v3.25.2
Taxation
 6 Months Ended
Jun. 30, 2025
Income Tax Disclosure [Abstract]  
Taxation
20 — Taxation

United States — With the exception of certain U.S. corporate and foreign subsidiaries, THG 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. As such, any taxable income or loss generated by THG is passed through to and included in the taxable income or loss of THG unit holders, including Hagerty, Inc.

Hagerty, Inc. is taxed as a corporation under the IRC and pays corporate, federal, state, and local taxes with respect to income allocated from THG. Hagerty, Inc., Hagerty Insurance Holdings, Inc., Broad Arrow, Hagerty Radwood, Inc., and various foreign subsidiaries are treated as taxable entities and income taxes are provided where applicable. Hagerty Insurance Holdings, Inc. files a consolidated tax return with its wholly owned corporate subsidiaries Hagerty Re and Drivers Edge.

Canada — Hagerty's Canadian entities are taxed as non-resident corporations and subject to income tax in Canada under provisions of the Canadian Revenue Agency.

United Kingdom — Hagerty's 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 made an irrevocable election under Section 953(d) of the IRC, as amended, to be taxed as a U.S. domestic corporation. As a result, 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 IRS, Hagerty Re established an irrevocable letter of credit with the Internal Revenue Service ("IRS") in 2021.

Tax Legislation — On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted. The law contains several key provisions including the reinstatement of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. The Company is still evaluating the impact of the OBBBA on its Consolidated Financial Statements.

The Organisation for Economic Co-operation and Development has a framework to implement a global minimum corporate tax rate of 15% for companies with global revenues and profits above certain thresholds (referred to as "Pillar 2"). Certain aspects of Pillar 2 became effective on January 1, 2024 and other aspects became effective on January 1, 2025. While it's uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which the Company operates have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2. While the Company's effective income tax rate and cash income tax payments could increase in future years as a result of the global minimum tax, management does not expect there will be a material impact to the Company's effective tax rate or its results of operations. The Company's assessment could be affected by legislative guidance and future enactment of additional provisions within the Pillar 2 framework.
Income Tax Expense — For the six months ended June 30, 2025 and 2024, income tax expense reflected in the Condensed Consolidated Statements of Operations differs from the tax computed by applying the statutory U.S. federal rate of 21% to "Income before income tax expense" as follows:

Six months ended June 30,
20252024
in thousands (except percentages)
Income tax expense at statutory rate$18,091 21 %$12,977 21 %
State taxes917 1 %259 — %
(Income) loss not subject to entity-level taxes(4,711)(5)%(3,382)(5)%
Foreign rate differential468 1 %(156)— %
Change in valuation allowance(1,234)(1)%(738)(1)%
(Gain) loss related to warrant liabilities, net— — %1,697 3 %
Permanent items32 — %346 1 %
Effect of changes in tax rates(1,236)(1)%— — %
Other, net(677)(1)%(63)— %
Income tax expense$11,650 15 %$10,940 18 %
Deferred Tax Assets — As of June 30, 2025 and December 31, 2024, the Company had deferred tax assets of $148.5 million and $148.1 million, respectively, related to the difference between the outside tax basis and book basis of its investment in the assets of THG. 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.

The Company evaluates the realizability of its deferred tax assets on a quarterly basis using all available evidence, both positive and negative. The realization of deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods, as permitted by law, as of June 30, 2025 and December 31, 2024, management concluded that it is more likely than not that certain deferred tax assets, including the deferred tax asset for the investment in the assets of THG, will not be realized. As a result, the Company recorded a valuation allowance of $176.4 million and $176.2 million against its deferred tax assets as of June 30, 2025 and December 31, 2024, respectively.

Given the Company's recent history of earnings and anticipated future earnings, management believes there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance recorded against the U.S. deferred tax assets will be reversed. Reversal of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period the reversal is recorded. In addition, a corresponding increase to the estimated value of the liability related to the TRA Liability, may be required to be recognized with the resulting expense recorded within "Interest and other income (expense), net" in the Condensed Consolidated Statements of Operations. The exact timing and amount of the valuation allowance reversal, and any corresponding increase to the TRA Liability, are subject to change on the basis of the level of profitability that is actually achieved.
Tax Examinations — 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 June 30, 2025, tax years 2020 to 2023 are subject to examination by various tax authorities. With few exceptions, as of June 30, 2025, the Company is no longer subject to U.S. federal, state, local or foreign examinations for years before 2020. THG is currently under audit by the IRS for the 2021 tax year.

The Canadian Revenue Agency closed its examinations of the Company for the 2018 tax year in March 2024 and for the 2020-2022 tax years in February 2025, with no changes to previously filed tax returns.

Uncertain Tax Positions — 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 Topic 740, Income Taxes ("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 June 30, 2025 and December 31, 2024, 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 expense" in the Condensed Consolidated Statements of Operations.
Tax Receivable Agreement Liability — In connection with the consummation of the business combination that formed Hagerty, Inc. in 2021, Hagerty, Inc. entered into a TRA with the Legacy Unit Holders. The TRA provides for payment to the Legacy Unit Holders of 85% of the U.S. federal, state and local income tax savings realized by Hagerty, Inc. as a result of the increases in tax basis and certain other tax benefits as outlined in the Business Combination Agreement upon the exchange of THG units and shares of Hagerty, Inc. Class V Common Stock for shares of Hagerty, Inc. Class A Common Stock or cash. The Business Combination Agreement is provided as Exhibit 2.1, incorporated by reference within Item 6. Exhibits, in this Quarterly Report. In connection with the filing of its 2019 income tax return THG made an election under Section 754 of the IRC for each taxable year in which TRA exchanges occur. This election cannot be revoked without the permission of the IRS Commissioner and will be in place for any future exchange of THG units. The remaining 15% cash tax savings resulting from the basis adjustments will be retained by Hagerty, Inc.

The amount and timing of any payments under the TRA will vary depending on a number of factors, including, but not limited to, the increase in tax basis of THG's assets, the timing of any future redemptions, exchanges or purchases of THG units held by Legacy Unit Holders, the price of Hagerty, Inc. Class A Common Stock at the time of the redemption, exchange or purchase, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that Hagerty, Inc. generates in the future, the tax rates then applicable, and the portion of the payments under the TRA constituting imputed interest.

In general, under the TRA, 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 THG units and shares of Hagerty, Inc. Class V Common Stock for shares of Hagerty, Inc. 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.

As of June 30, 2025, the estimated value of the TRA Liability was $5.1 million, of which $2.0 million was classified as a current liability within "Accounts payable, accrued expenses and other current liabilities" and $3.1 million was classified as a long-term liability within "Other long-term liabilities" on the Condensed Consolidated Balance Sheets. As of December 31, 2024, the estimated value of the TRA Liability was $2.2 million, of which $0.2 million was classified as a current liabilities within "Accounts payable, accrued expenses and other current liabilities" and $2.0 million was classified as a long-term liability within "Other long-term liabilities" on the Condensed Consolidated Balance Sheets.

During the six months ended June 30, 2025, Hagerty, Inc. made TRA payments of $0.2 million to the Legacy Unit Holders. There were no such TRA payments during the six months ended June 30, 2024.