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 II, Item 1A -"Risk Factors" in this Quarterly Report on Form 10-Q and in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10K for the year ended
December 31, 2021, filed on March 24, 2022. 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, LLCand its consolidated subsidiaries prior to the Business Combination and to Hagerty, Inc.and its consolidated subsidiaries, following the consummation of the Business Combination.
We are a global market leader in providing insurance for classic and enthusiast vehicles and we have built an industry-leading automotive enthusiast platform that engages, entertains, and connects with subscribing members. At Hagerty, everything begins and ends with the love of cars - an innate passion that fuels our unique membership model and cultivates deep, personal connections with more than 2.5 million members worldwide. Hagerty was founded in 1984, and initially focused on providing insurance coverage for antique boats. Today, our goal is to scale an organization capable of building an ecosystem of products, services, and entertainment for car lovers that catalyzes their passion for cars and driving.
Recent developments affecting comparability
December 2, 2021, The Hagerty Groupcompleted 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 Groupin what is commonly known as an "Up-C" structure. Under this structure, substantially all of Hagerty, Inc.'sassets and liabilities are held by The Hagerty Group. As of March 31, 2022, Hagerty, Inc.owned 24.7% of The Hagerty Group, HHC owned 52.8%, and Markel owned 23.4%.
Refer to Note 1 – Summary of Significant Accounting Policies and New Accounting
Standards and Note 4 – Business Combination in Point 1 of Part I hereof
Quarterly report on Form 10-Q for company information
Impact of COVID-19
March 2020, the World Health Organizationdeclared COVID-19 a pandemic. The pandemic has impacted every geography in which we operate. Governments implemented various restrictions around the world, including closure of non-essential businesses, travel, shelter-in-place requirements for citizens and other restrictions. In response to COVID-19, we have taken several precautionary steps to safeguard our business and team members from COVID-19, including implementing travel restrictions, arranging work from home capabilities and flexible work policies. The safety and well-being of our team members continues to be our top priority. As restrictions were put in place, our employees were able to transition to a work from home environment quickly and effectively due to our prior technology investments. During the three months ended March 31, 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. 35 -------------------------------------------------------------------------------- TABLE OF CONTENTS Key Performance Indicators and Certain Non-GAAP Financial Measures In addition to the measures presented in our Condensed Consolidated Financial Statements, we use the following key performance indicators and certain non-GAAP financial measures to evaluate our business, measure our performance, identify trends in our business against planned initiatives, prepare financial projections and make strategic decisions. We believe these financial and operational measures are useful in evaluating our performance when read together with our financial results prepared in accordance with GAAP. The following table presents these metrics as of and for the periods presented:
Three months completed
2022 2021 Total Revenue (in thousands)
$167,811 $129,200New Business Count (Insurance) 47,514 51,799 Total Written Premium (in thousands) $154,790 $133,707Policies in Force Retention (end of period) 88.9% 90.0% Loss Ratio 41.4% 41.4% HDC Paid Member Count (end of period) 727,010 666,609 Net Promoter Score (NPS) 82.0 82.0 Net Income (Loss) (in thousands) $15,866 $(6,851)Adjusted EBITDA (in thousands) $(5,959) $1,039Basic Earnings (Loss) Per Share $0.33N/A Adjusted Earnings (Loss) Per Share $0.04N/A Operating Income (Loss) (in thousands) $(13,004) $(5,096)Contribution Margin (in thousands) $37,146 $31,080New Business Count New Business Count represents the number of new insurance policies issued during the applicable period. We view new business count as an important metric to assess our financial performance because it is critical to achieving our growth objectives. While Hagerty benefits from strong renewal retention, new business policies more than offset those cancelled or non-renewed at expiration. Often new policies mean new relationships and an opportunity to sell additional products and services.
Total written premium
Total Written Premium is the total amount of insurance premium written on policies that were bound by our insurance carrier partners during the applicable period. We view Total Written Premium as an important metric, as it most closely correlates with our growth in insurance commission revenue and Hagerty Re earned premium. Total Written Premium excludes the impact of premium assumed by unrelated third-party reinsurers and therefore reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we deploy.
Policies in Force (PIF) Retention is the percentage of current period policies that are renewed on the policy renewal date. We view PIF Retention as an important measurement of the number of policies retained each year, which contributes to recurring revenue streams from MGA commissions, membership fees and earned premiums. It also contributes to maintaining our NPS as discussed below. Loss Ratio Loss Ratio, expressed as a percentage, is the ratio of (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. 36 -------------------------------------------------------------------------------- TABLE OF CONTENTS HDC Paid Member Count HDC Paid Member Count is the number of current members
whopay an annual membership subscription as of an applicable period end date. We view HDC Paid Member Count as important because it helps us measure membership revenue growth and provides an opportunity to customize our value proposition and benefits to specific types of enthusiasts, both by demographic and vehicle interest.
Net Promoter Score
We use NPS as our "north star metric," measuring the overall strength of our relationship with members. NPS is measured twice annually through a web-based survey sent by email invitation to a random sample of existing members, and reported annually using an average of the two surveys. Often referred to as a barometer of brand loyalty and customer engagement, NPS is well-known in our industry as a strong indicator of growth and retention.
We define Adjusted EBITDA as net income (loss) (the most directly comparable GAAP measure) before interest, income taxes, and depreciation and amortization (EBITDA), adjusted to exclude changes in fair value of warrant liabilities, gains and losses from asset disposals and certain other non-recurring gains and losses. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.
Our management uses adjusted EBITDA:
•as a measurement of operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations;
• for planning purposes, including the preparation of our internal annual report
operating budget and financial projections;
•assess the performance and effectiveness of our operational strategies;
•assess our ability to develop our business;
• as a performance factor in measuring performance under our leadership
compensation plan; and
• as a preferred predictor of baseline operational performance, comparisons with benchmarks
periods and competitive positioning.
By providing this non-GAAP financial measure, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. 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:
• Adjusted EBITDA does not reflect our cash expenditures or future needs
for capital expenditure, or contractual commitments;
• Adjusted EBITDA does not reflect changes in or cash requirements of our
working capital requirements;
• Adjusted EBITDA does not reflect interest charges or cash requirements
necessary to service interest or principal payments on our debt;
• Adjusted EBITDA does not reflect our tax charges or cash requirements for
pay our taxes; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures does not reflect any cash requirements for such replacements; and
• other companies in our industry may calculate Adjusted EBITDA differently from
we do, limiting its usefulness as a comparative measure.
37 -------------------------------------------------------------------------------- TABLE OF CONTENTS Due to these limitations, Adjusted EBITDA 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. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is Net income (loss): Three months ended March 31, 2022 2021 in thousands Net income (loss)
$ 15,866 $ (6,851)Interest and other (income) expense 684 437 Income tax expense 2,030 1,318 Depreciation and amortization 7,147 4,371 Change in fair value of warrant liabilities (31,686) - Net (gain) loss from asset disposals - 1,764 Adjusted EBITDA $ (5,959) $ 1,039We incurred $9.3 millionand $7.0 millionduring the three months ended March 31, 2022and 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 Farmand potentially other distribution partnerships as well as to further develop our Hagerty Marketplacetransactional platform. These costs were not included in the Adjusted EBITDA reconciliation above. Pursuant to a defined set of activities and objectives, these expenses are adding entirely new capabilities for us, integrating our new and legacy policyholder, membership and Hagerty Marketplacesystems with State Farm'slegacy policy and agent management systems and other third-party platforms. In addition to onboarding a third-party project management related to these initiatives, we leased a new member service center in Dublin, Ohioand added several hundred new employees as of March 31, 2022to meet the expected transactional volume from these initiatives.
These costs began in 2020 and are expected to be largely completed in
Adjusted EPS We define Adjusted Earnings (Loss) Per Share ("Adjusted EPS") as consolidated Net income (loss) that is attributable to both our controlling and non-controlling interest of
$15.9 milliondivided by the outstanding and potentially dilutive shares of Hagerty, Inc.(353.0 million shares) which includes (1) the weighted average issued and outstanding shares of Class A Common Stock, (2) all issued and outstanding shares of Class V Common Stock, and (3) all un-exercised warrants. The most directly comparable GAAP measure is basic earnings per share ("Basic EPS"), which is calculated as Net income (loss) attributable to only controlling interest in Hagerty, Inc.of $27.5 milliondivided by the weighted average issued and outstanding shares of Class A Common Stock (82.4 million shares). In accordance with ASC 260, for periods in which we report a net loss to stockholders, diluted EPS would be the same as Basic EPS, because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. As a result, in periods where we report a net loss attributable to controlling interest, such as during the year ended December 31, 2021, EPS did not need to be differentiated between basic or diluted EPS because both basic and diluted EPS were the same. In periods where we report net income attributable to controlling interest, such as the three months ended March 31, 2022, we believe that Basic EPS is the most comparable GAAP measure to Adjusted EPS. 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. We present Adjusted EPS because we consider it to be an important supplemental measure of our operating performance and believe it is used by investors and securities analysts in evaluating the consolidated performance of other companies in our industry. We also believe that Adjusted EPS, which compares our consolidated net loss (which includes our controlling and non-controlling interest) with our outstanding and potentially dilutive shares, provides useful information to investors regarding our performance on a fully consolidated basis. 38 -------------------------------------------------------------------------------- TABLE OF CONTENTS Our management uses Adjusted EPS:
•as a measure of the operational performance of our business on a
•assess the performance and effectiveness of our operational strategies;
•assess our ability to develop our business; and
• as a preferred predictor of baseline operational performance, comparisons with benchmarks
periods and competitive positioning.
The following table reconciles Adjusted EPS to the most directly comparable GAAP measure, which is Basic EPS: in thousands (except per share amounts) Numerator: Net income (loss) attributable to controlling interest(1) $ 27,507 Net income (loss) attributable to non-controlling interest (11,641) Consolidated net income (loss)(2)
Weighted average Class A common shares outstanding:
82,433 Potentially dilutive shares outstanding: Class V Common Stock outstanding 251,034 Warrants outstanding 19,484 Potentially dilutive shares outstanding 270,518 Fully dilutive shares outstanding(2) 352,951
Basic EPS = (Net income (loss) attributable to controlling interest /
Weighted average number of Class A common shares outstanding(1)
Adjusted EPS = (Consolidated Net Income (Loss) / Fully Dilutive Shares
(1) Numerator and denominator of the basic GAAP BPA measure
(2) Numerator and denominator of non-GAAP EPS adjusted measure
We define Contribution Margin as total revenue less operating expense adding back our fixed operating expenses such as depreciation and amortization, general and administrative costs and shared service salaries and benefits expenses. We define Contribution Margin Ratio as Contribution Margin divided by total revenue. We present Contribution Margin and Contribution Margin Ratio because we consider them to be important supplemental measures of our performance and believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results. We caution investors that Contribution Margin and Contribution Margin Ratio are not recognized measures under GAAP and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and that Contribution Margin and Contribution Margin Ratio, as we define them, may be defined or calculated differently by other companies. In addition, both Contribution Margin and Contribution Margin Ratio have limitations as analytical tools because they exclude certain significant recurring expenses of our business. 39 -------------------------------------------------------------------------------- TABLE OF CONTENTS Our management uses Contribution Margin and Contribution Margin Ratio to:
•analyze the relationship between cost, volume and profit as sales increase;
• measure how much profit is made for any product or service sold; and
• measure how different management actions might affect the Company’s total
revenues and associated cost levels.
The following table reconciles Contribution Margin and Contribution Margin Ratio to the most directly comparable GAAP measures, which are Operating income (loss) and Operating income (loss) margin (Operating income (loss) divided by Total revenue), respectively: Three months ended March 31, 2022 2021 in thousands (except percentages) Total revenue
$ 167,811 $ 129,200Less: total operating expenses 180,815 134,296 Operating income (loss) $ (13,004) $ (5,096)Operating income (loss) margin (8) % (4) % Add: fixed operating expenses $ 50,150 $ 36,176Contribution Margin $ 37,146 $ 31,080Contribution Margin Ratio 22 % 24 %
Main factors and trends affecting our operational performance
Our financial condition and results of operations have been and will continue
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 Canadaand 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 our members
Turning our members into lifetime fans is key to our success. We currently have over 2.5 million members, including approximately 727,000 paid subscribers ("HDC Members") and over 1.7 million
whopurchase insurance or interact with us but have yet to join HDC and receive additional club-level benefits. Our ability to retain members will depend on a number of factors including our NPS and members' satisfaction with our products, pricing and offerings of our competitors.
Our ability to increase HDC subscriptions
Our long-term growth will benefit from our ability to increase our HDC membership subscription base across the
U.S., Canadaand into the U.K.and the E.U. We realize increasing value from each HDC Member whosigns up with us or is retained as a recurring revenue base, forming the basis for organic growth for our new product offerings and improving our loss ratios over time. One of our principal goals is to convert all of our members whoare 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. 40 -------------------------------------------------------------------------------- TABLE OF CONTENTS Our Ability to Introduce New and Innovative Products Our growth will depend on our ability to introduce new and innovative insurance and automotive lifestyle products that will drive organic growth from our existing member base as well as attract new customers. Our insurance offerings as well as our membership and Hagerty Marketplacetechnology platforms provide us with a foundation to expand our insurance and membership base, engage auto enthusiasts and provide innovative products to members globally.
Our ability to manage risk through our technology
Risk is managed through our technology, proprietary algorithms, underwriting and claims practices, data science and regulatory compliance capabilities, which we use to determine the risk profiles of our members. Our ability to manage risk is enhanced and controlled over time as data is continuously collected and analyzed by our algorithms with the objective of lowering our loss ratios over time. Our success depends on our ability to adequately and competitively price risk.
Our ability to manage growth related to our strategic alliances
We have strategic alliances with several insurance carriers that we expect to serve as a key driver in our growth in commission and fee revenue. For example, we expect
State Farmto begin offering our features and services to its customers in late 2022, which we expect will begin to drive additional commission and fee revenue.
Our ability to increase 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 operating results
We primarily generate revenue from the sale of automotive insurance policies and HDC membership subscriptions as well as from participating in the underwriting results on policies written by our insurance carrier partners. Our revenue model incorporates multiple components in the insurance and lifestyle value chains, built on data collection and member experience.
Income from commissions and fees
Our insurance affiliated intermediaries act as MGAs
who, among other things, write collector vehicle business on behalf of the insurance carrier partners. In exchange for commissions paid by the insurance carrier partners, we generally handle all sales, marketing, pricing, underwriting, policy administration and fulfillment, billing and claim services. In addition, we also manage all aspects of our omnichannel distribution, both direct and brokerage, including independent agencies, national sales accounts, large agency and broker networks and national partner relationships. We earn new and renewal commissions for the distribution and servicing of classic automobile and boat insurance policies written through personal and commercial lines with multiple insurance carrier partners in the U.S., Canadaand the U.K.Additionally, policyholders pay fees directly to us related to their insurance coverage. These commissions and fees are earned when the policy becomes effective, net of policy changes and cancellations. For policies that have elected to pay via installment plan, revenue is recognized on the policy effective date as the insured becomes fully entitled to the policy benefits, regardless of when payment is collected. Our performance obligation to the insurance carrier partner is complete when the policy is issued. Under the terms of many of its contracts with insurance carrier partners, we have the opportunity to earn an annual CUC, or profit-share, based on the calendar-year performance of the insurance book of business with each of those insurance carrier partners. Our CUC agreements are based on written or earned premium and loss ratio results. Each insurance carrier partner contract and related CUC is calculated independently. Revenue from CUC is accrued throughout the year and settled annually.
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., Canadaand the U. K. Hagerty Reis a Bermuda-domiciled, Class 3A reinsurer. Hagerty Re was funded in December 2016and was granted a license by the BMA in March 2017. 41
TABLE OF CONTENTS
Earned premiums represent the earned portion of gross written premiums which
Hagerty Re has assumed, under quota-share reinsurance agreements with our
insurance partners. Earned premiums are recognized over the term of the
policy, which is usually 12 months.
Membership and other income
We earn subscription revenue and other revenue through membership offerings and other automotive and lifestyle services sold to policyholders and classic vehicle enthusiasts. HDC memberships are sold as a bundled product which give members access to our products and services, including
HDC Magazine, automotive enthusiast events, our proprietary vehicle valuation tool, emergency roadside services and special vehicle-related discounts. Hagerty Garage+ Social storage memberships include storage in addition to the HDC member benefits. Income from the sale of HDC and storage membership subscriptions is recognized ratably over the period of the membership, which is generally 12 months. Other revenue includes advertising sales, admission income, sponsorships, event registration fees, valuation services, merchandise sales and DriveShare rentals. Other revenue is recognized when the performance obligation for the related product or service is satisfied. Costs and Expenses
Our costs and expenses consist of salaries and benefits paid to employees,
assigning commissions, claims and claims settlement expenses paid to insurance companies
transport partners, commercial costs, 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 48% of net earned premium for the three months ended
March 31, 2022. Ceding commission will change proportionately to earned premium assumed through our various quota share reinsurance agreements.
Claims and claims 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. 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. 42 -------------------------------------------------------------------------------- TABLE OF CONTENTS Sales expense Sales expense includes costs related to the sales and servicing of a policy, primarily broker expense, cost of sales, promotion expense and travel and entertainment expenses. Cost of sales includes postage, document costs, payment processing fees, emergency roadside service costs and other variable costs associated with the sale and servicing of a policy. Broker expense is the compensation paid to our agent partners and national broker partners when an insurance policy is written through a broker relationship. Promotion expense includes various expenses related to branding, events, advertising, marketing, and acquisition. Sales expenses, in general, are expensed as incurred and will likely increase as we continue to grow. Broker expense and cost of sales will likely track with written premium growth, while promotion expense and travel and entertainment expense will decrease as a percent of revenue over the long term.
General and administrative services
General and administrative services consist of occupancy costs, hardware and software, consulting services, legal and accounting services, community relations and non-income taxes. These costs are expensed as incurred. We expect this expense category to increase commensurate with our expected business volume and growth expectations and be managed lower as a percent of revenue over the next few years after we reach scale to handle incoming business from new partnerships.
Depreciation and amortization
Depreciation and amortization reflects the recognition of the cost of our investments in various assets over their useful life. Depreciation expense relates to leasehold improvements, furniture and equipment, vehicles, hardware and purchased software. Amortization relates to investments related to recent acquisitions, SaaS implementation, internal software development and investments made in digital media and content assets. Depreciation and amortization are expected to increase slightly in dollar amount over time but will likely decrease as a percent of revenue as investments in platform technology reach scale.
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 a 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 Groupis taxed as a pass-through ownership structure under provisions of the Internal Revenue Code ("IRC") and a similar section of state income tax law, except for Hagerty Re and various foreign subsidiaries. Any taxable income or loss generated by The Hagerty Groupis passed through to and included in the taxable income or loss of Hagerty Group Unit Holders, including Hagerty, Inc. Hagerty, Inc.is taxed as a corporation and pays corporate federal, state, and local taxes with respect to income allocated from The Hagerty Group. 43 --------------------------------------------------------------------------------
TABLE OF CONTENTS Results of Operations Summary The following table summarizes our results of operations for the three months ended
March 31, 2022and 2021, and the dollar and percentage change between the two periods: Three months ended March 31, 2022 2021 $ Change % Change REVENUES: in thousands (except percentages) Commission and fee revenue $ 62,461 $ 54,373 $ 8,08814.9 % Earned premium 89,132 63,234 25,898 41.0 % Membership and other revenue 16,218 11,593 4,625 39.9 % Total revenues 167,811 129,200 38,611 29.9 % OPERATING EXPENSES: Salaries and benefits 46,476 38,149 8,327 21.8 % Ceding commission 42,378 30,389 11,989 39.5 % Losses and loss adjustment expenses 36,919 26,193 10,726 40.9 % Sales expense 28,437 20,352 8,085 39.7 % General and administrative services 19,458 14,842 4,616 31.1 % Depreciation and amortization 7,147 4,371 2,776 63.5 % Total operating expenses 180,815 134,296 46,519 34.6 % OPERATING INCOME (LOSS) (13,004) (5,096) (7,908) (155.2) % Change in fair value of warrant liabilities 31,686 - 31,686 100.0 % Interest and other income (expense) (684) (437) (247) (56.5) % INCOME (LOSS) BEFORE INCOME TAX EXPENSE 17,998 (5,533) 23,531 425.3 % Income tax expense (2,030) (1,318) (712) (54.0) % Income (loss) on equity method investment, net of tax (102) - (102) (100.0) % NET INCOME (LOSS) $ 15,866 $ (6,851) $ 22,717331.6 % Revenue Commission and fee revenue Commission and fee revenue was $62.5 millionfor the three months ended March 31, 2022, an increase of $8.1 million, or 14.9%, compared to 2021, primarily driven by an increase of $9.6 millionin revenue from renewal policies. This increase was partially offset by lower new business count for the three months ended March 31, 2022compared to 2021. The increase in commission and fee revenue was also driven by new and renewal average premium increases of 14.6% and 3.7%, respectively. Commission and fee revenue from direct sources increased $3.8 million, or 15.0%, from $25.1 millionduring the three months ended March 31, 2021to $28.9 millionduring the three months ended March 31, 2022. Our commission and fee revenue from agent sources increased $4.3 million, or 14.8%, from $29.3 millionduring the three months ended March 31, 2021to $33.6 millionduring the three months ended March 31, 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). 44 -------------------------------------------------------------------------------- TABLE OF CONTENTS The following table presents the detail of our commission and fee revenues for the three months ended March 31, 2022and 2021 by geography: U.S. Canada U.K. Total in thousands Three months ended March 31, 2022 Commission and fee revenue $ 45,670 $ 2,318 $ 884 $ 48,872Contingent commission 13,468 - 121 13,589 Total $ 59,138 $ 2,318 $ 1,005 $ 62,461Three months ended March 31, 2021 Commission and fee revenue $ 39,500 $ 1,893 $ 716 $ 42,109Contingent commission 12,119 18 127 12,264 Total $ 51,619 $ 1,911 $ 843 $ 54,373During the three months ended March 31, 2022, we experienced consistent organic growth across all jurisdictions in commission and fee revenue. CUC growth of 11.1% in the U.S.was below commission and fee growth of 15.6% as not all premium are subject to CUC.
Earned premium revenue was
$89.1 millionfor the three months ended March 31, 2022, an increase of $25.9 million, or 41.0%, compared to 2021. Organic growth added approximately $24.2 millionto earned premium revenue and the increase in U.S.quota share percentage added approximately $1.7 millionto earned premium during the three months ended March 31, 2022. This increase in earned premium generally correlates with an increase in written premiums assumed by the Company of $25.0 millionfrom $72.6 millionfor the three months ended March 31, 2021to $97.6 millionfor the three months ended March 31, 2022.
Membership and other income
Membership and other revenue was
$16.2 millionfor the three months ended March 31, 2022, an increase of $4.6 million, or 39.9%, compared to 2021. Membership fee revenue was $10.3 millionfor the three months ended March 31, 2022, an increase of $0.6 million, or 6.6%, compared 2021, which was primarily attributable to the increase in the issuance of new policies bundled with an HDC membership, as well as growth of new stand-alone HDC subscriptions (i.e., HDC subscriptions sold to members without insurance policies). For the three months ended March 31, 2022, membership fees were 63.6% of the Membership and other revenue total. Other revenue was $5.9 millionfor the three months ended March 31, 2022, an increase of $4.0 millioncompared to 2021, primarily due to newly acquired events, driving increases of $1.7 millionand $1.4 millionin sponsorship income and admission income, respectively, for the three months ended March 31, 2022compared to 2021. Other revenue includes sponsorship, admission, advertising, valuation and registration income and accounts for 36.4% of the membership and other revenue total. Costs and Expenses Salaries and benefits Salaries and benefits expenses were $46.5 millionfor the three months ended March 31, 2022, an increase of $8.3 million, or 21.8%, compared to 2021. The increase was primarily attributable to a net increase of over 200 employees in our sales, member services, technology and distribution units, an increase of approximately 16.0% year over year. Headcount increased to support current and anticipated growth, such as the additions of several new large national insurance partnerships and our continued development of new systems and digital transformation technology investments, as well as several acquisitions primarily in the event and lifestyle business.
Ceding commission expense was
$42.4 millionfor the three months ended March 31, 2022, an increase of $12.0 million, or 39.5%, 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 $6.3 millionas well as higher U.S.premium volume ceded to Hagerty Re from our insurance carrier partner, which added approximately $5.0 million. 45 -------------------------------------------------------------------------------- TABLE OF CONTENTS The following table presents the amount of premiums ceded and the quota share percentages for the three months ended March 31, 2022and 2021: U.S. Canada U.K. Total in thousands (except percentages) Three months ended March 31, 2022 Subject premium $ 134,746 $ 5,756 $ 1,844 $ 142,346Quota share percentage 70.0 % 35.0 % 70.0 % 68.6 % Assumed premium in Hagerty Re $ 94,322 $ 2,015 $ 1,291 $ 97,628Net ceding commission $ 40,406 $ 1,490 $ 482 $ 42,378Three months ended March 31, 2021 Subject premium $ 118,141 $ 4,914$ - $ 123,055Quota share percentage 60.0 % 35.0 % - % 59.0 % Assumed premium in Hagerty Re $ 70,884 $ 1,720$ - $ 72,604Net ceding commission $ 29,087 $ 1,302$ - $ 30,389In the U.S., the increase in premiums assumed in Hagerty Re during the three months ended March 31, 2022compared 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 $13.5 millionof the overall $25.0 millionincrease. In the U.K., the increase in premiums assumed in Hagerty Re from March 31, 2021to March 31, 2022was primarily due to the entry into the U.K.reinsurance agreement, which became effective during the first quarter of 2021.
Claims and claims adjustment expenses
Losses and loss adjustment expenses was
$36.9 millionfor the three months ended March 31, 2022, an increase of $10.7 million, or 40.9%, compared to 2021. 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 41.4%, for both the three months ended March 31, 2022and 2021.
Sales expense was
$28.4 millionfor the three months ended March 31, 2022, an increase of $8.1 million, or 39.7%, compared to 2021. The increase was primarily due to a $5.1 millionincrease in travel and promotion costs related to newly acquired events and increased advertising, a $1.4 millionincrease in broker expense which was driven additional premium volume across our agent distribution channel and a $0.8 millionincrease in roadside costs from our towing provider.
General and administrative services
General and administrative services expenses were
$19.5 millionfor the three months ended March 31, 2022, an increase of $4.6 million, or 31.1%, compared to 2021. The increase was primarily driven by a $3.3 millionincrease in consulting services and accounting services. The increase in consulting services was primarily driven by scaling and growth of digital asset construction. The increase in accounting services was primarily driven by additional accounting fees related to public company audit requirements. The increase was also driven by $0.9 millionin software and hardware costs, primarily related to company headcount growth.
Depreciation and amortization
Depreciation and amortization expense was
$7.1 millionfor the three months ended March 31, 2022, an increase of $2.8 million, or 63.5%, 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 $2.2 million.
Change in fair value of warrant liabilities
During the three months ended
March 31, 2022, the change in fair value of warrant liabilities was $31.7 million, which represents the net change in valuation of our warrant liabilities during the three months ended March 31, 2022. We did not have warrants as of March 31, 2021. Refer to Note 8 - Fair Value Measurements and Note 13 - Warrant Liabilities in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information with respect to our warrants. 46 -------------------------------------------------------------------------------- TABLE OF CONTENTS Income tax expense Income tax expense was $2.0 millionfor the three months ended March 31, 2022, an increase of $0.7 million, or 54.0%, compared to 2021. The increase in income tax expense for the three months ended March 31, 2022compared to 2021 was primarily due to an increase in net income before income tax expense of $3.2 millionwithin Hagerty Re, which is taxed as a corporation. Refer to Note 15 - 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.
Cash and capital resources
Maintaining a strong balance sheet and capital position is a top priority. We manage liquidity globally and across all operating subsidiaries, making use of our working capital, equity proceeds from the Business Combination, and our Credit Facility (as defined below) when needed. 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
March 31, 2022, Hagerty Re had approximately $263.5 millionin cash and cash equivalents and municipal securities. Our MGA operations are financed primarily through the commissions and fees received from our insurance carrier partners and, if necessary, proceeds from our existing Credit Facility. Our membership-related subsidiaries finance their operations from the sale of HDC Member subscriptions, as well as proceeds, if necessary, from our existing Credit Facility. We, 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.
Bermuda, Hagerty Re is subject to the BSCR administered by the BMA. No regulatory action is taken by the BMA if an insurer's capital and surplus is equal to or in excess of their enhanced capital requirement as determined by the BSCR model. In addition, the BMA has established a target capital level for each insurer which is 120% of the enhanced capital requirement. To ensure compliance with BSCR standards, Hagerty Re's target is 130% of the enhanced capital requirement. As of March 31, 2022, Hagerty Re's actual performance relative to the enhanced capital requirement was in excess of 120%.
Bermudalaw, Hagerty Re is prohibited from declaring or issuing a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. Prior approval from the BMA is also required if the Hagerty Re's proposed dividend payments would exceed 25% of its prior year-end total statutory capital and surplus. The amount of dividends which could be paid by Hagerty Re in 2022 without prior approval is $26.8 million. Regulation relating to insurer solvency is generally for the protection of the policyholders rather than for the benefit of the stockholders of an insurance company. We believe that our existing cash and cash equivalents and municipal securities and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our reinsurance premium growth rate, renewal rates, the introduction of new and enhanced products, entry into, and successful entry in new geographic markets, and the continuing market adoption of our product offerings.
Comparative cash flows
The following table summarizes our cash flow data for the three months ended
March 31, 2022and 2021: Three months ended March 31, 2022 2021 $ Change % Change in thousands (except percentages) Net Cash Provided by Operating Activities $ 9,014 $ 20,997 $ (11,983)(57.1) % Net Cash Used in Investing Activities $ (31,797)(21,173) $ (10,624)(50.2) % Net Cash Used in Financing Activities $ (19,000) $ (8,500) $ (10,500)(123.5) % 47
-------------------------------------------------------------------------------- TABLE OF CONTENTS Operating Activities
Cash flow from operating activities consists primarily of net income (loss)
adjusted for non-cash items and changes in working capital balances.
Net cash provided by operating activities is presented below:
Three months ended March 31, 2022 2021 $ Change % Change in thousands (except percentages) Net income (loss)
$ 15,866 $ (6,851) $ 22,717331.6 % Non-cash adjustments to net income (loss) (23,727) 7,059 (30,786) (436.1) % Changes in operating assets and liabilities 16,875 20,789
Net cash from operating activities
Net cash provided by operating activities for the three months ended
March 31, 2022was $9.0 million. Cash used during the period included $7.9 millionfrom net income (loss) after non-cash expenses are excluded. Non-cash expenses primarily included a gain related to the change in fair value of warrant liabilities of $31.7 million, partially offset by depreciation and amortization expense of $7.1 million. Changes in operating assets and liabilities provided $16.9 millionof operating cash. The increase in cash from changes in operating assets and liabilities was primarily attributable to a decrease in commission receivable of $43.4 million, an increase to due to insurers of $16.4 millionand an increase in advanced premiums of $15.6 million. These changes were partially offset by an increase in premiums receivable of $22.3 million, an increase in prepaid expenses and other assets of $15.2 million, and a decrease in commissions payable of $14.8 million. Net cash provided by operating activities for the three months ended March 31, 2021was $21.0 million. Cash provided during this period included $0.2 millionfrom net income (loss) after non-cash expenses are excluded. Non-cash expenses primarily included depreciation and amortization expense of $4.4 millionand a loss on disposal of software development of $2.1 million. The increase in cash from changes in our operating assets and liabilities was primarily attributable to decreases in commission receivable of $40.4 million, an increase to the due to insurers of $16.2 millionand an increase in advanced premiums of $12.0 million. These changes were partially offset by an increase in premiums receivable of $22.4 million, an increase in prepaid expenses and other assets of $13.1 millionand a decrease in accrued expenses of $11.0 million.
Cash used in investing activities for the three months ended
March 31, 2022increased $10.6 millioncompared to 2021. We invested approximately $10.5 millionin property, equipment and software (excluding acquisitions), comparable to the same period in 2021. Additionally, we had payments related to acquisitions, net of cash acquired, totaling $6.0 millionduring the three months ended March 31, 2022, an increase of $2.9 millioncompared to 2021. We also invested approximately $15.3 millionas an equity method investment and joint venture with Broad Arrow. For additional information regarding our 2022 acquisitions and equity method investments, refer to Note 5 - Acquisitions and Investments in Item 1 of Part I of this Quarterly Report on Form 10-Q. Lastly, during the three months ended March 31, 2021, Hagerty Re invested in fixed income securities in connection with our reinsurance agreement with Aviva of approximately $7.4 million. Hagerty Re made no such additional investments during the three months ended March 31, 2022. For additional information regarding our fixed income securities, refer to Note 8 - Fair Value Measurements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Cash used in financing activities for the three months ended
March 31, 2022increased $10.5 millioncompared to 2021, primarily due to a decrease in outstanding debt under our Credit Facility. There were total net cash outflows of $18.0 millionrelated to draws under our Credit Facility during the three months ended March 31, 2022, compared to $7.5 millionduring the three months ended March 31, 2021.
Sources and future 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. 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. 48 -------------------------------------------------------------------------------- TABLE OF CONTENTS We expect that our primary liquidity needs will include cash used to (1) facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) fund the growth of our membership and
Hagerty Marketplaceinitiatives, (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.
Multi-bank credit facility
Credit Agreement (the “Credit Agreement”), which amended the terms of our
revolving credit facility (the “Credit Facility”) with
N / A
from time to time as lenders.
The current term of the credit agreement expires in
extended for one year on an annual basis if agreed between us and the lending party
to this one. Any outstanding balance on the credit facility is due when due.
The Credit Facility borrowings are collateralized by our assets, except for the assets of our
U.K., Bermudaand German subsidiaries as well as the assets of Hagerty Events, LLCand the non-wholly owned subsidiaries of MHH.
Under the Credit Agreement, we are required, among other things, to comply with certain
financial covenants, including a fixed charge coverage ratio and leverage
report. We complied with these covenants at
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. 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 LIBOR or the alternative replacement of LIBOR. The amount exchanged is calculated based on the notional amount. The significant inputs, primarily the LIBOR forward curve, used to determine the fair value are considered Level 2 observable market inputs. We monitor the credit and nonperformance risk associated with its counterparty and believes the risk to be insignificant and not warranting a credit adjustment at
March 31, 2022.
initial notional amount of
March 2017, we entered into an interest rate swap agreement with an original notional amount of $15 millionat a fixed rate of 2.20%. The 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, 2021that 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.'sassets resulting from (a) purchase of Hagerty Group Units from any of the Legacy Unit Holders using the net proceeds from any future offering, (b) redemptions or exchanges by the Legacy Unit Holders of Class V Common Stock and Hagerty GroupUnits 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. 49 -------------------------------------------------------------------------------- TABLE OF CONTENTS Legacy Unit Holders may, subject to certain conditions and transfer restrictions described above, redeem or exchange their Class V Common Stock and Hagerty GroupUnits for shares of Class A Common Stock of Hagerty, Inc.on a one-for-one basis. The Hagerty Groupmade 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 Groupat 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 Groupas 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.
The following table summarizes the main contractual and other obligations
Total 2022 2023 2024 2025 2026 Thereafter in thousands Debt
$ 117,500$ - $ - $ - $ - $ 117,500$ - Interest payments 1,024 205 273 273 273 - -
Operating leases 94,504 6,708 8,774 8,596
8,465 7,951 54,010 Purchase commitments 11,346 9,682 1,664 - - - - Total
$ 224,374 $ 16,595 $ 10,711 $ 8,869 $ 8,738 $ 125,451 $ 54,010
Interest payments exclude interest payments on floating rate debt and commitment
fees related to our credit facility.
Significant 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 described in note 1 to the consolidated financial statements
Statements Contained in the Company’s 2021 Annual Report on Form 10-K. We
include here some updates to these policies.
50 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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 an Exchange Agreement with the Legacy Unit Holders. The 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 considered redeemable 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 the Condensed Consolidated Balance Sheets. The 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 the Condensed Consolidated Balance Sheets. Refer to Note 11 - Members' and Stockholders' Equity, in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.
New accounting standards
The new accounting standards are described in Note 1 – Summary of the main
Accounting methods and new accounting standards, in point 1 of Part I of this
Quarterly report on Form 10-Q.
Seasonality and quarterly results
2021 2022 Fourth First Quarter First Quarter Second Quarter Third Quarter Quarter (1) (2) in thousands Commission and fee revenue
63,234 70,437 78,700 83,453 89,132 Membership and other revenue 11,593 13,529 13,198 13,364 16,218 Total revenues
Total operating expenses 134,296 153,135 166,328 175,390 180,815 Operating income (loss)
$ (5,096) $ 14,274 $ 1,758 $ (21,006) $ (13,004)Net income (loss) $ (6,850) $ 12,503$ (548) $ (66,459) $ 15,866(1) The fourth quarter 2021 net loss of $66.5 millionis primarily due to a change in fair value of warrant liabilities expense of $42.5 millionthat 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) The first quarter 2022 net income of $15.9 millionis primarily due to a decrease in the fair value of warrant liabilities, which generated a gain of $31.7 millionthat was 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.