Notes Receivable

12 Months Ended

Dec. 31, 2022

5 — Notes Receivable

In January 2022, the Company entered into a joint venture with Broad Arrow, pursuant to which Hagerty acquired an approximately 40% equity ownership in Broad Arrow. Then in August 2022, the Company acquired the remaining 60% equity interest in Broad Arrow. Refer to Note 9 — Acquisitions and Investments for additional information.

Broad Arrow Capital ("BAC"), a subsidiary of Broad Arrow, makes term loans to high-net-worth individuals and businesses secured by collector cars. Term loans typically have an initial maturity of up to two years, often with an option to renew for one year increments, and carry a fixed or variable rate of interest. The carrying value of the loan portfolio approximates its fair value due to the typical short-term maturity and market rate of interest associated with most loans.

The Company aims to mitigate the risk associated with a potential devaluation in collateral by targeting a maximum loan-to-value ("LTV") ratio of 65% (i.e., the principal loan amount divided by the estimated collateral value). The LTV ratio is reassessed 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.

The Company believes the LTV ratio is the critical credit quality indicator for the secured loans made by BAC. In estimating the realizable value of a collector car pledged as collateral for a loan, the Company relies on management's expertise in the collector car market and considers an array of factors impacting the current and expected future value of the car including the 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. All loans are secured by the underlying collateral.

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 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.

The table below provides the aggregate LTV ratio for the Company's loan portfolio as of December 31, 2022:


	December 31, 2022

	in thousands
Secured loans	$	37,427
Estimate of collateral value	$	75,802
Aggregate LTV ratio	49.4		%

The Company considers a loan to be past due when interest payments are not paid within 10 days of the monthly due date, or if principal payments are not paid by the contractual maturity date. There were no past due loans as of December 31, 2022.

A loan is considered to be impaired if management determines that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. The determination of whether a specific loan is impaired, and the amount of any required allowance, is based on the facts available to management and is reevaluated and adjusted as additional facts become known. If a loan is considered to be impaired, finance revenue is no longer recognized and steps are taken to restructure or take possession of the collateral. If necessary, bad debt expense is recorded for any principal or accrued interest that is deemed uncollectible. As of December 31, 2022, there were no impaired loans outstanding.

Allowance for Loan Losses

The Company and management do not believe there is a material risk of loan loss based on the aggregate LTV ratio of 49.4% and, to a lesser extent, its understanding of the creditworthiness of the borrowers. Therefore, as of December 31, 2022, there is no allowance for loan losses recorded.