Notes To Consolidated Financial Statements (Unaudited)
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 car enthusiasts and its members.
The Company operates several entities which collectively support Hagerty's revenue streams. Hagerty earns commission and fee revenue 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 Hagerty's 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"), which is a related party. Refer to Note 17 — Related-Party Transactions for additional information.
•The business produced by the Canadian MGA is written by Aviva Canada Inc. ("Aviva"), through Aviva's Canadian subsidiary, Elite Insurance Company ("Elite"). In turn, Hagerty Re assumes premiums through a quota share agreement with Elite.
•In 2021, Hagerty Re entered into a reinsurance agreement with Markel International Insurance Company Limited to reinsure classic auto risks produced by Hagerty's 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, which is a related party. Refer to Note 17 — Related-Party Transactions for additional information.
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, an award-winning magazine, valuation services, exclusive events and automotive third-party discounts. The Company owns and operates collector vehicle events, including the Amelia and Greenwich Concours d'Elegance, earning revenue through ticket sales and sponsorships. The Company also operates Hagerty Garage + Social, a network of world-class vehicle storage and exclusive social club facilities for classic, collector and exotic cars owners. The Company owns and operates Hagerty Marketplace, which offers services for buying, selling and financing collector vehicles through classified listings, auctions and facilitating private sales.
In August 2022, the Company acquired the remaining 60% outstanding equity interest of Broad Arrow Group, Inc., and its consolidated subsidiaries ("Broad Arrow"). The acquisition will enable the Company to further leverage respective product offerings under Hagerty Marketplace. Refer to Note 6 — Acquisitions and Investments for additional information.
The Company’s headquarters are located in Traverse City, Michigan.
Basis of Presentation — The Company's Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and with the instructions for Quarterly Reports on Form 10-Q and Regulation S-X and include the accounts of Hagerty, Inc. and The Hagerty Group with its consolidated subsidiaries.
The financial statements reflect all normal recurring adjustments and accruals that are, in the opinion of management, necessary for a fair statement of financial position and results of operations for the interim periods presented. Interim financial statements do not include all of the information and notes required by GAAP for annual consolidated financial statements. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Principles of Consolidation — The Company's Condensed Consolidated Financial Statements contain the accounts of Hagerty and its majority-owned or controlled subsidiaries. As of September 30, 2022, the Company had economic ownership of 24.5% of The Hagerty Group. In addition, Member Hubs Holding, LLC ("MHH"), which operates as Hagerty Garage + Social, is an 80% owned subsidiary of The Hagerty Group. The Company consolidates these entities under the voting interest method guidance in accordance with Accounting Standards Codification ("ASC") Topic 810, Consolidations ("ASC 810"). Non-controlling interest is presented separately on the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Condensed Consolidated Balance Sheets, and Condensed Consolidated Statements of Changes in Members' and Stockholders' Equity.
Prior to August 2022, the Company owned approximately 40% of the outstanding equity interest of Broad Arrow and accounted for it as an equity method investment. Subsequent to the acquisition of the remaining 60% outstanding equity interest of Broad Arrow in August 2022, Broad Arrow became a wholly-owned subsidiary of the Company and as a result, is consolidated in accordance with ASC 810.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Business Combination — On December 2, 2021, (the "Closing"), The Hagerty Group completed a business combination with Aldel Financial Inc. ("Aldel"), and Aldel Merger Sub LLC ("Merger Sub"), a Delaware limited liability company and wholly owned subsidiary of Aldel (the "Business Combination"). 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. ("HHC") 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 (the "Board") as well as having majority voting ownership.
•The Hagerty Group’s management is also the management of the Company.
•The Hagerty Group is larger as compared to Aldel based on assets, revenue 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 5 — 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 the Company's Condensed 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 Condensed Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Although the estimates are considered reasonable, actual results could materially differ from those estimates.
The most significant estimates that are susceptible to notable change in the near-term relate 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 Company’s results of operations in the period for which those estimates changed.
Segment Information — The Company has one operating segment and one reportable segment. The Company’s Chief Operating Decision Maker ("CODM") is the Chief Executive Officer ("CEO"), who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis. The Company’s management approach is to utilize an internally developed strategic decision making framework with its members 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 members.
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 "Foreign currency translation adjustments", a component of Accumulated other comprehensive income (loss). Transaction gains and losses are recognized in "Interest and other income (expense)" within the Condensed Consolidated Statements of Operations.
Notes Receivable — Notes receivable, net of an allowance for loan losses, includes amounts due on term loans secured by collector vehicles. The allowance for loan losses is estimated based upon historical experience, the impact of current economic conditions on the collateral value, knowledge about the client's financial standing and other factors and is evaluated periodically. Term loans are recorded on the date the loan is made based on the loan amount in the agreement. Term loans normally have an initial maturity of one year with an option to renew for an additional year, and accrue interest based on the stated rate in the loan agreement. As a result, the valuation of collector vehicles is inherently subjective, and the realizable value of collector vehicles often fluctuates over time. Refer to Note 4 — Notes Receivable for additional information.
Equity Method Investments — The Company applies the equity method of accounting to 20% to 50% owned investments where Hagerty exercises significant influence, in accordance with ASC Topic 323 Investments—Equity Method and Joint Ventures.
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, the Company 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 Condensed Consolidated Statements of Operations each reporting period. Refer to Note 14 — Warrant Liabilities for additional information.
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, Broad Arrow and various foreign subsidiaries. Any taxable income or loss generated by The Hagerty Group is passed through to and included in the taxable income or loss of all holders of limited liability units in The Hagerty Group ("Hagerty Group Units"), which includes 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, Broad Arrow and various foreign subsidiaries are treated as taxable entities and income taxes are provided where applicable. Refer to Note 16 — Taxation for additional information.
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 the Condensed Consolidated Statements of Operations 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.
Tax Receivable Agreement Liability — In connection with the Business Combination, Hagerty, Inc. entered into a 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 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 produces taxable income and the resulting cash tax liability is reduced by deducting 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" on the Condensed Consolidated Balance Sheets.
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 more likely than not to be realized.
•At the Closing, Hagerty, Inc. recorded 85% of the estimated realizable tax benefit as an increase to the liability due under the TRA, which is recorded within "Other long-term liabilities", with a decrease to "Additional paid-in capital" on the Condensed Consolidated Balance Sheets. The remaining 15% of the estimated realizable tax benefit will be retained by Hagerty, Inc.
All of the effects of changes in any of the estimates after the date of the redemption or exchange will be recorded within "Interest and other income (expense)" in the Condensed Consolidated Statements of Operations.
Non-controlling Interest — Hagerty, Inc. is the sole managing member of The Hagerty Group and, as a result, consolidates the financial results of The Hagerty Group. Hagerty, Inc. reports a non-controlling interest representing the economic interest in The Hagerty Group held by other unit holders of The Hagerty Group. Additionally, non-controlling interest represents the portion of economic ownership of MHH that is not owned or controlled by The Hagerty Group. Hagerty, Inc. consolidates its ownership of The Hagerty Group and MHH under the voting interest method.
Redeemable Non-controlling Interest — In connection with the Business Combination, Hagerty, Inc. entered into an exchange agreement with the Legacy Unit Holders ("Legacy Unit Holders Exchange Agreement"). The Legacy Unit Holders Exchange Agreement permitted 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 had 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 was considered redeemable as the redemption was considered outside the Company's control. Redeemable non-controlling interest represented the economic interests of the Legacy Unit Holders. Income or loss was attributed to the redeemable non-controlling interest based on the weighted average ownership of the Hagerty Group Units outstanding during the period held by the Legacy Unit Holders. The redeemable non-controlling interest was measured at the greater of the initial fair value or the redemption value and was required to be presented as temporary equity on the Condensed Consolidated Balance Sheets as of December 31, 2021.
On March 23, 2022, the Legacy Unit Holders 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. As a result of the amendment, the redeemable non-controlling interest was accreted to its redemption value as of March 23, 2022 and subsequently removed from temporary equity and recorded to equity as non-controlling interest.
Earnings Per Share — Hagerty calculates basic and dilutive earnings per share ("EPS") in accordance with ASC Topic 260 Earnings Per Share ("ASC 260"). Basic earnings per share is computed by dividing Net income (loss) attributable to controlling interest 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 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 equal to 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.
Stock-Based Compensation — Hagerty issues restricted stock units and performance restricted stock units under the 2021 Equity Incentive Plan. The grant date fair value for restricted stock units is determined based on the closing price of the Company's common stock on the business day prior to grant. Hagerty uses a Monte Carlo simulation model to estimate the fair value of performance restricted stock units. Stock-based compensation expense is recognized over the applicable requisite service period of the award, generally using the straight-line method. Forfeitures are recorded as they occur. Refer to Note 15 — Stock-Based Compensation for additional information.
Recently Adopted Accounting Guidance
Media Content — In March 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 are capitalized and amortized over the estimated useful life of the asset. The adoption of the ASU had a $3.3 million impact on the Company’s Condensed Consolidated Financial Statements through December 31, 2021.
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, which provides optional relief to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference 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. Both ASUs were effective immediately upon issuance and adoption of these ASUs did not have a material impact on the Company's Condensed Consolidated Financial Statements and related disclosures.
Convertible Instruments and Contracts — In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s 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 EPS for convertible instruments and requires the use of the if-converted method. The amendments in ASU 2020-06 are effective for the Company as of January 1, 2022 with the option to early adopt as of January 1, 2021. The Company early adopted ASU 2020-06 effective January 1, 2021 and the adoption of the ASU did not have an impact on the Company's Condensed 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 on the Condensed Consolidated Balance Sheets. The guidance requires disclosure to enable users of the Condensed 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 and emerging growth companies that had not yet adopted the original ASU. Under the amended guidance, the leasing standard will be effective for the Company’s 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 an emerging growth company and has elected to adopt ASC 842 with its 2022 Annual Financial Statements. The Company is currently evaluating the effect of adoption of these standards on the Company's Condensed Consolidated Financial Statements and related disclosures and expects to record a material right-of-use asset and liability on the Condensed Consolidated Balance Sheets related to the Company's operating leases. Upon adoption, the Company expects to elect the package of practical expedients, which, among other things, does not require the Company 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 Company's Condensed Consolidated Financial Statements and related disclosures.
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 (loss). 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 the Company's Condensed Consolidated Financial Statements and related disclosures.
2 — Revenue
In August 2022, the Company acquired the remaining 60% outstanding equity interest of Broad Arrow. Revenue from Broad Arrow, which offers services for buying, selling and financing collector cars, primarily through auctions and facilitating private sales is recognized at the time of sale pursuant to ASC Topic 606, Revenue from Contracts with Customers. Revenue related to Broad Arrow is recognized in Membership, marketplace and other revenue within the Condensed Consolidated Statements of Operations. Refer to Note 6 — Acquisitions and Investments for additional information.
Disaggregation of Revenue — The following table presents Hagerty's revenue by distribution channel offering, as well as a reconciliation to total revenue for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Agent | | Direct | | Total |
| | | | |
| in thousands |
Three months ended September 30, 2022 |
| Commission and fee revenue | $ | 37,998 | | | $ | 33,031 | | | $ | 71,029 | |
| Contingent commission | 7,937 | | | 6,491 | | | 14,428 | |
| Membership revenue | — | | | 11,375 | | | 11,375 | |
| Marketplace and other revenue | — | | | 12,438 | | | 12,438 | |
| Total revenue from customer contracts | $ | 45,935 | | | $ | 63,335 | | | $ | 109,270 | |
| Earned premium recognized under ASC 944 | | | | | 107,487 | |
| Total revenue | | | | | $ | 216,757 | |
| | | | | |
| Three months ended September 30, 2021 |
| Commission and fee revenue | $ | 32,895 | | | $ | 28,491 | | | $ | 61,386 | |
| Contingent commission | 7,106 | | | 7,696 | | | 14,802 | |
| Membership revenue | — | | | 10,411 | | | 10,411 | |
| Marketplace and other revenue | — | | | 2,787 | | | 2,787 | |
| Total revenue from customer contracts | $ | 40,001 | | | $ | 49,385 | | | $ | 89,386 | |
| Earned premium recognized under ASC 944 | | | | | 78,699 | |
| Total revenue | | | | | $ | 168,085 | |
| | | | | | | | | | | | | | | | | |
| Agent | | Direct | | Total |
| | | | |
| in thousands |
Nine months ended September 30, 2022 |
| Commission and fee revenue | $ | 104,390 | | | $ | 91,183 | | | $ | 195,573 | |
| Contingent commission | 26,169 | | | 21,682 | | | 47,851 | |
| Membership revenue | — | | | 32,824 | | | 32,824 | |
| Marketplace and other revenue | — | | | 23,618 | | | 23,618 | |
| Total revenue from customer contracts | $ | 130,559 | | | $ | 169,307 | | | $ | 299,866 | |
| Earned premium recognized under ASC 944 | | | | | 290,719 | |
| Total revenue | | | | | $ | 590,585 | |
| | | | | |
| Nine months ended September 30, 2021 |
| Commission and fee revenue | $ | 90,450 | | | $ | 78,797 | | | $ | 169,247 | |
| Contingent commission | 23,264 | | | 21,493 | | | 44,757 | |
| Membership revenue | — | | | 29,965 | | | 29,965 | |
| Marketplace and other revenue | — | | | 8,355 | | | 8,355 | |
| Total revenue from customer contracts | $ | 113,714 | | | $ | 138,610 | | | $ | 252,324 | |
| Earned premium recognized under ASC 944 | | | | | 212,370 | |
| Total revenue | | | | | $ | 464,694 | |
The following table presents Hagerty's revenue disaggregated by geographic area, as well as a reconciliation to total revenue for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Canada | | Europe | | Total |
| | | | | | | |
| in thousands |
| Three months ended September 30, 2022 |
| Commission and fee revenue | $ | 63,941 | | | $ | 5,940 | | | $ | 1,148 | | | $ | 71,029 | |
| Contingent commission | 14,491 | | | — | | | (63) | | | 14,428 | |
| Membership revenue | 10,538 | | | 837 | | | — | | | 11,375 | |
| Marketplace and other revenue | 11,740 | | | 227 | | | 471 | | | 12,438 | |
| Total revenue from customer contracts | $ | 100,710 | | | $ | 7,004 | | | $ | 1,556 | | | $ | 109,270 | |
| Earned premium recognized under ASC 944 | | | | | | | 107,487 | |
| Total revenue | | | | | | | $ | 216,757 | |
| | | | | | | |
| Three months ended September 30, 2021 |
| Commission and fee revenue | $ | 54,919 | | | $ | 5,293 | | | $ | 1,174 | | | $ | 61,386 | |
| Contingent commission | 15,134 | | | (373) | | | 41 | | | 14,802 | |
| Membership revenue | 9,664 | | | 747 | | | — | | | 10,411 | |
| Marketplace and other revenue | 2,322 | | | 101 | | | 364 | | | 2,787 | |
| Total revenue from customer contracts | $ | 82,039 | | | $ | 5,768 | | | $ | 1,579 | | | $ | 89,386 | |
| Earned premium recognized under ASC 944 | | | | | | | 78,699 | |
| Total revenue | | | | | | | $ | 168,085 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Canada | | Europe | | Total |
| | | | | | | |
| in thousands |
| Nine months ended September 30, 2022 |
| Commission and fee revenue | $ | 176,011 | | | $ | 16,214 | | | $ | 3,348 | | | $ | 195,573 | |
| Contingent commission | 47,757 | | | — | | | 94 | | | 47,851 | |
| Membership revenue | 30,317 | | | 2,507 | | | — | | | 32,824 | |
| Marketplace and other revenue | 21,806 | | | 697 | | | 1,115 | | | 23,618 | |
| Total revenue from customer contracts | $ | 275,891 | | | $ | 19,418 | | | $ | 4,557 | | | $ | 299,866 | |
| Earned premium recognized under ASC 944 | | | | | | | 290,719 | |
| Total revenue | | | | | | | $ | 590,585 | |
| | | | | | | |
| Nine months ended September 30, 2021 |
| Commission and fee revenue | $ | 152,134 | | | $ | 13,983 | | | $ | 3,130 | | | $ | 169,247 | |
| Contingent commission | 45,003 | | | (355) | | | 109 | | | 44,757 | |
| Membership revenue | 27,843 | | | 2,122 | | | — | | | 29,965 | |
| Marketplace and other revenue | 7,121 | | | 172 | | | 1,062 | | | 8,355 | |
| Total revenue from customer contracts | $ | 232,101 | | | $ | 15,922 | | | $ | 4,301 | | | $ | 252,324 | |
| Earned premium recognized under ASC 944 | | | | | | | 212,370 | |
| Total revenue | | | | | | | $ | 464,694 | |
Earned Premium — The following table presents Hagerty Re's total premiums assumed and the change in unearned premiums for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended
September 30, | | Nine months ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| in thousands |
| Underwriting income: | | | | | | | |
| Premiums assumed | $ | 136,187 | | | $ | 103,359 | | | $ | 373,442 | | | $ | 284,598 | |
| Reinsurance premiums ceded | (1,268) | | | — | | | (10,958) | | | (8,465) | |
| Net premiums assumed | 134,919 | | | 103,359 | | | 362,484 | | | 276,133 | |
| Change in unearned premiums | (25,229) | | | (22,741) | | | (74,624) | | | (67,041) | |
Change in deferred reinsurance premiums | (2,203) | | | (1,919) | | | 2,859 | | | 3,278 | |
| Net premiums earned | $ | 107,487 | | | $ | 78,699 | | | $ | 290,719 | | | $ | 212,370 | |
Contract Assets and Liabilities — The following table is a summary of the Company's contract assets and liabilities for the periods specified below. Contract assets are classified as "Commission receivable", and liabilities are classified as "Contract liabilities" within current and non-current liabilities on the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| in thousands |
| Contract assets | $ | 48,213 | | | $ | 57,596 | |
| Contract liabilities | $ | 46,663 | | | $ | 41,390 | |
Contract assets consist of contingent underwriting commission ("CUC") receivables, which are earned throughout the year and received in the first quarter of the following year. As such, the Commission receivable balance is generally smallest in the first quarter, and grows throughout the year as additional CUC receivables are accrued.
Contract liabilities consist of cash collected in advance of revenue recognition, which primarily includes HDC membership and the State Farm advanced commission (refer to Note 17 — Related-Party Transactions for additional information).
3 — Prepaid Expenses and Other Assets
The following table is a summary of current and long-term prepaid expenses and other assets as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | | | |
| | in thousands |
| Prepaid sales, general and administrative expenses | $ | 18,788 | | | $ | 18,004 | |
| Prepaid SaaS implementation costs | 18,217 | | | 16,318 | |
| Fixed income investments | 11,094 | | | 10,785 | |
Reinsurance recoverable (1) | 8,100 | | | — | |
| Contract costs | 4,978 | | | 4,160 | |
| Media content | 4,833 | | | 3,335 | |
| Deferred reinsurance premiums ceded | 3,169 | | | 310 | |
Other (2) | 17,359 | | | 7,808 | |
| Prepaid expenses and other assets | $ | 86,538 | | | $ | 60,720 | |
| | | | |
(1) Reinsurance recoverable represents recoverable losses in excess of $10.0 million related to Hurricane Ian. Refer to Note 8 — Provision for Unpaid Losses and Loss Adjustment Expenses for additional information.
(2) As of September 30, 2022, other assets primarily includes $4.0 million of other investments, $3.5 million of fair value of interest rate swap, $2.8 million of taxes receivable, $2.5 million of collector vehicle investments and $1.1 million of deferred financing costs.
4 — Notes Receivable
In August 2022, the Company acquired the remaining outstanding equity interest in Broad Arrow. Broad Arrow makes term loans secured by collector cars, primarily to high net worth clients and businesses. Term loans primarily have an initial maturity of one year with an option to renew for an additional year, and typically carry a variable market rate of interest. As these loans typically mature in one year, the carrying value of the loans approximates fair value.
In estimating the realizable value of collector cars pledged as collateral for loans, we consider the current and expected future value based on our expertise in the collector car market.
As of September 30, 2022, the net notes receivable balance of Broad Arrow was $29.7 million, of which $22.4 million was classified within current assets and $7.3 million was classified within long-term assets on our Condensed Consolidated Balance Sheets. The classification of a loan as current or non-current takes into account the contractual maturity date of the loan, as well as the likelihood of renewing the loan on or before its contractual maturity date.
Broad Arrow aims to mitigate the risk associated with a potential devaluation in collateral by targeting a maximum loan-to-value ("LTV") ratio of 65% (i.e., the principal loan amount divided by the estimated collateral value).
The Company believes that the quality of the collateral and the creditworthiness of the borrower are the critical credit quality indicators for the secured loans made by Broad Arrow. Key factors in assessing the quality of the collateral include year, make, model, mileage, history, and in the case of classic cars provenance, quality of restoration (if applicable), and originality of body, chassis and mechanical components, and comparable market transaction values. These factors help determine the value of the collateral in calculating the LTV ratio. The creditworthiness of the borrower is based on their financial and credit history.
The table below provides the aggregate LTV ratio for the Broad Arrow loan portfolio as of September 30, 2022:
| | | | | |
| September 30, 2022 |
| |
| in thousands |
| Secured loans | $ | 29,737 | |
| Estimate of collateral value | $ | 62,457 | |
| Aggregate LTV ratio | 48 | % |
Broad Arrow considers a loan to be past due when interest payments are not paid within 10 days of the monthly due date, or if principal payments are not paid by the contractual maturity date. There were no past due loans as of September 30, 2022.
A loan is considered to be impaired when we determine that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. The determination of whether a specific loan is impaired, and the amount of any required allowance, is based on the facts available to management and is reevaluated and adjusted as additional facts become known. If a loan is considered to be impaired, finance revenue is no longer recognized and steps are taken to restructure or take possession of the collateral, if necessary, bad debt expense is recorded for any principal or accrued interest that is deemed uncollectible. As of September 30, 2022, there were no impaired Broad Arrow loans outstanding.
Allowance for Loan Losses
The Company has no history of past due loans and does not believe there is a risk of loan loss based on criteria of clients served, no known adverse client developments and the sustained economic value of the collector cars used as collateral. Therefore, as of September 30, 2022, there is no allowance for loan losses recorded.
5 — 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 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 (1) 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 (2) 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 Company’s 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 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 Aldel's 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 Aldel's Class B Common Stock were converted into shares of Class A Common Stock on a one-for-one basis; and
•572,500 outstanding shares of Aldel's Class A Common Stock became Hagerty Class A Common Stock.
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 14 — Warrant Liabilities for additional information on the Company's 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.
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 Condensed 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 and Hagerty Group Units or cash. Refer to Note 16 — 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 | |
6 — Acquisitions and Investments
Broad Arrow Acquisition
In January 2022, Hagerty entered into a joint venture with Broad Arrow, pursuant to which Hagerty invested $15.3 million in exchange for equity ownership of approximately 40% of Broad Arrow. The Company followed equity method accounting for its investment in Broad Arrow with the carrying amount included within "Equity method investments" on the Condensed Consolidated Balance Sheets as of June 30, 2022 and the Company's share of income (loss) within "Income (loss) from equity method investment, net of tax" on the Condensed Consolidated Statements of Operations.
In August 2022, the Company acquired the remaining 60% outstanding equity interest of Broad Arrow from the former Broad Arrow shareholders (the "Contributors"), in exchange for equity consideration ("Broad Arrow Acquisition"). The equity consideration consisted of Class A Common Stock and Hagerty Group Units. The number of Class A Common Stock shares and Hagerty Group Units issued was calculated using a 20 day Volume Weighted Average Stock Price of Hagerty, Inc. prior to the closing date on August 16, 2022, pursuant to the Contribution and Exchange Agreement. The fair value of the purchase consideration of $73.3 million was calculated based on the Hagerty, Inc. stock price of $13.47 as of the closing date in accordance with ASC 820. As a result of the Broad Arrow Acquisition, the Company and Broad Arrow expect to further leverage their respective product offerings and continue to build Hagerty Marketplace.
Fair Value of Consideration Transferred
The Broad Arrow Acquisition will be accounted for as a business combination achieved in stages (step acquisition), in accordance with ASC 805-10-25. The following table summarizes the fair value of Broad Arrow as of the date of the Broad Arrow Acquisition (in thousands):
| | | | | | | | |
| Total equity consideration | $ | 73,253 | |
Fair value of previously held equity interest in Broad Arrow (1) | 48,309 | |
| Total consideration and value to be allocated to net assets | $ | 121,562 | |
| | |
(1) The Broad Arrow Acquisition is considered a step acquisition, and accordingly, the Company remeasured its pre-existing 40% equity interest in Broad Arrow immediately prior to completion of the acquisition to its estimated fair value of approximately $48.3 million. As a result of the remeasurement, the Company recorded a net gain of approximately $34.7 million within the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022, representing the excess of the approximate $48.3 million estimated fair value of its pre-existing 40% equity interest over its transaction date carrying value of approximately $13.6 million.
Allocation of Consideration Transferred
The acquisition of Broad Arrow was reflected in our Condensed Consolidated Financial Statements as a step acquisition and as such we remeasured our pre-existing 40% equity interest in Broad Arrow to fair value as discussed above. The fair value of our previously held equity interest immediately prior to the completion of the Broad Arrow Acquisition is derived from the Hagerty, Inc. stock price of $13.47 as of the closing date and thus represents a Level 1 measurement.
The fair values assigned to identifiable assets acquired and liabilities assumed are preliminary based on management's estimates and assumptions and could result in changes to the amounts recorded below. The Company expects to finalize the valuation as soon as practicable, but no longer than one year from the acquisition date, as permitted in accordance with ASC 805. The following table summarizes the preliminary purchase consideration and the purchase price allocation to fair values of the identifiable assets acquired and liabilities assumed as of the date of the Broad Arrow Acquisition:
| | | | | | | | |
Notes receivable (1) | $ | 21,594 | |
Intangible assets, net (2) | 3,100 | |
Other assets (3) | 11,756 | |
Other liabilities (4) | (13,449) | |
| Total identifiable net assets acquired | 23,001 | |
| Goodwill | 98,561 | |
| Total consideration and value to be allocated to net assets | $ | 121,562 | |
| | |
(1) Broad Arrow makes term loans, particularly to high net worth clients and businesses, that are secured by collector vehicles. Refer to Note 4 — Notes Receivable for additional information with respect to the Notes receivable acquired.
(2) The fair value of identifiable intangible assets was a Level 3 measurement, estimated using significant assumptions that are not observable in the market through the use of a discounted cash flow model with inputs including discount rate and terminal growth rate as well as return on assets. Identifiable intangible assets include trade names of $3.1 million with a 5-year estimated useful life.
(3) Other assets includes $6.2 million of Prepaid expenses and other current assets, $2.8 million of cash acquired and $2.6 million of Accounts receivable.
(4) Other liabilities includes a $7.0 million Note payable, $5.3 million of Contract liabilities and $0.7 million of Accounts payable.
The excess of the purchase price over the aggregate estimated fair values of identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill recognized is primarily a result of the expected enhancement of our Hagerty Marketplace business through Broad Arrow's various service offerings, including buying, selling and financing of collector vehicles through classified listings, auctions and facilitating private sales, as well as the assembled workforce of and various other factors. The Company recognized $0.8 million of acquisition related expenses associated with the Broad Arrow Acquisition in its Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022.
The acquisition of Broad Arrow was not material to the Company's Condensed Consolidated Statements of Operations. Therefore, pro forma results of operations related to this acquisition have not been presented. As Broad Arrow is now a wholly-owned subsidiary of the Company, the Company now consolidates the results of Broad Arrow in accordance with ASC 810, and the financial results of Broad Arrow have been included within the Company's Condensed Consolidated Financial Statements since the acquisition date. The Company's Condensed Consolidated Statements of Operations include total revenue and income before taxes of approximately $5.9 million and $2.1 million, attributable to Broad Arrow since the acquisition date.
Speed Digital Acquisition
In April 2022, Hagerty acquired Speed Digital LLC ("Speed Digital") for a purchase price of $15.0 million. The Company paid $7.5 million at closing with an additional two annual installments of $3.75 million each to be paid in 2023 and 2024. Speed Digital was previously wholly owned indirectly by Robert Kauffman, a director on the Company's Board, who will receive 100% of the proceeds of the purchase price. Speed Digital operates a software as a service ("SaaS") business primarily serving collector car dealers and auction houses, and an advertising and content syndication platform, which includes Motorious.com. The Company acquired Speed Digital to enhance the Hagerty Marketplace business to establish relationships with their dealer partners and facilitate growth in Hagerty Marketplace products; augment the Company's automotive intelligence data; and allow Motorious.com to drive audience engagement, content distribution, and advertising revenue.
Other Acquisitions
Lastly, during the nine months ended September 30, 2022 and 2021, the Company completed various acquisitions, which had an aggregate purchase price of $3.5 million and $12.4 million, respectively.
7 — Goodwill and Intangible Assets
Goodwill
The following is a reconciliation of the changes in the Company's goodwill for the periods specified below:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | | | |
| | in thousands |
| Goodwill as of January 1, | $ | 11,488 | | | $ | 4,745 | |
Goodwill resulting from acquisitions (1) | 103,543 | | | 6,328 | |
Goodwill as of September 30, | $ | 115,031 | | | $ | 11,073 | |
| | | | |
(1) Goodwill resulting from acquisitions for the nine months ended September 30, 2022 includes $98.6 million related to the Broad Arrow Acquisition. Refer to Note 6 — Acquisitions and Investments for additional information.
Intangible Assets
The cost and accumulated amortization of intangible assets as of September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
| Weighted Average Useful Life | | September 30, 2022 | | December 31, 2021 |
| | | | | |
| | | in thousands |
| Renewal rights | 9.9 | | $ | 17,184 | | | $ | 17,557 | |
| Internally developed software | 3.1 | | 105,367 | | | 76,865 | |
| Trade names and trademarks | 14.3 | | 12,541 | | | 5,004 | |
| Relationships and customer lists | 15.6 | | 10,426 | | | 5,652 | |
| Other | 4.4 | | 1,429 | | | 1,464 | |
| Intangible assets | | | 146,947 | | | 106,542 | |
| Less: accumulated amortization | | | (45,411) | | | (30,371) | |
| Intangible assets, net | | | $ | 101,536 | | | $ | 76,171 | |
Intangible asset amortization expense was $5.9 million and $3.5 million for the three months ended September 30, 2022 and 2021, respectively, and $15.4 million and $8.9 million for the nine months ended September 30, 2022 and 2021, respectively.
The estimated future aggregate amortization expense as of September 30, 2022 is as follows (in thousands):
| | | | | |
| 2022 | $ | 6,154 | |
| 2023 | 32,577 | |
| 2024 | 24,534 | |
| 2025 | 15,684 | |
| 2026 | 3,766 | |
| Thereafter | 18,821 | |
| Total | $ | 101,536 | |
8 — Provision for Unpaid Losses and Loss Adjustment Expenses
The following table presents a reconciliation of the beginning and ending provision for unpaid losses and loss adjustment expenses, net of amounts recoverable from reinsurers:
| | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| | | | | in thousands |
Net unpaid losses and loss adjustment expenses, beginning of period | | | | | $ | 74,869 | | | $ | 54,988 | |
| Incurred losses and loss adjustment expenses: | | | | | | | |
| Current accident year | | | | | 136,144 | | | 87,643 | |
| Prior accident year | | | | | — | | | — | |
| Total incurred losses and loss adjustment expenses | | | | | 136,144 | | | 87,643 | |
| Payments: | | | | | | | |
| Current accident year | | | | | 27,939 | | | 20,604 | |
| Prior accident year | | | | | 27,759 | | | 18,403 | |
| Total payments | | | | | 55,698 | | | 39,007 | |
| Effect of foreign currency rate changes | | | | | (490) | | | (33) | |
Net reserves for losses and loss adjustment expenses, end of period | | | | | 154,825 | | | 103,591 | |
| Reinsurance recoverable | | | | | 8,100 | | | — | |
Gross reserves for losses and loss adjustment expenses, end of period | | | | | $ | 162,925 | | | $ | 103,591 | |
In updating Hagerty Re's 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 Company’s 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.
Current year incurred losses and loss adjustment expenses for the nine months ended September 30, 2022 included $10.0 million of estimated net losses related to Hurricane Ian. This amount is equal to the Company's retention under its catastrophe reinsurance program. Claims from Hurricane Ian, which made landfall on September 28, 2022, are still being reported. At this time, we are utilizing various loss estimation techniques to project ultimate losses from Hurricane Ian, including reviews of the modeled loss estimates that factor in third party industry loss estimates, detailed policy level reviews and direct contact with insureds and brokers. Importantly, any further losses above $10.0 million will be recoverable under the Company's catastrophe reinsurance program.
Additionally, the Company strengthened reserves for U.S. auto liability by $6.5 million for the 2022 accident year. Liability claims severity in this line has been increasing across the industry and the Company in 2022.
9 — Fair Value Measurements
Hagerty measures and discloses fair values in accordance with the provisions of ASC 820. The Company’s recurring 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.
•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 Company's 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 Secured Overnight Financing Rate ("SOFR") 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 11 — Interest Rate Swaps for additional information.
Warrant liabilities
The Company's 5,750,000 Public Warrants are Level 1 within the fair value hierarchy as they are measured utilizing quoted market prices. The Company has determined that its private warrants are Level 3 within the fair value hierarchy. The Company's private warrants include 257,500 Private Placement Warrants, 28,750 Underwriter Warrants, 1,300,000 OTM Warrants and 12,147,300 PIPE Warrants. The Company utilizes a Monte Carlo simulation model to measure the fair value of the private warrants. The Company’s Monte Carlo simulation model includes assumptions related to the expected stock-price volatility, expected term, dividend yield and risk-free interest rate. Refer to Note 14 — Warrant Liabilities for additional information.
The following table summarizes the significant inputs in the valuation model as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Inputs | | Private Placement Warrants | | Underwriter Warrants | | OTM Warrants | | PIPE Warrants |
| Exercise price | | $11.50 | | $11.50 | | $15.00 | | $11.50 |
| Common stock price | | $8.99 | | $8.99 | | $8.99 | | $8.99 |
| Volatility | | 43.7% | | 43.7% | | 41.0% | | 43.7% |
| Expected term of the warrants | | 4.18 | | 4.18 | | 9.18 | | 4.18 |
| Risk-free rate | | 4.10% | | 4.10% | | 3.80% | | 4.10% |
| 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 management's 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 Company’s historical rate, which the Company anticipates to remain at zero.
The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021, is shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements |
| Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| in thousands |
| September 30, 2022 |
| Financial Assets | | | | | | | |
| Interest rate swaps | $ | 3,516 | | | $ | — | | | $ | 3,516 | | | $ | — | |
| Total | $ | 3,516 | | | $ | — | | | $ | 3,516 | | | $ | — | |
| | | | | | | |
| Financial Liabilities | | | | | | | |
| Public warrants | $ | 14,088 | | | $ | 14,088 | | | $ | — | | | $ | — | |
| Private placement warrants | 727 | | | — | | | — | | | 727 | |
| Underwriter warrants | 81 | | | — | | | — | | | 81 | |
| OTM warrants | 4,888 | | | — | | | — | | | 4,888 | |
| PIPE warrants | 29,807 | | | — | | | — | | | 29,807 | |
| Total | $ | 49,591 | | | $ | 14,088 | | | $ | — | | | $ | 35,503 | |
| | | | | | | |
| 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 | |
The following table presents a reconciliation of the Company's warrant liabilities that are classified as Level 3 within the fair value hierarchy for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Private Placement Warrants | | Underwriter Warrants | | OTM Warrants | | PIPE Warrants | | Total |
| | | | | | | | | |
| in thousands |
Balance at December 31, 2021 | $ | 1,248 | | | $ | 139 | | | $ | 6,849 | | | $ | 55,887 | | | $ | 64,123 | |
| Change in fair value of warrant liabilities | (521) | | | (58) | | | (1,961) | | | (24,174) | | | (26,714) | |
| Exercise of warrants | — | | | — | | | — | | | (1,906) | | | (1,906) | |
| Transfers In (Out) of Level 3 | — | | | — | | | — | | | — | | | — | |
Balance at September 30, 2022 | $ | 727 | | | $ | 81 | | | $ | 4,888 | | | $ | 29,807 | | | $ | 35,503 | |
Fixed Income Investments
The Company has fixed income investments that consist of Canadian Sovereign, Provincial and Municipal fixed income securities held in a trust account to meet the requirements of a third-party insurer, Aviva, in connection with Hagerty Re's 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.
The following table discloses the fair value and related carrying amount of fixed income investments held by Hagerty Re as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| Carrying Amount | | Estimated Fair Value |
| | | |
| in thousands |
| September 30, 2022 |
| Fixed income securities, short-term | $ | 2,218 | | | $ | 2,170 | |
| Fixed income securities, long-term | 8,876 | | | 8,436 | |
| Total | $ | 11,094 | | | $ | 10,606 | |
| | | |
| 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 Company has reviewed the portfolio for other than temporary impairments and concluded that no impairment exists as of September 30, 2022. The Company did not record any gains or losses on these securities during the nine months ended September 30, 2022 or 2021.
10 — Debt
As of the indicated dates, the principal amount of Hagerty's debt consisted of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| in thousands |
Credit Facility | $ | 136,000 | | | $ | 135,500 | |
Note payable | — | | | 1,000 | |
| Total debt outstanding | $ | 136,000 | | | $ | 136,500 | |
| Less: current portion | — | | | (1,000) |
| Total long-term debt outstanding | $ | 136,000 | | | $ | 135,500 | |
Credit Facility — In September 2022, the Company entered into a Fourth 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 amendment primarily included definition updates, transitioning the pricing terms from LIBOR to Term SOFR and changes to the financial covenants.
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.
The current term of the Credit Agreement matures 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 Credit Facility accrues interest at the Term SOFR Rate plus an applicable margin determined by the Company's net leverage ratio for the preceding period (as defined in the Credit Agreement). The effective borrowing rate was 5.15% and 1.61% as of September 30, 2022 and December 31, 2021, respectively.
The Credit Facility borrowings are collateralized by Company assets, except for the assets of the Company’s U.K., Bermuda and German subsidiaries 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 September 30, 2022 and December 31, 2021, the Company was in compliance with the covenants under the Credit Agreement.
Note Payable — The Company had a $2.0 million note payable related to a business combination for the purchase installment payments, with a fixed interest rate of 3.25%. The note was paid in two equal installments, $1.0 million of which was paid in 2021. The note payable matured March 1, 2022 at which time the second installment of $1.0 million was paid.
Letters of Credit — The Company authorized four letters of credit for a total of $11.6 million for operational purposes related to Section 953(d) tax structuring election and lease down payment support.
11 — Interest Rate Swaps
Hagerty's interest rate swap agreements are used to fix the interest rate on a portion of the Company's 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)" in the Condensed Consolidated Statements of Operations.
As of September 30, 2022, the Company had one outstanding interest rate swap, which was entered into in December 2020, with an original notional amount of $35.0 million. In September 2022, the interest rate swap was amended to replace LIBOR with Term SOFR and the fixed swap rate is now 0.81%. The estimated fair value of interest rate swap is included within either "Prepaid expenses and other non-current assets" or "Other long-term liabilities" on the Condensed Consolidated Balance Sheets and the change in fair value is recorded within "Derivative instruments" in the Condensed Consolidated Statements of Comprehensive Income (Loss). The interest rate swap matures in December 2023.
As of December 31, 2021, the Company had an additional interest rate swap outstanding, which was entered into in March 2017, with an original notional amount of $15.0 million at a fixed swap rate of 2.20%. The interest rate swap matured in March 2022.
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 assessed, at the hedge’s 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 Condensed 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 nine months ended September 30, 2022 and 2021. The Company does not expect to have a reclassification into earnings within the next 12 months.
12 — Members' and Stockholders' Equity
Hagerty, Inc.
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. As of September 30, 2022, there were 83,202,969 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 September 30, 2022, 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. Hagerty's 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 September 30, 2022, there were no shares of Preferred Stock issued and outstanding.
The Hagerty Group
Members' Equity — Prior to the Business Combination, The Hagerty Group had one class of partnership interests consisting of 100,000 units outstanding with no par value. At the Closing, all units were converted to Hagerty Group Units as discussed in Note 5 — Business Combination.
Hagerty Group Units — Hagerty Group Units are a unit of economic interest in The Hagerty Group. The following table summarizes the ownership of Hagerty Group Units in The Hagerty Group as of September 30, 2022: