integrating our existing and additional employees. Our compensation programs are designed to support these objectives and will be enhanced through the granting of stock-based compensation awards.
As of December 31, 2021, we have 1,668 total employees and 1,635 full-time employees. None of our employees are represented by a labor union or covered by collective bargaining agreements. We have not experienced any work stoppages. We are recognized as having a highly engaged workforce as evidenced by the receipt of the Gallup Exceptional Workplace Award in 2021. This award is Gallup’s premier recognition for the highest level of employee engagement in workplace cultures, presented only to organizations that meet rigorous standards of excellence. We have consistently been a Certified “Great Place to Work” over the past five years.
Diversity and Inclusion
Our diversity and inclusion objective is to be a company where each of us genuinely belongs, is respected and valued, and can do our best work. We take this to heart not just within our Company, but also within the broader automotive enthusiast community.
To help achieve our internal goals, we focus on attraction, retention and development at all levels. This means that we will ensure fair and transparent processes in talent assessment and hiring, performance management and career progression and retention. We are working to create a stronger sense of inclusion and belonging for our employees in general with a lens on representation. Engagement and belonging are fueled by having a meaningful connection to others and opportunities to grow and develop our careers. Across all of these dimensions, we are committed to building programs, systems and tools that foster greater belonging.
We intend to continue to invest and further develop our leadership training and support to ensure that all leaders — those promoted, developing or hired — understand how to lead, keeping our diversity and inclusion principles top of mind in every aspect of their role.
Compensation
Our compensation programs are designed to attract, retain and motivate talented, deeply qualified and committed individuals who believe in our mission, while rewarding employees for long-term value creation. We have a
pay-for-performance
culture in which employee compensation is aligned to company performance, as well as individual contributions and impacts. The 2021 Employee Stock Purchase Plan and the 2021 Equity Incentive Plan are designed to align employee compensation to the long-term interests of our stockholders, while encouraging them to think and act like owners. While we are still evolving our programs and practices, we strive for a fair, competitive, transparent and equitable approach in recognizing and rewarding our employees.
Health and Wellness
The health and wellness of our employees and their families is integral to our success. We have a comprehensive benefits program to support the physical, mental and financial well-being of our employees. We have a self-insured medical plan in which our employees pay approximately 25% of the monthly estimated premiums. In addition to core medical, we offer maternity and paternity benefits to help employees who are looking to grow their family. To support the mental health of our employees, we offer clinical care providers at no cost to them.
 
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In response to
COVID-19,
we transitioned to a remote workforce to help protect the health and wellness of our employees while continuing to provide the proper support to our clients and customers. We recognize that these are trying times for everyone, including our employees. To support our employees through this time, we introduced additional programs focused on mental and physical health, and balancing the demand of work and personal family needs.
Facilities
Our corporate headquarters are located in Traverse City, Michigan, and consist of approximately 109,500 square feet of office space at the main campus location under a lease agreement that expires in March 2036. We maintain additional U.S. offices in Dublin, Ohio; Golden, Colorado; Ann Arbor, Michigan; and Greenwich, Connecticut. We also operate a learning garage in Traverse City, Michigan and Littleton, Colorado. In Canada, our offices are located in Stouffville, Ontario; in the U.K., our offices are located in Towcester, Northamptonshire; and in Germany, our offices are located in Bochum. We lease all of our facilities and own one garage, two condominiums and five vacant real estate properties in Traverse City, Michigan. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
We have a network of Hagerty Garage + Social locations in the U.S., which includes Bedford Hills, New York; Chicago, Illinois; Delray Beach, Florida; Miami, Florida and Redmond, Washington. In Canada, we have a location in Burlington, Ontario.
Legal Proceedings
From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources.
Future litigation may be necessary to defend ourselves and our partners by determining the scope, enforceability, and validity of third party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
 
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