UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _______

Commission file number: 001-40244

HAGERTY, INC.

(Exact name of registrant as specified in its charter)


Delaware		86-1213144
(State of incorporation)		(I.R.S. Employer Identification No.)

121 Drivers Edge, Traverse City, Michigan		49684
(Address of principal executive offices)		(Zip code)

	(800) 922-4050
	Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Class A common stock, par value $0.0001 per share

HGTY

The New York Stock Exchange

Warrants, each whole warrant exercisable for one share
of Class A common stock, each at an exercise price of
$11.50 per share

HGTY.WS

The New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐☒
Non-accelerated filer	☒☐	Smaller reporting company	☒☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had ~~83,202,969~~84,380,625 shares of Class A Common Stock outstanding and 251,033,906 shares of Class V Common Stock outstanding as of ~~October~~April 21, ~~2022.~~2023.

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Table of Contents


Title						Page
Forward Looking Statements						4
Glossary of Terms						6

Part I – Financial Information						87
Item 1. Financial Statements (Unaudited)						87
~~Unaudited~~ Condensed Consolidated Statements of Operations						87
~~Unaudited~~ Condensed Consolidated Statements of Comprehensive Income (Loss)						98
~~Unaudited~~ Condensed Consolidated Balance Sheets						109
~~Unaudited~~ Condensed Consolidated Statements of Equity						1311
~~Unaudited~~ Condensed Consolidated Statements of Cash Flows						1412
~~Unaudited~~ Notes Accompanying the Condensed Consolidated Financial Statements						1613
Note 1 — Basis of Presentation and Accounting Policies						13
Note 2 — Revenue						17
Note 3 — Other Assets						19
Note 4 — Notes Receivable						19
Note 5 — Leases						20
Note 6 — Acquisitions and Investments						21
Note 7 — Goodwill and Intangible Assets						23
Note 8 — Provision for Unpaid Losses and Loss Adjustment Expenses						24
Note 9 — Reinsurance						25
Note 10 — Restructuring, Impairment and Related Charges						25
Note 1 1 — Fair Value Measurements						26
Note 12 — Long-Term Debt						28
Note 1 3 — Interest Rate Swaps						29
Note 1 4 — Stockholders' Equity						29
Note 1 5 — Earnings (Loss) Per Share						31
Note 1 6 — Warrant Liabilities						31
Note 1 7 — Stock-Based Compensation						32
Note 1 8 — Taxation						34
Note 1 9 — Related-Party Transactions						36
Note 20 — Commitments and Contingencies						38
Note 2 1 — Subsequent Events						38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						4339
Item 3. Quantitative and Qualitative Disclosures About Market Risk						6453
Item 4. Controls and Procedures						6554

Part II – Other Information						6655
Item 1. Legal Proceedings						6655
Item 1A. Risk Factors						6655
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						6655
Item 3. Defaults Upon Senior Securities						6655
Item 4. Mine Safety Disclosures						6655
Item 5. Other Information						6655
Item 6. Exhibits						6756
Signatures						6858

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Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made by us, contain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, products, services, and technology offerings, market conditions, growth and trends, expansion plans and opportunities, and our objectives for future operations are forward-looking statements. Forward-looking statements can be identified by words such as "anticipate," "believe," "envision," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," "ongoing," "contemplate," and other similar expressions, although not all forward-looking statements contain these identifying words.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things, our ability to:

•compete effectively within our industry and attract and retain ~~members;~~Members;

•maintain key strategic relationships with our insurance distribution and underwriting carrier partners;

•prevent, monitor and detect fraudulent activity;

•manage risks associated with disruptions, interruptions, outages or other issues with our technology platforms or our use of third-party services;

•accelerate the adoption of our membership products as well as any new insurance programs and products we offer;

•~~anticipate and address impacts from the coronavirus pandemic and current and future variants of the virus ("COVID-19");~~

•manage the cyclical nature of the insurance business, including through any periods of recession, economic downturn or inflation;

•address unexpected increases in the frequency or severity of claims;

•comply with the numerous laws and regulations applicable to our business, including state, federal and foreign laws relating to insurance and rate increases, privacy, the internet, and accounting matters;

•manage risks associated with being a controlled company; and

•successfully defend any litigation, government inquiries, and investigations.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will occur. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Report. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.

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Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our website, investor.hagerty.com, under the heading ~~"Financials"~~"Financials & Filings" immediately after they are filed with, or furnished to, the SEC. We use our investor relations website, investor.hagerty.com, as a means of disclosing information which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings, public conference calls, webcasts, and social media channels. Information contained on or accessible through, including any reports available on, our website or social media channels is not a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q or any other report or document we file with the SEC. Any reference to our website in this Form 10-Q is intended to be an inactive textual reference only.

Unless the context requires otherwise, the terms "we", "our", "us", "Hagerty", "HGTY", and the "Company" as used in this Quarterly Report on Form 10-Q refer to Hagerty, Inc., formerly known as Aldel Financial Inc. ("Aldel"), and our consolidated subsidiaries, including The Hagerty Group, LLC ("The Hagerty Group").

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Glossary of Terms

The following is a glossary of selected terms used throughout this Quarterly Report on Form 10-Q that are technical in nature:

~~ASU~~ ~~Accounting Standards Update. The Financial Accounting Standards Board ("FASB") issues an ASU to communicate changes to the FASB Codification.~~

BMA Bermuda Monetary Authority, established under the Bermuda Monetary Authority Act of 1969. The BMA supervises, regulates and inspects financial institutions operating from within its jurisdiction.

Book of Business Insurance policies bound by us with our Carriers (as defined below) on behalf of our ~~clients.~~

~~Business Combination~~ ~~The business combination that was completed on December 2, 2021, pursuant to the Business Combination Agreement~~insurance Members (as defined below).

~~Business Combination Agreement~~ ~~The agreement dated as of August 17, 2021, by and among Aldel, Aldel Merger Sub and The Hagerty Group. The Business Combination Agreement is provided as Exhibit 2.1, incorporated by reference within~~ ~~Item 6. Exhibits, in this Quarterly Report on Form 10-Q.~~

BSCR Bermuda Solvency Capital Requirement, which is the Bermuda Monetary Authority's risk-based capital model that was developed to enhance the capital adequacy framework for the insurance sector.

Carrier An insurance company.

CUC Contingent Underwriting Commission, a profit-share based on the calendar-year performance of the insurance book of business with a carrier.

~~GAAP~~ ~~Accounting principles generally accepted in the United States of America.~~

Hagerty Re Hagerty Reinsurance Limited, our wholly owned captive reinsurance subsidiary.

~~Hagerty Group Units~~ ~~A unit of economic interest of The Hagerty Group.~~

HDC Hagerty Drivers Club membership program.

HHC Hagerty Holding Corp., a close corporation under Delaware law.

IBNR Incurred but not reported, a reserve account used as a provision for claims and/or events that have transpired but have not yet been reported to the ~~insurance carrier.~~

~~Legacy Unit Holders~~ ~~HHC and Markel, the economic owners of The Hagerty Group, prior to the consummation of the Business Combination.~~

~~Legacy Unit Holders Exchange Agreement~~ An agreement between the Company, HHC and Markel. Under the Legacy Unit Holders Exchange Agreement, HHC and Markel (as defined below) have the right to exchange their Hagerty Group Units and Class V Common Stock for, at the option of the Company, Class A Common Stock or cash. The Legacy Unit Holders Exchange Agreement was amended and restated on March 23, 2022.Carrier.

Loss Ratio Expressed as a percentage, the ratio of (1) losses and loss adjustment expenses incurred to (2) earned premium in Hagerty Re.

~~Markel~~ Members~~Markel Corporation, a holding company for insurance, reinsurance~~ Insurance policyholders and ~~investments operations, headquartered in Richmond, Virginia.~~HDC paid subscribers.

MGA Managing General Agent, an insurance agent or broker that has been granted underwriting authority by an insurer.

~~MHH~~ ~~Member Hubs Holding, LLC is a joint venture formed to create Hagerty Garage + Social between Hagerty Ventures LLC, a wholly owned subsidiary of The Hagerty Group, and HGS Hub Holdings LLC.~~

~~Motorsport Reg~~ A motorsport membership, licensing and event online management system that automates event listings, registration, and payment processing for all types of motorsport events ranging from small social gatherings to large participatory motorsport events.

~~TABLE OF CONTENTS~~

NPS Net Promoter Score, which ~~we use~~is used as ~~our "north star metric," measuring~~an important measure of the overall strength of our relationship with ~~members.~~Members. As a leading auto enthusiast brand, we use NPS as a barometer for Hagerty brand loyalty and engagement, and is a strong indicator of growth and retention.

~~Omnichannel~~ ~~A multichannel approach to sales that focuses on providing a seamless customer experience.~~

PIF Policies in Force, which is the number of current and active insurance policies as of the applicable period end date.

~~SaaS~~ ~~Software as a Service, a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.~~

Written Premium The total amount of ~~total~~ insurance premium written by our MGA affiliates on policies that were bound by our insurance carrier partners during the applicable period.

~~TRA~~ ~~Tax Receivable Agreement, a contract between Hagerty, Inc. and the Legacy Unit Holders~~for payment from Hagerty, Inc. of 85% of the cash tax savings that results from the step-up in basis from the exchange of Hagerty Group Units and Class V Common Stock for Class A Common Stock of Hagerty, Inc.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Hagerty, Inc.

Condensed Consolidated Statements of Operations (Unaudited)


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2022		2021		2022		2021			2023		2022

REVENUE:	REVENUE:	in thousands (except per share/unit amounts)								REVENUE:	in thousands (except per share amounts)
Commission and fee revenue	Commission and fee revenue	$	85,457	$	76,188	$	243,424	$	214,004	Commission and fee revenue	$	74,612	$	62,461
Earned premium	Earned premium	107,487		78,699		290,719		212,370		Earned premium	117,231		89,132
Membership, marketplace and other revenue	Membership, marketplace and other revenue	23,813		13,198		56,442		38,320		Membership, marketplace and other revenue	26,509		16,218
Total revenue	Total revenue	216,757		168,085		590,585		464,694		Total revenue	218,352		167,811
OPERATING EXPENSES:	OPERATING EXPENSES:									OPERATING EXPENSES:
Salaries and benefits	Salaries and benefits	50,120		42,287		149,867		122,134		Salaries and benefits	55,232		46,476
Ceding commission	Ceding commission	50,415		37,195		138,048		101,262		Ceding commission	55,425		42,378
Losses and loss adjustment expenses	Losses and loss adjustment expenses	60,605		32,298		136,144		87,643		Losses and loss adjustment expenses	48,412		36,919
Sales expense	Sales expense	44,097		32,098		109,989		80,810		Sales expense	35,113		28,437
General and administrative services	General and administrative services	23,853		16,563		64,040		46,627		General and administrative services	21,381		19,458
Depreciation and amortization	Depreciation and amortization	8,890		5,886		24,337		15,282		Depreciation and amortization	13,743		7,147
Restructuring, impairment and related charges, net										Restructuring, impairment and related charges, net	5,535		—
Total operating expenses	Total operating expenses	237,980		166,327		622,425		453,758		Total operating expenses	234,841		180,815
OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)	(21,223)		1,758		(31,840)		10,936		OPERATING INCOME (LOSS)	(16,489)		(13,004)
Change in fair value of warrant liabilities	Change in fair value of warrant liabilities	11,583		—		37,869		—		Change in fair value of warrant liabilities	(515)		31,686
Revaluation gain on previously held equity method investment		34,735		—		34,735		—
Interest and other income (expense)	Interest and other income (expense)	662		(417)		(375)		(1,041)		Interest and other income (expense)	5,647		(684)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE	INCOME (LOSS) BEFORE INCOME TAX EXPENSE	25,757		1,341		40,389		9,895		INCOME (LOSS) BEFORE INCOME TAX EXPENSE	(11,357)		17,998
Income tax benefit (expense)	Income tax benefit (expense)	91		(1,888)		(4,077)		(4,790)		Income tax benefit (expense)	(3,668)		(2,030)
Income (loss) from equity method investment, net of tax	Income (loss) from equity method investment, net of tax	(1,535)		—		(1,676)		—		Income (loss) from equity method investment, net of tax	—		(102)
NET INCOME (LOSS)	NET INCOME (LOSS)	24,313		(547)		34,636		5,105		NET INCOME (LOSS)	(15,025)		15,866
Net loss (income) attributable to non-controlling interest	Net loss (income) attributable to non-controlling interest	(9,599)		68		2,049		204		Net loss (income) attributable to non-controlling interest	12,926		11,641
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	$	14,714	$	(479)	$	36,685	$	5,309	NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	$	(2,099)	$	27,507

Earnings (loss) per share of Class A Common Stock
Earnings (loss) per share of Class A Common Stock:										Earnings (loss) per share of Class A Common Stock:
Basic	Basic	$	0.18	N/A		$	0.44	N/A		Basic	$	(0.03)	$	0.33
Diluted	Diluted	$	0.07	N/A		$	0.03	N/A		Diluted	$	(0.03)	$	(0.01)

Weighted-average shares of Class A Common Stock outstanding:	Weighted-average shares of Class A Common Stock outstanding:									Weighted-average shares of Class A Common Stock outstanding:
Basic	Basic	82,816		N/A		82,569		N/A		Basic	83,227		82,433
Diluted	Diluted	336,768		N/A		335,392		N/A		Diluted	83,227		335,903

Earnings (loss) per Members' Unit
Basic and diluted		N/A		$	(4.79)	N/A		$	53.09

Weighted-average units outstanding:
Basic and diluted		N/A		100		N/A		100

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

See Note 1719 for information regarding Related-Party ~~Transactions disclosure.~~Transactions.

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Hagerty, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2022		2021		2022		2021			2023		2022

		in thousands									in thousands
Net income (loss)	Net income (loss)	$	24,313	$	(547)	$	34,636	$	5,105	Net income (loss)	$	(15,025)	$	15,866
Other comprehensive income (loss), net of tax:	Other comprehensive income (loss), net of tax:									Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	Foreign currency translation adjustments	(2,173)		(812)		(2,921)		(626)		Foreign currency translation adjustments	237		274
Derivative instruments	Derivative instruments	987		69		2,920		677		Derivative instruments	(478)		1,545
Other comprehensive income (loss)	Other comprehensive income (loss)	(1,186)		(743)		(1)		51		Other comprehensive income (loss)	(241)		1,819
Comprehensive income (loss)	Comprehensive income (loss)	23,127		(1,290)		34,635		5,156		Comprehensive income (loss)	(15,266)		17,685
Comprehensive loss (income) attributable to non-controlling interest	Comprehensive loss (income) attributable to non-controlling interest	(9,599)		68		2,049		204		Comprehensive loss (income) attributable to non-controlling interest	13,108		11,641
Comprehensive income (loss) attributable to controlling interest	Comprehensive income (loss) attributable to controlling interest	$	13,528	$	(1,222)	$	36,684	$	5,360	Comprehensive income (loss) attributable to controlling interest	$	(2,158)	$	29,326

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

See Note 1719 for information regarding Related-Party ~~Transactions disclosure.~~Transactions.

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Hagerty, Inc.

Condensed Consolidated Balance Sheets (Unaudited)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022

ASSETS	ASSETS	in thousands (except share amounts)				ASSETS	in thousands (except share amounts)
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	180,417	$	275,332	Cash and cash equivalents	$	63,367	$	95,172
Restricted cash and cash equivalents	Restricted cash and cash equivalents	435,916		328,640		Restricted cash and cash equivalents	444,024		444,019
Accounts receivable	Accounts receivable	69,730		46,729		Accounts receivable	62,843		58,255
Premiums receivable	Premiums receivable	135,293		75,297		Premiums receivable	135,026		100,700
Commission receivable		48,213		57,596
Prepaid expenses and other current assets		47,428		30,155
Commissions receivable						Commissions receivable	15,978		60,151
Notes receivable	Notes receivable	22,390		—		Notes receivable	33,716		25,493
Deferred acquisition costs, net	Deferred acquisition costs, net	114,172		81,535		Deferred acquisition costs, net	113,686		107,342
Other current assets						Other current assets	57,775		45,651
Total current assets	Total current assets	1,053,559		895,284		Total current assets	926,415		936,783
Notes receivable						Notes receivable	12,707		11,934
Property and equipment, net	Property and equipment, net	28,142		28,363		Property and equipment, net	24,617		25,256
Long-Term Assets:
Prepaid expenses and other non-current assets		39,110		30,565
Notes receivable		7,347		—
Lease right-of-use assets						Lease right-of-use assets	80,462		82,398
Intangible assets, net	Intangible assets, net	101,536		76,171		Intangible assets, net	102,786		104,024
Goodwill	Goodwill	115,031		11,488		Goodwill	115,041		115,041
Total long-term assets		263,024		118,224
Other long-term assets						Other long-term assets	39,925		37,082
TOTAL ASSETS	TOTAL ASSETS	$	1,344,725	$	1,041,871	TOTAL ASSETS	$	1,301,953	$	1,312,518
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current Liabilities:	Current Liabilities:					Current Liabilities:
Accounts payable		$	26,374	$	9,084
Accounts payable, accrued expenses and other current liabilities						Accounts payable, accrued expenses and other current liabilities	$	75,186	$	77,049
Losses payable and provision for unpaid losses and loss adjustment expenses	Losses payable and provision for unpaid losses and loss adjustment expenses	162,925		109,351		Losses payable and provision for unpaid losses and loss adjustment expenses	161,955		167,257
Unearned premiums		249,823		175,199
Commissions payable	Commissions payable	81,712		60,603		Commissions payable	62,991		77,075
Due to insurers	Due to insurers	98,189		58,031		Due to insurers	87,712		68,171
Advanced premiums	Advanced premiums	24,113		13,867		Advanced premiums	34,506		17,084
Accrued expenses		48,167		46,074
Unearned premiums						Unearned premiums	247,253		235,462
Contract liabilities	Contract liabilities	27,830		21,723		Contract liabilities	25,662		25,257
Other current liabilities		1,404		1,886
Total current liabilities	Total current liabilities	720,537		495,818		Total current liabilities	695,265		667,355
Long-Term Liabilities:
Accrued expenses		9,167		13,166
Long-term lease liabilities						Long-term lease liabilities	78,845		80,772
Long-term debt						Long-term debt	89,030		108,280
Warrant liabilities						Warrant liabilities	46,076		45,561
Deferred tax liability						Deferred tax liability	13,846		12,850
Contract liabilities	Contract liabilities	18,833		19,667		Contract liabilities	18,669		19,169
Long-term debt		136,000		135,500
Deferred tax liability		13,546		10,510
Warrant liabilities		49,591		89,366
Other long-term liabilities	Other long-term liabilities	7,292		7,043		Other long-term liabilities	3,506		11,162
Total long-term liabilities		234,429		275,252
TOTAL LIABILITIES	TOTAL LIABILITIES	$	954,966	$	771,070	TOTAL LIABILITIES	945,237		945,149
				(continued)
Commitments and Contingencies (Note 20)						Commitments and Contingencies (Note 20)	—		—
STOCKHOLDERS' EQUITY						STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value (20,000,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively)						Preferred stock, $0.0001 par value (20,000,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively)	—		—
Class A common stock, $0.0001 par value (500,000,000 shares authorized, 83,338,436 and 83,202,969 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively)						Class A common stock, $0.0001 par value (500,000,000 shares authorized, 83,338,436 and 83,202,969 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively)	8		8
Class V common stock, $0.0001 par value (300,000,000 authorized, 251,033,906 shares issued and outstanding as of March 31, 2023 and December 31, 2022)						Class V common stock, $0.0001 par value (300,000,000 authorized, 251,033,906 shares issued and outstanding as of March 31, 2023 and December 31, 2022)	25		25
Additional paid-in capital						Additional paid-in capital	554,049		549,034
Accumulated earnings (deficit)						Accumulated earnings (deficit)	(491,701)		(489,602)
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	(272)		(213)
Total stockholders' equity						Total stockholders' equity	62,109		59,252
Non-controlling interest						Non-controlling interest	294,607		308,117
Total equity (Note 14)						Total equity (Note 14)	356,716		367,369
TOTAL LIABILITIES AND EQUITY						TOTAL LIABILITIES AND EQUITY	$	1,301,953	$	1,312,518

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

See Note 1719 for information regarding Related-Party ~~Transactions disclosure.~~Transactions.

~~TABLE OF CONTENTS~~

~~Hagerty, Inc.~~

~~Condensed Consolidated Balance Sheets (Unaudited)~~

September 30,
2022
December 31,
2021
in thousands (except share amounts)
Commitments and Contingencies (Note 18)
Redeemable non-controlling interest (Note 12) $ — $ 593,277
STOCKHOLDERS' / MEMBERS' EQUITY
Preferred stock, $0.0001 par value (20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively) — —
Class A common stock, $0.0001 par value (500,000,000 shares authorized, 83,202,969 and 82,327,466 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively) 8 8
Class V common stock, $0.0001 par value (300,000,000 authorized, 251,033,906 shares issued and outstanding as of September 30, 2022 and December 31, 2021) 25 25
Additional paid-in capital 546,393 160,189
Accumulated earnings (deficit) (445,590) (482,276)
Accumulated other comprehensive income (loss) (1,728) (1,727)
Total stockholders' / members' equity (deficit) 99,108 (323,781)
Non-controlling interest 290,651 1,305
Total equity (Note 12) 389,759 (322,476)
TOTAL LIABILITIES AND EQUITY $ 1,344,725 $ 1,041,871
(concluded)

~~The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.~~

~~See Note 17 for Related-Party Transactions disclosure.~~

119

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Hagerty, Inc.

Condensed Consolidated Statements of Changes in ~~Members' and~~ Stockholders' Equity (Unaudited)

Members' Equity Class A Common Stock Class V Common Stock Additional Paid in Capital Accumulated Earnings (Deficit) Accumulated Other Comprehensive Income/(Loss) Total Stockholders' / Members' Equity Non-controlling Interest Total Equity Redeemable Non-controlling Interest
in thousands Shares Amount Shares Amount
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
Net income (loss) before exchange agreement amendment — — — — — — (3,679) — (3,679) (172) (3,851) (11,205)
Other comprehensive income (loss) before exchange agreement amendment — — — — — — 1,657 1,657 — 1,657 —
Exercise of warrants — 125 — — — 1,906 — — 1,906 — 1,906 —
Redemption value adjustment for redeemable non-controlling interest — — — — — (162,095) (1,398,325) — (1,560,420) — (1,560,420) 1,560,418
Removal of the redeemable feature of the non-controlling interest — — — — — 528,615 1,398,325 — 1,926,940 215,550 2,142,490 (2,142,490)
Net income (loss) subsequent to exchange agreement amendment — — — — — — 31,187 — 31,187 (264) 30,923 —
Other comprehensive income (loss) subsequent to exchange agreement amendment — — — — — — — 162 162 — 162 —
Balance at March 31, 2022 $ — 82,452 $ 8 251,034 $ 25 $ 528,615 $ (454,768) $ 92 $ 73,972 $ 216,419 $ 290,391 $ —
Net income (loss) — — — — — — (5,536) — (5,536) (7) (5,543) —
Other comprehensive income (loss) — — — — — — — (634) (634) — (634) —
Stock-based compensation — — — — — 4,307 — — 4,307 — 4,307 —
Non-controlling interest issued capital — — — — — — — — — 1,000 1,000 —
Balance at June 30, 2022 $ — 82,452 $ 8 251,034 $ 25 $ 532,922 $ (460,304) $ (542) $ 72,109 $ 217,412 $ 289,521 $ —
Net income (loss) — — — — — — 14,714 — 14,714 9,599 24,313 —
Other comprehensive income (loss) — — — — — — — (1,186) (1,186) — (1,186) —
Restricted stock issued — 37 — — — — — — — — — —
Stock-based compensation — — — — — 3,858 — — 3,858 — 3,858 —
Broad Arrow acquisition — 714 — — — 9,613 — — 9,613 63,640 73,253 —
Balance at September 30, 2022 $ — 83,203 $ 8 251,034 $ 25 $ 546,393 $ (445,590) $ (1,728) $ 99,108 $ 290,651 $ 389,759 $ —

~~TABLE OF CONTENTS~~

~~Hagerty, Inc.~~

~~Condensed Consolidated Statements of Changes in Members' and Stockholders' Equity (Unaudited)~~


		Members' Equity		Class A Common Stock			Class V Common Stock			Additional Paid in Capital				Accumulated Earnings (Deficit)		Accumulated Other Comprehensive Income/(Loss)				Total Stockholders' / Members' Equity					Non-controlling Interest			Total Equity						Redeemable Non-controlling Interest				Class A Common Stock						Class V Common Stock				Additional Paid in Capital			Accumulated Earnings (Deficit)				Accumulated Other Comprehensive Income/(Loss)				Total Stockholders' Equity				Non-controlling Interest			Total Equity
in thousands	in thousands			Shares	Amount		Shares	Amount														in thousands		Shares							Amount								Shares			Amount
Balance at December 31, 2020		$	62,320	—	$	—	—	$	—			$	—					$	56,832			$	(1,954)				$	117,198					$	123				$	117,321		$	—
Balance at December 31, 2022																														Balance at December 31, 2022		83,203					$	8		251,034			$	25	$	549,034	$		(489,602)			$	(213)			$	59,252			$	308,117			$	367,369
Net income (loss)	Net income (loss)	—		—	—		—	—		—				(6,806)		—				(6,806)					(45)			(6,851)						—		Net income (loss)		—			—			—		—		—			(2,099)				—				(2,099)				(12,926)			(15,025)
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—	—		—	—		—				—		1,006				1,006					—			1,006						—		Other comprehensive income (loss)		—			—			—		—		—			—				(59)				(59)				(182)			(241)
Balance at March 31, 2021		$	62,320	—	$	—	—	$	—	$	—			$	50,026	$	(948)			$	111,398				$	78		$	111,476					$	—
Net income (loss)		—		—	—		—	—		—				12,594		—				12,594					(91)			12,503						—
Other comprehensive income (loss)		—		—	—		—	—		—				—		(212)				(212)					—			(212)						—
Distributions		(4,056)		—	—		—	—		—						—				(4,056)					—			(4,056)						—
Restricted stock issued																														Restricted stock issued		17					—			—			—		—		—			—				—				—				—
Stock-based compensation																														Stock-based compensation		—					—			—			—		4,113		—			—				4,113				—				4,113
Conversion of Hagerty Group Units to Class A Common Stock																														Conversion of Hagerty Group Units to Class A Common Stock		119					—			—			—		1,045		—			—				1,045				(1,045)				—
Non-controlling interest issued capital	Non-controlling interest issued capital	—		—	—		—	—		—				—		—				—					400			400						—		Non-controlling interest issued capital		—			—			—		—		—			—				—				—				500			500
Balance at June 30, 2021		$	58,264	—	$	—	—	$	—	$	—			$	62,620	$	(1,160)			$	119,724				$	387		$	120,111					$	—
Net income (loss)		—		—	—		—	—		—				(479)		—				(479)					(68)			(547)						—
Other comprehensive income (loss)		—		—	—		—	—		—				—		(743)				(743)					—			(743)						—
Non-controlling interest issued capital		—		—	—		—	—		—				—		—				—					100			100						—
Balance at September 30, 2021		$	58,264	—	$	—	—	$	—	$	—			$	62,141	$	(1,903)			$	118,502				$	419		$	118,921					$	—
Reallocation between controlling and non-controlling interest																														Reallocation between controlling and non-controlling interest		—					—			—			—		(143)		—			—				(143)				143				—
Balance at March 31, 2023																														Balance at March 31, 2023		83,339					$	8		251,034			$	25	$	554,049	$	(491,701)		$	(272)			$	62,109			$	294,607			$	356,716

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

See Note 1719 for information regarding Related-Party ~~Transactions disclosure.~~Transactions.

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Hagerty, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)


	Class A Common Stock			Class V Common Stock			Additional Paid in Capital		Accumulated Earnings (Deficit)		Accumulated Other Comprehensive Income/(Loss)		Total Stockholders' Equity		Non-controlling Interest		Total Equity		Redeemable Non-controlling Interest
in thousands	Shares	Amount		Shares	Amount
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
Net income (loss)	—	—		—	—		—		(3,679)		—		(3,679)		(172)		(3,851)		(11,205)
Other comprehensive income (loss)	—	—		—	—		—		—		1,657		1,657		—		1,657		—
Exercise of warrants	125	—		—	—		1,906		—		—		1,906		—		1,906		—
Redemption value adjustment for redeemable non-controlling interest	—	—		—	—		(162,095)		(1,398,325)		—		(1,560,420)		—		(1,560,420)		1,560,418
Removal of the redeemable feature of the non-controlling interest	—	—		—	—		528,615		1,398,325		—		1,926,940		215,550		2,142,490		(2,142,490)
Net income (loss) subsequent to exchange agreement amendment	—	—		—	—		—		31,187		—		31,187		(264)		30,923		—
Other comprehensive income (loss) subsequent to exchange agreement amendment	—	—		—	—		—		—		162		162		—		162		—
Balance at March 31, 2022	82,452	$	8	251,034	$	25	$	528,615	$	(454,768)	$	92	$	73,972	$	216,419	$	290,391	$	—

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

See Note 19 for information regarding Related-Party Transactions.

TABLE OF CONTENTS

Hagerty, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)


		Nine months ended September 30,					Three months ended March 31,
		2022		2021			2023		2022

OPERATING ACTIVITIES:	OPERATING ACTIVITIES:	in thousands				OPERATING ACTIVITIES:	in thousands
Net income (loss)	Net income (loss)	$	34,636	$	5,105	Net income (loss)	$	(15,025)	$	15,866
Adjustments to reconcile net income (loss) to net cash from operating activities:	Adjustments to reconcile net income (loss) to net cash from operating activities:					Adjustments to reconcile net income (loss) to net cash from operating activities:
Change in fair value of warrant liabilities	Change in fair value of warrant liabilities	(37,869)		—		Change in fair value of warrant liabilities	515		(31,686)
Loss on equity method investment		1,676		—
Revaluation gain on previously held equity method investment		(34,735)		—
Depreciation and amortization expense	Depreciation and amortization expense	24,337		15,282		Depreciation and amortization expense	13,743		7,147
Provision for deferred taxes	Provision for deferred taxes	3,373		3,901		Provision for deferred taxes	937		462
Loss on disposals of equipment, software and other assets	Loss on disposals of equipment, software and other assets	1,131		2,319		Loss on disposals of equipment, software and other assets	472		198
Stock-based compensation expense	Stock-based compensation expense	8,165		—		Stock-based compensation expense	4,113		—
Other	Other	242		163		Other	593		152
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable		(21,122)		(16,548)
Premiums receivable		(59,995)		(54,051)
Commission receivable		9,364		9,584
Prepaid expenses and other assets		(16,294)		(16,302)
Accounts, premiums and commission receivable						Accounts, premiums and commission receivable	3,777		19,950
Deferred acquisition costs	Deferred acquisition costs	(32,637)		(30,865)		Deferred acquisition costs	(6,344)		(3,459)
Accounts payable		16,842		(1,812)
Losses payable and provision for unpaid losses and loss adjustment expenses	Losses payable and provision for unpaid losses and loss adjustment expenses	53,574		26,623		Losses payable and provision for unpaid losses and loss adjustment expenses	(5,302)		2,520
Unearned premiums		74,624		67,041
Commissions payable	Commissions payable	21,109		22,443		Commissions payable	(14,084)		(14,765)
Due to insurers	Due to insurers	40,876		36,589		Due to insurers	19,510		16,362
Advanced premiums	Advanced premiums	10,363		7,625		Advanced premiums	17,422		15,559
Accrued expenses		(4,801)		2,946
Contract liabilities		(9)		4,560
Other current liabilities		713		756
Unearned premiums						Unearned premiums	11,791		6,272
Other assets and liabilities, net						Other assets and liabilities, net	(20,390)		(25,564)
Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities	93,563		85,359		Net Cash Provided by Operating Activities	11,728		9,014
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Purchases of property, equipment and software	Purchases of property, equipment and software	(33,429)		(31,163)		Purchases of property, equipment and software	(8,133)		(10,532)
Acquisitions, net of cash acquired	Acquisitions, net of cash acquired	(12,715)		(11,345)		Acquisitions, net of cash acquired	(6,076)		(6,028)
Purchase of previously held equity method investment	Purchase of previously held equity method investment	(15,250)		—		Purchase of previously held equity method investment	—		(15,250)
Issuance of note receivable to previously held equity investment		(7,000)		—
Issuance of notes receivable	Issuance of notes receivable	(8,391)		—		Issuance of notes receivable	(7,833)		—
Collection of notes receivable						Collection of notes receivable	415		—
Purchase of fixed income securities	Purchase of fixed income securities	(2,448)		(12,433)		Purchase of fixed income securities	(4,348)		—
Maturities of fixed income securities	Maturities of fixed income securities	1,216		1,206		Maturities of fixed income securities	1,150		—
Other investing activities	Other investing activities	(1,662)		(26)		Other investing activities	22		13
Net Cash Used in Investing Activities	Net Cash Used in Investing Activities	$	(79,679)	$	(53,761)	Net Cash Used in Investing Activities	(24,803)		(31,797)
FINANCING ACTIVITIES:						FINANCING ACTIVITIES:
Payments on long-term debt						Payments on long-term debt	(47,250)		(41,500)
Proceeds from long-term debt						Proceeds from long-term debt	27,871		22,500
Contribution from non-controlling interest						Contribution from non-controlling interest	500		—
Net Cash Used in Financing Activities						Net Cash Used in Financing Activities	(18,879)		(19,000)
Effect of exchange rate changes on cash and cash equivalents and restricted cash and cash equivalents						Effect of exchange rate changes on cash and cash equivalents and restricted cash and cash equivalents	154		6
				(continued)
Change in cash and cash equivalents and restricted cash and cash equivalents						Change in cash and cash equivalents and restricted cash and cash equivalents	(31,800)		(41,777)
Beginning cash and cash equivalents and restricted cash and cash equivalents						Beginning cash and cash equivalents and restricted cash and cash equivalents	539,191		603,972
Ending cash and cash equivalents and restricted cash and cash equivalents						Ending cash and cash equivalents and restricted cash and cash equivalents	$	507,391	$	562,195

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

See Note 1719 for Related-Party Transactions disclosure.

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Hagerty, Inc.

~~Condensed Consolidated Statements of Cash Flows (Unaudited)~~

Nine months ended September 30,
2022 2021
FINANCING ACTIVITIES: in thousands
Payments on long-term debt $ (90,500) $ (18,000)
Proceeds from long-term debt 91,000 67,500
Contribution from non-controlling interest 1,000 500
Payments on notes payable (1,000) (1,000)
Distributions — (4,056)
Net Cash Provided by Financing Activities 500 44,944
Effect of exchange rate changes on cash and cash equivalents and restricted cash and cash equivalents (2,023) (196)
Change in cash and cash equivalents and restricted cash and cash equivalents 12,361 76,346
Beginning cash and cash equivalents and restricted cash and cash equivalents 603,972 299,078
Ending cash and cash equivalents and restricted cash and cash equivalents $ 616,333 $ 375,424
NON-CASH INVESTING ACTIVITIES:
Purchase of property and equipment and software $ 4,137 $ 5,789
Broad Arrow acquisition $ 73,253 $ —
Other acquisitions $ 7,500 $ 3,763
CASH PAID FOR:
Interest $ 2,965 $ 1,636
Income taxes $ 5,253 $ 2,200
(concluded)

~~The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents as presented for the nine months ended September 30, 2022 and 2021:~~

2022 2021
in thousands
Cash and cash equivalents $ 180,417 $ 47,879
Restricted cash and cash equivalents 435,916 327,545
Total cash and cash equivalents and restricted cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows $ 616,333 $ 375,424

~~The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.~~

~~See Note 17 for Related-Party Transactions disclosure.~~

~~TABLE OF~~ ~~CONTENTS~~

~~Hagerty, Inc.~~

Notes To Condensed Consolidated Financial Statements (Unaudited)

1 — ~~Summary~~Basis of ~~Significant~~Presentation and Accounting Policies ~~and New Accounting Standards~~

~~Description of Business —~~ In these notes to the Condensed Consolidated Financial Statements, the terms"we," "our," "us," "Hagerty," and the "Company" refer to Hagerty, Inc. ~~("Hagerty" or the "Company")~~, and its consolidated subsidiaries, including The Hagerty Group, LLC ("The Hagerty Group"), unless the context requires otherwise.

Description of Business — Hagerty is a global market leader in providing insurance for classic cars and enthusiast vehicles. In addition, Hagerty provides an automotive enthusiast platform that engages, entertains and connects with its insurance policyholders andHagerty Drivers Club ("HDC") paid subscribers, referred to herein as "Members," and other car ~~enthusiasts and its members.~~enthusiasts. The Company’s headquarters are located in Traverse City, Michigan.

The Company operates several entities which collectively support Hagerty's revenue streams. As a Managing General Agency ("MGA"), Hagerty earns commission and fee revenue for the ~~distribution~~underwriting, sale and servicing of classic ~~automobile~~car and ~~boat~~enthusiast vehicle and marine 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 inthrough 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~~car and enthusiast vehicle and marine risks written through Hagerty's ~~Managing General Agency ("MGA")~~MGA entities in the U.S., Canada and the U.K.

•The ~~business produced~~policies sold by ~~the~~Hagerty's U.S. MGAs ~~is written~~are underwritten by Essentia Insurance Company ("Essentia") and reinsured with ~~its~~Essentia's affiliate, Evanston Insurance Company ("Evanston"). In turn, Hagerty Re assumes a portion of the risk and earns 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 1719 — Related-Party Transactions for additional information.

•The ~~business produced~~policies sold by ~~the~~Hagerty's Canadian MGA ~~is written~~are underwritten by Aviva Canada Inc. ("Aviva"), through Aviva's Canadian subsidiary, Elite Insurance Company ("Elite"). In turn, Hagerty Re assumes a portion of the risk and earns premiums through a quota share agreement with Elite.

•~~In 2021, Hagerty Re entered into a reinsurance agreement with~~The policies sold by Hagerty's U.K. MGA are underwritten by Markel International Insurance Company Limited ~~to reinsure classic auto risks produced by Hagerty's U.K. MGA.~~("Markel International"). In ~~connection with this new agreement,~~turn, Hagerty Re ~~purchased reinsurance to limit its liability to £1,000,000 per claim, as U.K. law requires unlimited liability coverage.~~assumes a portion of the risk and earns premiums through a quota share agreement with Markel International, ~~Insurance Company Limited is~~ a wholly owned subsidiary of Markel, which is a related party. Refer to Note 1719 — Related-Party Transactions for additional information. As U.K. law requires unlimited liability coverage, Hagerty Re purchases reinsurance to limit its liability to £1,000,000 per claim.

The Company earns subscription revenue through HDC membership offerings. HDC memberships are sold as a bundled product which give Members access to a number of products and services, including Hagerty Drivers Club Magazine, automotive enthusiast events, Hagerty's proprietary vehicle valuation tool, emergency roadside services and special vehicle-related discounts.

The Company earns fee-based revenue from its Marketplace offerings, which include the buying and selling of collector cars through classified listings, live auctions, time-based online auctions, and brokered private sales. In addition, Marketplace earns finance revenue from term loans made to high-net-worth individuals and businesses secured by collector cars.

In January 2022, the Company entered into a joint venture with Broad Arrow Group, Inc. and its consolidated subsidiaries ("Broad Arrow"), pursuant to which Hagerty invested $15.3 million in cash in exchange for equity ownership of approximately 40% of Broad Arrow. Then, in August 2022, the Company acquired the remaining 60% equity interest in Broad Arrow in exchange for approximately $73.3 million of equity consideration consisting of Class A Common Stock and limited liability units in The Hagerty Group ("Hagerty Group Units"). As a result of this acquisition, the Company and Broad Arrow expect to further leverage their respective product offerings and ~~other automotive services sold~~continue to ~~policyholders~~build Marketplace. Refer to Note 6 — Acquisitions 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. Investments for additional information.

The Company also owns and operates collector vehicle events, including ~~the~~The Amelia and Greenwich Concours d'Elegance, ~~earning~~through which revenue ~~through~~is earned from ticket sales and sponsorships. ~~The~~Lastly, 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~~car 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.

TABLE OF CONTENTS

~~The Company’s headquarters are located in Traverse City, Michigan.~~

Basis of Presentation — The Company's Condensed Consolidated Financial Statements ~~were~~are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and ~~with~~pursuant to the ~~instructions for Quarterly Reports on Form 10-Q~~regulations of the Securities and ~~Regulation S-X~~Exchange Commission and include the accounts of Hagerty, Inc., which is comprised of ~~and~~ The Hagerty Group with its consolidated subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as permitted by such rules and regulations.

The ~~financial statements~~Company's Condensed Consolidated Financial Statements reflect all normal recurring adjustments and accruals that are, in the opinion of management, necessary for a fair statement of its 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.~~2022. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

~~TABLE OF~~ ~~CONTENTS~~

Principles of Consolidation — The Company's Condensed Consolidated Financial Statements contain the accounts of Hagerty, Inc. and its majority-owned or controlled subsidiaries. AsThe Company is the sole managing member of ~~September 30, 2022,~~The Hagerty Group and, as a result, consolidates the financial results of The Hagerty Group. The Company had economic ownership of 24.6% and 24.5% of The Hagerty ~~Group.~~Group as of March 31, 2023 and December 31, 2022, respectively. 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~~From January 2022 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 ofin Broad Arrow in August 2022, Broad Arrow became a wholly-owned subsidiary of the Company and, as a result, isthe financial statements of Broad Arrow are now consolidated ~~in accordance with ASC 810.~~as a part of Hagerty. Refer to Note 6 — Acquisitions and Investments for additional information.

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~~Immediately after giving effect 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~~Combination, there were 82,327,466 shares of Hagerty, Inc. Class A Common Stock outstanding, 251,033,906 shares of Hagerty, Inc. Class V Common Stock outstanding, and 20,005,550 warrants outstanding which can be converted on a one-for-one basis into Hagerty, Inc. Class A Common Stock. Refer to Note 16 — Warrant Liabilities for additional information related to 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 withwarrants. ~~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~~Following the ~~operating company prior to the Business Combination and controls~~Closing, the Company ~~subsequent to the Business Combination through control of the board of directors (the "Board")~~is organized as ~~well as having majority voting ownership.~~

•~~The Hagerty Group’s management is also the management of the Company.~~

•a C corporation and owns an equity interest in The Hagerty Group in what is ~~larger~~commonly known as ~~compared to Aldel based on~~an "Up-C" structure in which substantially all of the assets ~~revenue~~ and ~~earnings.~~

~~Unless otherwise indicated or~~liabilities of the ~~context otherwise requires, "Hagerty" and "the Company" refer to the business and operations of~~Company are held by 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.~~Group.

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~~this extended transition period and, therefore, the Company may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or have opted out of using such extended transition period.

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, and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, ~~and~~as well as the reported amounts of revenue and expenses during the reporting period. Although the estimates are considered reasonable, actual results could materially differ from those estimates.

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~~The most significant~~Significant estimates ~~that~~made by management include, but are ~~susceptible to notable change in the near-term relate to~~not limited to: (1) the provision for unpaid losses and loss adjustment expenses, including incurred but not reported ("IBNR"), claims; (2) the ~~change in~~ fair value of the Company's warrant ~~liabilities and payments due under~~liabilities; (3) the amount of the liability associated with the Tax Receivable Agreement ("TRA"). ; (4) the valuation and accounting for the assets acquired and liabilities assumed in business combinations; (5) the fair values of the reporting units used in assessing the recoverability of goodwill; and (6) the valuation and useful lives of intangible assets. 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. Refer to Note 18 — Taxation for additional information related to the TRA.

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~~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.~~Members.

Foreign Currency Translation — The Company translates its foreign ~~operations’~~currency denominated assets and liabilities ~~denominated in foreign currencies~~ into U.S. dollars at current rates of exchange as of the balance sheet date, and foreign currency denominated income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in "Foreign currency translation adjustments", a component of Accumulated other comprehensive income (loss). ~~Transaction~~Foreign currency 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.

~~TABLE OF~~ ~~CONTENTS~~

~~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~~Supplemental Cash Flow Information — ~~— 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~~following table provides a reconciliation 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 valuecash equivalents and ~~was required to be presented as temporary equity on the Condensed Consolidated Balance Sheets~~restricted cash and cash equivalents as of ~~December~~March 31, ~~2021.~~2023 and 2022:

~~TABLE OF~~ ~~CONTENTS~~

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.


	March 31, 2023		March 31, 2022

	in thousands
Cash and cash equivalents	$	63,367	$	237,590
Restricted cash and cash equivalents	444,024		324,605
Total cash and cash equivalents and restricted cash and cash equivalents	$	507,391	$	562,195

~~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~~Supplemental cash flow information 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, resultingshown 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.table below:

~~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.


	Three months ended March 31,
	2023		2022

NON-CASH INVESTING ACTIVITIES:	in thousands
Purchase of property and equipment and software	$	1,061	$	4,580



CASH PAID FOR:
Interest	$	2,279	$	766
Income taxes	$	—	$	3,100

Recently Adopted Accounting ~~Guidance~~Standards

~~Media Content —~~Leases — In ~~March 2019,~~February 2016, the Financial Accounting Standards Board ~~("FASB"~~(the "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.

~~TABLE OF~~ ~~CONTENTS~~

~~Recent Accounting Guidance Not Yet Adopted~~

~~Leases —~~ ~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~ ~~("ASC 842"),~~842, which supersedes the lease requirements in ASC Topic 840, Leases ("ASC 840"). ~~This guidance increases transparency~~ASC 842 requires the recognition of an asset and ~~comparability among organizations~~liability for the rights and obligations created by ~~recognizing~~a leased asset, whether classified as an operating lease or a finance lease. The Company adopted ASC 842 effective January 1, 2022 using the modified retrospective approach and elected not to recast comparative prior year periods. Upon adoption, the Company measured and recorded its operating lease liabilities at the present value of the remaining rental payments. Corresponding right-of-use ("ROU") assets were recorded based on the amount of the lease liabilities, adjusted by any unamortized lease incentives, deferred rent accruals and initial direct costs. The adoption of ASC 842 resulted in the recognition of initial ROU assets and lease liabilities of $72.8 million as of January 1, 2022.

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ASC 842 also requires sellers in a sale-leaseback transaction to recognize the entire gain from the sale of an underlying asset at the time of sale rather than over the leaseback term. The carrying value of the deferred gain on the single sale-leaseback transaction executed by the Company prior to January 1, 2022 was approximately $4.3 million and was recorded as an increase to "Accumulated Earnings (Deficit)" and "Non-controlling Interest" within the Condensed Consolidated Statements of Changes in Stockholders' Equity at adoption.

The adoption of ASC 842 did not have a material impact on the Condensed Consolidated ~~Balance Sheets. The guidance requires disclosure to enable users~~Statements of ~~the~~Operations or 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, Cash Flows.

~~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~~also 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 provided by ASC 842, which ~~among other things, does~~allowed it to: (1) not ~~require the Company to~~ reassess ~~prior conclusions related to~~whether expired or existing contracts ~~containing~~contained leases, (ii) not reassess previous lease classification, and (iii) not revalue initial direct ~~costs.~~costs for existing leases. The Company ~~will continue~~also elected the lessee practical expedient to ~~finalize~~combine lease and non-lease components in the ~~implementation~~accounting for leases of ~~new processes~~all asset classes. In addition, the Company did not elect the hindsight practical expedient. The expense of operating leases under ASC 842 is generally recognized on a straight-line basis which is calculated as the total lease cost divided by the lease term and is recognized in the ~~assessment of the impact of this adoption on the Company's~~ Condensed Consolidated ~~Financial~~ Statements ~~and related disclosures.~~of Operations.

Credit Losses — In June 2016, the FASB issued ~~ASU~~Accounting Standards Update ("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~~amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses. The standard requires financial assets measured on the amortized cost basis to be presented at the net amount expected to be collected. The following financial assets held by the Company are ~~not accounted for at fair value through net income (loss). ASU No. 2019-10 defers~~within the ~~effective date~~scope of ASU No. ~~2016-13~~2016-13: (i) Accounts receivable, (ii) Premiums receivable, (iii) Commissions receivable, (iv) Notes receivable and (v) certain fixed income securities. The amount of any required allowance for expected credit losses is determined utilizing historical loss rates, which are then adjusted, if necessary, for specific financial assets that are judged to ~~January 1, 2023.~~have a higher-than-normal risk profile. Additional credit loss allowances may also be recorded after taking into account macro-economic and industry risk factors. For Notes receivable, to the extent necessary, the amount of any required allowance for credit losses takes into account the estimated realizable value of the collateral securing the loan. The Company ~~does not expect the adoption of~~adopted ASU No. 2016-13 ~~to have~~on January 1, 2023 without a material ~~impact~~effect on the Company's Condensed Consolidated Financial Statements and ~~related disclosures.~~with no required cumulative-effect adjustment to "Accumulated earnings (deficit)" within the Condensed Consolidated Statements of Changes in Stockholders' Equity.

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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~~March 31, 2023 and ~~2021:~~2022:


		Agent		Direct		Total			Agent				Direct				Total

		in thousands							in thousands
		Three months ended September 30, 2022							Three months ended March 31, 2023
Commission and fee revenue	Commission and fee revenue	$	37,998	$	33,031	$	71,029		Commission and fee revenue		$	31,687			$	26,139			$	57,826
Contingent commission	Contingent commission	7,937		6,491		14,428		Contingent commission	9,439				7,347				16,786
Membership revenue	Membership revenue	—		11,375		11,375		Membership revenue	—				12,547				12,547
Marketplace and other revenue	Marketplace and other revenue	—		12,438		12,438		Marketplace and other revenue	—				13,962				13,962
Total revenue from customer contracts	Total revenue from customer contracts	$	45,935	$	63,335	$	109,270	Total revenue from customer contracts	$	41,126			$	59,995			$	101,121
Earned premium recognized under ASC 944	Earned premium recognized under ASC 944					107,487		Earned premium recognized under ASC 944									117,231
Total revenue	Total revenue					$	216,757	Total revenue									$	218,352

		Three months ended September 30, 2021							Three months ended March 31, 2022
Commission and fee revenue	Commission and fee revenue	$	32,895	$	28,491	$	61,386	Commission and fee revenue	$	26,199			$	22,673			$	48,872
Contingent commission	Contingent commission	7,106		7,696		14,802		Contingent commission	7,375				6,214				13,589
Membership revenue	Membership revenue	—		10,411		10,411		Membership revenue	—				10,318				10,318
Marketplace and other revenue	Marketplace and other revenue	—		2,787		2,787		Marketplace and other revenue	—				5,900				5,900
Total revenue from customer contracts	Total revenue from customer contracts	$	40,001	$	49,385	$	89,386	Total revenue from customer contracts	$	33,574			$	45,105			$	78,679
Earned premium recognized under ASC 944	Earned premium recognized under ASC 944					78,699		Earned premium recognized under ASC 944									89,132
Total revenue	Total revenue					$	168,085	Total revenue									$	167,811

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

~~TABLE OF~~ ~~CONTENTS~~

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~~March 31, 2023 and ~~2021:~~2022:

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			U.S.		Canada		Europe		Total

		in thousands									in thousands
		Nine months ended September 30, 2022									Three months ended March 31, 2023
Commission and fee revenue	Commission and fee revenue	$	176,011	$	16,214	$	3,348	$	195,573	Commission and fee revenue	$	54,597	$	2,370	$	859	$	57,826
Contingent commission	Contingent commission	47,757		—		94		47,851		Contingent commission	16,752		—		34		16,786
Membership revenue	Membership revenue	30,317		2,507		—		32,824		Membership revenue	11,669		878		—		12,547
Marketplace and other revenue	Marketplace and other revenue	21,806		697		1,115		23,618		Marketplace and other revenue	13,526		164		272		13,962
Total revenue from customer contracts	Total revenue from customer contracts	$	275,891	$	19,418	$	4,557	$	299,866	Total revenue from customer contracts	$	96,544	$	3,412	$	1,165	$	101,121
Earned premium recognized under ASC 944	Earned premium recognized under ASC 944							290,719		Earned premium recognized under ASC 944							117,231
Total revenue	Total revenue							$	590,585	Total revenue							$	218,352

		Nine months ended September 30, 2021									Three months ended March 31, 2022
Commission and fee revenue	Commission and fee revenue	$	152,134	$	13,983	$	3,130	$	169,247	Commission and fee revenue	$	45,670	$	2,318	$	884	$	48,872
Contingent commission	Contingent commission	45,003		(355)		109		44,757		Contingent commission	13,468		—		121		13,589
Membership revenue	Membership revenue	27,843		2,122		—		29,965		Membership revenue	9,491		827		—		10,318
Marketplace and other revenue	Marketplace and other revenue	7,121		172		1,062		8,355		Marketplace and other revenue	5,312		318		270		5,900
Total revenue from customer contracts	Total revenue from customer contracts	$	232,101	$	15,922	$	4,301	$	252,324	Total revenue from customer contracts	$	73,941	$	3,463	$	1,275	$	78,679
Earned premium recognized under ASC 944	Earned premium recognized under ASC 944							212,370		Earned premium recognized under ASC 944							89,132
Total revenue	Total revenue							$	464,694	Total revenue							$	167,811

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Earned Premium — The following table presents Hagerty Re's total premiums assumed and ~~the change in unearned premiums~~earned for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

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


	Three months ended March 31,
	2023		2022
	in thousands
Premiums:
Assumed	$	132,187	$	97,628
Ceded	(13,728)		(9,690)
Net	$	118,459	$	87,938

Premiums earned:
Assumed	$	120,397	$	91,356
Ceded	(3,166)		(2,224)
Net	$	117,231	$	89,132

Contract Assets and Liabilities — The following table is a summary of the Company's contract assets and liabilities ~~for the periods specified below.~~as of March 31, 2023 and December 31, 2022. Contract assets are classified as ~~"Commission~~"Commissions 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			March 31, 2023		December 31, 2022

		in thousands					in thousands
Contract assets	Contract assets	$	48,213	$	57,596	Contract assets	$	15,978	$	60,151
Contract liabilities	Contract liabilities	$	46,663	$	41,390	Contract liabilities	$	44,331	$	44,426

Contract assets consist of contingent underwriting commission ("CUC") receivables, which are earned throughout the year and ~~received~~settled annually in the first quarter of the following year. As such, the ~~Commission~~Commissions 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~~commission. Refer to Note 1719 — Related-Party Transactions for additional ~~information).~~information.

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3 — ~~Prepaid Expenses and~~ Other Assets

The ~~following table is a summary~~composition of other assets, current and long-term, ~~prepaid expenses and other assets as of September 30, 2022 and December 31, 2021:~~consist of:

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




	March 31, 2023		December 31, 2022

	in thousands
Prepaid sales, general and administrative expenses	$	26,341	$	24,234
Prepaid software as a service ("SaaS") implementation costs	18,871		18,501
Fixed income investments	16,178		12,986
Contract costs	6,988		6,576
Inventory (1)	5,004		2,074
Digital media content (2)	2,350		5,580
Deferred reinsurance premiums ceded	10,653		91
Other (3)	11,315		12,691
Other assets	$	97,700	$	82,733

(1) ~~Reinsurance recoverable represents recoverable losses in excess~~As of ~~$10.0 million related to Hurricane Ian. Refer to Note 8 — Provision~~March 31, 2023, inventory primarily includes vehicles owned by Broad Arrow that have been purchased for ~~Unpaid Losses and Loss Adjustment Expenses for additional information.~~resale purposes.

(2) The reduction in digital media content when compared to December 31, 2022 was primarily attributable to a $3.6 million impairment recorded in the first quarter of 2023 as a result of lower than anticipated advertising and sponsorship revenue associated with these assets.

(3) As of ~~September 30, 2022,~~March 31, 2023, other assets primarily includes $4.0 million of other investments, ~~$3.5~~the $2.8 million of fair value of an interest rate swap, ~~$2.8~~$2.7 million of ~~taxes receivable,~~collector vehicle investments, and $1.3 million of deferred financing costs related to the Company's credit facility. As of December 31, 2022, other assets primarily included $4.0 million of other investments, the $3.3 million fair value of an interest rate swap, $2.5 million of collector vehicle investments, ~~and $1.1~~$1.4 million of deferred financing ~~costs.~~costs related to the Company's credit facility, and $1.4 million related to an outstanding reinsurance recoverable.

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4 — Notes Receivable

~~In August 2022, the Company acquired the remaining outstanding equity interest in~~ Broad ~~Arrow.~~Arrow Capital ("BAC"), a subsidiary of Broad Arrow, makes term loans to high-net-worth individuals and businesses secured by collector ~~cars, primarily to high net worth clients and businesses.~~cars. Term loans ~~primarily~~made by BAC can carry a fixed or variable rate of interest and typically have an initial maturity of ~~one year~~up to two years, often with an option for both parties to renew for ~~an additional year, and typically carry a variable market rate of interest. As these loans typically mature in~~ one year ~~the~~increments. The carrying value of the ~~loans~~loan portfolio approximates its fair ~~value.~~value due to the relatively short-term maturities and the market rates of interest associated with most loans.

BAC 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 value of the collateral). The LTV ratio is reassessed if the loan is renewed and on a quarterly basis, or more frequently, if there is a material change in the circumstances related to the loan, the value of the collateral, the disposal plans for the collateral, or if an event of default occurs. If, as a result of this reassessment, the LTV ratio increases above the target level, the borrower is contractually required to make principal payments and/or post sufficient additional collateral to reduce the LTV ratio to cure the overage. If an event of default occurs with respect to a loan, BAC is entitled to sell the collateral to recover the outstanding principal and accrued interest balance.

Management believes that the LTV ratio is the critical credit quality indicator for the loans made by BAC. In estimating the realizable value of the collector cars pledged as collateral for BAC's loans, ~~we consider~~management utilizes its expertise in the collector car market and considers an array of factors impacting the current and expected future value ~~based on our expertise~~of each car including the year, make, model, mileage, history, and in the case of classic cars, the provenance, quality of restoration (if applicable), and originality of the body, chassis, and mechanical components, and comparable market transaction values.

The repayment of secured loans can be adversely impacted by a decline in the collector car ~~market.~~market in general or in the value of the collateral, which is concentrated within certain collecting categories. In addition, in situations when BAC’s claim on the collateral is subject to a legal process, the ability to realize proceeds from the collateral may be limited or delayed.

As of ~~September 30, 2022,~~March 31, 2023, the Company's net notes receivable balance ~~of Broad Arrow~~ was ~~$29.7~~$46.4 million, of which ~~$22.4~~$33.7 million was classified within current assets and ~~$7.3~~$12.7 million was classified within long-term assets on ~~our~~the Condensed Consolidated Balance Sheets. As of December 31, 2022, the Company's net notes receivable balance was $37.4 million, of which $25.5 million was classified within current assets and $11.9 million was classified within long-term assets on the 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).

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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~~Company's loan portfolio as of ~~September 30,~~March 31, 2023 and December 31, 2022:


	~~September 30,~~ ~~2022~~

	~~in thousands~~
~~Secured loans~~	$	~~29,737~~
~~Estimate of collateral value~~	$	~~62,457~~
~~Aggregate LTV ratio~~	48		%


	March 31, 2023			December 31, 2022

	in thousands
Secured loans	$	46,423		$	37,427
Estimate of collateral value	$	96,514		$	75,802
Aggregate LTV ratio	48.1		%	49.4		%

~~Broad Arrow~~Management 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~~As of March 31, 2023 and December 31, 2022, the amount of past due interest payments was immaterial and there were no past due ~~loans as of September 30, 2022~~.principal payments.

A non-accrual loan is ~~considered~~a loan for which future interest income is not recorded due to ~~be impaired when we determine~~management’s determination that it is probable that ~~a portion of~~future interest on the ~~principal and interest owed by the borrower~~loan will not ~~be recovered after taking~~collectible. BAC did not have any non-accrual loans as of March 31, 2023 or December 31, 2022.

As of March 31, 2023 and December 31, 2022, the allowance for expected credit losses was not material based on management’s quarterly risk assessment, which takes into ~~account~~consideration a number of factors including the ~~estimated realizable value~~level of historical losses for similar loans, the quality of the collateral, ~~securing~~the low LTV ratio of the loans, management's overall assessment of the current circumstances and risks related to each loan, and, to a lesser extent, the creditworthiness of each borrower.

As of December 31, 2022, management performed an analysis on the loan ~~as well as the ability~~portfolio for indicators of ~~the borrower to repay any shortfall between the value of the collateral~~impairment 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 interestdetermined 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~~Leases

~~On December 2, 2021, through~~ The ~~Hagerty Group,~~following table summarizes 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~~components 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.~~Company's operating lease expense:


	Three months ended March 31,
	2023		2022

	in thousands
Operating lease expense (1)	$	3,147	$	2,050
Short-term lease expense (1)	69		11
Variable lease expense (1) (3)	807		576
Sublease revenue (2)	(63)		(12)
Lease cost, net	$	3,960	$	2,625

(1)Classified within "General and administrative services" on the Condensed Consolidated Statements of Operations.

(2)Classified within "Membership, marketplace and other revenue" on the Condensed Consolidated Statements of Operations.

(3)Amounts include payments for maintenance, taxes, insurance and payments affected by the CPI.

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~~Pursuant~~

The following tables summarize supplemental balance sheet information related 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 thing~~s, make Aldel a member of~~ ~~The Hagerty Group~~.operating leases:


	March 31, 2023			December 31, 2022

	in thousands
Operating lease ROU assets	$	80,462		$	82,398

Current lease liabilities (1)	7,799			7,556
Long-term lease liabilities	78,845			80,772
Total operating lease liabilities	$	86,644		$	88,328


	March 31, 2023			December 31, 2022

	in thousands
ROU assets obtained in exchange for new operating lease liabilities (2)	$	114		$	82,398
Gains on sales and leaseback transactions, net	$	—		$	4,314
Weighted-average lease term	10.03			10.23
Weighted-average discount rate	5.5		%	5.5		%

~~As outlined~~(1) Current lease liabilities are recorded 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~~"Accounts payable, accrued expenses 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"~~other current liabilities" within the Condensed Consolidated Balance Sheets.

(2)

~~In connection with~~The balance as of December 31, 2022 includes the ~~Business Combination, Hagerty, Inc. entered into the~~ ~~TRA~~ ~~with the Legacy Unit Holders. The~~ ~~TRA~~ ~~provides~~transition adjustment of $72.8 million for ~~payment to the Legacy Unit Holders~~operating lease ROU assets recorded as 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~~January 1, 2022, upon the ~~exchange~~adoption 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.~~ASC 842.

The following table ~~is a summary~~summarizes information about the amount and timing of the ~~cash inflows and outflows related to the Business Combination:~~Company's future operating lease commitments as of March 31, 2023:


	~~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~~


	in thousands
2023	$	9,209
2024	12,235
2025	11,812
2026	11,179
2027	10,987
Thereafter	58,530
Total lease payments	113,952
Less: imputed interest	(27,308)
Total lease liabilities	$	86,644

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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 cash 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~~recorded within "Equity method investments" on the Condensed Consolidated Balance Sheets as of ~~June 30,~~March 31, 2022 and the Company's share of income (loss) recorded within "Income (loss) from equity method investment, net of tax" on the Condensed Consolidated Statements of Operations.

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In August 2022, the Company acquired the remaining 60% ~~outstanding~~ equity interest ofin Broad Arrow from the former Broad Arrow shareholders (the "Contributors"), in exchange for equity consideration ("Broad Arrow Acquisition"). The equity consideration consisted of shares of the Company's Class A Common Stock and Hagerty Group Units. The number of the Company's Class A Common Stock shares and Hagerty Group Units issued to the Contributors was calculated using a ~~20 day~~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 of August 16, 2022 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~~was accounted for as a business combination achieved in stages ~~(step~~(i.e., a 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~~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~~was accounted for as a step ~~acquisition, and accordingly,~~acquisition. Accordingly, the Company remeasured its pre-existing 40% equity interest in Broad Arrow immediately prior to the 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 estimatedThis 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 fair value measurement.

~~TABLE OF~~ ~~CONTENTS~~ As a result of the remeasurement, the Company recorded a net gain of approximately $34.7 million in for the third quarter of 2022, representing the excess of the $48.3 million estimated fair value of its pre-existing 40% equity interest over its closing date carrying value of approximately $13.6 million.

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. Allocation of Consideration Transferred

The following table summarizes the ~~preliminary~~allocation of the purchase consideration ~~and~~to the ~~purchase price allocation to~~ fair values of the identifiable assets acquired and liabilities assumed as of the date of the Broad Arrow ~~Acquisition:~~Acquisition (in thousands):


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 purchase consideration ~~and value to be~~ allocated to net assets acquired	$	121,562

(1) Broad Arrow makes term loans ~~particularly to high net worth clients and businesses, that are~~ secured by collector ~~vehicles.~~cars. The fair value of the acquired loans approximates their carrying value due to the relatively short-term maturities and market rates of interest associated with most loans. Refer to Note 4 — Notes Receivable for additional information with respect to the Notes receivable acquired.

(2) The fair value of the identifiable intangible assets ~~was~~acquired is a Level 3 fair value measurement, estimated using significant assumptions that are not observable in the market through the use of a discounted cash flow model. Inputs utilized in this model ~~with inputs including~~include the discount rate and terminal growth rate, as well as the return on assets. Identifiable intangible assets ~~include~~acquired consisted of 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.~~receivable and $6.2 million of Other current assets.

(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~~consideration 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~~cars 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~~$5.8 million and ~~$2.1~~$0.1 million, respectively, attributable to Broad Arrow ~~since~~for the ~~acquisition date.~~three months ended March 31, 2023.

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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. The first annual installment was paid during the three months ended March 31, 2023 and the second annual installment will be paid in the first quarter of 2024. Speed Digital was previously wholly owned indirectly by Robert Kauffman, a ~~director on~~member of the Company's Board of Directors (the "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~~During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, ~~and 2021,~~ the Company completed various acquisitions, which had an aggregate purchase price of $3.5 ~~million and $12.4 million, respectively.~~million. During the three months ended March 31, 2023, the Company did not have any acquisitions.

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7 — Goodwill and Intangible Assets

Goodwill

The following is a reconciliation of the changes in the Company's goodwill for the ~~periods specified below:~~three months ended March 31, 2023 and 2022:

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


	2023		2022

	in thousands
Goodwill as of January 1,	$	115,041	$	11,488

Effect of foreign currency translation	—		22
Goodwill as of March 31,	$	115,041	$	11,510

~~(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.~~information related to the Company's acquisitions of Speed Digital, in April 2022, and Broad Arrow, in August 2022, which together resulted in the recognition of $103.6 million of goodwill.

Intangible Assets

The cost and accumulated amortization of intangible assets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:


		Weighted Average Useful Life	September 30, 2022		December 31, 2021			Weighted Average Useful Life	March 31, 2023		December 31, 2022

			in thousands						in thousands
Renewal rights	Renewal rights	9.9	$	17,184	$	17,557	Renewal rights	9.9	$	17,283	$	17,282
Internally developed software	Internally developed software	3.1	105,367		76,865		Internally developed software	3.1	115,312		109,764
Trade names and trademarks	Trade names and trademarks	14.3	12,541		5,004		Trade names and trademarks	14.0	12,541		12,541
Relationships and customer lists	Relationships and customer lists	15.6	10,426		5,652		Relationships and customer lists	15.4	13,890		13,890
Other	Other	4.4	1,429		1,464		Other	4.4	1,433		1,434
Intangible assets	Intangible assets		146,947		106,542		Intangible assets		160,459		154,911
Less: accumulated amortization	Less: accumulated amortization		(45,411)		(30,371)		Less: accumulated amortization		(57,673)		(50,887)
Intangible assets, net	Intangible assets, net		$	101,536	$	76,171	Intangible assets, net		$	102,786	$	104,024

Intangible asset amortization expense was ~~$5.9~~$6.8 million and ~~$3.5~~$4.2 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $15.4 million and $8.9 million for the nine months ended September 30, 2022 and 2021,~~ respectively.

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The estimated future aggregate amortization expense as of ~~September 30, 2022~~March 31, 2023 is as follows (in thousands):


2022		$	6,154
2023	2023	32,577		2023	$	22,739
2024	2024	24,534		2024	28,146
2025	2025	15,684		2025	19,546
2026	2026	3,766		2026	11,099
2027				2027	3,768
Thereafter	Thereafter	18,821		Thereafter	17,488
Total	Total	$	101,536	Total	$	102,786

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 related to Hagerty Re, net of amounts recoverable from reinsurers:


		Nine months ended September 30,						Three months ended March 31,
			2022		2021				2023		2022

			in thousands						in thousands
Net unpaid losses and loss adjustment expenses, beginning of period			$	74,869	$	54,988
Gross reserves for unpaid losses and loss adjustment expenses, beginning of year							Gross reserves for unpaid losses and loss adjustment expenses, beginning of year		$	111,741	$	74,869
Less: Reinsurance recoverable							Less: Reinsurance recoverable		843		—
Net reserves for unpaid losses and loss adjustment expenses, beginning of year							Net reserves for unpaid losses and loss adjustment expenses, beginning of year		110,898		74,869
Incurred losses and loss adjustment expenses:	Incurred losses and loss adjustment expenses:						Incurred losses and loss adjustment expenses:
Current accident year	Current accident year		136,144		87,643		Current accident year		48,412		36,919
Prior accident year	Prior accident year		—		—		Prior accident year		—		—
Total incurred losses and loss adjustment expenses	Total incurred losses and loss adjustment expenses		136,144		87,643		Total incurred losses and loss adjustment expenses		48,412		36,919
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	Effect of foreign currency rate changes		(490)		(33)		Effect of foreign currency rate changes		85		83
Net reserves for losses and loss adjustment expenses, end of period			154,825		103,591
Net reserves for unpaid losses and loss adjustment expenses, end of period							Net reserves for unpaid losses and loss adjustment expenses, end of period		159,395		111,871
Reinsurance recoverable	Reinsurance recoverable		8,100		—		Reinsurance recoverable		843		—
Gross reserves for losses and loss adjustment expenses, end of period			$	162,925	$	103,591
Gross reserves for unpaid losses and loss adjustment expenses, end of period							Gross reserves for unpaid losses and loss adjustment expenses, end of period		$	160,238	$	111,871

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.

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9 — Reinsurance

~~Additionally,~~Hagerty Re purchases catastrophe reinsurance to protect its capital from large catastrophic events and to provide earnings protection and stability. The 2023 catastrophe reinsurance program splits the ~~Company strengthened reserves~~exposure between accounts with total insured values ("TIV") of up to $5.0 million and U.S. accounts with TIV of $5.0 million and above ("High-Net-Worth Accounts"). Accounts with TIV of up to $5.0 million are afforded $105.0 million of coverage excess of a per event retention of $25.0 million in two layers; $25.0 million excess of $25.0 million and $55.0 million excess of $50.0 million. High-Net-Worth Accounts in the U.S. are covered by a separate catastrophe reinsurance program which provides $30.0 million excess of per event retention of $9.0 million in one layer; $21.0 million excess of $9.0 million.

In addition to the aforementioned catastrophe coverage, Hagerty Re has entered into quota share agreements to cede physical damage risks on High-Net-Worth Accounts assumed from Evanston. Specifically, Hagerty Re is ceding 20% of these risks effective January 1, 2023, and is ceding an additional 50% of these risks effective March 1, 2023, under quota share agreements with various reinsurers, some of which are related parties. Refer to Note 19 — Related-Party Transactions for ~~U.S. auto~~additional information.

Reinsurance contracts do not relieve Hagerty Re from its primary liability ~~by $6.5 million for~~to the ~~2022 accident year. Liability claims severity~~ceding carriers according to the terms of its reinsurance treaties. Failure of reinsurers to honor their obligations could result in ~~this line has been increasing across~~additional losses to Hagerty Re. Hagerty Re evaluates the ~~industry~~financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. All of Hagerty Re's reinsurers have an A.M. Best rating of A- (excellent) or better, or fully collateralize their maximum obligation under the ~~Company in 2022.~~treaty.

910 — Restructuring, Impairment and Related Charges

In 2022, management approved an initiative to increase operational efficiencies and flexibility by transitioning to a "remote first" work model for employees. This initiative primarily included the rationalization of the Company's office space throughout the U.S., Canada, and the U.K. Additionally, in the fourth quarter of 2022, the Board approved a voluntary retirement program ("VRP") and a reduction in force (the "2022 RIF"). As a result of these actions (collectively, the "2022 Restructuring Actions"), the Company recognized $18.3 million within "Restructuring, impairment and related charges, net" in the Consolidated Statements of Operations for the year ended December 31, 2022. These charges consisted of $8.0 million of severance related costs associated with the 2022 RIF and $4.2 million of severance related costs associated with the VRP, as well as an impairment charge of $4.7 million related to operating lease ROU assets and a $1.5 million loss on the disposal of leasehold improvements associated with the impaired leases.

In the first quarter of 2023, the Board approved a further reduction in force (the "2023 RIF") following a strategic review of business processes as the Company focuses on driving efficiencies in order to achieve growth and profitability goals. As a result of these actions (collectively, the "2023 Restructuring Actions"), in the first quarter of 2023, the Company recognized $5.5 million within "Restructuring, impairment and related charges, net" in the Condensed Consolidated Statements of Operations. These charges consist of $5.1 million of severance related costs associated with the 2023 RIF and a $0.4 million impairment charge to write-down the value of certain digital media content assets.

The following is a reconciliation of the liability related to the 2022 Restructuring Actions and the 2023 Restructuring Actions, which is recorded within "Accounts payable, accrued expenses and other current liabilities" on the Condensed Consolidated Balance Sheets. The remaining liability as of March 31, 2023 is expected to be settled in the second quarter of 2023.


	in thousands
Balance at December 31, 2022	$	9,470
Costs incurred and charged to expense	5,535
Costs paid or otherwise settled (1)	(10,264)
Balance at March 31, 2023	$	4,741

(1)Includes cash payments made for severance, as well as a $0.4 million non-cash impairment related to certain digital media content assets and the non-cash stock-based compensation effects related to the 2023 RIF.

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11 — 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.

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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")~~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 1113 — 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.~~Warrants are Level 3 within the fair value hierarchy. 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 1416 — Warrant Liabilities for additional information.

The following table summarizes the significant inputs in the valuation model as of ~~September 30, 2022:~~March 31, 2023:


Inputs	Inputs	Private Placement Warrants	Underwriter Warrants	OTM Warrants	PIPE Warrants	Inputs	Private Placement Warrants	Underwriter Warrants	OTM Warrants	PIPE Warrants
Exercise price	Exercise price	$11.50	$11.50	$15.00	$11.50	Exercise price	$11.50	$11.50	$15.00	$11.50
Common stock price	Common stock price	$8.99	$8.99	$8.99	$8.99	Common stock price	$8.74	$8.74	$8.74	$8.74
Volatility	Volatility	43.7%	43.7%	41.0%	43.7%	Volatility	46.6%	46.6%	44.0%	46.6%
Expected term of the warrants	Expected term of the warrants	4.18	4.18	9.18	4.18	Expected term of the warrants	3.68	3.68	8.68	3.68
Risk-free rate	Risk-free rate	4.10%	4.10%	3.80%	4.10%	Risk-free rate	3.70%	3.70%	3.50%	3.70%
Dividend yield	Dividend yield	—%	—%	—%	—%	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.

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The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, is shown in the table below:


		Fair Value Measurements									Fair Value Measurements
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3

		in thousands									in thousands
		September 30, 2022									March 31, 2023
Financial Assets	Financial Assets									Financial Assets
Interest rate swaps	Interest rate swaps	$	3,516	$	—	$	3,516	$	—	Interest rate swaps	$	2,816	$	—	$	2,816	$	—
Total	Total	$	3,516	$	—	$	3,516	$	—	Total	$	2,816	$	—	$	2,816	$	—

Financial Liabilities	Financial Liabilities									Financial Liabilities
Public warrants	Public warrants	$	14,088	$	14,088	$	—	$	—	Public warrants	$	13,053	$	13,053	$	—	$	—
Private placement warrants	Private placement warrants	727		—		—		727		Private placement warrants	681		—		—		681
Underwriter warrants	Underwriter warrants	81		—		—		81		Underwriter warrants	76		—		—		76
OTM warrants	OTM warrants	4,888		—		—		4,888		OTM warrants	4,701		—		—		4,701
PIPE warrants	PIPE warrants	29,807		—		—		29,807		PIPE warrants	27,565		—		—		27,565
Total	Total	$	49,591	$	14,088	$	—	$	35,503	Total	$	46,076	$	13,053	$	—	$	33,023

		December 31, 2021									December 31, 2022
Financial Assets	Financial Assets									Financial Assets
Interest rate swaps	Interest rate swaps	$	531	$	—	$	531	$	—	Interest rate swaps	$	3,294	$	—	$	3,294	$	—
Total	Total	$	531	$	—	$	531	$	—	Total	$	3,294	$	—	$	3,294	$	—

Financial Liabilities	Financial Liabilities									Financial Liabilities
Public warrants	Public warrants	$	25,243	$	25,243	$	—	$	—	Public warrants	$	12,880	$	12,880	$	—	$	—
Private placement warrants	Private placement warrants	1,248		—		—		1,248		Private placement warrants	673		—		—		673
Underwriter warrants	Underwriter warrants	139		—		—		139		Underwriter warrants	75		—		—		75
OTM warrants	OTM warrants	6,849		—		—		6,849		OTM warrants	4,706		—		—		4,706
PIPE warrants	PIPE warrants	55,887		—		—		55,887		PIPE warrants	27,227		—		—		27,227
Total	Total	$	89,366	$	25,243	$	—	$	64,123	Total	$	45,561	$	12,880	$	—	$	32,681

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~~three months ended ~~September 30,~~March 31, 2023 and 2022:


		Private Placement Warrants		Underwriter Warrants		OTM Warrants		PIPE Warrants		Total			Private Placement Warrants		Underwriter Warrants		OTM Warrants		PIPE Warrants		Total

		in thousands											in thousands
Balance at December 31, 2021	Balance at December 31, 2021	$	1,248	$	139	$	6,849	$	55,887	$	64,123	Balance at December 31, 2021	$	1,248	$	139	$	6,849	$	55,887	$	64,123
Change in fair value of warrant liabilities	Change in fair value of warrant liabilities	(521)		(58)		(1,961)		(24,174)		(26,714)		Change in fair value of warrant liabilities	(460)		(51)		(1,867)		(20,109)		(22,487)
Exercise of warrants	Exercise of warrants	—		—		—		(1,906)		(1,906)		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

Balance at March 31, 2022												Balance at March 31, 2022	$	788	$	88	$	4,982	$	33,872	$	39,730

Balance at December 31, 2022												Balance at December 31, 2022	$	673	$	75	$	4,706	$	27,227	$	32,681
Change in fair value of warrant liabilities												Change in fair value of warrant liabilities	8		1		(5)		338		342

Balance at March 31, 2023												Balance at March 31, 2023	$	681	$	76	$	4,701	$	27,565	$	33,023

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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.

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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 critical credit quality indicator for the fixed income investments is the credit ratings and management considers all of the fixed income investments currently held by Hagerty Re to be investment grade.

The following table discloses the fair value and related carrying amount of fixed income investments held bywithin Hagerty Re as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value

		in thousands					in thousands
		September 30, 2022					March 31, 2023
Fixed income securities, short-term	Fixed income securities, short-term	$	2,218	$	2,170	Fixed income securities, short-term	$	7,350	$	7,294
Fixed income securities, long-term	Fixed income securities, long-term	8,876		8,436		Fixed income securities, long-term	8,828		8,528
Total	Total	$	11,094	$	10,606	Total	$	16,178	$	15,822

		December 31, 2021					December 31, 2022
Fixed income securities, short-term	Fixed income securities, short-term	$	1,189	$	1,188	Fixed income securities, short-term	$	6,296	$	6,205
Fixed income securities, long-term	Fixed income securities, long-term	9,596		9,476		Fixed income securities, long-term	6,690		6,316
Total	Total	$	10,785	$	10,664	Total	$	12,986	$	12,521

~~The Company has reviewed~~Each reporting period management reviews the ~~portfolio for other than temporary impairments and concluded that no impairment exists~~credit-rating of each security to ensure it is considered investment grade. Based on the factors outlined above, as of ~~September 30, 2022.~~March 31, 2023, the Company does not expect any credit losses related to the fixed income investments and therefore there is no allowance for credit losses recorded. The Company did not record any gains or losses on these securities during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 or ~~2021.~~2022.

1012 — Long-Term Debt

As of ~~the indicated dates, the principal amount of Hagerty's debt~~March 31, 2023 and December 31, 2022, "Long-term debt" consisted of the following:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022

		in thousands					in thousands
Credit Facility	Credit Facility	$	136,000	$	135,500	Credit Facility	$	84,559	$	105,000
Note payable		—		1,000
Notes payable						Notes payable	4,471		3,280
Total debt outstanding	Total debt outstanding	$	136,000	$	136,500	Total debt outstanding	$	89,030	$	108,280
Less: current portion	Less: current portion	—		(1,000)		Less: current portion	—		—
Total long-term debt outstanding	Total long-term debt outstanding	$	136,000	$	135,500	Total long-term debt outstanding	$	89,030	$	108,280

Credit Facility — In ~~September 2022, the Company~~January and April 2023, The Hagerty Group entered into ~~a Fourth Amendment~~the Sixth and Seventh Amendments to Amended and Restated Credit Agreement ~~("Credit~~(the "Credit Agreement"), which amended the terms of its revolving credit facility ~~("Credit~~(the "Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto from time to time as lenders. The ~~amendment primarily included definition updates, transitioning~~primary purpose of the ~~pricing terms from LIBOR~~amendments was to ~~Term SOFR and changes to~~clarify certain definitions within the ~~financial covenants.~~Credit Agreement.

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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~~up to $25.0 million and ~~$3.0 million, respectively, or lesser amounts~~borrowings in the ~~event~~British Pound and Euro of up to $25.0 million in the ~~available aggregate commitments are less than such sublimits.~~aggregate.

The current term of the Credit Agreement ~~matures~~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 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 weighted-average borrowing rate was ~~5.15% and 1.61% as of September 30, 2022 and December~~7.16% for the three months ended March 31, ~~2021, respectively.~~2023.

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~~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. In January 2023, Broad Arrow Europe Limited and Broad Arrow Capital UK Limited were joined to the Credit Facility as co-borrowers.

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~~March 31, 2023 and December 31, ~~2021,~~2022, the Company was in compliance with the financial covenants under the Credit Agreement.

~~Note~~Notes Payable — As of March 31, 2023 and December 31, 2022, the Company had outstanding notes payable, which are used to fund certain loans made by BAC in the U.K., totaling $4.5 million and $3.3 million, respectively. The notes payable accrue interest at fixed rates ranging from 7.0% to 9.0% and are due between October 2024 and March 2025. Refer to Note 4 — Notes Receivable for additional information on the lending activities of BAC.

The Company had a $2.0 million note payable related to a business combination for the future 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.

1113 — 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,~~March 31, 2023, 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, as a result, the fixed swap rate is now 0.81%. The estimated fair value of the interest rate swap is included within either ~~"Prepaid expenses and other non-current~~"Other long-term 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~~its outstanding 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~~In the event the cash flow hedge is no longer deemed effective, such amounts are reclassified into interest expense, net from ~~other~~Other comprehensive income (loss) ~~during the period in which the hedged item affects earnings.~~. There were no such reclassifications during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. The Company does not expect to have a reclassification into earnings within the next 12 months.

1214 — ~~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,~~March 31, 2023

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and December 31, 2022, there were 83,338,436 and 83,202,969 shares of Class A Common Stock issued and ~~outstanding.~~outstanding, respectively.

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. In connection with the Business Combination, Hagerty issued 251,033,906 shares of Class V Common Stock to the Legacy Unit Holders along with an equivalent number of Hagerty Group Units, as discussed below. Each share of Class V Common Stock, together with the corresponding Hagerty Group Unit, is exchangeable for one share of Class A Common Stock. As of ~~September 30,~~March 31, 2023 and December 31, 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,~~March 31, 2023 and December 31, 2022, there were no shares of Preferred Stock issued and outstanding.

~~TABLE OF~~ ~~CONTENTS~~

~~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 Unitsare a unit of economic interest inThe Hagerty Group. The following table summarizes the ownership of Hagerty Group Units in The Hagerty Group as of September 30, 2022:~~

Units Owned Ownership Percentage
Hagerty Group Units held by Hagerty, Inc. 83,202,969 24.5 %
Hagerty Group Units held by other unit holders 255,758,466 75.5 %
Total 338,961,435 100.0 %

Non-controlling ~~Interest~~Interests — — 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,~~Each Hagerty Group Unit and, if applicable, the associated share of Class V Common Stock, is exchangeable for one share of Class A Common Stock. During the three months ended March 31, 2023, 118,500 Hagerty Group Units were exchanged for an equal amount of Class A Common Stock.

The following table summarizes the ownership of Hagerty Group Units as of March 31, 2023:


	March 31, 2023			December 31, 2022
	Units Owned	Ownership Percentage		Units Owned	Ownership Percentage
Hagerty Group Units held by Hagerty, Inc.	83,338,436	24.6	%	83,202,969	24.5	%
Hagerty Group Units held by other unit holders	255,639,966	75.4	%	255,758,466	75.5	%
Total	338,978,402	100.0	%	338,961,435	100.0	%

In addition to the non-controlling interest ~~represents~~related to The Hagerty Group, a non-controlling interest is also reported for 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.

At the end of each reporting period, The Hagerty Group equity attributable to Hagerty, Inc. and the non-controlling unit holders, respectively, is reallocated to reflect their current ownership in The Hagerty Group.

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").~~Agreement. The Legacy Unit Holders Exchange Agreement permitted the Legacy Unit Holders to exchange shares of Class V Common Stock and the associated Hagerty Group Units for an equivalent amount of shares 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~~This 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. 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 subject to the lock-up period, as defined within the Lock-Up Agreement, dated as of December 2, 2021, between the Company and 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, with a corresponding adjustment to "Additional paid-in capital" and "Accumulated earnings (deficit)". The total redeemable non-controlling interest as of December 31, 2021 was $593.3 million. For the period from January 1, 2022 to March 23, 2022, additional accretion of $1.6 billion was recognized, with a corresponding adjustment of $162.1 million and $1.4 billion to "Additional paid-in capital" and "Accumulated earnings (deficit)", respectively.

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. The redeemable non-controlling interest balance of $2.1 billion as of March 23, 2022 was recorded in equity as non-controlling interest with corresponding adjustments of $1.4 billion, $528.6 million, and $215.6 million to "Accumulated earnings (deficit)", "Additional paid-in capital" and "Non-controlling interest", respectively.

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15 — Earnings (Loss) Per ~~Unit and~~ Share

The following table sets forth the calculation of ~~basic~~Basic EPS ~~which~~and Diluted EPS for the three months ended March 31, 2023 and 2022. Basic EPS is ~~based on~~computed using Net income (loss) attributable to controlling interest, ~~for the three and nine months ended September 30, 2022 and 2021,~~ divided by the weighted average of Class A Common Stock and Members' Units outstanding as of September 30, 2022 and 2021, respectively. Diluted EPS of Class A Common Stock and Members' Units is computed by dividing Net income (loss) attributable to controlling interest by the weighted average number of shares of Class A Common Stock ~~and Members' Units~~ outstanding asduring the period. Diluted EPS is computed using Net income (loss) attributable to controlling interest divided by the weighted average number of ~~September 30, 2022 and 2021,~~shares of Class A Common Stock outstanding during the period, adjusted to give effect to potentially dilutive securities. ~~Potentially~~The Company's potentially dilutive securities ~~for the diluted EPS calculation consists~~consist of (1) unexercised warrants and ~~unvested~~unissued stock-based restricted stock units, ~~and~~ performance restricted stock units, ~~all~~and employee stock purchase plan shares, with the dilutive effect calculated using the Treasury Stock Method, and (2) non-controlling interest Hagerty Group Units, with the dilutive effect calculated using the "If-converted" Method. In the computation of Diluted EPS, Net income (loss) attributable to controlling interest is adjusted to remove the change in fair value associated with the Company's warrant liabilities that are potentially dilutive and Net income (loss) associated with non-controlling interest in Hagerty Group Units.


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2022		2021		2022		2021			2023		2022

		in thousands (except per share/unit amounts)									in thousands (except per share amounts)
Numerator:	Numerator:									Numerator:
Net income (loss) attributable to controlling interest	Net income (loss) attributable to controlling interest	$	14,714	$	(479)	$	36,685	$	5,309	Net income (loss) attributable to controlling interest	$	(2,099)	$	27,507
Adjustment for change in fair value of potentially dilutive warrant liabilities		—		—		(24,753)		—
Adjustment for net income attributable to non-controlling interest		9,817		—		(1,420)		—
Adjusted net income (loss) to common shareholders		$	24,531	$	(479)	$	10,512	$	5,309
Adjustments:										Adjustments:
Change in fair value of potentially dilutive warrant liabilities										Change in fair value of potentially dilutive warrant liabilities	—		(20,620)
Net income (loss) attributable to non-controlling interest Hagerty Group Units										Net income (loss) attributable to non-controlling interest Hagerty Group Units	—		(11,452)
Adjusted net income (loss) attributable to Class A Common Stock shareholders										Adjusted net income (loss) attributable to Class A Common Stock shareholders	$	(2,099)	$	(4,565)

Denominator:	Denominator:									Denominator:
Weighted average shares of Class A Common Stock outstanding — basic	Weighted average shares of Class A Common Stock outstanding — basic	82,816		N/A		82,569		N/A		Weighted average shares of Class A Common Stock outstanding — basic	83,227		82,433
Effect of dilutive securities:
Conversion of non-controlling interest Hagerty Group Units to Class A Common Stock		253,396		N/A		251,821		N/A
Adjustments:										Adjustments:
Conversion of non-controlling interest Hagerty Group Units to shares of Class A Common Stock										Conversion of non-controlling interest Hagerty Group Units to shares of Class A Common Stock	—		251,034
Warrants	Warrants	—		N/A		817		N/A		Warrants	—		2,436
Stock-based compensation awards	Stock-based compensation awards	556		N/A		185		N/A		Stock-based compensation awards	—		—
Weighted average shares of Class A Common Stock outstanding — diluted	Weighted average shares of Class A Common Stock outstanding — diluted	336,768		N/A		335,392		N/A		Weighted average shares of Class A Common Stock outstanding — diluted	83,227		335,903

Earnings (loss) per share of Class A Common Stock
Earnings (loss) per share attributable to Class A Common Stock shareholders										Earnings (loss) per share attributable to Class A Common Stock shareholders
Basic	Basic	$	0.18	N/A		$	0.44	N/A		Basic	$	(0.03)	$	0.33
Diluted	Diluted	$	0.07	N/A		$	0.03	N/A		Diluted	$	(0.03)	$	(0.01)

Earnings (loss) per Members' Unit — basic and diluted		N/A		$	(4.79)	N/A		$	53.09
Weighted average units outstanding — basic and diluted		N/A		100		N/A		100

1416 — Warrant Liabilities

~~In connection with the Business Combination, the~~The Company ~~registered~~had 5,750,000 Public Warrants, 257,500 Private Placement Warrants, 28,750 Underwriter Warrants, 1,300,000 OTM Warrants, and ~~12,669,300~~12,147,300 PIPE ~~Warrants. Upon the Closing, the following warrants were~~Warrants registered and outstanding ~~to purchase shares~~as of ~~the Company's Class A Common Stock that were issued by Aldel prior to the Business Combination:~~March 31, 2023.

Public Warrants — Each ~~warrant~~Public Warrant is exercisable for one share of the Company's Class A Common Stock at a price of $11.50 per share, subject to adjustments, ~~commencing~~provided that the Company has an effective registration statement under the Securities Act covering the number of shares 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 Public Warrants may be exercised on a cash basis only for a whole number of shares of the Company’s Class A Common Stock. The Public Warrants expire in ~~April 2022,~~December 2026.

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Private Placement Warrants— Each Private Placement Warrant is exercisable for one share of the Company's Class A Common Stock at a price of $11.50 per share, subject to adjustments, and subject to additional vesting requirements as outlined within the warrant agreements covering those securities, 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~~Private Placement Warrants may be exercised ~~on a cash basis~~ only for a whole number of shares of the Company’s Class A Common Stock. Additionally, the Private Placement Warrants are exercisable on a cashless basis so long as they are held by the original warrant holder or permitted transferees. The ~~warrants~~Private Placement Warrants expire in December 2026.

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~~Private Placement~~Underwriter Warrants — — Each ~~warrant will be~~Underwriter Warrant is exercisable for one share of the Company's Class A Common Stock at a price of $11.50 per share, subject to adjustments, commencing in December 2022, and subject to additional vesting requirements as outlined within the warrant agreements covering those securities, including the Sponsor Warrant Lock-Up Agreement, dated December 2, 2021, between the Company and the holders of the Private Placement and OTM Warrants (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~~Underwriter Warrants may be exercised only for a whole number of shares of the Company’s Class A Common Stock. ~~Additionally, the Private Placement~~The Underwriter Warrants are exercisable on a cashless basis so long as they are held by the ~~Sponsor~~Underwriter or any of its permitted transferees. The ~~warrants~~Underwriter Warrants expire in December 2026.

~~Underwriter~~OTM Warrants — — Each ~~warrant~~OTM Warrant is exercisable for one share of the Company's Class A Common Stock at a price of ~~$11.50~~$15.00 per share, subject to adjustments ~~commencing in April 2022,~~and additional vesting requirements as outlined within the warrant agreements covering those securities, 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~~OTM Warrants may be exercised only for a whole number of shares of the ~~Company’s~~Company's Class A Common Stock. ~~Additionally, 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 in December 2026.~~

~~OTM Warrants~~ — Each warrant will be exercisable for one share of the Company's Class A Common Stock at a price of $15.00 per share, subject to adjustments, commencing in December 2022 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. Additionally, the 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~~OTM Warrants expire in December 2031.

PIPE Warrants — Each ~~warrant~~PIPE Warrant is exercisable for one share of the Company's Class A Common Stock at a price of $11.50 per share, subject to adjustments, ~~commencing in January 2022,~~ 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. ~~Additionally,~~The PIPE Warrants may be exercised only for a whole number of shares of the Company's Class A Common Stock. The PIPE Warrants may be exercised on a cashless basis. The ~~warrants~~PIPE Warrants expire in December 2026.

The Company accounts for these warrants as liabilities in accordance with ASC 815-40. The warrants are measured at fair value each reporting period ~~and~~with the change in fair value is recorded within "Change in fair value of warrant liabilities" in the Condensed Consolidated Statements of Operations. The Company recognized a ~~$11.6~~$0.5 million ~~gain~~loss and a ~~$37.9~~$31.7 million gain as a result of aan increase and decrease in the fair value of the warrant liability for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, respectively. ~~The Company did not have warrants for the three and nine months ended September 30, 2021.~~

~~For~~During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, 522,000 PIPE warrants were exercised, on a cashless basis, for an equivalent of 124,748 shares of the Company's Class A Common Stock. The cashless exercise resulted in a decrease in "Warrant liabilities" and an increase in "Class A Common Stock" and "Additional paid-in capital" of $1.9 million on the ~~Company's~~ Condensed Consolidated Balance Sheets. No warrants were exercised during the three months ended March 31, 2023.

As of ~~September 30, 2022,~~March 31, 2023, a warrant liability of ~~$49.6~~$46.1 million was reflected as a long-term liability on the Company's Condensed Consolidated Balance Sheets and the total number of warrants outstanding was 19,483,550.

1517 — Stock-Based Compensation

In December 2021, ~~the~~Hagerty's Board approved the 2021 Equity Incentive Plan, which ~~authorized an aggregate~~provides for the issuance of ~~38,317,399~~up to approximately 38.3 million shares of the Company's Class A Common Stock ~~for issuance~~ to employees and non-employee directors. 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 restricted stock units. ~~The Board determines~~Awards granted under the ~~period over which stock-based awards become exercisable and awards~~2021 Equity Incentive Plan generally vest over a two to five-year period. As of ~~September 30, 2022,~~March 31, 2023, there were ~~31,402,240~~approximately 31.4 million shares available for future grants under the 2021 Equity Incentive Plan.

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Stock-based compensation expense related to employees is recognized in the Condensed Consolidated Statements of Operations within "Salaries and benefits" and, to a much lesser extent, when applicable, "Restructuring, impairment and related charges, net." Stock-based compensation expense related to non-employee directors is recognized within "General and administrative ~~services" in the Company's Condensed Consolidated Statements of Operations.~~services." The Company accounts for forfeitures asof stock-based compensation awards in the period when they occur.

The following table summarizes stock-based compensation expense recognized during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023. As the first stock-based compensation grant occurred in the second quarter of 2022, there was no stock-based compensation expense during the three months ended March 31, 2022:

Three months ended
September 30, 2022 Nine months ended
September 30, 2022
in thousands
Restricted stock units $ 3,143 $ 6,735
Performance restricted stock units 715 1,430
Total stock-based compensation expense $ 3,858 $ 8,165


	Three months ended March 31, 2023

	in thousands
Restricted stock units	$	3,233
Performance restricted stock units	715
Employee stock purchase plan	165
Total stock-based compensation expense	$	4,113

Restricted Stock Units

The Company grants serviced-based restricted stock units to employees and non-employee directors. Compensation expense for these service-based restricted stock units is ~~based on~~determined in reference to the closing market price of the Company's Class A Common Stock on the business day prior to the grant date, and is recognized ratably over the service period. There were ~~$3.3 million of~~no restricted stock ~~units granted~~unit grants during the ~~nine~~three months ended ~~September 30, 2022, with a weighted average fair value of $10.81.~~March 31, 2023. Unrecognized compensation expense related to restricted stock units as of ~~September 30, 2022~~March 31, 2023 was ~~$27.9~~$21.7 million, which the Company expects to recognize over a weighted average period of ~~3.55~~3.47 years.

The following table provides a summary of the restricted stock unit activity during the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:

Restricted Stock Units Weighted Average Fair Value
Unvested balance as of December 31, 2021 — $ —
Granted 3,251,560 10.81
Vested (37,071) 10.79
Forfeited (43,537) 10.79
Unvested balance as of September 30, 2022 3,170,952 $ 10.81


	Restricted Stock Units	Weighted Average Fair Value
Unvested balance as of December 31, 2022	3,195,038	$	10.76

Vested	(16,967)	10.79
Forfeited	(15,648)	10.79
Unvested balance as of March 31, 2023	3,162,423	$	10.76

Performance Restricted Stock Units

In April 2022, the ~~Company~~CEO was granted performance restricted stock units of up to 3,707,136 shares toof the Company's ~~CEO.~~Class A Common Stock. The award had a grant date fair value of approximately $19.2 million, which was estimated using a Monte Carlo simulation model. The performance restricted stock units are both a market and service-based award in accordance with ASC 718. Shares issuable under this award will be earned based on the achievement of stock price targets of the Company's Class A Common ~~Stock.~~Stock as follows: (i) 25% of the shares can be earned when the stock price exceeds $20.00 per share for 60 consecutive days, (ii) 25% of the shares can be earned when the stock price exceeds $25.00 per share for 60 consecutive days, and (iii) 50% of the shares can be earned when the stock price exceeds $30.00 per share for 60 consecutive days. These market-based conditions must be met in order for these stock awards to vest, and it is therefore possible that no shares could ultimately vest. ~~Shares~~If the market-based conditions are met, shares earned will vest over the earlier of three years after achievement of the stock price measure or the end of the seven-year performance period. The Company will recognize the entire $19.2 million of compensation expense for this award, regardless of whether such conditions are met, over the requisite service period.

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The following table summarizes the assumptions and related information used to determine the grant-date fair value of performance restricted stock units awarded for the periods presented:


Inputs						Performance Restricted Stock Units
Weighted average grant-date fair value per share						$5.19
Expected stock volatility						35%
Expected term (in years)						7.0
~~Expected stock volatility~~Risk-free interest rate						~~35%~~2.5%
Dividend yield						—%
~~Risk-free interest rate~~						~~2.5%~~

The following table provides a summary of performance restricted stock unit activity during the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:

Performance Restricted Stock Units Weighted Average Fair Value
Outstanding as of December 31, 2021 — $ —
Granted 3,707,136 5.19
Outstanding as of September 30, 2022 3,707,136 $ 5.19


	Performance Restricted Stock Units	Weighted Average Fair Value
Outstanding as of December 31, 2022	3,707,136	$	5.19
Granted	—	—
Outstanding as of March 31, 2023	3,707,136	$	5.19

Employee Stock Purchase Plan

In December 2021, the Company adopted the 2021 Employee Stock Purchase Plan (the ~~"ESPP Plan"~~"ESPP"). The Compensation Committee of the Board ~~will administer~~administers the ESPP ~~Plan~~, including the determination of the time and frequency of offering periods, as well as the terms and conditions of the offerings. The ESPP ~~Plan~~ allows substantially all employees to participate.

The offering periods ~~will~~ last six months, beginning on the first business day of April 3 and October 3 each ~~year, with the initial offering period beginning on October 3, 2022.~~year. Eligible employees may contribute up to 50% of their base wages and the purchase price will be ~~90%~~determined each offering period by the Compensation Committee. The ESPP allows for a discount of up to 15% and for the purchase price to occur at the lesser of the fair market value of the Company's Class A Common Stock on (1) the offering date, and (2) the applicable purchase date. As of ~~September 30, 2022,~~March 31, 2023, the total number of the Company's Class A Common Stock authorized and reserved for issuance under the ESPP ~~Plan~~ was 11,495,220 ~~shares and~~shares. As of March 31, 2023, no shares had been purchased under the ESPP.

18 — 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, 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 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 Tax Receivable Agreement ("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 Group’s assets as a result of an exchange of Hagerty Group Units and Class V Common Stock for Class A Common Stock or cash. See "Tax Receivable Agreement Liability" below.

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.

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.

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~~16 — Taxation~~

Income tax expense (benefit) 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 income ~~(loss)" before taxes~~tax expense" as follows:


		Nine months ended September 30,									Three months ended March 31,
		2022				2021					2023				2022

		in thousands (except percentages)									in thousands (except percentages)
Income tax expense at statutory rate		$	8,481	21	%	$	2,078	21	%
Income tax (benefit) expense at statutory rate										Income tax (benefit) expense at statutory rate	$	(2,385)	21	%	$	3,780	21	%
State taxes	State taxes	(51)		—	%	—		—	%	State taxes	(62)		1	%	(164)		(1)	%
Loss not subject to entity-level taxes	Loss not subject to entity-level taxes	1,402		3	%	1,264		13	%	Loss not subject to entity-level taxes	4,374		(39)	%	3,168		18	%
Foreign rate differential	Foreign rate differential	(264)		(1)	%	(174)		(2)	%	Foreign rate differential	(214)		2	%	(177)		(1)	%
Change in valuation allowance	Change in valuation allowance	2,101		5	%	1,622		16	%	Change in valuation allowance	1,566		(14)	%	1,965		11	%
Change in fair value of warrant liabilities		(7,952)		(19)	%	—		—	%
Change in fair value of warrant liability										Change in fair value of warrant liability	108		(1)	%	(6,654)		(37)	%
Permanent items	Permanent items	360		1	%	—		—	%	Permanent items	281		(2)	%	112		1	%
Income tax expense	Income tax expense	$	4,077	10	%	$	4,790	48	%	Income tax expense	$	3,668	(32)	%	$	2,030	12	%

~~Deferred~~

The Company recorded a deferred tax asset for the difference between outside tax basis and book basis of the Company’s investment in assets of The Hagerty Group of $157.8 million and $159.3 million at March 31, 2023 and December 31, 2022, respectively. The Company's 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, including the deferred tax asset for the investment in assets of The Hagerty Group, will not be ~~utilized. The valuation allowance as of September 30, 2022~~realized. As a result, the Company has ~~been increased for additional foreign net operating losses, additional net operating losses of Hagerty, Inc. and adjusted for changes in foreign exchange rates. The Company had~~recorded a valuation allowance of ~~$176.3~~$178.1 million and ~~$174.8~~$176.1 million against its deferred tax assets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. In the event that management subsequently determines that it is more likely than not that the Company will realize its deferred tax assets in the future over the recorded amount, a decrease to the valuation allowance will be made, which will reduce the provision for income taxes.

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 March 31, 2023, tax years 2019 to 2022 are subject to examination by various tax authorities. With few exceptions, as of March 31, 2023, the Company is no longer subject to U.S. federal, state, local or foreign examinations for years before 2019.

The Canadian statute of limitation for tax year 2018 was open as of March 31, 2023 and remains open because the Company is currently under examination by the Canadian Revenue Agency for that year.

The calculation of the Company's tax liabilities involves uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

The Company records uncertain tax benefits ("UTB") as liabilities in accordance with ASC 740 and adjusts these liabilities when management's conclusion changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the UTB liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

As of March 31, 2023 and 2022, 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 within "Income tax benefit (expense)" in the Condensed Consolidated Statements of Operations.

In August 2022, the Inflation Reduction Act ("IRA") was enacted into law. Among the provisions in the IRA was a 15% corporate minimum tax effective for years beginning after December 31, 2022, and a 1% tax on share repurchases after December 31, 2022. The Company does not expect the tax provisions of the IRA to have a material impact on its results.

Tax Receivable Agreement Liability — 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 (provided as Exhibit 2.1, incorporated by reference within Item 6. Exhibits, in this Quarterly Report on Form 10-Q) 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.

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Significant inputs and assumptions ~~were~~are 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%~~25.6%. The estimated value of the TRA recorded by the Company within Other long-term liabilities on the Condensed Consolidated Balance Sheets was $0.6 million and $3.2 million at ~~the Closing was $3.5 million~~March 31, 2023 and December 31, 2022, respectively, which was limited by the ability to currently utilize tax ~~benefits and~~benefits. The decrease in value of $2.6 million was recorded in ~~"Other long-term liabilities" with an offsetting entry to "Additional paid-in capital"~~"Interest and other income (expense)" within the Condensed Consolidated ~~Balance Sheets. There was no change~~Statements of Operations.

In general, cash tax savings result in a year when the tax liability of Hagerty, Inc. for the year, computed without regard to the ~~estimated value from~~deductions attributable to the ~~Closing~~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 ~~September 30, 2022.~~be substantial.

1719 — Related-Party Transactions

As of ~~September 30, 2022,~~March 31, 2023, Markel had a 23.0% ownership in The Hagerty Group and State Farm ~~Automobile Insurance Company ("State Farm")~~ had a 14.8% ownership in The Hagerty Group. As such, both Markel and State Farm are considered related parties.

State Farm

Alliance Agreement

State Farm and Hagerty entered into a master alliance agreement in 2020 to establish an alliance insurance program ~~where~~whereby State Farm’s customers, through ~~the~~ State Farm agents, ~~would~~will have access to Hagerty features and ~~services which~~services. This program is expected to begin in the ~~first~~second half of 2023. Under this agreement, State Farm paid Hagerty an advanced commission of $20.0 million in 2020, to be recognized into Commission and fee revenue over the life of the ~~contract. The parties have~~contract beginning with the ability to issue policies.

As part of the Company's master alliance agreement with State Farm, it also entered into a managing general underwriter agreement ~~where~~whereby 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 State Farm agents on a state by state basis. Hagerty Insurance Agency, LLC will be paid commission under the managing general underwriter agreement and ancillary agreements for servicing the State Farm Classic+ ~~policies along with~~policies. Additionally, the Company will have the opportunity to ~~earn revenue from Hagerty Drivers Club, LLC connected with Hagerty's~~offer HDC membership ~~products and services that, in addition~~ to ~~the~~ State Farm Classic+ ~~policy, are made available~~customers which provides Hagerty an additional revenue opportunity.

Reinsurance Agreement

Effective March 1, 2023, Hagerty Re entered into a quota share reinsurance agreement to cede 50% of the High-Net-Worth Accounts physical damage risks assumed from Evanston to Oglesby Reinsurance Company, an affiliate of State ~~Farm customers.~~Farm. Refer to Note 9 — Reinsurance for additional information on the Company's reinsurance programs.

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Markel

Alliance Agreement

The Company's 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 ~~carriers~~ due to insurer liabilities and commission revenue under the agreement with Markel subsidiaries:


		September 30, 2022			December 31, 2021				March 31, 2023			December 31, 2022

		in thousands (except percentages)							in thousands (except percentages)
Due to insurer	Due to insurer	$	91,549		$	54,850		Due to insurer	$	84,044		$	64,873
Percent of total	Percent of total	93		%	95		%	Percent of total	96		%	95		%


		Three months ended September 30,						Nine months ended September 30,							Three months ended March 31,
		2022			2021			2022			2021				2023			2022

		in thousands (except percentages)													in thousands (except percentages)
Commission revenue	Commission revenue	$	78,808		$	70,459		$	225,060		$	197,152		Commission revenue	$	71,639		$	59,536
Percent of total	Percent of total	94		%	94		%	94		%	94		%	Percent of total	97		%	96		%

Reinsurance Agreement

~~Under~~For the three months ended March 31, 2023 and 2022, under a quota share agreement with Evanston, a wholly-owned subsidiary of Markel, Hagerty Re reinsured ~~70%~~approximately 80% and ~~60%~~70%, respectively, of the risks ~~for the nine months ended September 30, 2022 and 2021, respectively,~~ written through the Company’s U.S. MGAs. Effective January 1, 2023, the quota share agreement with Evanston was amended to increase Hagerty Re's participation on High-Net-Worth Accounts from 80% to 100%. At the same time, Hagerty Re entered into a reinsurance agreement to cede 10% of the High-Net-Worth Accounts physical damage risks assumed from Evanston to Markel International, an affiliate of Markel. Additionally, under a quota share agreement with Markel International Insurance Company Limited, Hagerty Re reinsured ~~70%~~approximately 80% and ~~60%~~70% of the risks for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, written through the Company’s U.K. MGA. ~~All balances listed below are related to business with a Markel affiliate:~~

September 30,
2022
December 31,
2021
Assets: in thousands
Premiums receivable $ 130,384 $ 72,697
Deferred acquisition costs, net 110,209 78,449
Total assets $ 240,593 $ 151,146
Liabilities:
Losses payable and provision for unpaid losses and loss adjustment expenses $ 154,706 $ 104,139
Unearned premiums 240,387 167,541
Commissions payable 79,650 59,511
Total liabilities $ 474,743 $ 331,191
The following tables summarize all balances related to the Company's business with Markel affiliates:

Three months ended
September 30, Nine months ended
September 30,
2022 2021 2022 2021
Revenue: in thousands
Earned premium $ 102,958 $ 74,953 $ 278,386 $ 202,422
Expenses:
Ceding commission $ 48,421 $ 35,935 $ 132,724 $ 97,261
Losses and loss adjustment expenses 58,900 30,779 130,279 83,045
Total expenses $ 107,321 $ 66,714 $ 263,003 $ 180,306

As a result of the related party transactions disclosed herein, the Company is required to maintain certain cash collected as restricted as it will be used to settle liabilities that result from these related party transactions.


	March 31, 2023		December 31, 2022

Assets:	in thousands
Premiums receivable	$	130,086	$	97,897
Deferred acquisition costs, net	110,982		103,869
Total assets	$	241,068	$	201,766
Liabilities:
Losses payable and provision for unpaid losses and loss adjustment expenses	$	153,145	$	160,236
Commissions payable	60,916		75,898
Unearned premiums	240,816		227,192
Total liabilities	$	454,877	$	463,326

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	Three months ended March 31,
	2023		2022

Revenue:	in thousands
Earned premium	$	113,362	$	85,690
Expenses:
Ceding commission	$	53,758	$	40,888
Losses and loss adjustment expenses	46,655		34,571
Total expenses	$	100,413	$	75,459

Broad Arrow

In January 2022, the Company entered into a joint venture with Broad Arrow and acquired approximately 40% equity ownership interest in Broad Arrow. In August 2022, the Company acquired the remaining 60% equity interest of Broad Arrow in exchange for $73.3 million of Class A Common Stock and Hagerty Group Units exchangeable for Class A Common Stock. Prior to the Company's joint venture with Broad Arrow in January 2022, Broad Arrow was majority owned by Kenneth Ahn, the President of ~~Hagerty~~ Marketplace, who received Hagerty Group Units as a part of this transaction. Refer to Note 6 — Acquisitions and Investments for additional information.

Speed Digital

In April 2022, Hagerty acquired Speed Digital for a purchase price of $15.0 million. Speed Digital was previously wholly owned indirectly by Robert Kauffman, a director on Hagerty's Board, who will receive 100% of the proceeds of the purchase price. Refer to Note 6 — Acquisitions and Investments for additional information.

1820 — 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 Company's 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 Condensed Consolidated Balance Sheets.

1921 — Subsequent Events

Management has evaluated subsequent events through ~~November 10, 2022,~~May 9, 2023, which is the date these Condensed Consolidated Financial Statements were issued and no subsequent events were identified.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader of the financial statements with a narrative from the perspective of management on the financial condition, results of operations, liquidity and certain other factors that may affect our operating results. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed within Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10‑K for the year ended December 31, ~~2021,~~2022, filed on March ~~24, 2022.~~14, 2023.

Unless otherwise indicated or the context otherwise requires, references in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" to "we", "our", "Hagerty" and "the Company" refer to the business and operations of ~~The Hagerty Group, LLC and its consolidated subsidiaries prior to the Business Combination and to~~ Hagerty, Inc. and its consolidated subsidiaries, ~~following the consummation of the Business Combination.~~including The Hagerty Group.

Overview

~~We are~~Hagerty is a global market leader in providing insurance for classic cars and enthusiast ~~vehicles~~vehicles. We consistently earn strong net promoter scores by providing auto enthusiasts superior insurance coverage with excellent customer service and welower prices than traditional carriers. We have ~~built~~also leveraged our trusted insurance brand to build a leading automotive lifestyle brand. We offer an ~~industry-leading~~ automotive enthusiast platform that protects, engages, entertains and connects with ~~subscribing members. At Hagerty, everything begins~~our Members and ~~ends with the love of cars – an innate passion that fuels our unique membership model and cultivates deep, personal connections with more than 2.6 million members worldwide.~~

~~Hagerty was founded in 1984, and initially focused on providing insurance coverage for antique boats. Today, our~~other car enthusiasts. Our goal is to ~~scale an organization capable of building an ecosystem of products, services,~~save driving and ~~entertainment~~car culture for ~~car lovers that catalyzes their passion for cars and driving.~~future generations.

Recent Developments Affecting Comparability

Broad Arrow Acquisition

In January 2022, we entered into a joint venture with Broad Arrow Group, Inc. and its consolidated subsidiaries ("Broad Arrow"), pursuant to which we invested $15.3 million in cash in exchange for equity ownership of approximately 40% of Broad Arrow. In August 2022, we acquired the remaining 60% ~~outstanding~~ equity interest ofin Broad Arrow in exchange for $73.3 million of equity consideration of both Hagerty, Inc. and The Hagerty Group. ~~The~~As a result of this acquisition, we and Broad Arrow expect to further leverage our respective product offerings and continue to build Marketplace.

Prior to the acquisition, ~~was~~we accounted for our approximately 40% ownership interest in Broad Arrow using the equity method of accounting under which we recognized our share of Broad Arrow's income (loss) within ~~both "Additional paid-in capital" and "Non-controlling interest" within our Condensed Consolidated Balance Sheets and~~Income (loss) from equity method investment, net of tax in the Condensed Consolidated Statements of ~~Changes in Members' and Stockholders' Equity. The fair value~~Operations. Subsequent to the acquisition of the ~~purchase consideration of $73.3 million was calculated based on the Hagerty, Inc. stock price of $13.47 as~~remaining 60% equity interest in Broad Arrow in August 2022, Broad Arrow became a wholly-owned subsidiary of the ~~closing date~~Company and, as a result, the financial statements of Broad Arrow are now consolidated as a part of Hagerty. Revenue from Broad Arrow is included as part of Marketplace and is recorded within "Membership, marketplace and other revenue" in ~~accordance with ASC 820.~~our Condensed Consolidated Statements of Operations. Refer to Note 6 — Acquisitions and Investments – in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information ~~on the consideration paid for~~related to the Broad Arrow Acquisition.

Prior to the acquisition, we owned approximately 40% of the outstanding equity ownership interests of Broad Arrow , with the carrying amount included as "Equity method investments" on the Condensed Consolidated Balance Sheets and we recognized our share of income (loss) within "Income (loss) from equity method investment, net of tax" on the Condensed Consolidated Statements of Operations.

As a result of the acquisition. we remeasured our pre-existing 40% equity ownership interests to its estimated fair value of approximately $48.3 million, which resulted in a $34.7 million gain within our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022.

Subsequent to the acquisition, Broad Arrow became a wholly-owned subsidiary of the Company and as a result, we consolidate the financial results of Broad Arrow. Revenue from Broad Arrow is included with our existing revenue from Hagerty Marketplace and recorded in "Membership, marketplace and other revenue" within our Condensed Consolidated Statements of Operations.

~~Business Combination~~

~~On December 2, 2021, The Hagerty Group completed a business combination pursuant to the Business Combination Agreement with Aldel and~~ ~~Merger Sub. In connection with the Closing, Aldel changed its name from~~ ~~Aldel Financial Inc.~~ ~~to Hagerty, Inc.~~

~~Following the Closing, Hagerty, Inc. is organized as a C corporation and owns an~~ equity interest in The Hagerty Group in what is commonly known as an "Up-C" structure. Under this structure, substantially all of Hagerty, Inc.'s assets and liabilities are held by The Hagerty Group. As of September 30, 2022, Hagerty, Inc. owned 24.5% of The Hagerty Group.

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Refer to Note 1 — Summary of Significant Accounting Policies and New Accounting Standards and Note 5 — Business Combination in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information on the Business Combination.

~~Impact of COVID-19~~

The global spread of the COVID-19 pandemic, including the spread of recent variants, continues to evolve, and to date has led to the implementation of various containment efforts. While conditions appear to be improving, particularly as more people get vaccinated, governments may re-implement restrictive measures to protect against further spread of any new variants. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society. In response to the COVID-19 pandemic, we have taken several precautionary steps to safeguard our business and team members from COVID-19 and the recent variants of the virus. While the impact of COVID-19 appears to be easing, the safety and well-being of our team members continues to be our top priority. Our office facilities are now open for those who want to work in those spaces, subject to certain restrictions, but a significant number of our personnel continue to work from home. During the nine months ended September 30, 2022, new business growth returned to pre-pandemic pace, events were being held and new initiatives were on track. Management will continue to follow and monitor guidelines in each jurisdiction.

~~Key Performance Indicators and Certain Non-GAAP Financial Measures~~

Key Performance Indicators

~~In addition to the measures presented in~~The tables below present a summary of our ~~Condensed Consolidated Financial Statements, we use the following key performance indicators~~Key Performance Indicators, including important operational metrics, as well as certain GAAP and ~~certain~~ non-GAAP financial measures as of and for the periods presented. We use these Key Performance Indicators to evaluate our business, measure our performance, identify trends ~~in our business~~ against planned initiatives, prepare financial projections, and make strategic decisions. We believe these ~~financial and operational measures~~Key Performance Indicators are useful in evaluating ~~our~~the Company's performance when read together with our ~~financial results~~Condensed Consolidated Financial Statements prepared in accordance with GAAP. ~~The following tables present these metrics as of and for the periods presented:~~

Three months ended
September 30, Nine months ended
September 30,
2022 2021 2022 2021
Total Revenue (in thousands)
$216,757 $168,085 $590,585 $464,694
New Business Count (Insurance) 68,561 68,077 190,997 196,889
Total Written Premium (in thousands)
$222,136 $192,091 $614,623 $533,889
Loss Ratio 56.4% 41.0% 46.8% 41.3%
Operating Income (Loss) (in thousands)
$(21,223) $1,758 $(31,840) $10,936
Contribution Margin (in thousands)
$38,631 $44,863 $136,809 $129,409
Net Income (Loss) (in thousands)
$24,313 $(547) $34,636 $5,105
Adjusted EBITDA (in thousands)
$(10,010) $7,644 $96 $27,982
Basic Earnings (Loss) Per Share $0.18 N/A $0.44 N/A
Adjusted Earnings (Loss) Per Share $(0.06) N/A $(0.10) N/A


	Three months ended March 31,
	2023			2022
Operational Metrics
Total Written Premium (in thousands) (1)	$	182,850		$	154,790
Loss Ratio (2)	41.3		%	41.4		%
New Business Count (Insurance) (3)	51,762			47,514








GAAP Measures
Total Revenue (in thousands)	$	218,352		$	167,811
Operating Income (Loss) (in thousands)	$	(16,489)		$	(13,004)
Net Income (Loss) (in thousands)	$	(15,025)		$	15,866
Basic Earnings (Loss) Per Share	$	(0.03)		$	0.33

Non-GAAP Financial Measures
Adjusted EBITDA (in thousands) (4)	$	6,705		$	(5,959)
Adjusted Earnings (Loss) Per Share (4)	$	(0.04)		$	(0.04)

September 30,
2022
December 31, 2021
Policies in Force 1,310,646 1,247,056
Policies in Force Retention 88.0% 89.1%
HDC Paid Member Count 749,740 718,583
Net Promoter Score (NPS) 82.0 82.0


	March 31, 2023		December 31, 2022
Operational Metrics
Policies in Force (5)	1,335,008		1,315,977
Policies in Force Retention (6)	87.9	%	88.0	%
Vehicles in Force (7)	2,275,387		2,234,461
HDC Paid Member Count (8)	767,872		752,754
Net Promoter Score (NPS) (9)	83		83

~~New Business Count~~(1) Total Written Premium is the total amount of insurance premium written by our MGA affiliates on policies that were bound by our insurance carrier partners during the period. We view Total Written Premium as an important metric as it most closely correlates with our growth in insurance commission revenue and Hagerty Re earned premium. Total Written Premium reflects the actual business volume and direct economic benefit generated from our policy acquisition efforts.

(2) Loss Ratio, expressed as a percentage, is the ratio of (1) losses and loss adjustment expenses incurred to (2) earned premium in Hagerty Re. We view Loss Ratio as an important metric because it is a powerful benchmark for profitability. The benchmark allows us to evaluate our historical loss patterns including incurred losses and make necessary and appropriate adjustments.

(3) New Business Count represents the number of new insurance policies issued by our MGA affiliates during the applicable period. We view ~~new business count~~New Business Count as an important metric to assess our financial performance because it is critical to achieving our growth objectives. While Hagerty benefits from strong renewal retention, new business policies more than offset those cancelled or non-renewed at expiration. Often new policies mean new relationships and an opportunity to sell additional products and services.

(4) Refer to "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP amount.

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~~Total Written Premium~~

Total Written Premium is the total amount of insurance premium written on policies that were bound by our insurance carrier partners during the applicable period. We view Total Written Premium as an important metric as it most closely correlates with our growth in insurance commission revenue and Hagerty Re earned premium. Total Written Premium excludes the impact of premium assumed by unrelated third-party reinsurers and therefore reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we deploy.

~~Loss Ratio~~

Loss Ratio, expressed as a percentage, is the ratio of (1) losses and loss adjustment expenses incurred to (2) earned premium in Hagerty Re. We view Loss Ratio as an important metric because it is a powerful benchmark for profitability. The benchmark allows us to evaluate our historical loss patterns including incurred losses, reset insurance pricing dynamics and make necessary and appropriate adjustments. Hurricane Ian, which made landfall on September 28, 2022, generated $10.0 million of net losses and added 9.3% and 3.4% to the loss ratio for the three and nine months ended September 30, 2022, respectively. Additionally, we strengthened reserves for U.S. auto liability by $6.5 million for the 2022 accident year, which added 6.1% and 2.2% to the loss ratio for the three and nine months ended September 30, 2022, respectively. These two items account for the significant increase in 2022 loss ratios in comparison to 2021.

~~Policies in Force~~

(5) Policies in Force ("PIF") are the number of current and active insurance policies as of the applicable period end date. We view ~~Policies in Force~~PIF as an important metric to assess our financial performance because policy growth drives our revenue growth, increases brand awareness and market penetration, generates additional insight to improve the performance of our platform, and provides key data to assist strategic decision making for the Company.

~~Policies in Force Retention~~

(6) PIF Retention is the percentage of expiring policies that are renewed on the renewal effective date, calculated on a rolling twelve months basis. We view PIF Retention as an important measurement of the number of policies retained each year, which contributes to recurring revenue streams from MGA commissions, membership fees, and earned premiums. It also contributes to maintaining our NPS, as discussed below.

~~HDC Paid Member Count~~(7) Vehicles in Force are the number of current insured vehicles as of the applicable period end date. We view Vehicles in Force as an important metric to assess our financial performance because insured vehicle growth drives our revenue growth and increases market penetration. Vehicles in Force generates additional insight to support Marketplace and Hagerty Media, and provides key data to assist strategic decision making for the Company.

(8) HDC Paid Member Count is the number of current ~~members~~Members who pay an annual membership subscription as of anthe applicable period end date. We ~~view~~believe that HDC Paid Member Count asis important because it helps us measure membership revenue growth and provides an opportunity to customize our value proposition and benefits to specific types of enthusiasts, both by demographic and vehicle interest.

(9) Hagerty uses Net Promoter Score

~~We use NPS~~ ("NPS") as ~~our "north star metric," measuring~~an important measure of the overall strength of our relationship with ~~members.~~Members. NPS is measured twice annually through a web-based survey sent by email invitation to a random sample of existing ~~members,~~Members, and is reported annually using an average of the two surveys. Often referred to as a barometer of brand loyalty and ~~customer~~Member engagement, NPS is well-known in our industry as a strong indicator of growth and retention.

~~Non-GAAP Financial Measures~~Components of Our Results of Operations

~~Contribution Margin and Contribution Margin Ratio~~

Revenue

We ~~define Contribution Margin~~generate commission and fee-based revenue primarily from the sale of automotive insurance policies on behalf of our insurance carrier partners and reinsurance premiums from participating in the underwriting of these policies. To a lesser extent, we also generate fee-based revenue from HDC membership subscriptions, our media and entertainment activities, and Marketplace services. Our revenue model incorporates multiple touchpoints in the insurance and lifestyle value chains, built on data collection and Member experience.

Commission and fee revenue

Certain of our insurance affiliated subsidiaries act as ~~total~~MGAs who, among other things, write collector car, enthusiast vehicle, and marine policies on behalf of our insurance carrier partners in exchange for commissions. Commissions are earned for new and renewed policies. Additionally, policyholders pay fees directly to us related to their insurance coverage. Commission and fee revenue ~~less~~is earned when the policy becomes effective, net of allowances for policy changes and cancellations, as our performance obligation is complete when the policy is issued.

Under the terms of many of our contracts with insurance carriers, we have the opportunity to earn an annual contingent underwriting commission ("CUC"), or profit-share, based on the calendar-year performance of the insurance book of business. Our CUC agreements are based on written or earned premium and loss ratio results. Each insurance carrier partner contract and related CUC is calculated independently. Revenue from CUC is accrued throughout the year and settled annually in the first quarter of the following year.

Earned premium

Reinsurance premiums are earned by Hagerty Re, which reinsures collector car, enthusiast vehicle, and marine risks written through our affiliated MGAs in the U.S., Canada, and the U.K. Hagerty Re is a Bermuda-domiciled, Class 3A reinsurer.

Earned premium represents the earned portion of written premiums that Hagerty Re has assumed under quota share reinsurance agreements with our insurance carrier partners. Earned premium is recognized over the term of the policy, which is generally 12 months.

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Membership, marketplace and other revenue

We earn subscription revenue through bundled HDC membership offerings, which include access to products and services such as Hagerty Drivers Club Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, emergency roadside assistance, and special vehicle-related discounts. We also earn fee-based revenue from Hagerty Garage + Social memberships, which include storage services in addition to the HDC Member benefits. Revenue from the sale of HDC and storage memberships is recognized ratably over the period of the membership. The membership is treated as a single performance obligation to provide access to stated Member benefits over the life of the membership, which is currently one year.

Marketplace earns fee-based revenue from the sale of collector cars through classified listings, live auctions, time-based online auctions, and brokered private sales, as well as finance revenue from term loans to high-net-worth individuals and businesses secured by collector cars. Fee-based revenue earned by Marketplace is recognized when the underlying sale is completed. Finance revenue is recognized when earned based on the amount of the outstanding loan, the applicable interest rate on the loan, and the length of time the loan was outstanding during the period.

Other revenue includes sponsorship, admission, advertising, valuation and registration income. Other revenue is recognized when the performance obligation for the related product or service is satisfied.

Operating Expenses

Our operating expenses ~~adding back our fixed operating~~typically consist of salaries and benefits, ceding commission, losses and loss adjustment expenses, ~~such as depreciation and amortization,~~sales expenses, general and administrative ~~costs~~services, and ~~shared service salaries~~depreciation and amortization.

Salaries and benefits ~~expenses. We define Contribution Margin Ratio~~

Salaries and benefits consist primarily of costs related to employee compensation, payroll taxes, employee benefits, and employee development costs. Employee compensation includes wages paid to employees, as ~~Contribution Margin divided by total~~well as various incentive compensation plans. Employee benefits include the costs of various employee benefits plans, including medical, dental insurance, and wellness plans. Costs related to employee education, training, and recruiting are included in employee development costs. Salaries and benefits costs are expensed as incurred except for those costs which are required to be capitalized, which are then amortized over the useful life of the software or digital media content asset created. Salaries and benefits are expected to increase over time as the business continues to grow but will likely decrease as a percent of revenue.

Ceding commission

Ceding commission consists of the commission paid by Hagerty Re to insurance carriers for our pro-rata share of (i) policy acquisition costs (which primarily consist of the commission earned by our MGA affiliates), (ii) general and administrative services, and (iii) other costs. Hagerty Re pays a fixed rate ceding commission which varies by insurance carrier partner, averaging approximately 47% and 48% of net earned premium for the three months ended March 31, 2023 and 2022, respectively. Ceding commission is recognized as an expense over the annual policy term. In future periods, ceding commission will change in proportion to earned premium assumed through our various quota share reinsurance agreements.

Losses and loss adjustment expenses

Losses and loss adjustment expenses represent management's best estimate of the share of losses assumed by Hagerty Re, including its share of the net cost to settle claims submitted by insureds. Losses consist of claims paid, case reserves and IBNR, net of estimated recoveries for reinsurance, salvage and subrogation. Loss adjustment expenses consist of the cost associated with the investigation and settling of claims. The estimates utilized in determining the amount of losses and loss adjustment expenses recorded in a period are based on statistical analysis performed by our internal and external actuarial team. Reserves are reviewed regularly and adjusted, as necessary, to reflect management’s estimate of the ultimate cost of settlement.

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Sales expense

Sales expense includes costs related to the sale and servicing of insurance policies, as well as costs related to our Membership and Marketplace offerings, such as broker expense, cost of sales, promotion expense, and travel and entertainment expenses. Broker expense is the compensation paid to our agent partners and national broker partners when an insurance policy is written through a broker relationship. Broker expense generally tracks with written premium growth. Cost of sales includes postage, document costs, payment processing fees, emergency roadside service costs, and other variable costs associated with the sale and servicing of a policy. Cost of sales also includes costs associated with vehicles sold through Marketplace. Promotion expense includes various costs related to branding, events, advertising, marketing, and customer acquisition. Promotion expense and travel and entertainment expense will likely decrease as a percent of revenue over the long-term. Sales expenses, in general, are expensed as incurred and will trend with revenue growth.

General and administrative services

General and administrative services primarily consist expenses related to professional services, occupancy costs, and non-capitalized hardware and software. These costs are expensed as incurred. We ~~present Contribution Margin~~expect this expense category to increase in dollar amount over time but will likely decrease as a percentage of revenue over the next few years after we reach scale to handle incoming business from new partnerships.

Depreciation and ~~Contribution Margin Ratio because we consider them to be important supplemental measures~~amortization

Depreciation and amortization reflects the recognition of the cost of our ~~performance~~investments in various assets over their useful lives. Depreciation expense relates to leasehold improvements, furniture and ~~believe that these non-GAAP financial measures~~equipment, vehicles, hardware and purchased software. Amortization relates to investments related to recent acquisitions, SaaS implementation, and internal software development, as well as investments made in and impairments of digital media content assets. Depreciation and amortization are ~~useful~~expected to ~~investors~~increase in dollar amount over time but will likely decrease as a percent of revenue as investments in platform technology reach scale.

Other Items

Change in fair value of warrant liabilities

Our warrants are accounted for ~~period-to-period comparisons~~as liabilities in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"), and are measured at fair value each reporting period, with changes in fair value recognized as non-operating income (expense) in our Condensed Consolidated Statements of Operations. In general, under the fair value accounting model, in periods when our stock price increases, the warrant liability increases, and we recognize additional expense. In periods when our stock price decreases, the warrant liability decreases, and we recognize additional income.

Interest and other income (expense)

Interest and other income (expense) primarily includes interest income related to our cash balances and interest expense related to outstanding borrowings under our Credit Facility, as well as changes in the value of the liability related to the Company's Tax Receivable Agreement ("TRA") with HHC and Markel. Refer to Note 18 — Taxation – in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information related to the TRA.

Income tax expense

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 certain U.S. corporate subsidiaries and 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 Hagerty Group Units, 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.

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Results of Operations

Three Months Ended March 31, 2023 compared to the Three Months Ended March 31, 2022

The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022, and the dollar and percentage changes between the two periods:


	Three months ended March 31,
	2023		2022		$ Change		% Change

REVENUE:	in thousands (except percentages)
Commission and fee revenue	$	74,612	$	62,461	$	12,151	19.5	%
Earned premium	117,231		89,132		28,099		31.5	%
Membership, marketplace and other revenue	26,509		16,218		10,291		63.5	%
Total revenue	218,352		167,811		50,541		30.1	%
OPERATING EXPENSES:
Salaries and benefits	55,232		46,476		8,756		18.8	%
Ceding commission	55,425		42,378		13,047		30.8	%
Losses and loss adjustment expenses	48,412		36,919		11,493		31.1	%
Sales expense	35,113		28,437		6,676		23.5	%
General and administrative services	21,381		19,458		1,923		9.9	%
Depreciation and amortization	13,743		7,147		6,596		92.3	%
Restructuring, impairment and related charges, net	5,535		—		5,535		100.0	%
Total operating expenses	234,841		180,815		54,026		29.9	%
OPERATING INCOME (LOSS)	(16,489)		(13,004)		(3,485)		(26.8)	%
Change in fair value of warrant liabilities	(515)		31,686		(32,201)		(101.6)	%
Interest and other income (expense)	5,647		(684)		6,331		925.6	%
INCOME (LOSS) BEFORE INCOME TAX EXPENSE	(11,357)		17,998		(29,355)		(163.1)	%
Income tax benefit (expense)	(3,668)		(2,030)		(1,638)		80.7	%
Income (loss) from equity method investment, net of tax	—		(102)		102		(100.0)	%
NET INCOME (LOSS)	$	(15,025)	$	15,866	$	(30,891)	(194.7)	%

Revenue

Commission and fee revenue

Commission and fee revenue was $74.6 million for the three months ended March 31, 2023, an increase of $12.2 million, or 19.5%, compared to 2022, consisting of an increase of $9.9 million in revenue from policy renewals and an increase of $2.3 million in revenue from new policies.

The increase in revenue from policy renewals was primarily related to a 10.7% increase in related policy premiums, as well as continued strong policy retention. The increase in renewal revenue attributable to policy premiums reflects sustained year-over-year growth in our business and rate increases in several states due to higher vehicle repair costs, both of which contribute to higher premiums and, in turn, higher commission revenue.

The increase in revenue from new policies was related to sustained year-over-year growth in our business, as well as rate increases in several states. The average premium on a newly issued policy increased 7.9% for the three months ended March 31, 2023 compared to the same period in 2022 as a result of writing accounts with higher insured values at higher rates. Accordingly, premiums from newly insured policies increased $5.3 million, or 17.6%, during the three months ended March 31, 2023. In turn, base commission revenue from newly issued policies grew by $1.7 million over the same period.

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Earned premium

Earned premium was $117.2 million for the three months ended March 31, 2023, an increase of $28.1 million, or 31.5%, compared to 2022. The higher level of earned premium generally correlates with the level of written premiums assumed by Hagerty Re, which increased $34.6 million, or 35.4%, compared to 2022. This increase was primarily due to Hagerty Re's U.S. quota share increasing from 70% in 2022 to approximately 80% in 2023, which accounted for $16.5 million of the overall $34.6 million increase. The remaining increase was primarily a result of consistent underlying growth in the premiums assumed across all geographic areas in which we operate.

Membership, marketplace and other revenue

Membership, marketplace and other revenue was $26.5 million for the three months ended March 31, 2023, an increase of $10.3 million, or 63.5%, compared to 2022.

Membership fee revenue was $12.5 million for the three months ended March 31, 2023, an increase of $2.2 million, or 21.6%, compared to 2022, which was primarily attributable to the increase in the issuance of new policies bundled with an HDC membership, as well as an increase in storage revenue related to our expansion of Hagerty Garage + Social locations. Hagerty Garage + Social had seven locations in operation as of March 31, 2023, compared to four locations in operation as of March 31, 2022. For the three months ended March 31, 2023, membership fees were 47.3% of the Membership, marketplace and other revenue total.

Marketplace revenue was $6.7 million for the three months ended March 31, 2023 and was primarily generated by the auction, private sale, and lending activities of Broad Arrow, which was acquired and consolidated into our results beginning in August 2022. For the three months ended March 31, 2023, marketplace revenue was 25.1% of the Membership, marketplace and other revenue total.

Other revenue was $7.3 million for the three months ended March 31, 2023, an increase of $1.4 million, or 23.8%, compared to 2022, primarily due to increases in sponsorship and admission revenue of $1.0 million and $0.3 million respectively, for the three months ended March 31, 2023 compared to 2022. Other revenue includes sponsorship, admission, advertising, valuation and registration income and accounts for 27.6% of the Membership, marketplace and other revenue total.

Operating Expenses

Salaries and benefits

Salaries and benefits expenses were $55.2 million for the three months ended March 31, 2023, an increase of $8.8 million, or 18.8%, compared to 2022. The increase was primarily attributable to a net increase of nearly 200 employees in sales, member services, technology, and Marketplace, representing an increase of approximately 10% when compared to the prior year. This headcount increase supported our growth, including the addition of several new large national insurance partnerships and our continued development of new systems and digital transformation technology investments, as well as several acquisitions, including the Broad Arrow Acquisition.

In the fourth quarter of 2022, the Board approved a voluntary retirement program and a reduction in force and, in the first quarter of 2023, approved a further reduction in force (the "2023 RIF") following a strategic review of our business processes as we focus on driving efficiencies in order to achieve growth and profitability goals. Refer to Note 10 — Restructuring, Impairment and Related Charges in ~~understanding and evaluating~~Item 1 of Part I of this Quarterly Report on Form 10-Q for information related to our ~~operating results.~~restructuring plans.

Ceding commission

Ceding commission expense was $55.4 million for the three months ended March 31, 2023, an increase of $13.0 million, or 30.8%, compared to 2022. The increase was primarily attributable to an increase in our U.S. quota share percentage from 70% in 2022 to approximately 80% in 2023, which accounted for $7.7 million of the increase, as well as higher U.S. premium volume ceded to Hagerty Re from our insurance carrier partners, which added approximately $5.1 million.

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We caution investors that Contribution Margin and Contribution Margin Ratio are not recognized measures under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and that Contribution Margin and Contribution Margin Ratio, as we define them, may be defined or calculated differently by other companies. In addition, both Contribution Margin and Contribution Margin Ratio have limitations as analytical tools because they exclude certain significant recurring expenses of our business.

~~Our management uses Contribution Margin and Contribution Margin Ratio to:~~

•~~analyze the relationship between cost, volume and profit as revenue grows;~~

•~~measure how much profit is earned for any product or service sold; and~~

•~~measure how different management actions could affect the Company's total revenue and related cost levels.~~

The following table ~~reconciles Contribution Margin~~presents the amount of premiums ceded and ~~Contribution Margin Ratio to~~ the ~~most directly comparable GAAP measures, which are Operating income (loss)~~quota share percentages for the three months ended March 31, 2023 and ~~Operating income (loss) margin (Operating income (loss) divided by Total revenue), respectively:~~2022:

Three months ended
September 30, Nine months ended
September 30,
2022 2021 2022 2021
in thousands (except percentages)
Total revenue $ 216,757 $ 168,085 $ 590,585 $ 464,694
Less: total operating expenses 237,980 166,327 622,425 453,758
Operating income (loss) $ (21,223) $ 1,758 $ (31,840) $ 10,936
Operating income (loss) margin (10) % 1 % (5) % 2 %
Add: fixed operating expenses $ 59,854 $ 43,105 $ 168,649 $ 118,473
Contribution Margin $ 38,631 $ 44,863 $ 136,809 $ 129,409
Contribution Margin Ratio (1)
18 % 27 % 23 % 28 %


	U.S.			Canada			U.K.			Total

	in thousands (except percentages)
	Three months ended March 31, 2023
Subject premium	$	158,592		$	6,101		$	1,961		$	166,654
Quota share percentage	81.0		%	35.0		%	80.0		%	79.3		%
Assumed premium in Hagerty Re	$	128,484		$	2,135		$	1,569		$	132,188
Net ceding commission	$	53,178		$	1,667		$	580		$	55,425

	Three months ended March 31, 2022
Subject premium	$	134,746		$	5,756		$	1,844		$	142,346
Quota share percentage	70.0		%	35.0		%	70.0		%	68.6		%
Assumed premium in Hagerty Re	$	94,322		$	2,015		$	1,291		$	97,628
Net ceding commission	$	40,406		$	1,490		$	482		$	42,378

~~(1)~~

Losses and loss adjustment expenses

Losses and loss adjustment expenses were $48.4 million for the three months ended March 31, 2023, an increase of $11.5 million, or 31.1%, compared to 2022. The increase was primarily driven by higher premium volume ceded to Hagerty Re from our insurance carrier partners. The loss ratio, including catastrophe losses, was 41.3% and 41.4% for the three months ended March 31, 2023 and 2022, respectively.

Sales expense

Sales expense was $35.1 million for the three months ended March 31, 2023, an increase of $6.7 million, or 23.5%, compared to 2022. The increase was primarily due to a $2.6 million increase in cost of sales driven by Broad Arrow vehicle sales. Additionally, broker expense increased $2.2 million and bank fees increased $0.5 million consistent with written premium growth. Lastly, magazine production and mailing costs increased $0.6 million and towing fees increased $0.4 million consistent with the growth in HDC paid member count.

General and administrative services

General and administrative services expenses were $21.4 million for the three months ended March 31, 2023, an increase of $1.9 million, or 9.9%, compared to 2022, which was primarily driven by a $1.4 million increase in occupancy costs, primarily attributable to newly opened Hagerty Garage + Social locations and a $1.3 million increase in software subscription licenses, partially offset by a $0.8 million decrease in professional services.

Depreciation and amortization

Depreciation and amortization expense was $13.7 million for the three months ended March 31, 2023, an increase of $6.6 million, or 92.3%, compared to 2022. The increase was primarily attributable to a $3.6 million impairment of digital media content assets as a result of lower than anticipated advertising and sponsorship revenue associated with these assets. Additionally, a higher base of capital assets resulted in increased depreciation and amortization expense of approximately $3.0 million.

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Restructuring, impairment and related charges, net

In the first quarter of 2023, the Board approved the 2023 RIF following a strategic review of our ~~contribution margin is~~business processes as we focus on driving efficiencies in order to achieve growth and profitability goals. As a result of these actions, during the three months ended March 31, 2023, we recognized restructuring, impairment and related charges of $5.5 million, which consisted of $5.1 million of severance related costs associated with the 2023 RIF and a $0.4 million impairment charge to write-down the value of certain digital media content assets. The Company anticipates incremental annualized savings of approximately $20.0 million to $25.0 million as a result of this reduction in force, reduced hiring plans, as well as additional cost containment initiatives. Refer to Note 10 — Restructuring, Impairment and Related Charges in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to the restructuring initiatives implemented in 2023.

Other Items

Change in fair value of warrant liabilities

During the three months ended March 31, 2023 and 2022, the change in fair value of warrant liabilities resulted in a loss of $0.5 million and a gain of $31.7 million, respectively, which represents the net change in our valuation of warrant liabilities. Refer to Note 16 — Warrant Liabilities in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our warrants.

Interest and other income (expense)

Interest and other income (expense) was $5.6 million of income for the three months ended March 31, 2023, compared to $0.7 million of expense for the three months ended March 31, 2022. The increase was primarily ~~driven~~due to an increase in interest income on cash balances of $4.7 million resulting from higher variable interest rates and a decrease in the value of the TRA liability of $2.6 million These factors were partially offset by an increase in interest expense of $1.1 million for outstanding borrowings related to our Credit Facility due to higher variable interest rates.

Income tax benefit (expense)

Income tax expense was $3.7 million for the three months ended March 31, 2023, an increase of $1.6 million, or 80.7%, compared to 2022. The increase in income tax expense for the three months ended March 31, 2023 compared to 2022 was primarily due to an increase in net income before income tax expense of $7.6 million within Hagerty Re, which is taxed as a corporation. Refer to Note 18 — Taxation in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to items affecting our effective tax rate.

Liquidity and Capital Resources

Maintaining a strong balance sheet and capital position is a top priority for us. We manage liquidity globally and across all operating subsidiaries.

Future Sources and Uses of Liquidity

Our sources of liquidity include our: (1) cash on hand; (2) short-term investments; (3) net working capital; (4) cash flows from operations; and (5) borrowings from our Credit Facility (as defined below), as well as other potential funding sources. Our primary liquidity needs and capital requirements include cash required for: (1) the funding of business operations, including continued investments in technology; (2) the servicing and repayment of borrowings under the Credit Agreement (as defined below); (3) the payment of income taxes; and (4) the funding of potential payments under the TRA. Based on our current expectations, we believe that these sources of liquidity will be sufficient to provide an adequate level of capital to support our anticipated short and long-term commitments, operating needs, and capital requirements.

Capital and Dividend Restrictions

We, and particularly Hagerty Re, pay close attention to the underlying underwriting and reserving risks by monitoring the pricing and loss development of the underlying business written through our affiliated MGAs. Additionally, Hagerty Re seeks to minimize its investment risk by investing in low yield cash, money market accounts, and investment grade municipal securities.

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Capital Restrictions

In Bermuda, Hagerty Re is subject to the BSCR administered by the BMA. No regulatory action is taken by the BMA if an insurer’s capital and surplus is equal to or in excess of their enhanced capital requirement, as determined by the BSCR model. In addition, the BMA has established a target capital level for each insurer which is 120% of the enhanced capital requirement. Hagerty Re maintained sufficient statutory capital surplus to comply with regulatory requirements as of March 31, 2023.

Dividend Restrictions

Under Bermuda law, Hagerty Re is prohibited from declaring or issuing a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. Prior approval from the BMA is also required if Hagerty Re's proposed dividend payments would exceed 25% of its prior year-end total statutory capital and surplus. The amount of dividends which could be paid by Hagerty Re in 2023 without prior approval is $32.9 million.

Regulation relating to insurer solvency is generally for the protection of the policyholders rather than for the benefit of the stockholders of an insurance company. We believe that Hagerty Re's existing cash and cash equivalents, municipal securities, and cash flow from operations will be sufficient to support its working capital and capital expenditure requirements for at least the next 12 months. Hagerty Re's future capital requirements will depend on many factors, including its reinsurance premium growth rate, renewal rates, the introduction of new and enhanced products, entry into, and successful entry in new geographic markets, and the continuing market adoption of its product offerings.

Comparative Cash Flows

The following table summarizes our cash flow data for the three months ended March 31, 2023 and 2022:


	Three months ended March 31,
	2023		2022		$ Change		% Change

	in thousands (except percentages)
Net Cash Provided by Operating Activities	$	11,728	$	9,014	$	2,714	30.1	%
Net Cash Used in Investing Activities	$	(24,803)	$	(31,797)	$	6,994	22.0	%
Net Cash Used in Financing Activities	$	(18,879)	$	(19,000)	$	121	0.6	%

Operating Activities

Cash provided by operating activities primarily consists of net income (loss), adjusted for non-cash items, and changes in working capital balances. Net cash provided by operating activities for the three months ended March 31, 2023 and 2022 is presented below:


	Three months ended March 31,
	2023		2022		$ Change		% Change

	in thousands (except percentages)
Net income (loss)	$	(15,025)	$	15,866	$	(30,891)	(194.7)	%
Non-cash adjustments to net income (loss)	20,373		(23,727)		44,100		185.9	%
Changes in operating assets and liabilities	6,380		16,875		(10,495)		(62.2)	%
Net Cash Provided by Operating Activities	$	11,728	$	9,014	$	2,714	30.1	%

Net cash provided by operating activities for the three months ended March 31, 2023 was $11.7 million, an increase of $2.7 million, or 30.1%, compared to 2022. The increase was due to a $13.2 million increase in Net income (loss), after excluding non-cash adjustments, partially offset by a $10.5 million decrease in cash from operating assets and liabilities.

The increase in Net income (loss), after excluding non-cash adjustments, was primarily driven by Hagerty Re where there was an increase in interest income due to higher variable interest rates earned on cash balances and a higher level of written premium resulting from an increase in U.S quota ~~share.~~share from 70% to approximately 80%. Also contributing to the favorable comparison to the prior year is organic revenue growth across all areas of our business, as well as management's cost containment measures.

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The decrease in cash from operating assets and liabilities was primarily due to an increase in Accounts, premiums and commission receivable due to the increase in Hagerty Re's U.S. quota share percentage and organic revenue growth across our business, partially offset by an increase in accrued expenses.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2023 decreased $7.0 million compared to 2022.

In the three months ended March 31, 2023, we invested approximately $8.1 million in property, equipment and software, which was primarily driven by spending on internally developed software, representing a decrease of $2.4 million when compared to the same period in 2022.

In January 2022, we invested approximately $15.3 million in cash as an equity method investment and joint venture with Broad Arrow. Then, in August 2022, we acquired the remaining 60% equity interest in Broad Arrow in an all equity transaction, at which point Broad Arrow became a wholly-owned and consolidated subsidiary of the Company. In the three months ended March 31, 2023, the lending activities of Broad Arrow resulted in the funding of $7.8 million of terms loans and term loan repayments of $0.4 million. Refer to Note 4 — Notes Receivable and Note 6 — Acquisitions and Investments in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information related to the acquisition of Broad Arrow and its lending activities.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2023 decreased $0.1 million compared to 2022, primarily due to a net increase in repayments of borrowings from our Credit Facility (as defined below). There were total net cash outflows of $21.0 million related to our Credit Facility during the three months ended March 31, 2023, compared to $19.0 million of net cash outflows during the three months ended March 31, 2022.

Financing Arrangements

Multi-bank Credit Facility

In January and April 2023, The Hagerty Group entered into the Sixth and Seventh Amendment to the Amended and Restated Credit Agreement (the "Credit Agreement"), which amended the terms of our revolving credit facility (the "Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto from time to time as lenders. The primary purpose of the amendments was to clarify certain definitions within the Credit Agreement.

The aggregate amount of commitments available to the Company under the Credit Facility is $230.0 million. The current term of the Credit Agreement expires in October 2026 and may be extended by one year on an annual basis if agreed to by us and the lenders party thereto. Any unpaid balance on the Credit Facility is due at maturity. As of March 31, 2023, total outstanding borrowings under the Credit Facility were $84.6 million.

The Credit Facility borrowings are collateralized by our assets, except for the assets of our U.K., Bermuda and German subsidiaries as well as MHH and its subsidiaries. In January 2023, Broad Arrow Europe Limited and Broad Arrow Capital UK Limited were joined to the Credit Facility as co-borrowers.

Under the Credit Agreement, we are required, among other things, to meet certain financial covenants, including a fixed charge coverage ratio and a leverage ratio. We were in compliance with these financial covenants as of March 31, 2023.

Refer to Note 12 — Long-Term Debt in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information on the Credit Facility.

Interest Rate Swap

Interest rate swap agreements are contracts to exchange floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.

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The purpose of the interest rate swap agreement is to fix the interest rate on a portion of our existing variable rate debt in order to reduce exposure to interest rate fluctuations. Under such agreements, we pay the counterparty interest at a fixed rate. In exchange, the counterparty pays us interest at a variable rate, adjusted quarterly and based on the Secured Overnight Financing Rate ("SOFR"). The amount exchanged is calculated based on the notional amount. The significant inputs, primarily the SOFR forward curve, used to determine the fair value are considered Level 2 observable market inputs. We monitor the credit and nonperformance risk associated with our counterparty and believe the risk to be insignificant and does not warrant a credit adjustment at March 31, 2023.

In December 2020, we entered into a 5-year interest rate swap agreement with an original notional amount of $35.0 million. In September 2022, the interest rate swap was amended to replace LIBOR with SOFR and the fixed swap rate is now 0.81%. This interest rate swap matures in December 2025.

Tax Receivable Agreement

Hagerty, Inc. expects to have adequate capital resources to meet the requirements and obligations under the TRA entered into with the Legacy Unit Holders on December 2, 2021 that provides for the payment by Hagerty, Inc. to the Legacy Unit Holders of 85% of the amount of cash savings, if any, under U.S. federal, state and local income tax or franchise tax realized as a result of (1) any increase in tax basis of Hagerty, Inc.'s assets resulting from (a) purchase of Hagerty Group Unitsfrom any of the Legacy Unit Holders using the net proceeds from any future offering, (b) redemptions or exchanges by the Legacy Unit Holders of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock or (c) payments under the TRA and (2) tax benefits related to imputed interest deemed arising as a result of payments made under the TRA.

Legacy Unit Holders may, subject to certain conditions and transfer restrictions described above, redeem or exchange their Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock of Hagerty, Inc. on a one-for-one basis. The Hagerty Group intends to have in effect an election under Section 754 of the IRC of 1986, as amended, and the regulations thereunder for each taxable year in which a redemption or exchange of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock occurs, which is expected to result in increases to the tax basis of the assets of The Hagerty Group at the time of a redemption or exchange of Hagerty Group Units. The redemptions and exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of The Hagerty Group. These increases in tax basis may reduce the amount of tax that Hagerty, Inc. would otherwise be required to pay in the future. This payment obligation as a part of the TRA is an obligation of Hagerty, Inc. and not of The Hagerty Group. For purposes of the TRA, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Hagerty, Inc. (calculated with certain assumptions) to the amount of such taxes that Hagerty, Inc. would have been required to pay had there been no increase to the tax basis of the assets of The Hagerty Group as a result of the redemptions or exchanges and had Hagerty, Inc. not entered into the TRA. Estimating the amount of payments that may be made under the TRA is by nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors.

Contractual Obligations

The following table summarizes significant contractual obligations and other commitments as of March 31, 2023:


	Total		2023		2024		2025		2026		2027		Thereafter

	in thousands
Debt	$	89,030	$	—	$	3,361	$	1,110	$	84,559	$	—	$	—
Interest payments	1,378		473		595		310		—		—		—
Operating leases	113,952		$	9,209	12,235		11,812		11,179		10,987		58,530
Purchase commitments	9,328		5,555		3,773		—		—		—		—
Total	$	213,688	$	15,237	$	19,964	$	13,232	$	95,738	$	10,987	$	58,530

Interest payments excludes variable rate debt interest payments and commitment fees related to our Credit Facility.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet financing arrangements as of March 31, 2023.

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Critical Accounting Policies and Estimates

Our unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of our Condensed Consolidated Financial Statements requires management to make assumptions and estimates that affect the reported results of operations and financial position, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. These accounting estimates, amount others, may involve a high degree of complexity and judgment on the part of management. Further, these estimates and other factors could have a significant impact to our financial condition, results of operations and cash flows. Management evaluates its significant accounting estimates on an ongoing basis using historical experience and various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from management's estimates.

Our accounting policies are set forth in Note 1 — Basis of Presentation and Accounting Policies to Consolidated Financial Statements contained in the Company’s 2022 Annual Report on Form 10-K. We include herein certain updates to those policies.

New Accounting Standards

New accounting standards are described in Note 1 — Basis of Presentation and Accounting Policies, in Item 1 of Part I of this Quarterly Report on Form 10-Q, which are incorporated herein by reference.

Non-GAAP Financial Measures

Adjusted EBITDA

We define Adjusted EBITDA as ~~net~~consolidated Net income (loss) ~~(the most directly comparable GAAP measure) before~~excluding interest and other income ~~taxes,~~(expense), income tax (expense) benefit, and depreciation and amortization, ~~(EBITDA),~~ adjusted to exclude (i) restructuring, impairment and related charges, net; (ii) changes in fair value of warrant ~~liabilities,~~liabilities; (iii) stock-based compensation ~~expense, gains and losses~~expense; (iv) when applicable, the net gain or loss from asset ~~disposals~~disposals; and (v) when applicable, certain other ~~non-recurring gains and losses.~~ unusual items.

We present Adjusted EBITDA because we consider it to be an important supplemental measure of ~~our~~the Company's performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.

~~Our management~~ Management uses Adjusted ~~EBITDA:~~

•EBITDA as a measure of the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core ~~operations;~~

•~~for planning purposes, including the preparation of our internal annual operating budget and financial projections;~~

•~~to evaluate the performance and effectiveness of our operational strategies;~~

•~~to evaluate our capacity to expand our business;~~

•~~as a performance factor in measuring performance under our executive compensation plan; and~~

•~~as a preferred predictor of core operating performance, comparisons to prior periods and competitive positioning.~~operations.

~~TABLE OF~~ ~~CONTENTS~~

By providing this non-GAAP financial measure, together with a reconciliation to net income (loss), which is the most ~~directly~~ comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. However, Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net income (loss) or other financial statement data presented in our Condensed Consolidated Financial Statements as indicators of financial performance. ~~Some of these limitations include:~~

•Hagerty's Adjusted EBITDA ~~does not reflect our cash expenditures,~~may be determined or ~~future requirements for capital expenditures, or contractual commitments;~~

•~~Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;~~

•~~Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;~~

•~~Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;~~

•~~although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such~~calculated differently than similarly titled measures ~~does not reflect any cash requirements for such replacements; and~~

•of other companies in our industry, ~~may calculate Adjusted EBITDA differently than we do, limiting its~~which could reduce the usefulness ~~as a comparative measure.~~of this non-GAAP financial measure when comparing our performance to that of other companies.

TABLE OF CONTENTS

The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is Net income (loss):

Three months ended
September 30, Nine months ended
September 30,
2022 2021 2022 2021
in thousands
Net income (loss) $ 24,313 $ (547) $ 34,636 $ 5,105
Interest and other (income) expense (662) 417 375 1,041
Income tax (benefit) expense (91) 1,888 4,077 4,790
Depreciation and amortization 8,890 5,886 24,337 15,282
Change in fair value of warrant liabilities (11,583) — (37,869) —
Stock-based compensation expense 3,858 — 8,165 —
Revaluation gain on previously held equity method investment (34,735) — (34,735) —
Net (gain) loss from asset disposals — — — 1,764
Other non-recurring (gains) losses (1)
— — 1,110 —
Adjusted EBITDA $ (10,010) $ 7,644 $ 96 $ 27,982

~~(1)Other non-recurring (gains) losses relates to severance expense recognized for the nine months ended September 30, 2022.~~

Net income (loss) and Adjusted EBITDA include $10.0 million of estimated net losses related to Hurricane Ian. Additionally, we strengthened reserves for U.S. auto liability by $6.5 million for the 2022 accident year. Both of these events adversely impacted the 2022 results compared to the three and nine months ended September 30, 2021.

We incurred $6.0 million and $7.6 million during the three months ended September 30, 2022 and 2021, respectively, and $24.1 million and $23.3 million during the nine months ended September 30, 2022 and 2021, respectively, for certain pre-revenue costs related to scaling our infrastructure, newly-developed digital platforms and legacy systems, human resources and occupancy to accommodate our alliance with State Farm and other potential distribution partnerships as well as to further develop our Hagerty Marketplace initiatives. These costs were not included in the Adjusted EBITDA reconciliation above.

~~TABLE OF~~ ~~CONTENTS~~

Pursuant to a defined set of activities and objectives, these expenses are adding entirely new capabilities for us, integrating our new and legacy policyholder, membership and Hagerty Marketplace systems with State Farm’s legacy policy and agent management systems and other third-party platforms. In addition to onboarding a third-party project management system related to these initiatives, we leased a new member service center in Dublin, Ohio and added several hundred new employees as of September 30, 2022 to meet the expected transactional volume from these initiatives. These costs commenced in 2020 and will reduce our operating profitability until we start to produce adequate revenue to cover the ongoing costs, primarily associated with serving State Farm customers.


	Three months ended March 31,
	2023		2022

	in thousands
Net income (loss)	$	(15,025)	$	15,866
Interest and other (income) expense	(5,647)		684
Income tax (benefit) expense	3,668		2,030
Depreciation and amortization	13,743		7,147
Restructuring, impairment and related charges, net	5,535		—
Change in fair value of warrant liabilities	515		(31,686)
Stock-based compensation expense	3,916		—
Adjusted EBITDA	$	6,705	$	(5,959)

Adjusted EPS

We define Adjusted Earnings (Loss) Per Share ("Adjusted EPS") as consolidated Net income (loss) attributable to both our controlling and non-controlling interest, less the change in fair value of our warrants ~~and the revaluation gain on previously held equity method investment,~~ divided by our outstanding and total potentially dilutive securities. The total potentially dilutive securities includes (1) the weighted-average issued and outstanding shares of Class A Common ~~Stock,~~Stock; (2) all issued and outstanding non-controlling interest Hagerty Group ~~Units~~Units;, (3) all unexercised ~~warrants~~warrants; and (4) all ~~unvested~~unissued stock-based compensation awards.

In the third quarter of 2022, we began removing (1) the change in fair value of our warrants and (2) the revaluation gain on previously held equity method investment from consolidated Net income (loss) attributable to both our controlling and non-controlling interest for purposes of calculating Adjusted EPS. ~~While this Quarterly Report on Form 10-Q does not include~~For comparability, references to prior ~~periods'~~period non-GAAP measures ~~as revised,~~have been updated to show the effect of removing the change in the fair value of our ~~Adjusted EPS for the three and nine months ended September 30, 2022 are $(0.06) and $(0.10), respectively, as compared to $0.07 and $0.10, respectively, under the prior formulation of~~warrants from Adjusted EPS. We believe this updated presentation of Adjusted EPS enhances investors' understanding of our financial performance from activities occurring in the ordinary course of our business.

The most directly comparable GAAP measure is basic earnings per share ("Basic EPS"), which is calculated as Net income (loss) attributable to controlling interest divided by the weighted average of Class A Common Stock outstanding during the period.

We present Adjusted EPS because we consider it to be an important supplemental measure of our operating performance and believe it is used by investors and securities analysts in evaluating the consolidated performance of other companies in our industry. We also believe that Adjusted EPS, which compares our consolidated Net income (loss) (which includes our controlling and non-controlling interest) with our outstanding and potentially dilutive shares, provides useful information to investors regarding our performance on a fully consolidated basis.

~~Our management~~Management uses Adjusted EPS:

•as a ~~measure~~measurement of operating performance of our business on a fully consolidated basis;

•to evaluate the performance and effectiveness of our operational strategies;

•~~to evaluate our capacity to expand our business;~~ and

•as a preferred predictor of core operating performance, comparisons to prior periods and competitive positioning.

We caution investors that Adjusted EPS is not a recognized measure under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, including Basic EPS, and that Adjusted EPS, as we define it, may be defined or calculated differently by other companies. In addition, Adjusted EPS has limitations as an analytical tool and should not be considered as a measure of profit or loss per share.

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TABLE OF CONTENTS

The following table reconciles Adjusted EPS to the most directly comparable GAAP measure, which is Basic EPS:


							Three months ended March 31,
		Three months ended September 30, 2022		Nine months ended September 30, 2022			2023		2022

		in thousands (except per share amounts)					in thousands (except per share amounts)
Numerator:	Numerator:					Numerator:
Net income (loss) attributable to controlling interest(1)	Net income (loss) attributable to controlling interest(1)	$	14,714	$	36,685	Net income (loss) attributable to controlling interest(1)	$	(2,099)	$	27,507
Net income (loss) attributable to non-controlling interest	Net income (loss) attributable to non-controlling interest	9,599		(2,049)		Net income (loss) attributable to non-controlling interest	(12,926)		(11,641)
Consolidated net income (loss)	Consolidated net income (loss)	24,313		34,636		Consolidated net income (loss)	(15,025)		15,866
Change in fair value of warrant liabilities	Change in fair value of warrant liabilities	(11,583)		(37,869)		Change in fair value of warrant liabilities	515		(31,686)
Revaluation gain on previously held equity method investment		(34,735)		(34,735)
Adjusted consolidated net income (loss)(2)	Adjusted consolidated net income (loss)(2)	$	(22,005)	$	(37,968)	Adjusted consolidated net income (loss)(2)	$	(14,510)	$	(15,820)

Denominator:	Denominator:					Denominator:
Weighted average shares of Class A Common Stock outstanding — basic(1)	Weighted average shares of Class A Common Stock outstanding — basic(1)	82,816		82,569		Weighted average shares of Class A Common Stock outstanding — basic(1)	83,227		82,433
Total potentially dilutive securities outstanding:	Total potentially dilutive securities outstanding:					Total potentially dilutive securities outstanding:
Conversion of non-controlling interest Hagerty Group Units to Class A Common Stock	Conversion of non-controlling interest Hagerty Group Units to Class A Common Stock	255,758		255,758		Conversion of non-controlling interest Hagerty Group Units to Class A Common Stock	255,640		251,034
Total warrants outstanding	Total warrants outstanding	19,484		19,484		Total warrants outstanding	19,484		19,484
Total unvested stock-based compensation awards		6,878		6,878
Total unissued stock-based compensation awards						Total unissued stock-based compensation awards	6,870		—
Potentially dilutive shares outstanding	Potentially dilutive shares outstanding	282,120		282,120		Potentially dilutive shares outstanding	281,994		270,518
Fully dilutive shares outstanding(2)	Fully dilutive shares outstanding(2)	364,936		364,689		Fully dilutive shares outstanding(2)	365,221		352,951

Basic EPS = (Net income (loss) attributable to controlling interest / Weighted-average shares of Class A Common Stock outstanding)(1)	Basic EPS = (Net income (loss) attributable to controlling interest / Weighted-average shares of Class A Common Stock outstanding)(1)	$	0.18	$	0.44	Basic EPS = (Net income (loss) attributable to controlling interest / Weighted-average shares of Class A Common Stock outstanding)(1)	$	(0.03)	$	0.33

Adjusted EPS = (Adjusted consolidated net income (loss) / Fully dilutive shares outstanding)(2)	Adjusted EPS = (Adjusted consolidated net income (loss) / Fully dilutive shares outstanding)(2)	$	(0.06)	$	(0.10)	Adjusted EPS = (Adjusted consolidated net income (loss) / Fully dilutive shares outstanding)(2)	$	(0.04)	$	(0.04)

(1) Numerator and Denominator of the GAAP measure Basic EPS

(2) Numerator and Denominator of the non-GAAP measure Adjusted EPS

~~Key Factors and Trends Affecting our Operating Performance~~

~~Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:~~

~~Our Ability to Attract Members~~

Our long-term growth will depend, in large part, on our continued ability to attract new members to our platform. Our growth strategy is centered around accelerating our existing position in markets that we already serve, expanding into new markets domestically across the U.S., internationally in Canada and the U.K. and eventually the E.U., digital innovation and developing new strategic insurance and lifestyle partnerships with key players in the automotive industry.

~~Our Ability to Retain Members~~

Turning our members into lifetime fans is key to our success. We currently have over 2.6 million members, including approximately 750,000 paid subscribers ("HDC Members") and over 1.8 million who purchase insurance or interact with us but have yet to join HDC and receive additional club-level benefits. Our ability to retain members will depend on a number of factors including our members’ satisfaction with our products, pricing and offerings of our competitors.

~~TABLE OF~~ ~~CONTENTS~~

~~Our Ability to Increase HDC Membership Subscriptions~~

Our long-term growth will benefit from our ability to increase our HDC membership subscription base across the U.S., Canada and into the U.K. and the E.U. We realize increasing value from each new and renewing HDC Member, forming the basis for underlying growth for our new product offerings. One of our principal goals is to convert all of our members who are not currently HDC Members to paid subscribers over time. We apply our highly scalable model, with a tailored approach to each enthusiast type across all demographic groups.

~~We are also able to drive membership in HDC through our insurance distribution channels. Approximately 75% of new insurance policy holders purchase memberships in HDC.~~

~~Our Ability to Introduce New and Innovative Products~~

Our growth will depend on our ability to introduce new and innovative insurance and automotive lifestyle products that will drive underlying growth from our existing member base as well as attract new customers. Our insurance offerings as well as our membership and Hagerty Marketplace technology platforms provide us with a foundation to expand our insurance and membership base, engage auto enthusiasts and provide innovative products to members globally.

~~Our Ability to Manage Risk Through Our Technology~~

Risk is managed through our technology, proprietary algorithms, underwriting and claims practices, data science and regulatory compliance capabilities, which we use to determine the risk profiles of our members. Our ability to manage risk is enhanced and controlled over time as data is continuously collected and analyzed by our algorithms with the objective of lowering our loss ratios over time. Our success depends on our ability to adequately and competitively price risk.

~~Our Ability to Manage Growth Related to Our Strategic Alliances~~

~~We have strategic alliances with several insurance carriers that we expect to serve as a key driver in our growth in commission and fee revenue.~~

~~Our Ability to Grow Quota Share~~

Hagerty Re's 2021 quota share of business assumed from Markel in the U.S. and U.K. was 60%. The quota share percentage increased to 70% in 2022 and will increase to 80% in 2023 and the years thereafter under a contract with Markel. The increase in quota share will have the effect of increasing our revenue, which will partially be offset by increases in our underwriting costs.

~~Components of Our Results of Operations~~

~~Revenue~~

We primarily generate revenue from the sale of automotive insurance policies and HDC membership subscriptions as well as from participating in the underwriting on policies written by our insurance carrier partners. Our revenue model incorporates multiple components in the insurance and lifestyle value chains, built on data collection and member experience.

~~Commission and fee revenue~~

Our insurance affiliated subsidiaries act as MGAs who, among other things, write collector vehicle business on behalf of the insurance carrier partners. In exchange for commissions paid by the insurance carrier partners, we generally handle all sales, marketing, pricing, underwriting, policy administration and fulfillment, billing and claim services. In addition, we also manage all aspects of our omnichannel distribution, both direct and brokerage, including independent agencies, national sales accounts, large agency and broker networks and national partner relationships.

We earn new and renewal commissions for the distribution and servicing of classic automobile and boat insurance policies written through personal and commercial lines with multiple insurance carrier partners in the U.S., Canada and the U.K. Additionally, policyholders pay fees directly to us related to their insurance coverage. These commissions and fees are earned when the policy becomes effective, net of policy changes and cancellations.

For policies that have elected to pay via installment plan, revenue is recognized on the policy effective date as the insured becomes fully entitled to the policy benefits, regardless of when payment is collected. Our performance obligation to the insurance carrier partner is complete when the policy is issued.

~~TABLE OF~~ ~~CONTENTS~~

Under the terms of many of its contracts with insurance carrier partners, we have the opportunity to earn an annual CUC, or profit-share, based on the calendar-year performance of the insurance book of business with each of those insurance carrier partners. Our CUC agreements are based on written or earned premium and loss ratio results. Each insurance carrier partner contract and related CUC is calculated independently. Revenue from CUC is accrued throughout the year and settled annually.

~~Earned premium~~

Reinsurance premiums are earned by our single cell captive reinsurance company, Hagerty Re. Hagerty Re reinsures the classic auto and marine risks written through our affiliated MGAs in the U.S., Canada and the U.K. Hagerty Re is a Bermuda-domiciled, Class 3A reinsurer. Hagerty Re was funded in December 2016 and was granted a license by the Bermuda Monetary Authority ("BMA") in March 2017.

Earned premium represents the earned portion of gross written premiums that Hagerty Re has assumed under quota share reinsurance agreements with our insurance carrier partners. Earned premium is recognized over the term of the policy, which is generally 12 months.

~~Membership, marketplace and other revenue~~

We earn subscription revenue and other revenue through membership offerings and other automotive and lifestyle services sold to policyholders and classic vehicle enthusiasts. HDC memberships are sold as a bundled product which give members access to our products and services, including HDC Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, emergency roadside services and special vehicle-related discounts. Hagerty Garage + Social storage memberships include storage in addition to the HDC member benefits. Income from the sale of HDC and storage membership subscriptions is recognized ratably over the period of the membership, which is generally 12 months. We earn revenue through Hagerty Marketplace which offers services for buying, selling and financing collector vehicles through classified listings, auctions and facilitating private sales, all of which is recognized at the time of sale. Lastly, other revenue includes sponsorship, admission, advertising, valuation and registration income. Other revenue is recognized when the performance obligation for the related product or service is satisfied.

~~Costs and Expenses~~

Our costs and expenses consist of salaries and benefits paid to employees, ceding commissions, losses and loss adjustment expenses paid to insurance carrier partners, sales expenses, general and administrative services, depreciation and amortization, change in fair value of warrant liabilities and income tax expense.

~~Salaries and benefits~~

Salaries and benefits consist primarily of costs related to employee compensation, payroll taxes, employee benefits and employee development costs. Employee compensation includes wages paid to employees as well as various incentive compensation plans. Employee benefits include the costs of various employee benefits plans including medical and dental insurance, wellness benefits and others. Costs related to employee education, training and recruiting are included in employee development costs. Salaries and benefits costs are expensed as incurred except for those costs which are required to be capitalized, which are then amortized over the useful life of the asset created (generally software or media content). Salaries and benefits are expected to increase over time as the business continues to grow, but will likely decrease as a percent of revenue.

~~Ceding commission~~

Ceding commission consists of the commission paid by Hagerty Re to our insurance carrier partners for our pro-rata share of acquisition costs (primarily our MGA commissions), general and administrative services and other costs. Hagerty Re pays a fixed rate ceding commission which varies by insurance carrier partner, averaging approximately 47% of net earned premium for the nine months ended September 30, 2022. Ceding commission will change proportionately to earned premium assumed through our various quota share reinsurance agreements.

~~Losses and loss adjustment expenses~~

Losses and loss adjustment expenses represent our share of losses assumed through various reinsurance agreements and includes our portion of the net cost to settle claims submitted by insureds. Losses consist of claims paid, case reserves and losses, IBNR, net of estimated recoveries for reinsurance, salvage and subrogation. Loss adjustment expenses consist of the cost associated with the investigation and settling of claims. Losses and loss adjustment expenses represent management’s best estimate of ultimate net loss at the financial statement date. Estimates are made using statistical analysis by our internal actuarial team. These reserves are reviewed regularly and adjusted as necessary to reflect management’s estimate of the ultimate cost of losses and loss adjustment expenses.

~~TABLE OF~~ ~~CONTENTS~~

Our reinsurance contracts are quota share reinsurance agreements on the business underwritten by our MGAs. These expenses are expected to grow proportionately with written premium and increase as the quota share percentage contractually increases.

~~Sales expense~~

Sales expense includes costs related to the sales and servicing of a policy, membership offerings and Hagerty Marketplace, which includes broker expense, cost of sales, promotion expense and travel and entertainment expenses. Broker expense is the compensation paid to our agent partners and national broker partners when an insurance policy is written through a broker relationship. Broker expense will likely track with written premium growth. Cost of sales includes postage, document costs, payment processing fees, emergency roadside service costs and other variable costs associated with the sale and servicing of a policy. Costs of sales also includes costs associated with vehicle sales through Hagerty Marketplace. Promotion expense includes various expenses related to branding, events, advertising, marketing, and acquisition. Promotion expense and travel and entertainment expense will likely decrease as a percent of revenue over the long term. Sales expenses, in general, are expensed as incurred and will trend with revenue growth.

~~General and administrative services~~

General and administrative services consist of occupancy costs, hardware and software, consulting services, legal and accounting services, community relations and non-income taxes. These costs are expensed as incurred. We expect this expense category to increase commensurate with our expected business volume and growth expectations and be managed lower as a percent of revenue over the next few years after we reach scale to handle incoming business from new partnerships.

~~Depreciation and amortization~~

Depreciation and amortization reflects the recognition of the cost of our investments in various assets over their useful life. Depreciation expense relates to leasehold improvements, furniture and equipment, vehicles, hardware and purchased software. Amortization relates to investments related to recent acquisitions, SaaS implementation, internal software development and investments made in digital media and content assets. Depreciation and amortization are expected to increase slightly in dollar amount over time but will likely decrease as a percent of revenue as investments in platform technology reach scale.

~~Change in fair value of warrant liabilities~~

~~Our warrants are accounted for as liabilities in accordance with Accounting Standards Codification ("ASC") Topic 815,~~ ~~Derivatives and Hedging~~ and are measured at fair value each reporting period, with changes in fair value recognized as non-operating income (expense). In general, under the fair value accounting model, as our stock price increases, the warrant liability increases, and we recognize additional expense in our Condensed Consolidated Statements of Operations. As our stock price decreases, the warrant liability decreases, and we recognize additional income in our Condensed Consolidated Statements of Operations.

~~Income tax expense~~

The Hagerty Group is taxed as a pass-through ownership structure under provisions of the Internal Revenue Code ("IRC") and a similar section of state income tax law, except for Hagerty Re, 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 Hagerty Group Units, ~~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.~~

~~TABLE OF~~ ~~CONTENTS~~

~~Results of Operations~~

~~Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021~~

~~The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021, and the dollar and percentage change between the two periods:~~

Three months ended September 30,
2022 2021 $ Change % Change
REVENUE: in thousands (except percentages)
Commission and fee revenue $ 85,457 $ 76,188 $ 9,269 12.2 %
Earned premium 107,487 78,699 28,788 36.6 %
Membership, marketplace and other revenue 23,813 13,198 10,615 80.4 %
Total revenue 216,757 168,085 48,672 29.0 %
OPERATING EXPENSES:
Salaries and benefits 50,120 42,287 7,833 18.5 %
Ceding commission 50,415 37,195 13,220 35.5 %
Losses and loss adjustment expenses 60,605 32,298 28,307 87.6 %
Sales expense 44,097 32,098 11,999 37.4 %
General and administrative services 23,853 16,563 7,290 44.0 %
Depreciation and amortization 8,890 5,886 3,004 51.0 %
Total operating expenses 237,980 166,327 71,653 43.1 %
OPERATING INCOME (LOSS) (21,223) 1,758 (22,981) (1,307.2) %
Change in fair value of warrant liabilities 11,583 — 11,583 100.0 %
Revaluation gain on previously held equity method investment 34,735 — 34,735 100.0 %
Interest and other income (expense) 662 (417) 1,079 258.8 %
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 25,757 1,341 24,416 1,820.7 %
Income tax benefit (expense) 91 (1,888) 1,979 104.8 %
Income (loss) from equity method investment, net of tax (1,535) — (1,535) (100.0) %
NET INCOME (LOSS) $ 24,313 $ (547) $ 24,860 4,544.8 %

~~Revenue~~

~~Commission and fee revenue~~

Commission and fee revenue was $85.5 million for the three months ended September 30, 2022, an increase of $9.3 million, or 12.2%, compared to 2021, consisting of an increase of $7.5 million in revenue from renewal policies and an increase of $1.8 million in revenue from new policies. The increase in revenue from renewal policies was primarily related to a 7.6% increase in renewal policy premiums as well as continued strong retention.

New business revenue also benefits from rate actions and higher vehicle values. The average premium on a newly issued policy issued has increased 15.0% for the three months ended September 30, 2022 compared to 2021, as a result of writing accounts with higher insured values at higher rates. As a result, premiums from newly insured policies have increased $5.7 million or 15.9% during the three months ended September 30, 2022. In turn, commission revenue from newly issued policies grew by $1.8 million over the same period.

Commission and fee revenue from agent sources increased $5.9 million, or 14.8% and commission and fee revenue from direct sources increased $3.4 million, or 9.2% during the three months ended September 30, 2022. Commission rates, generating commission revenue, vary based on geography but do not differ by distribution channel (i.e., whether they are direct-sourced or agent-sourced).

We experienced consistent underlying growth across the U.S. and Canada. Our commission and fee revenue from the U.S. increased $8.4 million, or 12.0% and commission and fee revenue from Canada increased $1.0 million, or 20.7%.

~~TABLE OF~~ ~~CONTENTS~~

As discussed above, CUC agreements are based on written or earned premium and loss ratio results. Our loss ratio for the three months ended September 30, 2022 was adversely impacted by the increased severity in U.S. auto liability claims in the 2022 accident year and net losses related to Hurricane Ian. As a result, expected CUC payout for 2022 was reduced, which resulted in a $4.1 million downward adjustment during the three months ended September 30, 2022.

~~Earned premium~~

Earned premium revenue was $107.5 million for the three months ended September 30, 2022, an increase of $28.8 million, or 36.6%, compared to 2021. Underlying growth added approximately $19.1 million to earned premium revenue and the increase in U.S. quota share percentage added approximately $9.2 million to earned premium during the three months ended September 30, 2022. This increase in earned premium generally correlates with an increase in written premiums assumed of $32.8 million from $103.4 million for the three months ended September 30, 2021 to $136.2 million for the three months ended September 30, 2022.

~~Membership, marketplace and other revenue~~

Membership, marketplace and other revenue was $23.8 million for the three months ended September 30, 2022, an increase of $10.6 million, or 80.4%, compared to 2021. Membership fee revenue was $11.4 million for the three months ended September 30, 2022, an increase of $1.1 million, or 10.3%, compared to 2021, which was primarily attributable to the increase in the issuance of new policies bundled with an HDC membership, as well as an increase in storage revenue related to our Hagerty Garage + Social locations. For the three months ended September 30, 2022, membership fees were 47.8% of the Membership, marketplace and other revenue total.

Marketplace revenue was $6.9 million for the three months ended September 30, 2022, which was primarily generated by Broad Arrow auctions. For the three months ended September 30, 2022, marketplace revenue was 29.1% of the Membership, marketplace and other revenue total.

Other revenue was $5.5 million for the three months ended September 30, 2022, an increase of $2.6 million, or 90.8%, compared to 2021, primarily due to newly acquired events, resulting in increases of $1.2 million and $0.9 million in sponsorship income and admission income, respectively, for the three months ended September 30, 2022 compared to 2021. Other revenue includes sponsorship, admission, advertising, valuation and registration income and accounts for 23.1% of the Membership, marketplace and other revenue total.

~~Costs and Expenses~~

~~Salaries and benefits~~

Salaries and benefits expenses were $50.1 million for the three months ended September 30, 2022, an increase of $7.8 million, or 18.5%, compared to 2021. The increase was primarily attributable to a net increase of over 300 employees in our sales, member services, technology and distribution units, an increase of approximately 19% year over year. Headcount increased to support current and anticipated growth, such as the additions of several new large national insurance partnerships and our continued development of new systems and digital transformation technology investments, as well as several acquisitions, including the Broad Arrow Acquisition.

~~Ceding commission~~

Ceding commission expense was $50.4 million for the three months ended September 30, 2022, an increase of $13.2 million, or 35.5%, compared to 2021. The increase was primarily attributable to an increase in our U.S. quota share percentage from 60% in 2021 to 70% in 2022, which accounted for $8.8 million of the increase, as well as higher U.S. premium volume ceded to Hagerty Re from our insurance carrier partner, which added approximately $3.6 million.

~~TABLE OF~~ ~~CONTENTS~~

~~The following table presents the amount of premiums ceded and the quota share percentages for the three months ended September 30, 2022 and 2021:~~

U.S. Canada U.K. Total
in thousands (except percentages)
Three months ended September 30, 2022
Subject premium $ 184,833 $ 14,911 $ 2,264 $ 202,008
Quota share percentage 70.0 % 35.0 % 70.0 % 67.4 %
Assumed premium in Hagerty Re $ 129,383 $ 5,218 $ 1,585 $ 136,186
Net ceding commission $ 47,749 $ 1,994 $ 672 $ 50,415
Three months ended September 30, 2021
Subject premium $ 161,308 $ 13,410 $ 3,135 $ 177,853
Quota share percentage 60.0 % 35.0 % 60.0 % 58.1 %
Assumed premium in Hagerty Re $ 96,785 $ 4,694 $ 1,881 $ 103,360
Net ceding commission $ 35,310 $ 1,618 $ 267 $ 37,195

In the U.S., the increase in premiums assumed by Hagerty Re during the three months ended September 30, 2022 compared to 2021 was primarily due to Hagerty Re’s U.S. quota share increasing from 60% in 2021 to 70% in 2022, which accounted for $18.5 million of the overall $32.8 million increase, as well as consistent underlying growth in premiums written by our MGAs and assumed by Hagerty Re.

~~Losses and loss adjustment expenses~~

Losses and loss adjustment expenses was $60.6 million for the three months ended September 30, 2022, an increase of $28.3 million, or 87.6%, compared to 2021. The increase was primarily driven by a $10.0 million loss related to Hurricane Ian and a $6.5 million loss related to the strengthening of reserves for U.S. auto liability for the 2022 accident year, which added 9.3% and 6.1%, respectively, to the loss ratio for the three months ended September 30, 2022. The remainder of the increase relates to Hagerty Re’s U.S. quota share increasing from 60% in 2021 to 70% in 2022. The loss ratio, including catastrophe losses, was 56.4% and 41.0% for the three months ended September 30, 2022 and 2021, respectively. The loss ratio excluding Hurricane Ian was 47.1% for the three months ended September 30, 2022.

~~Sales expense~~

Sales expense was $44.1 million for the three months ended September 30, 2022, an increase of $12.0 million, or 37.4%, compared to 2021. The increase was primarily due to a $8.9 million increase in travel and promotion costs related to newly acquired events, increased advertising and a $2.1 million increase in broker expense, which has driven additional premium volume across our agent distribution channel.

~~General and administrative services~~

General and administrative services expenses were $23.9 million for the three months ended September 30, 2022, an increase of $7.3 million, or 44.0%, compared to 2021, which was primarily driven by a $3.3 million increase in expenses related to operating as a public company, a $1.1 million increase in legal and consulting services related to acquisitions and a $0.8 million increase in software subscription licenses.

~~Depreciation and amortization~~

Depreciation and amortization expense was $8.9 million for the three months ended September 30, 2022, an increase of $3.0 million, or 51.0%, compared to 2021. The increase was primarily attributable to a higher base of capital assets from our digital platform development investment. Amortization on these capital assets increased by $1.4 million.

~~TABLE OF~~ ~~CONTENTS~~

~~Change in fair value of warrant liabilities~~

During the three months ended September 30, 2022, the change in fair value of warrant liabilities which resulted in a gain of $11.6 million, which represents the net change in valuation of our warrant liabilities during the three months ended September 30, 2022. We did not have warrants as of September 30, 2021. Refer to Note 9 — Fair Value Measurements and Note 14 — Warrant Liabilities in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our warrants.

~~Revaluation gain on previously held equity method investment~~

During the three months ended September 30, 2022, the Company recognized a revaluation gain on previously held equity method investments of $34.7 million, which represents the remeasurement of our 40% equity interest in Broad Arrow immediately prior to the Broad Arrow Acquisition in August 2022. Refer to Note 6 — Acquisitions and Investments in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our acquisition of Broad Arrow.

~~Income tax benefit (expense)~~

Income tax benefit was $0.1 million for the three months ended September 30, 2022, a decrease of $2.0 million, or 104.8%, compared to 2021. The decrease in income tax expense for the three months ended September 30, 2022 compared to 2021 was primarily due to a decrease in net income before income tax expense of $11.6 million within Hagerty Re, partially offset by an increase in net income before income tax expense of $2.1 million within Broad Arrow, which are taxed as corporations. Refer to Note 16 — Taxation in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to items affecting our effective tax rate.

~~Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021~~

~~The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021, and the dollar and percentage change between the two periods:~~

Nine months ended September 30,
2022 2021 $ Change % Change
REVENUE: in thousands (except percentages)
Commission and fee revenue $ 243,424 $ 214,004 $ 29,420 13.7 %
Earned premium 290,719 212,370 78,349 36.9 %
Membership, marketplace and other revenue 56,442 38,320 18,122 47.3 %
Total revenue 590,585 464,694 125,891 27.1 %
OPERATING EXPENSES:
Salaries and benefits 149,867 122,134 27,733 22.7 %
Ceding commission 138,048 101,262 36,786 36.3 %
Losses and loss adjustment expenses 136,144 87,643 48,501 55.3 %
Sales expense 109,989 80,810 29,179 36.1 %
General and administrative services 64,040 46,627 17,413 37.3 %
Depreciation and amortization 24,337 15,282 9,055 59.3 %
Total operating expenses 622,425 453,758 168,667 37.2 %
OPERATING INCOME (LOSS) (31,840) 10,936 (42,776) (391.1) %
Change in fair value of warrant liabilities 37,869 — 37,869 100.0 %
Revaluation gain on previously held equity method investment 34,735 — 34,735 100.0 %
Interest and other income (expense) (375) (1,041) 666 64.0 %
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 40,389 9,895 30,494 308.2 %
Income tax benefit (expense) (4,077) (4,790) 713 14.9 %
Income (loss) from equity method investment, net of tax (1,676) — (1,676) (100.0) %
NET INCOME (LOSS) $ 34,636 $ 5,105 $ 29,531 578.5 %

~~TABLE OF~~ ~~CONTENTS~~

~~Revenue~~

~~Commission and fee revenue~~

Commission and fee revenue was $243.4 million for the nine months ended September 30, 2022, an increase of $29.4 million, or 13.7%, compared to 2021, consisting of an increase of $24.7 million in revenue from renewal policies, as well as an increase of $4.7 million in revenue from new policies. The increase in revenue from renewal policies was primarily related to a 5.5% increase in renewal policy premiums as well as continued strong retention. The increase in renewal policy premiums for the nine months ended September 30, 2022 compared to 2021 reflects sustained year-over-year growth in our business, rate increases in several states due to inflation and appreciation of vehicle values, all of which contribute to higher premiums and, in turn, higher commission revenue.

New business revenue also benefits from rate actions and higher vehicle values. The average premium on a newly issued policy issued has increased 16.0% year-over-year as a result of writing accounts with higher insured values at higher rates. As a result, premiums from newly insured policies have increased $13.1 million, or 12.5% during the nine months ended September 30, 2022. In turn, commission revenue from newly issued policies grew by $4.1 million over the same period.

Commission and fee revenue from agent sources increased $16.8 million, or 14.8% and Commission and fee revenue from direct sources increased $12.6 million, or 12.6% during the nine months ended September 30, 2022. Commission rates, generating commission revenue, vary based on geography but do not differ by distribution channel (i.e., whether they are direct-sourced or agent-sourced).

During the nine months ended September 30, 2022, we experienced consistent underlying growth across all geographic areas in which we operate. Our commission and fee revenue from the U.S. increased $26.6 million, or 13.5%, commission and fee revenue from Canada increased $2.6 million, or 19.0% and commission and fee revenue from the U.K. increased $0.2 million, or 6.3%, each compared to the nine months ended September 30, 2021.

As discussed above, CUC agreements are based on written or earned premium and loss ratio results. Our loss ratio for the nine months ended September 30, 2022 was adversely impacted by the increased severity in U.S. auto liability claims in the 2022 accident year and net losses related to Hurricane Ian. As a result, expected CUC payout percentage for 2022 was reduced, driving a $4.1 million downward adjustment during the nine months ended September 30, 2022.

~~Earned premium~~

Earned premium revenue was $290.7 million for the nine months ended September 30, 2022, an increase of $78.3 million, or 36.9%, compared to 2021. Underlying growth added approximately $51.7 million to earned premium revenue and the increase in U.S. quota share percentage added approximately $25.3 million to earned premium during the nine months ended September 30, 2022. This increase in earned premium generally correlates with an increase in written premiums assumed by us of $88.8 million from $284.6 million for the nine months ended September 30, 2021 to $373.4 million for the nine months ended September 30, 2022.

~~Membership, marketplace and other revenue~~

~~Membership, marketplace and other revenue was $56.4 million for the nine months ended September 30, 2022, an increase of $18.1 million, or 47.3%, compared to 2021.~~ ~~Membership fee revenu~~e was $32.8 million for the nine months ended September 30, 2022, an increase of $2.9 million, or 9.5%, compared 2021, which was primarily attributable to the increase in the issuance of new policies bundled with an HDC membership as well as an increase in storage revenue related to our Hagerty Garage + Social locations. For the nine months ended September 30, 2022, membership fees were 58.2% of the Membership, marketplace and other revenue total.

Marketplace revenue was $8.0 million for the nine months ended September 30, 2022, which was primarily generated by Broad Arrow auctions. For the nine months ended September 30, 2022, marketplace revenue was 14.2% of the Membership, marketplace and other revenue total.

Other revenue was $15.6 million for the nine months ended September 30, 2022, an increase of $7.2 million, or 86.7%, compared to 2021, primarily due to newly acquired events, resulting in increases of $3.6 million and $3.0 million in sponsorship income and admission income, respectively. Other revenue includes sponsorship, admission, advertising, valuation and registration income and accounts for 27.6% of the Membership, marketplace and other revenue total.

~~TABLE OF~~ ~~CONTENTS~~

~~Costs and Expenses~~

~~Salaries and benefits~~

Salaries and benefits expenses were $149.9 million for the nine months ended September 30, 2022, an increase of $27.7 million, or 22.7%, compared to 2021. The increase was primarily attributable to a net increase of over 300 employees in our sales, member services, technology and distribution units, an increase of approximately 19% year over year. Headcount increased to support current and anticipated growth, such as the additions of several new large national insurance partnerships and our continued development of new systems and digital transformation technology investments, as well as several acquisitions, including the Broad Arrow Acquisition.

~~Ceding commission~~

Ceding commission expense was $138.0 million for the nine months ended September 30, 2022, an increase of $36.8 million, or 36.3%, compared to 2021. The increase was primarily attributable to an increase in our U.S. quota share percentage from 60% in 2021 to 70% in 2022, which accounted for $24.1 million of the increase, as well as higher U.S. premium volume ceded to Hagerty Re from our insurance carrier partner, which added approximately $9.9 million.

~~The following table presents the amount of premiums ceded and the quota share percentages for the nine months ended September 30, 2022 and 2021:~~

U.S. Canada U.K. Total
in thousands (except percentages)
Nine months ended September 30, 2022
Subject premium $ 505,215 $ 42,190 $ 7,178 $ 554,583
Quota share percentage 70.0 % 35.0 % 70.0 % 67.3 %
Assumed premium in Hagerty Re $ 353,651 $ 14,766 $ 5,025 $ 373,442
Net ceding commission $ 130,565 $ 5,325 $ 2,158 $ 138,048
Nine months ended September 30, 2021
Subject premium $ 448,865 $ 36,442 $ 4,207 $ 489,514
Quota share percentage 60.0 % 35.0 % 60.0 % 58.1 %
Assumed premium in Hagerty Re $ 269,319 $ 12,755 $ 2,524 $ 284,598
Net ceding commission $ 96,565 $ 4,359 $ 338 $ 101,262

In the U.S., the increase in premiums assumed by Hagerty Re during the nine months ended September 30, 2022 compared to 2021 was primarily due to Hagerty Re’s U.S. quota share increasing from 60% in 2021 to 70% in 2022, which accounted for $50.5 million of the overall $88.8 million increase. In the U.K., the increase in premiums assumed in Hagerty Re from September 30, 2021 to September 30, 2022 was primarily due to the entry into the U.K. reinsurance agreement, which became effective during the first quarter of 2021 and the subsequent movement of business from another carrier to Markel International Insurance Company Limited. Lastly, we experienced consistent underlying growth in premiums assumed across all geographic areas in which the Company operates.

~~Losses and loss adjustment expenses~~

Losses and loss adjustment expenses was $136.1 million for the nine months ended September 30, 2022, an increase of $48.5 million, or 55.3%, compared to 2021. The increase was primarily driven by a $10.0 million loss related to Hurricane Ian and a $6.5 million loss related to the strengthening of reserves for U.S. auto liability for the 2022 accident year, which added 3.4% and 2.2%, respectively, to the loss ratio for the nine months ended September 30, 2022. The loss ratio, including catastrophe losses, was 46.8% and 41.3% for the nine months ended September 30, 2022 and 2021, respectively. The loss ratio excluding Hurricane Ian was 43.4% for the nine months ended September 30, 2022.

~~Sales expense~~

Sales expense was $110.0 million for the nine months ended September 30, 2022, an increase of $29.2 million, or 36.1%, compared to 2021. The increase was driven by a $19.3 million increase in travel and promotion costs, primarily related to newly acquired events and increased advertising and a $5.9 million increase in broker expense which has driven additional premium volume across our agent distribution channel.

~~TABLE OF~~ ~~CONTENTS~~

~~General and administrative services~~

General and administrative services expenses were $64.0 million for the nine months ended September 30, 2022, an increase of $17.4 million, or 37.3%, compared to 2021, which was primarily driven by a $8.9 million increase in expenses related to operating as a public company, a $2.2 million increase in software subscription licenses and a $1.9 million increase in consulting services related to the continued scaling of our digital assets.

~~Depreciation and amortization~~

Depreciation and amortization expense was $24.3 million for the nine months ended September 30, 2022, an increase of $9.1 million, or 59.3%, compared to 2021. The increase was primarily attributable to a higher base of capital assets from our digital platform development investment. Amortization on these capital assets increased by $6.0 million.

~~Change in fair value of warrant liabilities~~

During the nine months ended September 30, 2022, the change in fair value of warrant liabilities which resulted in a gain of $37.9 million, which represents the net change in valuation of our warrant liabilities during the nine months ended September 30, 2022. We did not have warrants as of September 30, 2021. Refer to Note 9 — Fair Value Measurements and Note 14 — Warrant Liabilities in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our warrants.

~~Revaluation gain on previously held equity method investment~~

During the nine months ended September 30, 2022, the Company recognized a revaluation gain on previously held equity method investments of $34.7 million, which represents the remeasurement of our 40% equity interest in Broad Arrow immediately prior to the Broad Arrow Acquisition in August 2022. Refer to Note 6 — Acquisitions and Investments in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our acquisition of Broad Arrow.

~~Income tax benefit (expense)~~

Income tax expense was $4.1 million for the nine months ended September 30, 2022, a decrease of $0.7 million, or 14.9%, compared to 2021. The decrease in income tax expense for the nine months ended September 30, 2022 compared to 2021 was primarily due to a decrease in net income before income tax expense of $5.5 million within Hagerty Re, partially offset by an increase in net income before income tax expense of $2.1 million within Broad Arrow, which are taxed as corporations. Refer to Note 16 — Taxation in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to items affecting our effective tax rate.

~~Liquidity and Capital Resources~~

Maintaining a strong balance sheet and capital position is a top priority for us. We manage liquidity globally and across all operating subsidiaries, making use of our working capital, equity proceeds from the Business Combination, and our Credit Facility (as defined below).

~~Future Sources and Uses of Liquidity~~

Our sources of liquidity are our (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our Credit Facility (as defined below). Based on our current expectations, we believe that these sources of liquidity will be sufficient to meet our needs for at least the next 12 months.

We expect that our primary liquidity needs will include cash used to (1) facilitate the underlying growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) fund the growth of our membership and Hagerty Marketplace initiatives, (4) pay interest and principal due on borrowings under our Credit Agreement (as defined below), (5) pay income taxes and (6) make payments under the Tax Receivable Agreement.

~~Capital and Dividend Restrictions~~

Through our reinsurance subsidiary, Hagerty Re, we reinsure the same personal lines risks that are underwritten by our affiliated MGA subsidiaries on behalf of our insurance carrier partners. Our reinsurance operations are self-funded primarily through existing capital and net cash flows from operations. As of September 30, 2022, Hagerty Re had approximately $349.3 million in Cash and cash equivalents and Restricted cash and cash equivalents. We generally fund our MGA, membership and marketplace operations and planned capital expenditures from our cash flow from operations, cash on hand and, if needed, borrowings from our Credit Facility (as defined below).

~~TABLE OF~~ ~~CONTENTS~~

We, and particularly Hagerty Re, pay close attention to the underlying underwriting and reserving risks by monitoring the pricing and loss development of the underlying business written through its affiliated MGAs. Additionally, Hagerty Re seeks to minimize its investment risk by investing in low yield cash, money market accounts and investment grade municipal securities.

~~Capital Restrictions~~

In Bermuda, Hagerty Re is subject to the Bermuda Solvency Capital Requirement ("BSCR") administered by the BMA. No regulatory action is taken by the BMA if an insurer’s capital and surplus is equal to or in excess of their enhanced capital requirement as determined by the BSCR model. In addition, the BMA has established a target capital level for each insurer which is 120% of the enhanced capital requirement. To ensure compliance with BSCR standards, Hagerty Re's target is 130% of the enhanced capital requirement. As of September 30, 2022, Hagerty Re's actual performance relative to the enhanced capital requirement was in excess of 120%.

~~Dividend Restrictions~~

Regulation relating to insurer solvency is generally for the protection of the policyholders rather than for the benefit of the stockholders of an insurance company. We believe that our existing cash and cash equivalents and municipal securities and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our reinsurance premium growth rate, renewal rates, the introduction of new and enhanced products, entry into, and successful entry in new geographic markets, and the continuing market adoption of our product offerings.

~~Comparative Cash Flows~~

~~The following table summarizes our cash flow data for the nine months ended September 30, 2022 and 2021:~~

Nine months ended September 30,
2022 2021 $ Change % Change
in thousands (except percentages)
Net Cash Provided by Operating Activities $ 93,563 $ 85,359 $ 8,204 9.6 %
Net Cash Used in Investing Activities (79,679) (53,761) (25,918) (48.2) %
Net Cash Provided by Financing Activities $ 500 $ 44,944 $ (44,444) (98.9) %

~~Operating Activities~~

~~Cash provided by operating activities primarily consists of net income (loss) adjusted for non-cash items and changes in working capital balances.~~

~~Net cash provided by operating activities is presented below:~~

Nine months ended September 30,
2022 2021 $ Change % Change
in thousands (except percentages)
Net income (loss) $ 34,636 $ 5,105 $ 29,531 578.5 %
Non-cash adjustments to net income (loss) (33,680) 21,665 (55,345) (255.5) %
Changes in operating assets and liabilities 92,607 58,589 34,018 58.1 %
Net Cash Provided by Operating Activities $ 93,563 $ 85,359 $ 8,204 9.6 %

~~TABLE OF~~ ~~CONTENTS~~

Net cash provided by operating activities for the nine months ended September 30, 2022 was $93.6 million, an increase of $8.2 million, or 9.6% compared to 2021. The increase in net cash provided by operating activities was primarily due to an increase in cash due to the timing of Broad Arrow transactions in which cash was collected from buyers during the nine months ended September 30, 2022 and outgoing proceeds to sellers of approximately $13.5 million was not completed until October 2022. This was offset by a decrease in cash flow from operating losses, excluding non-cash increases in loss expense related to Hurricane Ian and additional reserves totaling $16.5 million, an in increase in depreciation and amortization expense of $9.1 million and the introduction of stock-based compensation in 2022, which contributed $8.2 million of non-cash expense.

~~Investing Activities~~

Cash used in investing activities for the nine months ended September 30, 2022 increased $25.9 million compared to 2021. We invested approximately $33.4 million in property, equipment and software (excluding acquisitions) which was primarily driven by internally developed software, an increase of $2.3 million compared to the same period in 2021. We had payments related to acquisitions, net of cash acquired, totaling $12.7 million during the nine months ended September 30, 2022, an increase of $1.4 million compared to 2021. Further, in January 2022, we invested approximately $15.3 million as an equity method investment and joint venture with Broad Arrow. We subsequently acquired the remaining 60% outstanding equity interest of Broad Arrow in an all equity transaction. For additional information regarding our 2022 acquisitions and equity method investments, refer to Note 6 — Acquisitions and Investments in Item 1 of Part I of this Quarterly Report on Form 10-Q. Lastly, we issued $8.4 million of terms loans during the nine months ended September 30, 2022, all subsequent to our acquisition of Broad Arrow. For additional information regarding our term loans, refer to 4 — Notes Receivable in Item 1 of Part I of this Quarterly Report on Form 10-Q.

~~Financing Activities~~

Cash provided by financing activities for the nine months ended September 30, 2022 decreased $44.4 million compared to 2021, primarily due to a net increase in payments on debt under our Credit Facility (as defined below). There were total net cash inflows of $0.5 million related to our Credit Facility during the nine months ended September 30, 2022, compared to $49.5 million of net cash inflows during the nine months ended September 30, 2021.

~~Financing Arrangements~~

~~Multi-bank Credit Facility~~

In September 2022, we entered into a Fourth Amendment to Amended and Restated Credit Agreement ("Credit Agreement"), which amended the terms of our 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 current term of the Credit Agreement expires in October 2026 and may be extended by one year on an annual basis if agreed to by us and the lenders party thereto. Any unpaid balance on the Credit Facility is due at maturity.

~~The Credit Facility borrowings are collateralized by our assets, except for the assets of our U.K., Bermuda and German subsidiaries as well as~~ ~~MHH and its subsidiaries~~.

~~Interest Rate Swap~~

The purpose of the interest rate swap agreement is to fix the interest rate on a portion of our existing variable rate debt in order to reduce exposure to interest rate fluctuations. Under such agreements, we pay the counterparty interest at a fixed rate. In exchange, the counterparty pays us interest at a variable rate, adjusted quarterly and based on the Secured Overnight Financing Rate ("SOFR"). The amount exchanged is calculated based on the notional amount. The significant inputs, primarily the SOFR forward curve, used to determine the fair value are considered Level 2 observable market inputs. We monitor the credit and nonperformance risk associated with its counterparty and believes the risk to be insignificant and does not warrant a credit adjustment at September 30, 2022.

~~TABLE OF~~ ~~CONTENTS~~

~~In March 2017, we entered into an interest rate swap agreement with an original notional amount of $15.0 million at a fixed swap rate of 2.20%. This interest rate swap matured in March 2022.~~

~~Tax Receivable Agreement~~

Hagerty, Inc. expects to have adequate capital resources to meet the requirements and obligations under the Tax Receivable Agreement entered into with the Legacy Unit Holders on December 2, 2021 that provides for the payment by Hagerty, Inc. to the Legacy Unit Holders of 85% of the amount of cash savings, if any, under U.S. federal, state and local income tax or franchise tax realized as a result of (1) any increase in tax basis of Hagerty, Inc.'s assets resulting from (a) purchase of Hagerty Group Unitsfrom any of the Legacy Unit Holders using the net proceeds from any future offering, (b) redemptions or exchanges by the Legacy Unit Holders of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock or (c) payments under the Tax Receivable Agreement and (2) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement.

Legacy Unit Holders may, subject to certain conditions and transfer restrictions described above, redeem or exchange their Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock of Hagerty, Inc. on a one-for-one basis. The Hagerty Group made an election under Section 754 of the IRC of 1986, as amended, and the regulations thereunder effective for each taxable year in which a redemption or exchange of Class V Common Stock and Hagerty Group Units for shares of Class A Common Stock occurs, which is expected to result in increases to the tax basis of the assets of The Hagerty Group at the time of a redemption or exchange of Hagerty Group Units. The redemptions and exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of The Hagerty Group. These increases in tax basis may reduce the amount of tax that Hagerty, Inc. would otherwise be required to pay in the future. This payment obligation as a part of the Tax Receivable Agreement is an obligation of Hagerty, Inc. and not of The Hagerty Group. For purposes of the Tax Receivable Agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Hagerty, Inc. (calculated with certain assumptions) to the amount of such taxes that Hagerty, Inc. would have been required to pay had there been no increase to the tax basis of the assets of The Hagerty Group as a result of the redemptions or exchanges and had Hagerty, Inc. not entered into the Tax Receivable Agreement. Estimating the amount of payments that may be made under the Tax Receivable Agreement is by nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors.

~~Contractual Obligations~~

~~The following table summarizes the significant contractual obligations and other commitments as of September 30, 2022:~~

Total 2022 2023 2024 2025 2026 Thereafter
in thousands
Debt $ 136,000 $ — $ — $ — $ — $ 136,000 $ —
Interest payments 926 71 285 285 285 — —
Operating leases 120,794 3,833 11,949 12,018 11,754 11,211 70,029
Purchase commitments 14,541 — 10,791 3,750 — — —
Total $ 272,261 $ 3,904 $ 23,025 $ 16,053 $ 12,039 $ 147,211 $ 70,029

~~Interest payments excludes variable rate debt interest payments and commitment fees related to our Credit Facility.~~

~~Off-Balance Sheet Arrangements~~

~~We do not have any material off-balance sheet financing arrangements as of September 30, 2022.~~

~~TABLE OF~~ ~~CONTENTS~~

~~Critical Accounting Policies and Estimates~~

Our unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP, which require management to make certain estimates and apply judgment. Estimates and judgments are based on historical experience, current trends and other factors that management believes to be important at the time the unaudited Condensed Consolidated Financial Statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in the unaudited Condensed Consolidated Financial Statements. These accounting policies, among others, may involve a high degree of complexity and judgment on the part of management. Further, these estimates and other factors could have significant adverse impact to our financial condition, results of operations and cash flows. We evaluate our significant estimates on an ongoing basis and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

Our accounting policies are set forth in Note 1 — Summary of Significant Accounting Policies and New Accounting Standards to Consolidated Financial Statements contained in the Company’s 2021 Annual Report on Form 10-K. We include herein certain updates to those policies.

~~Redeemable Non-Controlling Interest~~

As of December 31, 2021, redeemable non-controlling interest represented 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 a Legacy Unit Holders Exchange Agreement with the Legacy Unit Holders. 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 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 was consideredredeemable outside the Company's control. 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 our Condensed Consolidated Balance Sheets.

The Legacy Unit Holders Exchange Agreement was amended as of March 23, 2022. As a result of this amendment, the redeemable non-controlling interest held by the Legacy Unit Holders outstanding was recorded as non-controlling interest and presented as permanent equity on our Condensed Consolidated Balance Sheets. Refer to Note 12 — Members' and Stockholders' Equity, in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.

~~New Accounting Standards~~

~~New accounting standards are described in Note 1 — Summary of Significant Accounting Policies and New Accounting Standards, in Item 1 of Part I of this Quarterly Report on Form 10-Q.~~

~~TABLE OF~~ ~~CONTENTS~~

~~Seasonality and Quarterly Results~~

2021
First Quarter Second Quarter Third Quarter
Fourth Quarter (1)
in thousands
Commission and fee revenue $ 54,373 $ 83,443 $ 76,188 $ 57,567
Earned premium 63,234 70,437 78,700 83,453
Membership, marketplace and other revenue 11,593 13,529 13,198 13,364
Total revenue $ 129,200 $ 167,409 $ 168,086 $ 154,384
Total operating expenses 134,296 153,135 166,328 175,390
Operating income (loss) $ (5,096) $ 14,274 $ 1,758 $ (21,006)
Net income (loss) $ (6,850) $ 12,503 $ (548) $ (66,459)
2022
First Quarter (2)
Second Quarter (3)
Third Quarter (4)
Fourth Quarter
in thousands
Commission and fee revenue $ 62,461 $ 95,506 $ 85,457 N/A
Earned premium 89,132 94,100 107,487 N/A
Membership, marketplace and other revenue 16,218 16,411 23,813 N/A
Total revenue $ 167,811 $ 206,017 $ 216,757 N/A
Total operating expenses 180,815 203,630 237,980 N/A
Operating income (loss) $ (13,004) $ 2,387 $ (21,223) N/A
Net income (loss) $ 15,866 $ (5,543) $ 24,313 N/A

~~(1)~~ Fourth quarter 2021 net loss of $66.5 million is primarily due to an increase 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 consisted primarily of accelerated vesting of incentive plans related to the Business Combination.

~~(2)~~First quarter 2022 net income of $15.9 million is primarily due to a decrease in the fair value of warrant liabilities, which generated a gain of $31.7 million that was recognized as non-operating income.

~~(3)~~Second quarter 2022 net loss of 5.5 million is primarily due to an increase in the fair value of warrant liabilities, which generated a loss of $5.4 million that was recognized as a non-operating expense.

~~(4)~~ Third quarter 2022 net income of $24.3 million is primarily due to a decrease in the fair value of warrant liabilities, which generated a gain of $11.6 million and the revaluation of our previously held equity method investment immediately prior to the Broad Arrow Acquisition, which generated a gain of $34.7 million. Both gains were recognized as non-operating income.

Due to our significant North American footprint, our revenue streams, and in particular, commission and fee revenue, exhibit seasonality peaking in the middle of the second calendar quarter and diminishing through the rest of the year, with the lowest relative level of commission and fee revenue expected to occur in the fourth calendar quarter and beginning of the first calendar quarter. We expect to experience seasonal and other fluctuations in our quarterly operating results, which may not fully reflect the underlying performance of our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations, which primarily include interest rate risk, liquidity risk, and concentration risk. The following sections address the significant market risks associated with our business.

Interest Rate Risk. Interest rate risk is the risk that the fair value of future cash flows of a ~~smaller reporting company~~financial instrument will fluctuate due to change in prevailing market interest rates. As of March 31, 2023, we had approximately $49.6 million of variable rate indebtedness (after taking into consideration $35.0 million in interest rate swaps which converts variable-rate debt to fixed-rate debt), representing approximately 56% of our total debt outstanding, at an average interest rate during the three months ended March 31, 2023 of approximately 7.16%. Based on variable-rate borrowings outstanding as ~~defined~~of March 31, 2023, a 100-basis point (or 1.0%) change in our borrowing rates would result in our annual interest payments changing by ~~Rule 12b-2~~approximately $0.5 million. Our market risk exposure fluctuates based on changes in underlying interest rates.

We also have a portfolio of term loans secured by collector cars of approximately $46.4 million as of March 31, 2023 upon which interest is earned at rates tied to various reference rates including the ~~Exchange Act,~~Prime Rate and Term SOFR. Finally, the assets of Hagerty Re are substantially invested in cash and cash equivalents (including money market funds) which generally earn a higher rate of return as interest rates increase.

Liquidity Risk. Liquidity risk is the risk that we will not ~~required~~be able to ~~provide~~meet our financial obligations associated with financial liabilities. We manage our liquidity risk through the ~~information otherwise required under~~management of our capital structure. Our approach to managing liquidity is to ensure that we have sufficient liquidity to settle obligations and liabilities when due. Refer to "Liquidity and Capital Resources" in Item 2 of Part I of this ~~item.~~Quarterly Report on Form 10-Q for additional information.

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Concentration Risk. We rely on Markel and its subsidiaries for a significant portion of our revenue, representing approximately 97% of our commission revenues and 97% of our earned premium. Termination or disruption of this relationship could materially and adversely impact our revenue. Refer to Note 19 — Related-Party Transactions in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our relationship with Markel.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~September 30, 2022~~March 31, 2023 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC.

Changes in Internal Controls Over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the three months ended ~~September 30, 2022~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.

Future litigation may be necessary to defend ourselves and our partners by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

ITEM 1A. RISK FACTORS

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to our Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks that we currently do not know about or currently view as immaterial may also materially adversely affect our business, financial condition, or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 16, 2022, as part of the Broad Arrow Acquisition and pursuant to the Contribution and Exchange Agreement, we issued 713,684 shares of Class A Common Stock in Hagerty, Inc. to certain foreign Contributors, subject to a lockup that phases out pro-rata over a 5-year period. In addition, we issued 4,724,560 Hagerty Group Units to certain domestic Contributors which can be exchanged on a one-for-one basis over a 5-year period for Class A Common Stock in Hagerty, Inc., beginning in 2023. These shares were issued in reliance upon one or more exemptions from the registration requirements of the Securities Act, including Section 4(a)(2) thereof and Rule 506(b) of Regulation D.None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


Exhibit No.						Description
2.1*						Business Combination Agreement, dated as of August 17, 2021, by and among Aldel Financial Inc. Aldel Merger Sub LLC and The Hagerty Group, LLC (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K (File No. 001-40244), filed with the SEC on August 18, 2021).
3.1						~~Second~~Third Amended and Restated Certificate of Incorporation of the Company, dated December 2, ~~2021(~~2021 (incorporated by reference to Exhibit 3.1 of the Company’s Amendment No.3 to Form ~~8-K~~S-1 (File No. ~~001-40244)~~333 -261 810 ), filed with the SEC on ~~December 8, 2021)~~January 20, 202 3 ).
3.2						Amended and Restated By-Laws of the Company, dated December 2, 2021 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K (File No. 001-40244), filed with the SEC on December 8, 2021).
4.1						Form of Class A Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K (File No. 001-40244), filed with the SEC on December 8, 2021).
4.2						Form of Class V Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K (File No. 001-40244), filed with the SEC on December 8, 2021).
4.3						Form of Warrant Certificate of the Company (incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K (File No. 001-40244), filed with the SEC on December 8, 2021).
4.4						Warrant Agreement, dated April 8, 2021, between Continental Stock Transfer & Trust Company and the Company (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K (File No. 333-253166), filed with the SEC on April 13, 2021).
4.5						Warrant Agreement, dated December 2, 2021, between Continental Stock Transfer & Trust Company and the Company (incorporated by reference to Exhibit 4.5 of the Company’s Form 8-K (File No. 001-40244), filed with the SEC on December 8, 2021).
10.1						~~Fourth~~Sixth Amendment to Amended and Restated Credit Agreement, dated as of ~~September 30, 2022,~~January 31, 2023, among The Hagerty Group LLC, and JPMorgan Chase Bank, N.A., as Administrative Agent to the Lenders, filed herewith.
10.2						Seventh Amendment to Amended and Restated Credit Agreement, dated as of April 7, 2023, among The Hagerty Group LLC, Broad Arrow Capital Europe Limited, Broad Arrow Capital UK Limited, the Lenders party hereto, and JPMorgan Chase Bank, N.A., as Administrative Agent,. ~~Portions of this~~ ~~Exhibit have been omitted.~~ filed herewith.
~~10.2~~10.3†						~~Contribution and Exchange~~Amendment to Employment Agreement, dated ~~August 9, 2022,~~January 1, 2023, by and ~~among Hagerty, Inc., The Hagerty Group, LLC, Broad Arrow Group, Inc., Broad Arrow Holdings LLC, each other Contributor party thereto,~~between the Company and ~~the Contributor Representative party thereto~~Paul E. Rehrig (incorporated by reference to Exhibit ~~10.1~~10.13 of the Company’s Form ~~8-K~~10-K (File No. 001-40244), filed with the SEC on ~~August 9, 2022)~~March 14, 2023).
~~10.3†~~10.4†						Amendment to Employment Agreement, dated ~~August 19, 2022,~~March 10, 2023, by and between the Company and McKeel O Hagerty (incorporated by reference to Exhibit 10.15 of the Company’s Form 10-K (File No. 001-40244), filed with the SEC on March 14, 2023).
10.5†						Amendment to Employment Agreement, dated January 1, 2023, by and between the Company and Patrick McClymont (incorporated by reference to Exhibit ~~10.1~~10.17 of the Company’s Form ~~8-K~~10-K (File No. 001-40244), filed with the SEC on ~~August 23, 2022)~~March 14, 2023).
10.6†						Amended and Restated Employment Agreement, dated January 1, 2023, by and between the Company and Kenneth Ahn (incorporated by reference to Exhibit 10.19 of the Company’s Form 10-K (File No. 001-40244), filed with the SEC on March 14, 2023).
31.1						Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.
31.2						Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.
32.1#						Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
32.2#						Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
101.INS						XBRL Instance Document.
101.SCH						XBRL Taxonomy Extension Schema Document.
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB						XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document.
104						Cover Page Interactive Data File (formatted as Inline XBRL).

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*						The schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
†						Indicates management contract or compensatory plan or arrangement.
#						This certification is deemed not filed for purpose of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

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Signatures

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~November 10, 2022~~May 9, 2023.

HAGERTY, INC.

By:

/s/ McKeel O Hagerty

McKeel O Hagerty

Chief Executive Officer

HAGERTY, INC.

By:

/s/ Patrick McClymont

Patrick McClymont

Chief Financial Officer

6858


	Three months ended September 30, 2022		Nine months ended September 30, 2022

	in thousands
Restricted stock units	$	3,143	$	6,735
Performance restricted stock units	715		1,430
Total stock-based compensation expense	$	3,858	$	8,165


	Restricted Stock Units	Weighted Average Fair Value
Unvested balance as of December 31, 2021	—	$	—
Granted	3,251,560	10.81
Vested	(37,071)	10.79
Forfeited	(43,537)	10.79
Unvested balance as of September 30, 2022	3,170,952	$	10.81


	Performance Restricted Stock Units	Weighted Average Fair Value
Outstanding as of December 31, 2021	—	$	—
Granted	3,707,136	5.19
Outstanding as of September 30, 2022	3,707,136	$	5.19


	September 30, 2022	December 31, 2021
Policies in Force	1,310,646	1,247,056
Policies in Force Retention	88.0%	89.1%
HDC Paid Member Count	749,740	718,583
Net Promoter Score (NPS)	82.0	82.0


	Three months ended September 30,
	2022		2021		$ Change		% Change

REVENUE:	in thousands (except percentages)
Commission and fee revenue	$	85,457	$	76,188	$	9,269	12.2	%
Earned premium	107,487		78,699		28,788		36.6	%
Membership, marketplace and other revenue	23,813		13,198		10,615		80.4	%
Total revenue	216,757		168,085		48,672		29.0	%
OPERATING EXPENSES:
Salaries and benefits	50,120		42,287		7,833		18.5	%
Ceding commission	50,415		37,195		13,220		35.5	%
Losses and loss adjustment expenses	60,605		32,298		28,307		87.6	%
Sales expense	44,097		32,098		11,999		37.4	%
General and administrative services	23,853		16,563		7,290		44.0	%
Depreciation and amortization	8,890		5,886		3,004		51.0	%
Total operating expenses	237,980		166,327		71,653		43.1	%
OPERATING INCOME (LOSS)	(21,223)		1,758		(22,981)		(1,307.2)	%
Change in fair value of warrant liabilities	11,583		—		11,583		100.0	%
Revaluation gain on previously held equity method investment	34,735		—		34,735		100.0	%
Interest and other income (expense)	662		(417)		1,079		258.8	%
INCOME (LOSS) BEFORE INCOME TAX EXPENSE	25,757		1,341		24,416		1,820.7	%
Income tax benefit (expense)	91		(1,888)		1,979		104.8	%
Income (loss) from equity method investment, net of tax	(1,535)		—		(1,535)		(100.0)	%
NET INCOME (LOSS)	$	24,313	$	(547)	$	24,860	4,544.8	%


	2021
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter (1)

	in thousands
Commission and fee revenue	$	54,373	$	83,443	$	76,188	$	57,567
Earned premium	63,234		70,437		78,700		83,453
Membership, marketplace and other revenue	11,593		13,529		13,198		13,364
Total revenue	$	129,200	$	167,409	$	168,086	$	154,384

Total operating expenses	134,296		153,135		166,328		175,390
Operating income (loss)	$	(5,096)	$	14,274	$	1,758	$	(21,006)

Net income (loss)	$	(6,850)	$	12,503	$	(548)	$	(66,459)

	2022
	First Quarter (2)		Second Quarter (3)		Third Quarter (4)		Fourth Quarter

	in thousands
Commission and fee revenue	$	62,461	$	95,506	$	85,457	N/A
Earned premium	89,132		94,100		107,487		N/A
Membership, marketplace and other revenue	16,218		16,411		23,813		N/A
Total revenue	$	167,811	$	206,017	$	216,757	N/A

Total operating expenses	180,815		203,630		237,980		N/A
Operating income (loss)	$	(13,004)	$	2,387	$	(21,223)	N/A

Net income (loss)	$	15,866	$	(5,543)	$	24,313	N/A