REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Hagerty, Inc.
Opinion on the Financial Statements
We have audited the
accompanying consolidated balance sheets of Hagerty, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in members
and stockholders equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
March 24, 2022
We have served as the Companys auditor since 2019.
F-2
Hagerty, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
REVENUES: |
|
in thousands (except per share/unit amounts) |
|
Commission and fee revenue |
|
$ |
271,571 |
|
|
$ |
236,443 |
|
Earned premium |
|
|
295,824 |
|
|
|
220,502 |
|
Membership and other revenue |
|
|
51,684 |
|
|
|
42,603 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
619,079 |
|
|
|
499,548 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
171,901 |
|
|
|
137,508 |
|
Ceding commission |
|
|
140,983 |
|
|
|
105,974 |
|
Losses and loss adjustment expenses |
|
|
122,080 |
|
|
|
91,025 |
|
Sales expense |
|
|
107,483 |
|
|
|
86,207 |
|
General and administrative services |
|
|
64,558 |
|
|
|
51,188 |
|
Depreciation and amortization |
|
|
22,144 |
|
|
|
11,800 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
629,149 |
|
|
|
483,702 |
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(10,070 |
) |
|
|
15,846 |
|
Change in fair value of warrant liabilities |
|
|
(42,540 |
) |
|
|
|
|
Interest and other income (expense) |
|
|
(1,993 |
) |
|
|
(987 |
) |
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSE |
|
|
(54,603 |
) |
|
|
14,859 |
|
Income tax expense |
|
|
(6,751 |
) |
|
|
(4,820 |
) |
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
(61,354 |
) |
|
|
10,039 |
|
Net loss (income) attributable to non-controlling
interest |
|
|
398 |
|
|
|
127 |
|
Net loss (income) attributable to redeemable
non-controlling interest |
|
|
14,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST |
|
$ |
(46,358 |
) |
|
$ |
10,166 |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share of Class A Common Stock: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.56 |
) |
|
|
N/A |
|
Weighted-average shares of Class A Common Stock outstanding: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
82,327 |
|
|
|
N/A |
|
Earnings (loss) per Members Unit |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
N/A |
|
|
$ |
101.66 |
|
Weighted-average units outstanding |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
N/A |
|
|
|
100 |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-3
Hagerty, Inc.
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Net income (loss) |
|
$ |
(61,354 |
) |
|
$ |
10,039 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(792 |
) |
|
|
994 |
|
Derivative instruments |
|
|
1,019 |
|
|
|
(423 |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
227 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
(61,127 |
) |
|
|
10,610 |
|
Comprehensive loss (income) attributable to
non-controlling interest |
|
|
398 |
|
|
|
127 |
|
Comprehensive loss (income) attributable to redeemable
non-controlling interest |
|
|
14,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to controlling interest |
|
$ |
(46,131 |
) |
|
$ |
10,737 |
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-4
Hagerty, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
ASSETS |
|
in thousands (except share/unit amounts) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
275,332 |
|
|
$ |
38,108 |
|
Restricted cash and cash equivalents |
|
|
328,640 |
|
|
|
260,970 |
|
Accounts receivable |
|
|
46,729 |
|
|
|
33,884 |
|
Premiums receivable |
|
|
75,297 |
|
|
|
52,628 |
|
Commission receivable |
|
|
57,596 |
|
|
|
54,541 |
|
Prepaid expenses and other current assets |
|
|
30,155 |
|
|
|
14,656 |
|
Deferred acquisition costs, net |
|
|
81,535 |
|
|
|
58,572 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
895,284 |
|
|
|
513,359 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
28,363 |
|
|
|
25,822 |
|
|
|
|
|
|
|
|
|
|
Long-Term Assets: |
|
|
|
|
|
|
|
|
Prepaid expenses and other non-current assets |
|
|
30,565 |
|
|
|
20,167 |
|
Intangible assets, net |
|
|
76,171 |
|
|
|
46,617 |
|
Goodwill |
|
|
11,488 |
|
|
|
4,745 |
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
118,224 |
|
|
|
71,529 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,041,871 |
|
|
$ |
610,710 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
9,084 |
|
|
$ |
11,545 |
|
Losses payable |
|
|
34,482 |
|
|
|
21,980 |
|
Provision for unpaid losses and loss adjustment expenses |
|
|
74,869 |
|
|
|
54,988 |
|
Unearned premiums |
|
|
175,199 |
|
|
|
124,708 |
|
Commissions payable |
|
|
60,603 |
|
|
|
43,798 |
|
Due to insurers |
|
|
58,031 |
|
|
|
49,162 |
|
Advanced premiums |
|
|
13,867 |
|
|
|
13,745 |
|
Accrued expenses |
|
|
46,074 |
|
|
|
36,271 |
|
Deferred tax liability |
|
|
|
|
|
|
7,499 |
|
Contract liabilities |
|
|
21,723 |
|
|
|
19,541 |
|
Other current liabilities |
|
|
1,886 |
|
|
|
1,515 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
495,818 |
|
|
|
384,752 |
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
13,166 |
|
|
|
14,854 |
|
Contract liabilities |
|
|
19,667 |
|
|
|
19,667 |
|
Long-term debt |
|
|
135,500 |
|
|
|
69,000 |
|
Deferred tax liability |
|
|
10,510 |
|
|
|
|
|
Warrant liabilities |
|
|
89,366 |
|
|
|
|
|
Other long-term liabilities |
|
|
7,043 |
|
|
|
5,116 |
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
275,252 |
|
|
|
108,637 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
$ |
771,070 |
|
|
$ |
493,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued) |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-5
Hagerty, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
|
in thousands (except share/unit amounts) |
|
Commitments and Contingencies (Note 23) |
|
|
|
|
|
|
|
|
Redeemable non-controlling interest (Notes 16 and
25) |
|
$ |
593,277 |
|
|
$ |
|
|
STOCKHOLDERS / MEMBERS EQUITY |
|
|
|
|
|
|
|
|
Members units, no par value (0 and 100,000 units authorized, issued and outstanding as of
December 31, 2021 and 2020, respectively) |
|
$ |
|
|
|
$ |
62,320 |
|
Preferred stock, $0.0001 par value (20,000,000 and 0 shares authorized, no shares issued and
outstanding as of December 31, 2021 and 2020, respectively) |
|
|
|
|
|
|
|
|
Class A common stock, $0.0001 par value (500,000,000 and 0 shares authorized, 82,327,466 and
0 shares issued and outstanding as of December 31, 2021 and 2020, respectively) |
|
|
8 |
|
|
|
|
|
Class V common stock, $0.0001 par value (300,000,000 and 0 shares authorized, 251,033,906 and
0 shares issued and outstanding as of December 31, 2021 and 2020, respectively) |
|
|
25 |
|
|
|
|
|
Additional paid-in capital |
|
|
160,189 |
|
|
|
|
|
Accumulated earnings (deficit) |
|
|
(482,276 |
) |
|
|
56,832 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,727 |
) |
|
|
(1,954 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders / members equity: |
|
|
(323,781 |
) |
|
|
117,198 |
|
|
|
|
|
|
|
|
|
|
Non-controlling interest |
|
|
1,305 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
Total equity (Notes 16 and 25) |
|
|
(322,476 |
) |
|
|
117,321 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
1,041,871 |
|
|
$ |
610,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(concluded) |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-6
Hagerty, Inc.
Consolidated Statements of Changes in Members and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members Equity |
|
|
Class A Common Stock |
|
|
Class V Common Stock |
|
|
Additional Paid in Capital |
|
|
Accumulated Earnings (Deficit) |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Accumulated Equity (Deficit) |
|
|
Non-controlling Interest |
|
|
Total Stockholders Equity (Deficit) |
|
|
Redeemable Non-Controlling Interest |
|
in thousands |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Balance at December 31, 2019 |
|
$ |
66,320 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
46,666 |
|
|
$ |
(2,525 |
) |
|
$ |
110,461 |
|
|
$ |
|
|
|
$ |
110,461 |
|
|
$ |
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,166 |
|
|
|
|
|
|
|
10,166 |
|
|
|
(127 |
) |
|
|
10,039 |
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571 |
|
|
|
571 |
|
|
|
|
|
|
|
571 |
|
|
|
|
|
Distributions |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
Non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
|
$ |
62,320 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
56,832 |
|
|
$ |
(1,954 |
) |
|
$ |
117,198 |
|
|
$ |
123 |
|
|
$ |
117,321 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before transaction |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,089 |
) |
|
$ |
|
|
|
$ |
(3,089 |
) |
|
$ |
(312 |
) |
|
$ |
(3,401 |
) |
|
$ |
|
|
Other comprehensive income (loss) before transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
248 |
|
|
|
|
|
|
|
248 |
|
|
|
|
|
Distributions before transaction |
|
|
(4,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,056 |
) |
|
|
|
|
|
|
(4,056 |
) |
|
|
|
|
Non-controlling interest issued capital before
transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,580 |
|
|
|
1,580 |
|
|
|
|
|
Business Combination |
|
|
(58,264 |
) |
|
|
82,327 |
|
|
|
8 |
|
|
|
251,034 |
|
|
|
25 |
|
|
|
526,711 |
|
|
|
(489,661 |
) |
|
|
|
|
|
|
(21,181 |
) |
|
|
|
|
|
|
(21,181 |
) |
|
|
238,265 |
|
Net income (loss) after transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,358 |
) |
|
|
|
|
|
|
(46,358 |
) |
|
|
(86 |
) |
|
|
(46,444 |
) |
|
|
(11,510 |
) |
Other comprehensive income (loss) after transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
Redemption value adjustment for redeemable non-controlling
interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(366,522 |
) |
|
|
|
|
|
|
|
|
|
|
(366,522 |
) |
|
|
|
|
|
|
(366,522 |
) |
|
|
366,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
$ |
|
|
|
|
82,327 |
|
|
$ |
8 |
|
|
|
251,034 |
|
|
$ |
25 |
|
|
$ |
160,189 |
|
|
$ |
(482,276 |
) |
|
$ |
(1,727 |
) |
|
$ |
(323,781 |
) |
|
$ |
1,305 |
|
|
$ |
(322,476 |
) |
|
$ |
593,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-7
Hagerty, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
OPERATING ACTIVITIES: |
|
in thousands |
|
Net income (loss) |
|
$ |
(61,354 |
) |
|
$ |
10,039 |
|
Adjustments to reconcile net income (loss) to net cash from operating activities: |
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities |
|
|
42,540 |
|
|
|
|
|
Depreciation and amortization expense |
|
|
22,144 |
|
|
|
11,800 |
|
Provision for deferred taxes |
|
|
3,038 |
|
|
|
1,478 |
|
Loss on disposals of equipment, software and other assets |
|
|
2,425 |
|
|
|
2,648 |
|
Other |
|
|
155 |
|
|
|
758 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(13,449 |
) |
|
|
(14,500 |
) |
Premiums receivable |
|
|
(22,669 |
) |
|
|
(10,372 |
) |
Commission receivable |
|
|
(3,005 |
) |
|
|
(8,164 |
) |
Prepaid expenses and other assets |
|
|
(18,523 |
) |
|
|
(8,549 |
) |
Deferred acquisition costs |
|
|
(22,963 |
) |
|
|
(11,764 |
) |
Accounts payable |
|
|
(2,890 |
) |
|
|
4,597 |
|
Losses payable |
|
|
12,502 |
|
|
|
5,243 |
|
Provision for unpaid losses and loss adjustment expenses |
|
|
19,882 |
|
|
|
22,404 |
|
Unearned premiums |
|
|
50,491 |
|
|
|
25,601 |
|
Commissions payable |
|
|
16,805 |
|
|
|
7,570 |
|
Due to insurers |
|
|
8,883 |
|
|
|
9,366 |
|
Advanced premiums |
|
|
124 |
|
|
|
1,500 |
|
Accrued expenses |
|
|
981 |
|
|
|
13,429 |
|
Contract liabilities |
|
|
2,049 |
|
|
|
22,214 |
|
Other current liabilities |
|
|
5,115 |
|
|
|
(726 |
) |
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
42,281 |
|
|
|
84,572 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment and software |
|
|
(43,370 |
) |
|
|
(38,258 |
) |
Acquisitions, net of cash acquired |
|
|
(14,609 |
) |
|
|
(8,875 |
) |
Purchase of fixed income securities |
|
|
(12,246 |
) |
|
|
|
|
Maturities of fixed income securities |
|
|
1,183 |
|
|
|
|
|
Other investing activities |
|
|
48 |
|
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
$ |
(68,994 |
) |
|
$ |
(47,388 |
) |
|
|
|
|
|
(continued) |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-8
Hagerty, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
FINANCING ACTIVITIES: |
|
in thousands |
|
Payments on long-term debt |
|
$ |
(42,500 |
) |
|
$ |
(29,100 |
) |
Proceeds from long-term debt |
|
|
110,000 |
|
|
|
73,000 |
|
Contribution from minority interest |
|
|
1,580 |
|
|
|
250 |
|
Distributions |
|
|
(4,056 |
) |
|
|
(4,000 |
) |
Deferred financing costs |
|
|
(962 |
) |
|
|
(202 |
) |
Payments on notes payable |
|
|
(1,000 |
) |
|
|
|
|
Cash received in business combination |
|
|
789,661 |
|
|
|
|
|
Cash consideration to HHC at Closing |
|
|
(489,661 |
) |
|
|
|
|
Payment of capitalized transaction costs |
|
|
(30,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
332,071 |
|
|
|
39,948 |
|
Effect of exchange rate changes on cash and cash equivalents and restricted cash and cash
equivalents |
|
|
(464 |
) |
|
|
885 |
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents and restricted cash and cash equivalents |
|
|
304,894 |
|
|
|
78,017 |
|
Beginning cash and cash equivalents and restricted cash and cash equivalents |
|
|
299,078 |
|
|
|
221,061 |
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents and restricted cash and cash equivalents |
|
$ |
603,972 |
|
|
$ |
299,078 |
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
$ |
4,668 |
|
|
$ |
6,861 |
|
Acquisitions |
|
$ |
3,774 |
|
|
$ |
9,524 |
|
Warrant liabilities recognized in business combination |
|
$ |
46,826 |
|
|
$ |
|
|
CASH PAID FOR: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
2,502 |
|
|
$ |
1,508 |
|
Income taxes |
|
$ |
2,160 |
|
|
$ |
3,874 |
|
|
|
|
|
|
(concluded) |
|
The following table provides a reconciliation of cash and restricted cash from the Consolidated Balance Sheets to the
Consolidated Statements of Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Cash and cash equivalents |
|
$ |
275,332 |
|
|
$ |
38,108 |
|
Restricted cash and cash equivalents |
|
|
328,640 |
|
|
|
260,970 |
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash and cash equivalents on the Consolidated
Statements of Cash Flows |
|
$ |
603,972 |
|
|
$ |
299,078 |
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
See Note 22 for Related-Party Transactions disclosure.
F-9
Hagerty, Inc.
Notes To Consolidated Financial Statements
1 Summary of Significant Accounting Policies and New Accounting Standards
Description of Business Hagerty, Inc., (Hagerty or the Company) and its consolidated subsidiaries, including The Hagerty
Group, LLC (The Hagerty Group) is a global market leader in providing insurance for classic and enthusiast vehicles. In addition, Hagerty provides an automotive enthusiast platform that engages, entertains and connects with enthusiasts
and our members.
The Company operates several entities which collectively support Hagertys revenue streams. Hagerty earns commission and fee
revenues for the distribution and servicing of classic automobile and boat insurance policies written through personal and commercial lines agency agreements with multiple insurance carriers in the United States (U.S.), Canada and the
United Kingdom (U.K.).
Reinsurance premiums are earned in Hagerty Reinsurance Limited (Hagerty Re) which is registered as a
Class 3A reinsurer under the Bermuda Insurance Act 1978. Hagerty Re solely reinsures the classic auto and marine risks written through Hagertys Managing General Agency (MGA) entities in the U.S., Canada and the U.K.
|
|
|
The business produced by the U.S. MGAs is written by Essentia Insurance Company (Essentia) and
reinsured with its affiliate Evanston Insurance Company (Evanston). In turn, Hagerty Re assumes premiums through a quota share agreement with Evanston. Essentia and Evanston are wholly owned subsidiaries of Markel Corporation
(Markel). Markel is a related party. Refer to Note 22 Related-Party Transactions for additional information. |
|
|
|
In 2020, Hagerty Re entered into a reinsurance agreement with Aviva Canada Inc. (Aviva) to reinsure
classic auto and marine risks produced by Hagertys Canadian MGA. |
|
|
|
In 2021, Hagerty Re entered into a reinsurance agreement with Markel International Insurance Company Limited to
reinsure classic auto risks produced by Hagertys U.K. MGA. In connection with this new agreement, Hagerty Re purchased reinsurance to limit its liability to £1,000,000 per claim as U.K. law requires unlimited liability coverage. Markel
International Insurance Company Limited is a subsidiary of Markel. |
The Company earns subscription revenue through membership offerings
and other automotive services sold to policyholders and classic vehicle enthusiasts. Membership offerings include but are not limited to private label roadside assistance, digital and linear video content, award-winning magazine, valuation services,
and exclusive events and automotive third-party discounts. The Company owns and operates collector vehicle events, earning revenue through ticket sales, sponsorships, and event registration service fees. The Company also operates a peer-to-peer classic vehicle rental business for auto enthusiasts. In 2020, the Company started a majority-owned world-class vehicle storage and exclusive social club
facilities called Member Hubs Holding, LLC (MHH) for classic, collector and exotic cars owners.
The Companys headquarters are located
in Traverse City, Michigan.
Basis of Presentation The Consolidated Financial Statements were prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) and with the instructions for annual reports on Form 10-K and Regulation S-X and include
the accounts of Hagerty, Inc. and The Hagerty Group, LLC (The Hagerty Group) with its consolidated subsidiaries. The Consolidated Financial Statements for the year ended December 31, 2020, is derived from The Hagerty Groups
annual audited financial statements.
Principles of Consolidation The Consolidated Financial Statements contain the accounts of Hagerty and
its majority-owned or controlled subsidiaries. As of December 31, 2021, the Company had economic ownership of
F-10
24.7% of The Hagerty Group. In addition, MHH is an 80% owned subsidiary of The Hagerty Group. The Company consolidates these entities under the voting interest method guidance in accordance with
ASC Topic 810, Consolidations. Redeemable non-controlling interest and Non-controlling interest are presented separately on the Consolidated Balance Sheets,
Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss) and the Consolidated Statements of Changes in Members and Stockholders Equity.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Business Combination On December 2, 2021, The Hagerty Group completed a business combination with Aldel Financial Inc. and Aldel Merger Sub
LLC, a Delaware limited liability company and wholly owned subsidiary of Aldel. In connection with the Closing, Aldel changed its name from Aldel Financial Inc. to Hagerty, Inc.
The Business Combination was accounted for as a common control reverse acquisition, for which The Hagerty Group was determined to be the accounting acquirer
and Aldel was treated as the acquired company. The Hagerty Group issued equity for the net assets of Aldel, accompanied by a recapitalization. Business combinations in which the legal acquirer is not the accounting acquirer are commonly
referred to as reverse acquisitions. A reverse acquisition occurs when the entity that issues securities (legal acquirer) is identified as the acquiree for accounting purposes and the entity whose equity interests are acquired (the legal
acquiree) is identified as the acquirer for accounting purposes. Reverse acquisitions are accounted for in accordance with Subtopic 805-40 of ASC Topic 805, Business Combinations (ASC 805).
While other factors were evaluated but not considered to have a material impact on the determination, The Hagerty Group was determined to be the accounting acquirer based on the following factors:
|
|
|
Hagerty Holding Corp. controlled the operating company prior to the Business Combination and controls the Company
subsequent to the Business Combination through control of the board of directors as well as having majority voting ownership. |
|
|
|
The Hagerty Groups management is also the management of the Company. |
|
|
|
The Hagerty Group is larger as compared to Aldel based on assets, revenues and earnings. |
Unless otherwise indicated or the context otherwise requires, Hagerty and the Company refer to the business and operations of The
Hagerty Group and its consolidated subsidiaries prior to the Business Combination and to Hagerty, Inc. and its consolidated subsidiaries, including The Hagerty Group, following the consummation of the Business Combination.
Refer to Note 6 Business Combination for additional information.
Emerging Growth Company The Company currently qualifies as an emerging growth company under the Jumpstart Our Business Startups Act
of 2012 and can delay the adoption of new or revised accounting standards until those standards would apply to private companies.
The Company intends to
avail itself of such extended transition period and, therefore, the Company may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or have opted out of using such extended
transition period.
Use of Estimates The preparation of Consolidated Financial Statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during
the reporting period. Although the estimates are considered reasonable, actual results could materially differ from those estimates.
F-11
The most significant estimates that are susceptible to notable change in the near-term relates to the
provision for unpaid losses and loss adjustment expenses (including incurred but not reported (IBNR)), the change in fair value of warrant liabilities and payments due under the Tax Receivable Agreement (TRA). Although some
variability is inherent in these estimates, the Company believes that the current estimates are reasonable in all material respects. These estimates are reviewed regularly and adjusted as necessary. Adjustments related to changes in estimates are
reflected in the Companys results of operations in the period for which those estimates changed.
Segment Information The Company has
one operating segment and one reportable segment. The Companys Chief Operating Decision Maker (CODM) is the Chief Executive Officer, who makes resource allocation decisions and assesses performance based on financial information
presented on a consolidated basis. The Companys management approach is to utilize an internally developed strategic decision making framework with the membership patrons at the center of all decisions, which requires the CODM to have a
consolidated view of the operations so that decisions can be made in the best interest of Hagerty and its membership patrons.
Foreign Currency
Translation The Company translates its foreign operations assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date, and income and expense items at the
average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the foreign currency translation account, a component of accumulated other comprehensive income (loss). Transaction
gains and losses are recognized in Interest and other income (expense) within the Consolidated Statements of Operations.
Business Update
Related To COVID-19 In March 2020, the World Health Organization declared the Coronavirus (COVID-19) a pandemic. The pandemic has impacted every
geography in which the Company operates. Governments implemented various restrictions around the world, including closure of non-essential businesses, travel, shelter-in-place requirements for citizens and other restrictions.
The Company has taken several precautionary
steps to safeguard its 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
Hagertys team members continues to be the top priority. As restrictions were put in place, employees were able to transition to work from home environment quickly and effectively due to the prior technology investments and the Companys
focus on core values. Due to the restrictions and uncertainty caused by the pandemic, 2020 revenue growth was lower than expected primarily caused by lower levels of new business. Offsetting the 2020 revenue shortfall, expenses related to
promotional events and travel were lower than anticipated. By the end of 2020, and through the year ended December 31, 2021, new business growth returned to pre-pandemic pace, events were being held and
new initiatives were on track. Management will continue to follow and monitor guidelines in each jurisdiction and is working on a phased transition of employees returning to the office.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents Cash includes amounts held in banks in operating accounts and money market
funds. The Company considers money market funds with maturities within 90 days of the purchase date to be equivalent to cash. At December 31, 2021 and 2020, the Companys cash accounts exceeded federally insured limits.
The Company maintains cash collected by its MGAs for premiums from insured parties that have not yet been remitted to insurance companies. These funds are
required to be held in trust and segregated from operating cash. These funds and a corresponding liability are included in Restricted cash and cash equivalents and Due to insurers, respectively, within the Consolidated
Balance Sheets.
The Company has established a trust account for the benefit of the ceding insurer as security for Hagerty Res obligations for
losses, loss expenses, unearned premium and profit-sharing commissions. The use of this fund is restricted to the payment of these expenses and is included in Restricted cash and cash equivalents within the Consolidated Balance Sheets.
F-12
Accounts Receivable Accounts receivable are recorded, and revenue is recognized, at the latter
of the billed or policy effective date, net of estimated cancellations.
Reinsurance Premiums Ceded Reinsurance premiums ceded are expensed pro-rata over the term of the reinsurance treaties. The portion of the reinsurance premium related to the unexpired portions of the treaties at the end of the fiscal year is reflected in deferred reinsurance
premiums.
Acquisition Costs Acquisition costs are comprised of ceding commission and premium taxes that relate directly to the successful
acquisition of new or renewal policy premiums by Hagerty Re. Acquisition costs are deferred and recognized in income over the period of the exposure in the underlying treaties.
The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future-earned premiums is greater than the expected future
claims and expenses. Anticipated investment income is also a factor in this determination. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At December 31, 2021 and 2020, the deferred
acquisition costs were considered fully recoverable and no premium deficiency loss was recorded.
Property and Equipment Property and
equipment are recorded at cost and depreciated over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of either the lease term or the estimated useful lives of the improvements. Useful lives for financial
reporting range from three to seven years for computers, automobiles and office furniture. Building and building improvements have useful lives of 39 years.
The Company reviews all property and equipment that have finite lives for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable in accordance with ASC Topic 360, Impairment and Disposal of Long-Lived Assets (ASC 360). If it is determined the carrying amount of the asset is not recoverable, an impairment charge is recorded.
Upon sale or retirement, the cost and related accumulated depreciation of assets disposed of are removed from the accounts, and any resulting gain or loss is reflected in the Consolidated Statements of Operations.
Annual depreciation is calculated based on the straight-line method. Maintenance, repair costs and minor renovations are expensed as incurred, while
expenditures that increase the asset lives are capitalized.
Prepaid Expenses and Other Assets Prepaid expenses and other assets consist
primarily of prepaid Software-as-a-Service (SaaS) implementation costs, prepaid sales and general and administrative
services expenses and fixed income investments.
|
|
|
Prepaid expenses are recorded at cost and amortized over the service term. |
|
|
|
SaaS implementation costs are recorded as incurred in prepaid expenses. The Company expenses the costs incurred
during the preliminary project stage and, upon management approval, capitalizes the direct implementation costs once implementation begins. The Company monitors implementation on an ongoing basis and capitalizes the costs of any major improvements
or new functionality. Once the software is fully implemented, the ongoing maintenance costs are expensed. |
|
|
|
Fixed income investments consist of Canadian provincial and municipal bonds which qualify as debt securities
under ASC Topic 320 Investments Debt Securities. Fixed income investments are carried at amortized cost on the Consolidated Balance Sheets. Amortized cost is the amount at which an investment is acquired, adjusted for applicable
accrued interest, accretion of discount or amortization of premium. Premium or discount is amortized on a straight-line basis to maturity. Pricing information for each fixed income security is obtained from our outside investment manager. The
Company ultimately determines whether the inputs and the resulting market values are reasonable. Market pricing is based on fair value level 2 guidance using observable inputs such as quoted prices for similar assets at the measurement date.
|
F-13
Intangible Assets Intangible assets are recorded at cost and amortized over the estimated
useful life of each intangible asset. Acquired intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible assets. Intangible assets primarily consist of insurance policy
renewal rights, internally developed software, trade names, non-compete agreements and customer relationships. Amortization is recorded using the straight-line method over their estimated useful lives as it
approximates the pattern over which economic benefits are realized. Insurance policy renewal rights, internally developed software, trade names, non-complete agreements and customer relationships are amortized
over 3 to 25 years. For internally developed software, the Company expenses the costs incurred during the preliminary project stage and capitalizes the direct development costs (including the associated payroll and related costs for employees
working on development and outside contractor costs) once management approval is obtained.
Intangible assets are reviewed for impairment upon a
triggering event or when changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with ASC 360. If it is determined that the carrying amount of the asset is not recoverable, the Company recognizes
an impairment loss in the current period within the Consolidated Statements of Operations. The Company did not identify any impairment indicators during the years ended December 31, 2021 and 2020.
Goodwill Goodwill represents the excess of the cost of a business combination, as defined in ASC 805, over the fair value of net assets
acquired, including identifiable intangible assets. Goodwill is tested for impairment at the reporting unit level annually as of October 1, and whenever indicators of impairment exist. The Company evaluates impairment of goodwill by assessing
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors include industry and market considerations, overall financial performance, and other
relevant events and circumstances affecting the reporting unit. If after performing the qualitative assessment, the Company determines it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company
performs a quantitative fair value test. The primary valuation method used in the quantitative impairment assessment to determine the fair value of the reporting unit has been a discounted cash flow model. Other valuation methods or comparable
transactions may be used when appropriate and applicable to determine the fair value of a reporting unit.
The Company did not recognize any goodwill
impairments during the years ended December 31, 2021 and 2020.
Losses Payable Losses payable represents the amount of losses paid and
billed by the fronting insurer that have not been paid by Hagerty Re as of the balance sheet date.
Provision for Unpaid Losses and Loss Adjustment
Expenses Losses and loss adjustment expenses are recognized as incurred and are based on the estimated ultimate cost of settlement. Outstanding losses include amounts determined from reports and individual cases. As of any balance sheet
date, all claims have not yet been reported, and some claims may not be reported for many years. As a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for IBNR claims. While management believes that
these amounts are fairly stated, the ultimate liability may differ materially from the amounts provided.
The Company provides for IBNR claims based on an
analysis of the loss experience of the risks insured and the recommendations of appropriately qualified actuaries. The reinsurance recoverable amounts shown are determined by applying contract language specific to the Companys third-party
reinsurance program to losses and loss expenses arising from claims occurring as a result of a qualifying event. Adjustments to estimates will be included in the financial statements of subsequent periods when such adjustments become known.
Due to Insurers Due to insurers represents the net amount of premium due to carriers based on the respective contract with each carrier. The net
amount due is equal to the gross written premium less the Companys commission for policies that have reached their effective date.
Advanced
Premiums Advanced premiums represent the gross written premium received from customers prior to the effective date of the policy. At the effective date of the policy, advanced premiums are reclassified to due to insurers and commission
income is recognized.
F-14
Accrued Expenses Accrued expenses consist primarily of amounts owed for wages, payroll taxes,
incentive compensation, benefits, professional services and future installments for purchase consideration resulting from asset acquisitions and business combinations.
Warrant Liabilities The Company accounts for its outstanding warrants in accordance with ASC Topic 815 Derivatives and Hedging (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 and
utilizes a Monte Carlo simulation model to value the warrants. The change in the fair value of the warrants is recognized in the Consolidated Statements of Operations each reporting period. Refer to Note 17 Warrant Liabilities for additional
information.
Derivative Instruments The Company enters into certain derivative financial instruments, when available on a cost-effective
basis, to mitigate its risk associated with changes in interest rates. The Company accounts for derivatives in accordance with ASC 815, which establishes accounting and reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts), whether designated in hedging relationships or not, be recorded on the Consolidated Balance Sheets as either an asset or liability measured at fair value. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the derivative are recorded in Other comprehensive income (loss). If a derivative is not designated as an accounting hedge, the change in fair value is recognized in the Consolidated
Statements of Operations each reporting period. All derivative instruments are managed on a consolidated basis to efficiently minimize exposures.
Gains
and losses related to the derivative instruments are expected to be largely offset by gains and losses on the original underlying asset or liability. The Company does not use derivative financial instruments for speculative purposes.
The Company is exposed to credit loss in the event of nonperformance by the counterparties on derivative contracts. It is the Companys policy to manage
its credit risk on these transactions by dealing only with financial institutions having a long-term credit rating of A or better.
Acquisitions The Company accounts for acquisitions of entities or asset groups that qualify as businesses using the acquisition method of
accounting in accordance with ASC 805. Purchase consideration is allocated to the tangible and intangible assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date, which are measured in accordance with
the principles outlined in ASC Topic 820, Fair Value Measurement (ASC 820). The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future
events that are highly subjective in nature. The excess of the total purchase consideration over the fair value of the identified net assets acquired is recognized as goodwill. The results of the acquired businesses are included in the results of
operations beginning from the date of acquisition. Acquisition-related costs are expensed as incurred.
During the measurement period, which may be up to
one year from the acquisition date, the Company may record adjustments to the allocation of purchase consideration and to the fair values of assets acquired and liabilities assumed to the extent that additional information becomes available. After
this period, any subsequent adjustments are recorded in the Consolidated Statements of Operations.
Revenue Recognition The Company
recognizes revenue under both ASC Topic 606, Revenue from Contracts with Customers (ASC 606) and ASC Topic 944 Financial Services Insurance (ASC 944).
Commission and Fee Revenue
Hagerty earns new and renewal
commissions paid by insurance carriers and fees paid by the carriers insureds for the binding of insurance coverage. The Company has identified its customer as the insurance carrier and
F-15
determined transaction price to be the estimated commissions to be received over the term of the policy, based on an estimate of premiums placed, net of a constraint for policy changes and
cancellations. These commissions and fees, including those paid via installment plan, are earned when the policy becomes effective, as all rights are passed to the insured and the obligation to pay a claim resides with the carrier.
Under the terms of its contracts with insurance carriers, the Company has the opportunity to earn an annual contingent underwriting commission
(CUC) based on the loss performance of the insurance book of business. The Companys CUC agreements are based on written or earned premium and underwriting results. Each carrier contract and related CUC is calculated independently.
The CUCs represent a form of variable consideration associated with the placement of coverage, for which the Company earns commissions and fees. Under ASC 606, the Company must estimate the amount of consideration that will be received in the coming
year such that a significant reversal of revenue is not probable. As such, CUC is recognized as a contract asset as policies are issued using applicable premium and payout factors based on the estimated loss ratio from the contract.
Earned Premium
Reinsurance premium revenue is recognized
in Hagerty Re under ASC 944 on a pro rata basis over the period of the exposure in the underlying reinsurance agreement with the unearned portion recorded as Unearned premiums on the Consolidated Balance Sheets.
Membership and Other Revenue
Revenue from the sale of
Hagerty Drivers Club membership program (HDC) subscriptions is recognized ratably over the period of the membership, resulting in contract liabilities at December 31, 2021 and 2020. The Company treats the membership as a single
performance obligation to provide access to stated member benefits over the life of the membership, which is currently one year.
Contract Assets and
Liabilities The Company recognizes contract assets for amounts due to the Company for CUCs earned but not yet billed under terms of the contract. Contract assets are recorded within Commission receivable on the Consolidated
Balance Sheets.
Contract liabilities consist of payments received in advance of performance under a contract before the transfer of goods or services to
a customer or fulfillment of the contract obligations. In 2020, the Company entered into an agreement with a large national carrier and received an advanced commission payment to offset costs of system development. Contract liabilities consist
primarily of this advanced payment, along with the obligation to fulfill HDC membership benefits over the one-year life of a membership.
Contract Costs The Company accounts for contract costs under ASC Topic 340, Other Assets and Deferred Costs, which requires companies to
defer certain incremental costs to obtain customer contracts and certain costs to fulfill customer contracts.
The Company capitalizes the incremental
costs to obtain contracts primarily related to commission payments on new policy sales. These deferred costs are amortized over the expected life of the insurance client and are included in Prepaid expenses and other assets in the
Companys Consolidated Balance Sheets as of December 31, 2021 and 2020.
Advertising Advertising and sales promotion costs are
expensed the first time the advertising or sales promotion takes place. Advertising costs were $24.1 million and $18.2 million for the years ended December 31, 2021 and 2020, respectively, and are reflected as a component of
Sales expense in the Consolidated Statements of Operations.
Income Taxes 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 Hagerty Re and various
F-16
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. Hagerty, Inc., Hagerty Re and various foreign subsidiaries are treated as taxable entities and
income taxes are provided where applicable (see Note 21 Taxation).
Where applicable, income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating
loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are recognized to the extent that there is sufficient positive evidence as allowed under the ASC Topic 740, Income Taxes (ASC
740), to support the recoverability of those deferred tax assets. The Company establishes a valuation allowance to the extent that there is insufficient evidence to support the recoverability of the deferred tax asset under ASC 740. In making
such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning
strategies, and results of recent operations. If it is determined that the deferred tax assets would be realizable in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which
would reduce the provision for income taxes.
As of December 31, 2021 and 2020, the Company did not have any unrecognized tax benefits and had no
material accrued interest or penalties related to uncertain tax positions. If recorded, interest and penalties would be recorded as Income tax expense on the Consolidated Statements of Operations.
Tax Receivable Agreement Liability In connection with the Business Combination, Hagerty, Inc. entered into the TRA with HHC and Markel
(together, the Legacy Unit Holders). The TRA provides for payment to the Legacy Unit Holders of 85% of the U.S. federal, state and local income tax savings realized by Hagerty, Inc. as a result of the increases in tax basis and certain
other tax benefits as outlined in the Business Combination Agreement upon the exchange of limited liability units in The Hagerty Group (Hagerty Group Units) and Class V Common Stock of the Company for Class A Common Stock of
the Company or cash. The Hagerty Group will have in effect an election under Section 754 of the IRC effective for each taxable year in which an exchange of Hagerty Group Units occurs. The remaining 15% cash tax savings resulting from the basis
adjustments will be retained by Hagerty, Inc.
In general, cash tax savings result in a year when the tax liability of Hagerty, Inc. for the year,
computed without regard to the deductions attributable to the amortization of the basis increase and other deductions that arise in connection with the payment of the cash consideration under the TRA or the exchange of Hagerty Group Units and
Class V Common Stock for Class A Common Stock, would be more than the tax liability for the year taking into account such deductions. Payments under the TRA will not be due until the Company is able to reduce a cash tax liability by the
amortization of the basis increase on a filed tax return. The payments under the TRA are expected to be substantial. The estimated value of the TRA is recorded in Other long-term liabilities.
Hagerty, Inc. accounts for the effects of the basis increases as follows.
|
|
|
Hagerty, Inc. records an increase in deferred tax assets for the income tax effects of the increases in tax basis
based on enacted federal and state income tax rates at the date of the exchange. |
|
|
|
Hagerty, Inc. evaluates the ability to realize the full benefit represented by the deferred tax asset based on an
analysis that will consider expectations of future earnings among other things. If Hagerty, Inc. determines that the full benefit is not likely to be realized, a valuation allowance is established to reduce the amount of the deferred tax assets to
an amount that is likely to be realized. |
F-17
|
|
|
At Closing, Hagerty, Inc. recorded 85% of the estimated realizable tax benefit as an increase to the liability
due under the TRA and the remaining 15% of the estimated realizable tax benefit as an increase to Additional paid-in capital. |
All of the effects of changes in any of the estimates after the date of the redemption or exchange will be recorded in Net income (loss). Similarly, the
effect of subsequent changes in the enacted tax rates will be recorded in Net income (loss).
Non-controlling
Interest Non-controlling interest represents the portion of economic ownership of MHH that is not owned or controlled by The Hagerty Group. The Company consolidates its ownership of MHH under the
voting interest method. Non-controlling interest is shown separately on the Consolidated Statements of Operations.
Redeemable Non-controlling Interest 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 (Exchange Agreement). 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 Companys 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.
Earnings Per Share Basic earnings per share (EPS) is computed by dividing Net income
(loss) attributable to Hagerty, Inc. by the weighted-average number of shares of Class A Common Stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised, resulting in the issuance of shares of Class A Common Stock that would then share in the earnings of Hagerty, Inc. In periods in which the Company reports a net loss available to stockholders, diluted net loss per share
available to stockholders would be the same as basic net loss per share available to stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Self-Insurance The Company has elected to self-insure certain costs related to U.S. employee health benefit and short-term disability programs.
Costs resulting from self-insured losses are charged to expense when incurred. The Company has purchased insurance that limits its aggregate annual exposure for healthcare costs to approximately $10.8 million and $8.3 million for the years
ended December 31, 2021 and 2020, respectively. Total expenses for healthcare claims incurred for the years ended December 31, 2021 and 2020 were approximately $10.9 million and $7.6 million, respectively. Healthcare claims are
recorded within Salaries and benefits on the Consolidated Statements of Operations. As of December 31, 2021 and 2020, the Company has recorded approximately $0.9 million and $0.7 million as an estimate of IBNR claims,
respectively. The amount of actual losses incurred could differ materially from the estimate reflected in these financial statements.
Recently
Adopted Accounting Guidance
Financial Instruments In August 2017, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (ASC Topic 815): Targeted Improvements to Accounting for Hedging Activities, which relates to accounting
for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements and simplifies the application of hedge accounting in certain situations.
F-18
The Company early adopted ASU No. 2017-12 effective
January 1, 2020. Adoption of the standard enhanced the presentation of the effects of our hedging instruments and the hedged items in our Consolidated Financial Statements to increase the understandability of the results of our hedging
strategies.
Media Content In March 2019, the FASB issued ASU 2019-02, Improvements to Accounting
for Costs of Films and License Agreements for Program Materials, to align the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for
capitalization.
As a result of adopting this ASU on January 1, 2021, the Company applied the guidance of ASC Topic 926, Entertainment
- Films for the original content the Company self-produces and where the intellectual property is owned by the Company. For content the Company produces, the costs associated with production, including development costs,
direct costs and production overhead will be capitalized and amortized over the estimated useful life of the asset. The adoption of the ASU had a $3.3 million impact on the Companys Consolidated Financial Statements through
December 31, 2021.
Convertible Instruments and Contracts In August 2020, the FASB issued ASU
2020-06, Accounting for Convertible Instruments and Contracts in an Entitys Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models and
will generally be reported as a single liability at its amortized cost. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and
requires the use of the if-converted method. The Company early adopted ASU 2020-06 effective January 1, 2021, which did not have an impact on the Consolidated
Financial Statements.
Recent Accounting Guidance Not Yet Adopted
Leases In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), which
supersedes the lease requirements in ASC Topic 840, Leases (ASC 840). This guidance increases transparency and comparability among organizations by recognizing lease assets and lease liabilities in the Consolidated Balance Sheets.
The guidance requires disclosure to enable users of the Consolidated Financial Statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The transition to ASU No. 2016-02
requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach. In June 2020, the FASB issued ASU No. 2020-05, Effective
Dates for Certain Entities, which deferred the effective date for nonpublic entities, including emerging growth companies, that had not yet adopted the original ASU. Under the amended guidance, the leasing standard will be effective for the
Companys fiscal year beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the effect of adoption of these
standards on the Consolidated Financial Statements and related disclosures but expects to record a material right-of-use asset and liability on the Consolidated Balance
Sheets related to our operating leases upon adoption on January 1, 2022. Upon adoption, the Company expects to elect the package of practical expedients, which among other things, allows the Company not to reassess prior conclusions related to
contracts containing leases, lease classification and initial direct costs. The Company will continue to finalize the implementation of new processes and the assessment of the impact of this adoption on the Consolidated Financial Statements.
Credit Losses In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments
- Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which requires a company to consider forward looking information to determine current estimated credit losses for all financial
instruments that are not accounted for at fair value through net income. ASU No. 2019-10 defers the effective date of ASU No. 2016-13 to January 1, 2023.
The Company does not expect the adoption of ASU No. 2016-13 to have a material impact on Consolidated Financial Statements and related disclosures.
Reference Rate Reform In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC
Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASC 848), which
F-19
provides optional relief to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate
(LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Additionally, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (ASC
Topic 848), which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The Company does not expect the adoption
of these ASUs to have a material impact on the Consolidated Financial Statements and related disclosures.
2 Revenue
Disaggregation of Revenue The following table presents Hagertys revenue by distribution channel offering, as well as a reconciliation to
total revenue for the years ended December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agent |
|
|
Direct |
|
|
Total |
|
|
|
in thousands |
|
|
|
Year Ended December 31, 2021 |
|
Commission and fee revenue |
|
$ |
115,310 |
|
|
$ |
98,926 |
|
|
$ |
214,236 |
|
Contingent commission |
|
|
29,552 |
|
|
|
27,783 |
|
|
|
57,335 |
|
Membership revenue |
|
|
|
|
|
|
40,605 |
|
|
|
40,605 |
|
Other revenue |
|
|
|
|
|
|
11,079 |
|
|
|
11,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from customer contracts |
|
$ |
144,862 |
|
|
$ |
178,393 |
|
|
$ |
323,255 |
|
Earned premium recognized under ASC 944 |
|
|
|
|
|
|
|
|
|
|
295,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
$ |
619,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020 |
|
Commission and fee revenue |
|
$ |
99,294 |
|
|
$ |
82,721 |
|
|
$ |
182,015 |
|
Contingent commission |
|
|
30,024 |
|
|
|
24,404 |
|
|
|
54,428 |
|
Membership revenue |
|
|
|
|
|
|
36,278 |
|
|
|
36,278 |
|
Other revenue |
|
|
|
|
|
|
6,325 |
|
|
|
6,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from customer contracts |
|
$ |
129,318 |
|
|
$ |
149,728 |
|
|
$ |
279,046 |
|
Earned premium recognized under ASC 944 |
|
|
|
|
|
|
|
|
|
|
220,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
$ |
499,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
The following table presents Hagertys revenue disaggregated by geographic area, as well as a
reconciliation to total revenue for the years ended December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Canada |
|
|
Europe |
|
|
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 |
|
Membership revenue |
|
|
37,688 |
|
|
|
2,917 |
|
|
|
|
|
|
|
40,605 |
|
Other revenue |
|
|
9,448 |
|
|
|
301 |
|
|
|
1,330 |
|
|
|
11,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from customer contracts |
|
$ |
298,080 |
|
|
$ |
19,617 |
|
|
$ |
5,558 |
|
|
$ |
323,255 |
|
Earned premium recognized under ASC 944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
619,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Membership revenue |
|
|
33,938 |
|
|
|
2,340 |
|
|
|
|
|
|
|
36,278 |
|
Other revenue |
|
|
4,976 |
|
|
|
129 |
|
|
|
1,220 |
|
|
|
6,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from customer contracts |
|
$ |
256,474 |
|
|
$ |
17,484 |
|
|
$ |
5,088 |
|
|
$ |
279,046 |
|
Earned premium recognized under ASC 944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
499,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premium The following table presents Hagerty Res total premiums assumed and the change in unearned
premiums for the years ended December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Underwriting income: |
|
|
|
|
|
|
|
|
Premiums assumed |
|
$ |
353,925 |
|
|
$ |
250,557 |
|
Reinsurance premiums ceded |
|
|
(7,920 |
) |
|
|
(3,086 |
) |
|
|
|
|
|
|
|
|
|
Net premiums assumed |
|
|
346,005 |
|
|
|
247,471 |
|
Change in unearned premiums |
|
|
(50,491 |
) |
|
|
(25,601 |
) |
Change in deferred reinsurance premiums |
|
|
310 |
|
|
|
(1,368 |
) |
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
295,824 |
|
|
$ |
220,502 |
|
|
|
|
|
|
|
|
|
|
Contract Assets The following table is a reconciliation of the changes in the Companys contract assets for
the periods specified below. Contract assets are classified as Commission receivable on the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Contract assets as of January 1, |
|
$ |
54,541 |
|
|
$ |
46,320 |
|
CUC received |
|
|
(54,280 |
) |
|
|
(46,207 |
) |
CUC recognized |
|
|
57,335 |
|
|
|
54,428 |
|
|
|
|
|
|
|
|
|
|
Contract assets as of December 31, |
|
$ |
57,596 |
|
|
$ |
54,541 |
|
|
|
|
|
|
|
|
|
|
F-21
Contract Liabilities The following is a reconciliation of the changes in the Companys
contract liabilities for the periods specified below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Long-Term |
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Contract liabilities as of January 1, |
|
$ |
19,541 |
|
|
$ |
16,962 |
|
|
$ |
19,667 |
|
|
$ |
|
|
Advanced commission |
|
|
|
|
|
|
333 |
|
|
|
|
|
|
|
19,667 |
|
Membership and other revenue recognized during the period |
|
|
(51,684 |
) |
|
|
(42,603 |
) |
|
|
|
|
|
|
|
|
Membership and other revenue deferred during the period |
|
|
53,866 |
|
|
|
44,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities as of December 31, |
|
$ |
21,723 |
|
|
$ |
19,541 |
|
|
$ |
19,667 |
|
|
$ |
19,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Deferred Acquisition Costs
The following table presents a reconciliation of the changes in deferred acquisition costs for the periods specified below:
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Deferred acquisition costs as of January 1, |
|
$ |
58,572 |
|
|
$ |
46,808 |
|
Acquisition costs deferred |
|
|
163,946 |
|
|
|
117,738 |
|
Amortization charged to income |
|
|
(140,983 |
) |
|
|
(105,974 |
) |
|
|
|
|
|
|
|
|
|
Deferred acquisition costs as of December 31, |
|
$ |
81,535 |
|
|
$ |
58,572 |
|
|
|
|
|
|
|
|
|
|
4 Prepaid Expenses and Other Assets
Prepaid expenses and other assets, current and long-term, consist of:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Prepaid sales, general and administrative expenses |
|
$ |
18,004 |
|
|
$ |
11,661 |
|
Prepaid SaaS implementation costs |
|
|
16,318 |
|
|
|
15,369 |
|
Fixed income investments |
|
|
10,785 |
|
|
|
|
|
Contract costs |
|
|
4,160 |
|
|
|
2,749 |
|
Media content |
|
|
3,335 |
|
|
|
|
|
Other |
|
|
8,118 |
|
|
|
5,044 |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
$ |
60,720 |
|
|
$ |
34,823 |
|
|
|
|
|
|
|
|
|
|
F-22
5 Property and Equipment
The following table summarizes the carrying value of the Companys property and equipment.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Land and land improvements |
|
$ |
930 |
|
|
$ |
930 |
|
Buildings |
|
|
1,748 |
|
|
|
1,748 |
|
Leasehold improvements |
|
|
10,309 |
|
|
|
7,917 |
|
Furniture and equipment |
|
|
15,121 |
|
|
|
13,829 |
|
Computer equipment and software |
|
|
20,405 |
|
|
|
25,609 |
|
Automobiles |
|
|
738 |
|
|
|
747 |
|
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
$ |
49,251 |
|
|
$ |
50,780 |
|
Less: accumulated depreciation |
|
|
(20,888 |
) |
|
|
(24,958 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
28,363 |
|
|
$ |
25,822 |
|
|
|
|
|
|
|
|
|
|
Property and equipment depreciation expense was $6.4 million and $4.7 million for the years ended December 31,
2021 and 2020, respectively.
6 Business Combination
On December 2, 2021, through The Hagerty Group, the Company completed the Business Combination pursuant to the Business Combination Agreement with Aldel
and Merger Sub, with The Hagerty Group surviving as a wholly owned subsidiary of the Company immediately following the Business Combination. In connection with the closing of the Business Combination, the registrant changed its 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, whereupon 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.
As
outlined within the Business Combination Agreement, certain accredited investors or qualified institutional buyers (the PIPE Investors) entered into the Subscription Agreement, pursuant to which the PIPE Investors agreed to purchase
70,385,000 shares (the PIPE Shares) of the Companys Class A Common Stock and 12,669,300 warrants to purchase shares of 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). The sale of the PIPE Securities was consummated concurrently with the Closing.
In connection with the consummation of the Business Combination:
|
|
|
all of the existing limited liability company interests of The Hagerty Group held by HHC were converted into (1)
$489.7 million in cash, (2) 176,033,906 Hagerty Group Units, and (3) 176,033,906 shares of Class V Common Stock; |
|
|
|
all of the existing limited liability company interests of The Hagerty Group held by Markel were converted into
(1) 75,000,000 Hagerty Group Units, and (2) 75,000,000 shares of Class V Common Stock of the Company; |
|
|
|
3,005,034 shares of Aldels 11,500,000 Class A Common Stock subject to redemption were redeemed,
resulting in 8,494,966 Class A Common Stock still outstanding; |
|
|
|
all of the 2,875,000 outstanding shares of Aldels Class B Common Stock were converted into shares of
Class A Common Stock on a one-for-one basis; and |
|
|
|
572,500 outstanding Aldel Class A Common Stock became Hagerty, Inc. Class A Common Stock.
|
F-23
Immediately after giving effect to the Business Combination, there were 82,327,466 shares of Hagerty
Class A Common Stock outstanding, 251,033,906 shares of Hagerty Class V Common Stock outstanding and 20,005,550 warrants outstanding which can be converted on a
one-for-one basis to Class A Common Stock. Refer to Note 17 Warrant Liabilities for additional information on the Companys warrants.
Following the Closing, the Company 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 in which substantially all of the assets and liabilities of the Company are held by The Hagerty Group. As of December 31, 2021, the Company owned 24.7% of The Hagerty Group.
As a result of the Up-C structure, redeemable non-controlling interest is held
by the Legacy Unit Holders, who retained 75.3% of the economic ownership of The Hagerty Group as of December 31, 2021.
In connection with the
Business Combination, the Company incurred direct and incremental costs of approximately $41.9 million, consisting of primarily investment banking, insurance and professional fees, of which $32.6 million were recorded as a reduction of Additional-paid-in-capital within the Consolidated Balance Sheets.
In
connection with the Business Combination, Hagerty, Inc. entered into the TRA with the Legacy Unit Holders. The TRA provides for payment to the Legacy Unit Holders of 85% of the U.S. federal, state and local income tax savings realized by Hagerty,
Inc. as a result of the increases in tax basis and certain other tax benefits related to the transactions contemplated under the Business Combination Agreement upon the exchange of Hagerty Group Units and Class V Common Stock for Class A
Common Stock or cash. Refer to Note 21 Taxation for additional information related to the TRA.
The following table is a summary of the cash
inflows and outflows related to the Business Combination:
|
|
|
|
|
|
|
Business Combination |
|
|
|
in thousands |
|
Cash in trust, net of redemptions |
|
$ |
85,811 |
|
Cash, PIPE |
|
|
703,850 |
|
Less: transaction costs and advisory fees |
|
|
(41,859 |
) |
Less: Cash consideration to HHC at Closing |
|
|
(489,661 |
) |
|
|
|
|
|
Net cash received from Business Combination |
|
$ |
258,141 |
|
|
|
|
|
|
7 Acquisitions
2021 Business Combinations On June 22, 2021, the Company purchased the Amelia Island Concours dElegance event. On July 22, 2021,
the Companys MHH Canadian subsidiary purchased the Paddock Motor Club in Toronto, Canada. On August 12, 2021, the Company purchased McCalls Motorworks Revival. On November 30, 2021, Member Hubs Seattle, LLC purchased the
operations of Driver Club, LLC. The pro forma effect of these acquisitions does not materially impact the Companys reported results, either individually or in the aggregate, for each period presented in the Consolidated Statements of
Operations. As a result, no pro forma information has been presented.
2020 Asset Acquisition The Company completed one acquisition in 2020
that was accounted for as an asset acquisition. On March 1, 2020, the Company purchased the renewal rights to the collector insurance policies effective on or after March 1, 2020 from a Canadian insurance brokerage. As part of the
transaction, the seller entered into a non-compete agreement with the Company wherein it is prohibited from competing with the Company for a period of five years. Total purchase consideration for the
acquisition was $9.7 million, with cash paid at closing of $2.5 million and estimated current and long-term liabilities of $2.4 million and $4.8 million, respectively.
F-24
2020 Business Combination The Company purchased California Mille in 2020, which was accounted
for as a business combination. The pro forma effect of this acquisition did not materially impact the Companys reported results, for each period presented in the Consolidated Statements of Operations. As a result, no pro forma information has
been presented.
The following table summarizes the purchase consideration and the purchase price allocation to fair values of the identifiable assets
acquired and liabilities assumed as of the date of each acquisition:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Cash |
|
$ |
11,450 |
|
|
$ |
2,944 |
|
Fair value of non-cash consideration |
|
|
3,767 |
|
|
|
9,191 |
|
|
|
|
|
|
|
|
|
|
Total consideration |
|
$ |
15,217 |
|
|
$ |
12,135 |
|
|
|
|
|
|
|
|
|
|
Allocation of purchase price: |
|
|
|
|
|
|
|
|
Other current assets |
|
$ |
1,416 |
|
|
$ |
62 |
|
Intangible assets |
|
|
7,134 |
|
|
|
11,266 |
|
Goodwill |
|
|
6,753 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
15,303 |
|
|
|
12,272 |
|
Liabilities assumed |
|
|
|
|
|
|
|
|
Accrued compensation, current |
|
|
|
|
|
|
38 |
|
Contract liabilities, current |
|
|
86 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
86 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired |
|
$ |
15,217 |
|
|
$ |
12,135 |
|
|
|
|
|
|
|
|
|
|
8 Intangible Assets
The cost and accumulated amortization of intangible assets as of December 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Useful Life |
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
in thousands |
|
Renewal rights |
|
10.0 |
|
$ |
17,557 |
|
|
$ |
17,112 |
|
Internally developed software |
|
3.1 |
|
|
76,865 |
|
|
|
42,595 |
|
Trade names and trademarks |
|
19.7 |
|
|
5,004 |
|
|
|
2,009 |
|
Other |
|
12.6 |
|
|
7,116 |
|
|
|
3,065 |
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
|
|
106,542 |
|
|
|
64,781 |
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
|
|
(30,371 |
) |
|
|
(18,164 |
) |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
$ |
76,171 |
|
|
$ |
46,617 |
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization expense was $12.8 million and $5.8 million for the years ended December 31, 2021
and 2020 respectively.
The estimated future aggregate amortization expense as of December 31, 2021 is as follows (in thousands):
|
|
|
|
|
2022 |
|
$ |
19,926 |
|
2023 |
|
|
21,789 |
|
2024 |
|
|
13,744 |
|
2025 |
|
|
5,924 |
|
2026 |
|
|
2,553 |
|
Thereafter |
|
|
12,235 |
|
|
|
|
|
|
Total |
|
$ |
76,171 |
|
|
|
|
|
|
F-25
9 Goodwill
In applying the acquisition method of accounting for business combinations, amounts assigned to identifiable assets and liabilities acquired were based on
estimated fair values as of the date of acquisition, with the remainder recorded as goodwill.
The following is a reconciliation of the changes in the
Companys goodwill for the periods specified below:
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Goodwill as of January 1, |
|
$ |
4,745 |
|
|
$ |
3,801 |
|
Goodwill resulting from acquisition |
|
|
6,743 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
Goodwill as of December 31, |
|
$ |
11,488 |
|
|
$ |
4,745 |
|
|
|
|
|
|
|
|
|
|
10 Provision for Unpaid Losses and Loss Adjustment Expenses
The following table presents the provision for unpaid losses and loss adjustment expenses, net of amounts recoverable from reinsurers, at December 31,
2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Outstanding losses reported |
|
$ |
38,207 |
|
|
$ |
22,710 |
|
IBNR |
|
|
36,662 |
|
|
|
32,278 |
|
|
|
|
|
|
|
|
|
|
Total unpaid losses and loss adjustment expenses |
|
$ |
74,869 |
|
|
$ |
54,988 |
|
|
|
|
|
|
|
|
|
|
The following table presents a reconciliation of beginning and ending provision for unpaid losses and loss adjustment
expenses, net of amounts recoverable from reinsurers:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Net unpaid losses and loss adjustment expenses, beginning of the year |
|
$ |
54,988 |
|
|
$ |
32,581 |
|
Incurred losses and loss adjustment expenses: |
|
|
|
|
|
|
|
|
Current accident year |
|
$ |
132,481 |
|
|
$ |
91,025 |
|
Prior accident year(1) |
|
|
(10,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses |
|
$ |
122,080 |
|
|
$ |
91,025 |
|
|
|
|
|
|
|
|
|
|
Payments: |
|
|
|
|
|
|
|
|
Current accident year |
|
$ |
76,559 |
|
|
$ |
53,734 |
|
Prior accident year |
|
|
25,656 |
|
|
|
14,884 |
|
|
|
|
|
|
|
|
|
|
Total payments |
|
$ |
102,215 |
|
|
$ |
68,618 |
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency rate changes |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses, end of year |
|
$ |
74,869 |
|
|
$ |
54,988 |
|
Reinsurance recoverables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and loss adjustment expenses, end of year |
|
$ |
74,869 |
|
|
$ |
54,988 |
|
|
|
|
|
|
|
|
|
|
(1) |
Prior accident year development reflects lower than originally estimated incurred claims related to frequency
and severity in accident years 2017 to 2020. |
F-26
In updating Hagerty Res loss reserve estimates, inputs are considered and evaluated from many sources,
including actual claims data, the performance of prior reserve estimates, observed industry trends, and internal review processes, including the views of the Companys actuary. These inputs are used to improve evaluation techniques and to
analyze and assess the change in estimated ultimate losses for each accident year by line of business. These analyses produce a range of indications from various methods, from which an actuarial point estimate is selected.
In determining managements best estimate of the reserves for losses and loss adjustment expenses as of December 31, 2021 and 2020, consideration
was given both to the actuarial point estimate and a number of other internal and external factors, including:
|
|
|
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
Companys classic book; |
|
|
|
legislative and judicial changes in the jurisdictions in which the Company writes insurance; and
|
The following factors are relevant to the additional information included in the tables following:
|
|
|
Table organization: The tables are organized by accident year and include policies written on an
occurrence basis. |
|
|
|
Groupings: The Company believes that grouping total reserves for losses and loss adjustment expenses by
line of business have homogenous risk characteristics with similar development patterns and would generally be subject to similar trends. |
|
|
|
Claim counts: The Company considers a reported claim to be one claim for each claimant for each loss
occurrence. |
|
|
|
Limitations: There are limitations that should be considered on the reported claim count data in the
tables below, including: claim counts are presented only on a reported (not an ultimate) basis. |
The following table presents a summary
of total reserves for losses and loss adjustment expenses, gross of reinsurance recoverable, for the periods specified below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Auto |
|
$ |
74,573 |
|
|
$ |
54,548 |
|
Marine |
|
|
296 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and loss adjustment expenses |
|
$ |
74,869 |
|
|
$ |
54,988 |
|
|
|
|
|
|
|
|
|
|
F-27
The following tables present incurred losses and loss adjustment expenses, by accident year, undiscounted
and net of reinsurance recoveries.
a) Auto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
Reserves for Losses and Loss Adjustment Expenses Incurred But Not Reported |
|
|
Cumulative Number of Reported Claims |
|
|
|
Reporting Years Ended December 31, |
|
Accident Year |
|
2017* |
|
|
2018* |
|
|
2019* |
|
|
2020* |
|
|
2021 |
|
|
As of December 31, 2021 |
|
2017 |
|
$ |
18,594 |
|
|
$ |
18,594 |
|
|
$ |
18,594 |
|
|
$ |
18,594 |
|
|
$ |
18,409 |
|
|
$ |
318 |
|
|
|
11,030 |
|
2018 |
|
|
|
|
|
|
40,422 |
|
|
|
40,287 |
|
|
|
40,287 |
|
|
|
37,516 |
|
|
|
101 |
|
|
|
20,627 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
63,642 |
|
|
|
63,642 |
|
|
|
59,660 |
|
|
|
1,336 |
|
|
|
23,723 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,110 |
|
|
|
86,608 |
|
|
|
6,345 |
|
|
|
27,178 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,643 |
|
|
|
28,366 |
|
|
|
33,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
333,836 |
|
|
$ |
36,466 |
|
|
|
115,945 |
|
Cumulative paid losses and loss adjustment expenses from the table below |
|
|
|
(259,263 |
) |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses before 2017, net of
reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses, undiscounted and net of
reinsurance |
|
|
$ |
74,573 |
|
|
$ |
36,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid losses and loss adjustment expenses by accident year (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
Accident Year |
|
2017* |
|
|
2018* |
|
|
2019* |
|
|
2020* |
|
|
2021 |
|
2017 |
|
$ |
11,410 |
|
|
$ |
16,655 |
|
|
$ |
17,442 |
|
|
$ |
17,530 |
|
|
$ |
17,897 |
|
2018 |
|
|
|
|
|
|
23,915 |
|
|
|
34,992 |
|
|
|
35,899 |
|
|
|
36,414 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
37,910 |
|
|
|
51,491 |
|
|
|
55,617 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,167 |
|
|
|
73,402 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
259,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Unaudited required supplemental information. |
F-28
b) Marine:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
Reserves for Losses and Loss Adjustment Expenses Incurred But Not Reported |
|
|
Cumulative Number of Reported Claims |
|
|
|
Reporting Years Ended December 31, |
|
Accident Year |
|
2017* |
|
|
2018* |
|
|
2019* |
|
|
2020* |
|
|
2021 |
|
|
As of December 31, 2021 |
|
2017 |
|
$ |
198 |
|
|
$ |
198 |
|
|
$ |
198 |
|
|
$ |
198 |
|
|
$ |
183 |
|
|
$ |
|
|
|
|
124 |
|
2018 |
|
|
|
|
|
|
437 |
|
|
|
437 |
|
|
|
437 |
|
|
|
489 |
|
|
|
9 |
|
|
|
189 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
893 |
|
|
|
893 |
|
|
|
835 |
|
|
|
|
|
|
|
192 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915 |
|
|
|
975 |
|
|
|
8 |
|
|
|
206 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854 |
|
|
|
164 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,336 |
|
|
$ |
181 |
|
|
|
909 |
|
Cumulative paid losses and loss adjustment expenses from the table below |
|
|
|
(3,040 |
) |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses before the 2017 accident
year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses, undiscounted and net of
reinsurance |
|
|
$ |
296 |
|
|
$ |
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses by accident year (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident Year |
|
2017* |
|
|
2018* |
|
|
2019* |
|
|
2020* |
|
|
2021 |
|
2017 |
|
$ |
138 |
|
|
$ |
183 |
|
|
$ |
183 |
|
|
$ |
182 |
|
|
$ |
182 |
|
2018 |
|
|
|
|
|
|
332 |
|
|
|
426 |
|
|
|
425 |
|
|
|
431 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
514 |
|
|
|
828 |
|
|
|
835 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
568 |
|
|
|
967 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Unaudited required supplemental information. |
The following table presents supplementary information about average historical claims duration as of December 31, 2021 based on the cumulative incurred
and paid losses and allocated loss adjustment expenses presented above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Percentage of Payout of Incurred Claims by Age (in Years), Net of Reinsurance |
|
unaudited |
|
Year 1 |
|
|
Year 2 |
|
|
Year 3 |
|
|
Year 4 |
|
|
Year 5 |
|
Auto |
|
|
61.4 |
% |
|
|
25.2 |
% |
|
|
7.4 |
% |
|
|
2.8 |
% |
|
|
0.9 |
% |
Marine |
|
|
74.1 |
% |
|
|
15.2 |
% |
|
|
10.2 |
% |
|
|
0.2 |
% |
|
|
0.3 |
% |
11 Reinsurance
Hagerty Re purchases catastrophe reinsurance to protect held capital from large catastrophic events and to provide earnings protection and stability. As of
December 31, 2021, Hagerty Res program provides $83.0 million of excess of loss coverage attaching at $7.0 million. The top layer ($10.0 million excess of $80.0 million) can also be used to provide $10.0 million
of aggregate catastrophe protection attaching after $10.5 million of annual catastrophe loss. The Company retains 25% of the liability of this top and aggregate cover. It is the Companys intention to renew the program annually after
adjusting for portfolio growth.
F-29
During 2021, Hagerty Re renewed and increased its catastrophe reinsurance coverage effective January 1,
2022. The current program provides $100.0 million of coverage excess of a per event retention of $10.0 million in three layers; $50.0 million excess of $10.0 million, $30.0 million excess of $60.0 million and
$10.0 million excess of $90.0 million. The top layer can also be used to provide $10.0 million of aggregate catastrophe protection attaching after $12.5 million of annual catastrophe loss.
Reinsurance contracts do not relieve Hagerty Re from its primary liability to the ceding carriers according to the terms of its reinsurance treaties. Failure
of reinsurers to honor their obligations could result in additional losses to Hagerty Re. Hagerty Re evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers.
All of Hagerty Res reinsurers have an A.M. Best rating of A- (excellent) or better, or fully collateralize their maximum obligation under the treaty.
12 Statutory Capital and Surplus
Dividend
Restrictions 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 Bermuda Monetary Authority
(BMA) is also required if Hagerty Res proposed dividend payments would exceed 25% of its prior year-end total statutory capital and surplus. The amount of dividends which could be paid in
2022 without prior approval is $26.8 million.
Capital Restrictions In Bermuda, Hagerty Re is subject to the Bermuda Solvency Capital
Requirement (BSCR) administered by the BMA. No regulatory action is taken if an insurers capital and surplus is equal to or in excess of its enhanced capital requirement 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. Hagerty Re has a more prudent target of 130% of the enhanced capital requirement.
Statutory Financial Information Hagerty Re prepares its statutory financial statements in conformity with the accounting principles set forth in
Bermuda in The Insurance Act 1978, amendments thereto and related regulations. At December 31, 2021 and 2020, the general business statutory capital and surplus of the Company was $107.3 million and $82.0 million, respectively, and
the general business statutory net income of Hagerty Re was $25.2 million and $18.3 million for the years ended December 31, 2021 and 2020, respectively.
13 Fair Value Measurements
Hagerty measures and
discloses fair values in accordance with the provisions of ASC 820. The Companys significant fair value measurements primarily relate to interest rate swaps, warrant liabilities, and fixed income investments. The Company uses valuation
techniques based on inputs such as observable data, independent market data and/or unobservable data. Additionally, Hagerty makes assumptions in valuing its assets and liabilities, including assumptions about risk and the risks inherent in the
inputs to the valuation techniques.
The Company classifies fair value measurements within one of three levels in the fair value hierarchy. The level
assigned to a fair value measurement is based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The three levels of the fair value
hierarchy are as follows:
|
|
|
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that
are accessible at the measurement date. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
|
|
|
Level 2 Inputs other than quoted prices included within Level 1 that are either directly
or indirectly observable for substantially the full term of the asset or liability. |
F-30
|
|
|
Level 3 Unobservable inputs that management believes are predicated on the assumptions market
participants would use to measure the asset or liability at fair value. |
The Companys policy is to recognize significant transfers
between levels at the end of the reporting period.
Recurring fair value measurements
Interest rate swaps
Interest rate swaps are determined to
be Level 2 within the fair value hierarchy. The significant inputs, such as the LIBOR forward curve, of interest rate swaps are considered observable market inputs. The Company monitors the credit and nonperformance risk associated with its
counterparty and believes them to be insignificant. Refer to Note 15 Interest Rate Swaps for additional information.
Warrant liabilities
The Company has public and private warrants outstanding as of December 31, 2021 (refer to Note 17 Warrant Liabilities for additional
information).
The Company has determined that its Public Warrants are Level 1 within the fair value hierarchy. The Public Warrants are measured
utilizing quoted market prices.
The Company has determined that its private warrants are Level 3 within the fair value hierarchy. The Companys
private warrants include Private Placement Warrants, Underwriter Warrants, OTM Warrants and PIPE Warrants. The Company utilizes a Monte Carlo simulation model to measure the fair value of the private warrants. The Companys Monte Carlo
simulation model includes assumptions related to the expected stock-price volatility, expected term, dividend yield and risk-free interest rate.
The
following table summarizes the significant inputs in the valuation model as of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs |
|
Private Placement Warrants |
|
|
Underwriter Warrants |
|
|
OTM Warrants |
|
|
PIPE Warrants |
|
Exercise price |
|
$ |
11.50 |
|
|
$ |
11.50 |
|
|
$ |
15.00 |
|
|
$ |
11.50 |
|
Common stock price |
|
$ |
14.18 |
|
|
$ |
14.18 |
|
|
$ |
14.18 |
|
|
$ |
14.18 |
|
Volatility |
|
|
26.5 |
% |
|
|
26.5 |
% |
|
|
28.0 |
% |
|
|
26.5 |
% |
Expected term of the warrants |
|
|
4.92 |
|
|
|
4.92 |
|
|
|
9.93 |
|
|
|
4.92 |
|
Risk-free rate |
|
|
1.25 |
% |
|
|
1.25 |
% |
|
|
1.52 |
% |
|
|
1.25 |
% |
Dividend yield |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company estimates the volatility of its common stock based on factors including, but not limited to, implied volatility of
the Public Warrants, the historical performance of comparable companies, and managements understanding of the volatility associated with similar instruments of other entities.
The risk-free rate is based on the yield of the U.S. Treasury Constant Maturity for a term that approximates the expected remaining life, which is assumed to
be the remaining contractual term, of the warrants.
The dividend rate is based on the Companys historical rate, which the Company anticipates to
remain at zero.
F-31
The fair value of the Companys financial assets and liabilities measured at fair value on a recurring
basis at December 31, 2021 and 2020, is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
in thousands |
|
|
|
December 31, 2021 |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
531 |
|
|
$ |
|
|
|
$ |
531 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
531 |
|
|
$ |
|
|
|
$ |
531 |
|
|
$ |
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public warrants |
|
$ |
25,243 |
|
|
$ |
25,243 |
|
|
$ |
|
|
|
$ |
|
|
Private placement warrants |
|
|
1,248 |
|
|
|
|
|
|
|
|
|
|
|
1,248 |
|
Underwriter warrants |
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
139 |
|
OTM warrants |
|
|
6,849 |
|
|
|
|
|
|
|
|
|
|
|
6,849 |
|
PIPE warrants |
|
|
55,887 |
|
|
|
|
|
|
|
|
|
|
|
55,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
89,366 |
|
|
$ |
25,243 |
|
|
$ |
|
|
|
$ |
64,123 |
|
|
|
|
|
December 31, 2020 |
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
801 |
|
|
$ |
|
|
|
$ |
801 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
801 |
|
|
$ |
|
|
|
$ |
801 |
|
|
$ |
|
|
The following table presents a reconciliation of the Companys warrant liabilities that are classified as Level 3
within the fair value hierarchy for the year ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement Warrants |
|
|
Underwriter Warrants |
|
|
OTM Warrants |
|
|
PIPE Warrants |
|
|
Total |
|
|
|
in thousands |
|
Balance at December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Issuance of warrant liabilities |
|
|
460 |
|
|
|
51 |
|
|
|
2,899 |
|
|
|
31,800 |
|
|
|
35,210 |
|
Change in fair value of warrant liabilities |
|
|
788 |
|
|
|
88 |
|
|
|
3,950 |
|
|
|
24,087 |
|
|
|
28,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
$ |
1,248 |
|
|
$ |
139 |
|
|
$ |
6,849 |
|
|
$ |
55,887 |
|
|
$ |
64,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Investments
The Company has fixed income investments that consist of Canadian Sovereign and Provincial fixed income securities held in a trust account to meet the
requirements of a third-party insurer, Aviva, in connection with Hagerty Res reinsurance agreement.
The Company classifies its fixed income
investments in connection with its reinsurance agreement as held-to-maturity, as the Company has the intent and ability to hold these investments to maturity. The
Company has determined that its fixed income investments are Level 2 within the fair value hierarchy, as these investments are valued using observable inputs such as quoted prices for similar assets at the measurement date.
F-32
The following table discloses the fair value and related carrying amount of fixed income securities held
within Hagerty Res investments:
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
|
|
in thousands |
|
|
|
December 31, 2021 |
|
Fixed income securities, short-term |
|
$ |
1,189 |
|
|
$ |
1,188 |
|
Fixed income securities, long-term |
|
|
9,596 |
|
|
|
9,476 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,785 |
|
|
$ |
10,664 |
|
|
|
|
|
|
|
|
|
|
The duration of all unrealized losses is less than 12 months. The Company has reviewed the portfolio for other than temporary
impairments and concluded that no impairment exists as of December 31, 2021. The Company did not record any gains or losses on these securities during the year ended December 31, 2021.
14 Debt
As of the indicated dates, the principal
amount of Hagertys debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Credit Facility |
|
$ |
135,500 |
|
|
$ |
68,000 |
|
Note payable |
|
|
1,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
Total debt outstanding |
|
$ |
136,500 |
|
|
$ |
70,000 |
|
|
|
|
|
|
|
|
|
|
Less: current portion |
|
|
(1,000 |
) |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
Total long-term debt outstanding |
|
$ |
135,500 |
|
|
$ |
69,000 |
|
|
|
|
|
|
|
|
|
|
Aggregate annual maturities of long-term debt at December 31, 2021 are as follows (in thousands):
|
|
|
|
|
Year ending December 31, |
|
|
|
|
2022 |
|
$ |
1,000 |
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
135,500 |
|
|
|
|
|
|
Total |
|
$ |
136,500 |
|
|
|
|
|
|
Credit Facility In October 2021, the Company entered into a Third Amendment to Amended and Restated Credit
Agreement (Credit Agreement), which amended the terms of its revolving credit facility (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 the Company under the Credit Facility is $230.0 million. The Credit Agreement also
provides for an uncommitted incremental facility under which the Company 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.
F-33
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 the Company and the lenders party thereto. Any unpaid balance on the Credit Facility is due at maturity.
The Company 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 LIBOR plus 1.0% or (ii) an adjusted LIBOR rate equal to
the LIBOR multiplied by the statutory reserve rate, plus, in either case, an applicable margin based on a leverage ratio calculated based on the Companys financial statements for its four most recent fiscal quarters. The effective borrowing
rate was 1.61% and 2.48% as of December 31, 2021 and 2020, respectively.
The Credit Facility borrowings are collateralized by Company assets, except
for the assets of the Companys 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, the Company is required, among other things, to meet certain financial covenants (as defined in the Credit Agreement), including a
fixed charge coverage ratio and a leverage ratio. As of December 31, 2021 and 2020, the Company was in compliance with the covenants under the Credit Agreement.
The Credit Facility includes a provision for determining a LIBOR successor rate in the event LIBOR reference rates are no longer available. The alternative
benchmark replacement rate is the Secured Overnight Financing Rate (SOFR). In addition, the facility includes a provision for determining a SOFR successor rate in the event SOFR reference rates are no longer available. If no SOFR
successor rate has been determined, the rate will be based on the higher of the Prime Rate or the federal funds rate plus a fixed margin.
Note
Payable The Company has a note payable related to a business combination for the future purchase installment payments. The note is paid in two equal installments, $1.0 million of which was paid in 2021, and interest is calculated at
a fixed rate of 3.25%. The note payable expires March 1, 2022 at which time the second installment is due.
Letters of Credit The
Company authorized two letters of credit for a total of $10.8 million for operational purposes related to Section 953(d) tax structuring election and lease down payment support.
15 Interest Rate Swaps
Hagertys interest
rate swap agreements are used to fix the interest rate on a portion of the Companys existing variable rate debt to reduce the exposure to interest rate fluctuations. 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 within Interest and other
income (expense) on the Consolidated Statements of Operations.
As of December 31, 2021 the Company had two outstanding swaps. In March 2017,
the Company entered into an interest rate swap agreement with an original notional amount of $15.0 million at a fixed rate of 2.20%. In December 2020, the Company entered into an interest rate swap agreement with an original notional amount of
$35.0 million at a fixed rate of 0.78%. The estimated fair value of interest rate swap is included within Other long-term liabilities on the Consolidated Balance Sheets as of December 31, 2021 and 2020.
In accordance with ASC 815, the Company designated the December 2020 interest rate swap as a cash flow hedge and formally documented the relationship between
the interest rate swap and the variable rate borrowings, as well as its risk management objective and strategy for undertaking the hedge transaction. The Company also
F-34
assessed, at the hedges inception and will continue to assess on an ongoing basis, whether the derivative used in the hedging transaction was highly effective in offsetting changes in the
cash flows of the hedged item. The hedge is deemed effective, and therefore, the change in fair value is recorded within Derivative instruments in the Consolidated Statements of Comprehensive Income (Loss). Such amounts are reclassified
into interest expense, net from Other comprehensive income (loss) during the period in which the hedged item affects earnings. There were no such reclassifications during the years ended December 31, 2021 and 2020. The Company does not expect
to have a reclassification into earnings within the next 12 months.
16 Members and Stockholders Equity
Prior to the Business Combination, The Hagerty Group had one class of partnership interests. These units were recapitalized as Hagerty Group Units in
connection the Business Combination. The partnership interests are reflected as The Hagerty Groups historical members equity in the Consolidated Balance Sheets. As of the Closing and as of December 31, 2021, Hagerty held a 24.7%
economic ownership interest in The Hagerty Group.
Class A Common Stock Hagerty is authorized to issue 500,000,000 shares of
Class A Common Stock with a par value of $0.0001 per share. Holders of Class A Common Stock are entitled to one vote for each share. Additionally, Class A Common Stock is defined as Economic Common Stock, and holders are
entitled to receive dividends and other distributions (payable in cash, property, or capital stock of the Company) when, as and if declared thereon by Hagertys Board from time to time out of any assets or funds of the Company legally available
therefor and share equally on a per share basis in such dividends and distributions. As of December 31, 2021, there were 82,327,466 shares of Class A Common Stock issued and outstanding.
Class V Common Stock Hagerty is authorized to issue 300,000,000 shares of Class V Common Stock with a par value of $0.0001 per share.
Class V Common Stock represents voting, non-economic interests in Hagerty. Holders of Class V Common Stock are entitled to 10 votes for each share. As of December 31, 2021, there were
251,033,906 shares of Class V Common Stock issued and outstanding.
Preferred Stock Hagerty is authorized to issue 20,000,000 shares of
Preferred Stock with a par value of $0.0001 per share. Hagertys Board has the authority to issue shares of Preferred Stock with such designations, voting and other rights and preferences as may be determined from time to time. As of
December 31, 2021, there were no shares of Preferred Stock issued and outstanding.
Members Equity Prior to the Business
Combination, The Hagerty Group had 100,000 units outstanding with no par value. At Closing, all units were converted to Hagerty Group Units and Class V Common Stock as further described in Note 6 Business Combination.
Non-controlling Interest Non-controlling interest represents the
portion of economic ownership of MHH that is not owned or controlled by The Hagerty Group. The Company consolidates its ownership of MHH under the voting interest method. Non-controlling interest is shown
separately on the Consolidated Statements of Operations showing the portion that is not owned by The Hagerty Group.
Redeemable Non-controlling
Interest Following the Business Combination, Hagerty is the managing member of The Hagerty Group and, as a result, consolidates the financial results of The Hagerty Group. The Company reports redeemable
non-controlling interest representing economic interests in The Hagerty Group held by the Legacy Unit Holders. Under the Exchange Agreement, the Legacy Unit Holders can 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.
The decision to exchange
the Legacy Unit Holders Class V Common Stock and associated Hagerty Group Units for an equivalent amount of Class A Common Stock or cash is made at the discretion of the Company. However, the Company is controlled by the Legacy Unit
Holders through their voting control with Class V Common Stock.
F-35
Accordingly, the non-controlling interest is considered a redeemable non-controlling interest and is required to be
reported as temporary equity. The redeemable non-controlling interest is measured at the greater of the initial fair value or the redemption value, with a corresponding adjustment to additional paid-in capital. Future redemptions or exchanges of Hagerty Group Units by the Legacy Unit Holders will result in a change in ownership and reduce the Companys redeemable
non-controlling interest. Class V Common Stock and Hagerty Group Units held by the Legacy Unit Holders are exchangeable at the earlier of 180 days from the close of the Business Combination or when the
founder shares are no longer locked, as defined within the Lock-Up Agreement, dated as of December 2, 2021, between the Company, and the Legacy Unit Holders. As of December 31, 2021, the Class V
Common Stock and Hagerty Group Units held by the Legacy Unit Holders were not unlocked.
It is probable that the Class V Common Stock and Hagerty
Group Units will become redeemable as they will have become unlocked after a set period of time. Therefore, as of December 31, 2021, the Company has elected to accrete changes in the value of the redemption on a
pro-rated basis using the 180 day lockout period and the closing price of the Class A Common Stock as of the period end date. The redeemable non-controlling
interest had an accreted redemption value of $593.3 million as of December 31, 2021. Upon unlocking of the Class V Common Stock and Hagerty Group Units, the Company will adjust the redemption value each period using the closing
Class A Common Stock price as of the period end date.
The following table summarizes the ownership of The Hagerty Group as of December 31,
2021:
|
|
|
|
|
|
|
|
|
Owner |
|
Units Owned |
|
|
Ownership Percentage |
|
|
|
in thousands (except percentages) |
|
Hagerty, Inc. controlling interest |
|
|
82,327 |
|
|
|
24.7 |
% |
Redeemable non-controlling interest |
|
|
251,034 |
|
|
|
75.3 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
333,361 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
The following table is a reconciliation of the changes in carrying value of redeemable
non-controlling interest during the year ended December 31, 2021:
|
|
|
|
|
|
|
in thousands |
|
Redeemable non-controlling interest as of December 2,
2021 |
|
$ |
238,265 |
|
Net income (loss) attributable to redeemable
non-controlling interest |
|
|
(11,510 |
) |
Redemption value adjustment |
|
|
366,522 |
|
|
|
|
|
|
Redeemable non-controlling interest as of
December 31, 2021 |
|
$ |
593,277 |
|
|
|
|
|
|
As of March 23, 2022 the Exchange Agreement was amended to revise the option for the Company to settle the exchange of
Class V Common Stock and associated Hagerty Group Units in cash. Under the terms of the amendment, a cash exchange is only allowable in the event that net cash proceeds are received from a new permanent equity offering. Refer to Note 25
Subsequent Events for additional information.
Earnings Per Share The following table sets forth the calculation of basic EPS, which is
based on Net income (loss) attributable to Hagerty for the years ended December 31, 2021 and 2020, divided by the weighted average of Class A Common Stock and Members Units as of December 31, 2021 and 2020, respectively. Diluted
earnings per share of Class A Common Stock and Members Units is computed by dividing Net income (loss) attributable to Hagerty by the weighted average number of shares of Class A Common Stock and Members Units outstanding
adjusted to give effect to potentially dilutive securities. The Company has not included the
F-36
effects of the conversion of 20,005,550 public and private warrants and the conversion of 251,033,906 Class V Common Stock for the year ended December 31, 2021 to Class A Common
Stock as their effect would be anti-dilutive. There were no potentially dilutive securities to Members Units for the year ended December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands (except per share/unit amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(61,354 |
) |
|
$ |
10,039 |
|
Net loss (income) attributable to non-controlling
interest |
|
|
398 |
|
|
|
127 |
|
Net loss (income) attributable to redeemable
non-controlling interest |
|
|
14,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interest |
|
$ |
(46,358 |
) |
|
$ |
10,166 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares of Class A Common Stock basic and diluted |
|
|
82,327 |
|
|
|
N/A |
|
Weighted average Members Units basic and diluted |
|
|
N/A |
|
|
|
100 |
|
Earnings (loss) per share of Class A Common Stock basic and diluted |
|
$ |
(0.56 |
) |
|
|
N/A |
|
Earnings (loss) per unit basic and diluted |
|
|
N/A |
|
|
$ |
101.66 |
|
17 Warrant Liabilities
In connection with the Business Combination, the Company registered 5,750,000 Public Warrants, 257,500 Private Placement Warrants, 28,750 Underwriter Warrants,
1,300,000 OTM Warrants and 12,669,300 PIPE Warrants. Upon the Closing, the following warrants were outstanding to purchase shares of the Companys Class A Common Stock that were issued by Aldel prior to the Business Combination:
Public Warrants Each warrant will be exercisable for one share of the Companys Class A Common Stock at a price of
$11.50 per share, subject to adjustments, commencing on April 12, 2022 (12 months after the Aldel IPO), provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon
exercise of the warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The warrants may be exercised
only for a whole number of shares of the Companys Class A Common Stock. The warrants expire on December 1, 2026 (five years after the Closing date).
Private Placement Warrants Each warrant will be exercisable for one share of the Companys Class A Common Stock at a
price of $11.50 per share, subject to adjustments, commencing on December 2, 2022 (12 months following the Business Combination), and subject to additional vesting requirements as outlined within the warrant agreements covering those
securities, including the Sponsor Warrant Lock-Up Agreement, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current
prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The warrants may be exercised only for a whole number of shares of the
Companys Class A Common Stock. Additionally, the Private Placement Warrants are exercisable on a cashless basis so long as they are held by the Sponsor or any of its permitted transferees. The warrants expire on December 1, 2026
(five years after the Closing date).
Underwriter Warrants Each warrant will be exercisable for one share of the Companys Class A
Common Stock at a price of $11.50 per share, subject to adjustments, commencing on April 12, 2022 (12 months after the Aldel IPO), provided that the Company has an effective registration statement under the Securities Act covering the
shares of common stock issuable upon exercise of the warrants and a current prospectus relating to
F-37
them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The warrants may be exercised only for a
whole number of shares of the Companys Class A Common Stock. The Underwriter Warrants are exercisable on a cashless basis so long as they are held by the Underwriter or any of its permitted transferees. The warrants expire on
December 1, 2026 (five years after the Closing date).
OTM Warrants Each warrant will be exercisable for one share of the
Companys Class A Common Stock at a price of $15.00 per share, subject to adjustments, commencing on December 2, 2022 (12 months following the Business Combination) and subject to additional vesting requirements as outlined within the
warrant agreements covering those securities, including the Sponsor Warrant Lock-Up Agreement, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of
the warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. OTM Warrants may be exercised on a cashless
basis so long as they continue to be held by the initial purchasers or their permitted transferees. The warrants expire on December 1, 2031 (ten years after the Closing date).
PIPE Warrants Each warrant will be exercisable for one share of the Companys Class A Common Stock at a price of $11.50 per share,
subject to adjustments, commencing on January 1, 2022 (30 days after the date of the Business Combination), provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable
upon exercise of the warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under securities laws of the state of residence of the holder. The PIPE Warrants may be
exercised on a cashless basis. The warrants expire December 1, 2026 (five years after the Closing date).
The Company accounts for these warrants as
liabilities in accordance with ASC 815. The warrant liability was measured at fair value as of the closing of the Business Combination for $46.8 million. In addition, the warrants are valued each reporting period and adjusted to market, with
the increase or decrease being adjusted through earnings. A $42.5 million increase in the fair value of the warrant liability was reflected within Change in fair value of warrant liabilities in the Consolidated Statements of
Operations for the year ended December 31, 2021. As of December 31, 2021, a warrant liability of $89.3 million was reflected as a long-term liability on the Consolidated Balance Sheets.
As of December 31, 2021, the total number of warrants outstanding was 20,005,550. No warrants were exercised as of December 31, 2021.
18 Equity Based Compensation
In connection with
the Closing, the Company adopted the 2021 Equity Incentive Plan, under which 38,317,399 shares of Class A Common Stock were reserved for issuance for incentive stock compensation. The 2021 Equity Incentive Plan allows for the issuance of
incentive stock options, non-qualified stock options, restricted stock awards, stock appreciation rights, restricted stock units, and performance awards. The Board determines the period over which options
become exercisable and options generally vest over a two to five-year period. The 2021 Equity Incentive Plan was approved concurrently with the Closing. As of the years ended December 31, 2021 and 2020, there were no incentive stock
compensation grants.
In connection with the Closing, the Company adopted the 2021 Employee Stock Purchase Plan, under which 11,495,220 shares of
Class A Common Stock were reserved for purchase by employees through the 2021 Employee Stock Purchase Plan. The 2021 Employee Stock Purchase Plan is subject to the provisions of Section 423 of the IRC and regulations thereunder. The
Compensation Committee of the Board will administer the 2021 Employee Stock Purchase Plan, including discretionary authority to determine the time and frequency of granting options, the terms and conditions of the options and the number of shares
subject to each option. The 2021 Employee Stock Purchase Plan was approved concurrently with the Closing. As of the years ended December 31, 2021 and 2020, no shares had been purchased under the 2021 Employee Stock Purchase Plan.
F-38
19 Operating Leases
Noncancellable operating leases for office space, vehicles and equipment expire in various years through 2036. The majority of Hagertys leases require
the Company to pay its share of certain costs (maintenance and insurance) and include an annual increase of no more than the consumer price index and an option to renew.
Future minimum lease payments in the following five years are as follows (in thousands):
|
|
|
|
|
2022 |
|
$ |
9,068 |
|
2023 |
|
|
8,783 |
|
2024 |
|
|
8,587 |
|
2025 |
|
|
8,451 |
|
2026 |
|
|
7,936 |
|
Thereafter |
|
|
53,940 |
|
|
|
|
|
|
Total |
|
$ |
96,765 |
|
|
|
|
|
|
Total rent expense for the years ended December 31, 2021 and 2020 was $7.4 million and $6.9 million
respectively.
20 Postretirement Benefits
The
Company offers postretirement benefits. In the U.S., the Company offers a 401(k) profit-sharing plan covering substantially all U.S. employees. The plan provides for 4.0% matching contributions. Contributions to the plan were $4.9 million and
$3.8 million for the years ended December 31, 2021 and 2020, respectively.
21 Taxation
United States The Hagerty Group is taxed as a pass-through ownership structure under provisions of the IRC and a similar section of state income
tax law except for Hagerty Re. Any taxable income or loss generated by The Hagerty Group is passed through to and included in the taxable income or loss of the Hagerty Group Unit Holders, including the Company. The Company is taxed as a corporation
under the IRC and pays corporate, federal, state and local taxes with respect to income allocated from The Hagerty Group. The Company has a TRA with the Legacy Unit Holders that requires the Company to pay 85% of the tax savings that are realized as
a result of increases in the tax basis in The Hagerty Groups assets as a result of an exchange of Hagerty Group Units and Class V Common Stock for Class A Common Stock or cash.
Canada Canadian entities are taxed as non-resident corporations and subject to income tax in Canada
under provisions of the Canadian Revenue Agency.
United Kingdom U.K. entities are taxed as corporations and subject to income tax in the
U.K. under provisions of HM Revenue & Customs.
Bermuda Hagerty Re has received an undertaking from the Bermuda government
exempting it from all local income, withholding and capital gains taxes until March 31, 2035. At present time no such taxes are levied in Bermuda.
Effective January 1, 2019, Hagerty Re made an irrevocable election under Section 953(d) of the U.S. IRC, as amended, to be taxed as a U.S. domestic
corporation. As a result of this domestic election, Hagerty Re is subject to U.S. taxation on its world-wide income as if it were a U.S. corporation. In accordance with an agreement between Hagerty Re and the Internal Revenue Service
(IRS), Hagerty Re established an irrevocable letter of credit with the IRS in 2021.
F-39
Income (loss) before income tax expense includes the following components:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
United States |
|
$ |
(44,434 |
) |
|
$ |
21,318 |
|
Foreign |
|
|
(10,169 |
) |
|
|
(6,459 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(54,603 |
) |
|
$ |
14,859 |
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) attributable to income (loss) for the years ended December 31, 2021 and 2020 consists
of:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,753 |
|
|
$ |
3,383 |
|
Foreign |
|
|
(40 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
3,713 |
|
|
$ |
3,342 |
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,038 |
|
|
$ |
1,478 |
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,038 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,751 |
|
|
$ |
4,820 |
|
|
|
|
|
|
|
|
|
|
Income tax expense reflected in the financial statements differs from the tax computed by applying the statutory U.S. federal
rate of 21% to Net income (loss) before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands (except percentages) |
|
Income tax (benefit) expense at statutory rate |
|
$ |
(11,467 |
) |
|
|
21 |
% |
|
$ |
3,120 |
|
|
|
21 |
% |
State taxes |
|
|
(163 |
) |
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
Loss not subject to entity-level taxes |
|
|
6,485 |
|
|
|
(12 |
)% |
|
|
706 |
|
|
|
5 |
% |
Foreign rate differential |
|
|
(276 |
) |
|
|
1 |
% |
|
|
(161 |
) |
|
|
(1 |
)% |
Change in valuation allowance |
|
|
2,759 |
|
|
|
(5 |
)% |
|
|
1,193 |
|
|
|
8 |
% |
Change in fair value of warrant liability |
|
|
8,933 |
|
|
|
(16 |
)% |
|
|
|
|
|
|
0 |
% |
Permanent items |
|
|
477 |
|
|
|
(1 |
)% |
|
|
|
|
|
|
0 |
% |
Other, net |
|
|
3 |
|
|
|
0 |
% |
|
|
(38 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
6,751 |
|
|
|
(12 |
)% |
|
$ |
4,820 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amount recognized for tax purposes, as adjusted for foreign currency translation. At December 31, 2021 and 2020, the tax effects of temporary differences that give rise to significant
portions of the deferred tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Discount on provision for losses and loss adjustment expenses |
|
$ |
557 |
|
|
$ |
392 |
|
Unearned premiums |
|
|
7,345 |
|
|
|
5,238 |
|
Accrued professional fees |
|
|
5 |
|
|
|
7 |
|
Unrealized foreign currency gain |
|
|
70 |
|
|
|
97 |
|
Excess tax basis |
|
|
168,014 |
|
|
|
|
|
Foreign NOL carryforward |
|
|
6,492 |
|
|
|
4,771 |
|
Other |
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
182,798 |
|
|
|
10,505 |
|
Less: valuation allowance |
|
|
(174,821 |
) |
|
|
(4,771 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax assets |
|
$ |
7,977 |
|
|
$ |
5,734 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
$ |
(17,122 |
) |
|
$ |
(12,300 |
) |
Excise tax accrual |
|
|
(1,279 |
) |
|
|
(820 |
) |
Unrealized foreign currency gain |
|
|
(70 |
) |
|
|
(98 |
) |
Unrealized investment gain |
|
|
(16 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
(18,487 |
) |
|
$ |
(13,233 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(10,510 |
) |
|
$ |
(7,499 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or
all, of the deferred tax assets will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, the Company believes it is more likely than not that certain
deferred tax assets will not be utilized. As a result, the Company had a valuation allowance of $174.8 million and $4.8 million as of December 31, 2021 and 2020, respectively.
Significant inputs and assumptions were used to estimate the future expected payments under the TRA, including the timing of the realization of the tax
benefits and a tax savings rate of approximately 25.5%. The estimated value of the TRA recorded by the Company at the Closing was $3.5 million which was limited by the ability to currently utilize tax benefits and was recorded in Other
long-term liabilities with an offsetting entry to Additional paid-in capital within the Consolidated Balance Sheets. There is no change to the estimated value from the Closing to
December 31, 2021. The Company recorded a deferred tax asset for the difference between outside tax basis and book basis of the Companys investment in assets of The Hagerty Group of $167.4 million at the Closing with an offsetting
valuation allowance as it was more likely than not that the deferred tax asset will not be realized. These amounts were recorded to Additional paid-in capital. At December 31, 2021, the
deferred tax asset and offsetting valuation allowance is $168.0 million, adjusted from the Closing for net losses and nondeductible expenses.
The
Company has foreign income tax net operating loss (NOL) carryforwards related to foreign operations of approximately $45.3 million and $32.0 million as of December 31, 2021 and 2020, respectively. The Company has recorded
a deferred tax asset of $6.5 million reflecting the benefit of these loss carryforwards as of
F-41
December 31, 2021. Of the deferred tax assets, $1.7 million does not expire, and the remaining $4.8 million expires as follows (in thousands):
|
|
|
|
|
2036 |
|
$ |
419 |
|
2037 |
|
|
752 |
|
2038 |
|
|
899 |
|
2039 |
|
|
|
|
2040 |
|
|
1,222 |
|
2041 |
|
|
1,498 |
|
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction, as well as many state and
foreign jurisdictions. As of December 31, 2021, tax years 2018, 2019 and 2020 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2021, the Company is no longer subject to U.S. federal, state, local
or foreign examinations for years before 2018.
Tax year 2017 was open as of December 31, 2020. The Company is currently under examination by the
Canadian Revenue Agency for the tax years 2017 through 2018.
22 Related-Party Transactions
As a result of the Business Combination, as of December 31, 2021, Markel had a 23.4% ownership in the Company and State Farm Mutual Automobile Insurance
Company (State Farm) had a 15.0% ownership in the Company. As such, both Markel and State Farm are considered related parties.
State
Farm
State Farm and Hagerty entered into a master alliance agreement in 2020 to establish an alliance insurance program where State Farms
customers, through the State Farm agents, would have access to Hagerty features and services which is expected to begin in late 2022. Under this agreement, State Farm paid Hagerty an advanced commission of $20.0 million in 2020 and the parties
have entered into a managing general underwriter agreement where the State Farm Classic+ policy will be offered, through State Farm Classic Insurance Company, a new wholly owned subsidiary of State Farm, subject to any applicable state regulatory
review and approval. The State Farm Classic+ policy will be available to new and existing customers through the State Farm agents. Hagerty Insurance Agency, LLC would be paid commission under the managing general underwriter agreement and ancillary
agreements for servicing the State Farm Classic+ policies along with the opportunity for fee revenue for Hagerty Drivers Club, LLC connected with Hagertys membership products and services that, in addition to the State Farm Classic+ policy,
are made available to State Farm customers.
Markel
Alliance Agreement: The Companys affiliated U.S. and U.K. MGA subsidiaries have personal and commercial lines of business written with
Markel-affiliated carriers. The following tables provide information about Markel-affiliated due to insurer liabilities and commission revenue under the agreement with Markel subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
in thousands (except percentages) |
|
Due to insurer |
|
$ |
54,850 |
|
|
$ |
45,593 |
|
Percent of total |
|
|
95 |
% |
|
|
93 |
% |
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
Commission revenue |
|
$ |
239,432 |
|
|
$ |
216,033 |
|
Percent of total |
|
|
90 |
% |
|
|
91 |
% |
F-42
Reinsurance Agreement: Under a quota share agreement with Evanston, Hagerty Re reinsured 60% and 50%
of the risks for the years ended December 31, 2021 and 2020, respectively, written through the Companys U.S. MGAs. Additionally, in the first quarter of 2021, Hagerty Re began reinsuring risks produced by the Companys U.K. MGA and
underwritten by Markel International Insurance Company Limited under a 60% quota share agreement. All balances listed below are related to business with a Markel affiliate:
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
Assets |
|
in thousands |
|
Premiums receivable |
|
$ |
72,697 |
|
|
$ |
49,938 |
|
Deferred acquisition costs, net |
|
|
78,449 |
|
|
|
55,833 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
151,146 |
|
|
$ |
105,771 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Losses payable |
|
$ |
33,459 |
|
|
$ |
21,049 |
|
Provision for unpaid losses and loss adjustment expenses |
|
|
70,680 |
|
|
|
53,281 |
|
Unearned premiums |
|
|
167,541 |
|
|
|
118,207 |
|
Commissions payable |
|
|
59,511 |
|
|
|
42,644 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
331,191 |
|
|
$ |
235,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
Revenue |
|
in thousands |
|
Earned premium |
|
$ |
281,794 |
|
|
$ |
214,112 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Ceding commission |
|
$ |
134,946 |
|
|
$ |
103,479 |
|
Losses and loss adjustment expenses |
|
|
116,396 |
|
|
|
86,906 |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
251,342 |
|
|
$ |
190,385 |
|
|
|
|
|
|
|
|
|
|
23 Commitments and Contingencies
Litigation From time to time, Hagerty is 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, Hagerty does not believe that the ultimate resolution of these actions will have a material adverse effect on the Companys financial position, results of operations,
liquidity, or capital resources.
Employee Compensation Agreements In the ordinary course of conducting its business, the Company enters
into certain employee compensation agreements from time to time which commit the Company to severance obligations in the event an employee terminates employment with the Company. If applicable, these obligations are included in the accrued expenses
lines of the Consolidated Balance Sheets.
F-43
24 Quarterly Financial Information (unaudited)
The following table provides a summary of unaudited quarterly financial information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter(1) |
|
|
Year Ended |
|
2021 |
|
in thousands |
|
Commission and fee revenue |
|
$ |
54,373 |
|
|
$ |
83,443 |
|
|
$ |
76,188 |
|
|
$ |
57,567 |
|
|
$ |
271,571 |
|
Earned premium |
|
|
63,234 |
|
|
|
70,437 |
|
|
|
78,700 |
|
|
|
83,453 |
|
|
|
295,824 |
|
Membership and other revenue |
|
|
11,593 |
|
|
|
13,529 |
|
|
|
13,198 |
|
|
|
13,364 |
|
|
|
51,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
129,200 |
|
|
$ |
167,409 |
|
|
$ |
168,086 |
|
|
$ |
154,384 |
|
|
$ |
619,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(5,096 |
) |
|
$ |
14,274 |
|
|
$ |
1,758 |
|
|
$ |
(21,006 |
) |
|
$ |
(10,070 |
) |
Net income (loss) |
|
$ |
(6,850 |
) |
|
$ |
12,503 |
|
|
$ |
(548 |
) |
|
$ |
(66,459 |
) |
|
$ |
(61,354 |
) |
|
|
2020 |
|
|
|
Commission and fee revenue |
|
$ |
46,015 |
|
|
$ |
71,993 |
|
|
$ |
67,939 |
|
|
$ |
50,496 |
|
|
$ |
236,443 |
|
Earned premium |
|
|
50,454 |
|
|
|
52,954 |
|
|
|
56,969 |
|
|
|
60,125 |
|
|
|
220,502 |
|
Membership and other revenue |
|
|
10,390 |
|
|
|
10,515 |
|
|
|
10,873 |
|
|
|
10,825 |
|
|
|
42,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
106,859 |
|
|
$ |
135,462 |
|
|
$ |
135,781 |
|
|
$ |
121,446 |
|
|
$ |
499,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(4,171 |
) |
|
$ |
17,441 |
|
|
$ |
12,650 |
|
|
$ |
(10,074 |
) |
|
$ |
15,846 |
|
Net income (loss) |
|
$ |
(5,505 |
) |
|
$ |
16,178 |
|
|
$ |
10,979 |
|
|
$ |
(11,613 |
) |
|
$ |
10,039 |
|
(1) |
The fourth quarter 2021 net loss of $66.5 million is primarily due to a Change in fair value of warrant
liabilities expense of $42.5 million that was recognized as a non-operating expense, as well as approximately $13.3 million, which was primarily accelerated vesting of incentive plans related to the
Business Combination. |
25 Subsequent Events
On January 5, 2022, The Hagerty Group, a subsidiary of Hagerty, Inc. entered into a Common Stock Purchase Agreement (the Agreement) with Broad
Arrow Group, Inc., a Delaware corporation (BAG), and additional purchasers, whereby the Company invested in BAG. Under the terms of the Agreement, the Company invested $15.25 million in exchange for ownership of approximately 40% of
BAG and entered into a joint venture with BAG. Based in Ann Arbor, MI, the joint venture between BAG and Hagerty will enhance Hagertys portfolio of automotive-focused offerings for car enthusiasts by offering new services for the buying and
selling of collector cars. Further, Hagerty will appoint two of the seven members to the Board of Directors of BAG. Kenneth Ahn, who will serve as the Chief Executive Officer of BAG, will also be employed at Hagerty, as President of Marketplace.
Hagerty has employed three other BAG founders as executives within the Marketplace team.
As of March 23, 2022 the Exchange Agreement was amended to
revise the option for the Company to settle the exchange of Class V Common Stock and associated Hagerty Group Units in cash. Under the terms of the amendment, a cash exchange is only allowable in the event that net cash proceeds are received
from a new permanent equity offering. The result of the amendment will be a reversal of the adjustment made to recognize the redeemable non-controlling interest at the greater of the initial fair value or the
accreted redemption value and reclassification from temporary equity to permanent equity. The following table illustrates the impact from the amendment of the Exchange Agreement on Total equity as if the amendment occurred on December 31, 2021.
|
|
|
|
|
|
|
in thousands |
|
Total equity as of December 31, 2021 |
|
$ |
(322,476 |
) |
Reclassification of temporary equity as a result of the Exchange Agreement amendment |
|
|
593,277 |
|
|
|
|
|
|
Total equity adjusted for the Exchange Agreement amendment |
|
$ |
270,801 |
|
|
|
|
|
|
F-44