TIPTREE INC. - Quarter Report: 2020 September (Form 10-Q)
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, 2020
OR
| ☐ | 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: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland 38-3754322
(State or Other Jurisdiction of Incorporation of Organization (IRS Employer Identification No.)
299 Park Avenue, 13th Floor, New York, New York 10171
(Address of Principal Executive Offices) Zip Code
Registrant’s Telephone Number, Including Area Code: (212) 446-1400
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||
| common stock, par value $0.001 per share | TIPT | NASDAQ | Capital Market | ||||||||
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company ☐
Emerging growth company ☐
If an emerging 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 Exchange Act.) Yes☐ No ☒
As of November 1, 2020, there were 33,634,936 shares, par value $0.001, of the registrant’s common stock outstanding.
Tiptree Inc.
Quarterly Report on Form 10-Q
September 30, 2020
Table of Contents
ITEM | Page Number | |||||||
F- 1 | ||||||||
Item 1. Financial Statements (Unaudited) | F- 3 | |||||||
F- 3 | ||||||||
F- 4 | ||||||||
F- 5 | ||||||||
F- 6 | ||||||||
F- 8 | ||||||||
F- 9 | ||||||||
F- 9 | ||||||||
F- 9 | ||||||||
F- 13 | ||||||||
F- 14 | ||||||||
F- 15 | ||||||||
(6) Investments | F- 17 | |||||||
F- 22 | ||||||||
F- 23 | ||||||||
(9) Goodwill and Intangible Assets, net | F- 26 | |||||||
F- 27 | ||||||||
F- 28 | ||||||||
F- 30 | ||||||||
F- 36 | ||||||||
F- 37 | ||||||||
(15) Other Assets and Other Liabilities and Accrued Expenses | F- 38 | |||||||
F- 39 | ||||||||
F- 40 | ||||||||
F- 41 | ||||||||
(19) Stock Based Compensation | F- 42 | |||||||
F- 45 | ||||||||
F- 45 | ||||||||
F- 46 | ||||||||
F- 47 | ||||||||
F- 47 | ||||||||
Item 1A. Risk Factors | ||||||||
PART I. FINANCIAL INFORMATION
Forward-Looking Statements
Except for the historical information included and incorporated by reference in this Quarterly Report on Form 10-Q, the information included and incorporated by reference herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “may,” “might,” “plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, in this Quarterly Report on Form 10-Q and in our other public filings with the SEC.
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.
Market and Industry Data
Certain market data and industry data included in this Quarterly Report on Form 10-Q were obtained from reports of governmental agencies and industry publications and surveys. We believe the data from third party sources to be reliable based upon our management’s knowledge of the industry, but have not independently verified such data and as such, make no guarantees as to its accuracy, completeness or timeliness.
Note to Reader
In reading this Quarterly Report on Form 10-Q, references to:
“A.M. Best” means A.M. Best Company, Inc.
“CARES Act” means the Coronavirus Aid, Relief, and Economic Security Act.
“CLOs” means collateralized loan obligations.
“Corvid Peak” means collectively: Corvid Peak Holdings, L.P., Corvid Peak Capital Management, LLC., Corvid Peak GP Holdings, LLC. and Corvid Peak Holdings GP, LLC., formerly known as “Tricadia”.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“Invesque” means Invesque Inc.
“Luxury” means Luxury Mortgage Corp.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Smart AutoCare” means the following entities and their subsidiaries operating under the Smart AutoCare brand: SAC Holdings, Inc., Freedom Insurance Company, Ltd., Dealer Motor Services, Inc., Independent Dealer Group, Inc., Ownershield, Inc. and Accelerated Service Enterprise, LLC.
F - 1
“Tax Act” means Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act.
“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means, unless otherwise indicated by the context, Tiptree Inc. and its consolidated subsidiaries.
“Tiptree Holdings” means Tiptree Holdings, LLC., formerly known as “Caroline Holdings, LLC.”
“Transition Services Agreement” means the Amended and Restated Transition Services Agreement between Corvid Peak and Tiptree Inc., effective as of January 1, 2019.
“Tricadia” means collectively, Tricadia Holdings, L.P., Tricadia Capital Management, LLC., Tricadia Holdings GP, LLC., Tricadia Holdings and Tricadia GP Holdings LLC.
F - 2
TIPTREE INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)
Item 1. Financial Statements (Unaudited)
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets: | |||||||||||
| Investments: | |||||||||||
| Available for sale securities, at fair value, net of allowance for credit losses | $ | 369,914 | $ | 335,192 | |||||||
| Loans, at fair value | 115,472 | 108,894 | |||||||||
| Equity securities | 111,659 | 155,378 | |||||||||
| Other investments | 214,192 | 137,472 | |||||||||
| Total investments | 811,237 | 736,936 | |||||||||
| Cash and cash equivalents | 103,502 | 133,117 | |||||||||
| Restricted cash | 78,095 | 11,473 | |||||||||
| Notes and accounts receivable, net | 361,747 | 286,968 | |||||||||
| Reinsurance receivables | 646,571 | 539,833 | |||||||||
| Deferred acquisition costs | 204,396 | 166,493 | |||||||||
| Goodwill | 163,366 | 99,147 | |||||||||
| Intangible assets, net | 134,199 | 47,974 | |||||||||
| Other assets | 151,175 | 68,510 | |||||||||
| Assets held for sale | 140,578 | 107,835 | |||||||||
| Total assets | $ | 2,794,866 | $ | 2,198,286 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Debt, net | $ | 397,764 | $ | 374,454 | |||||||
| Unearned premiums | 792,533 | 754,993 | |||||||||
| Policy liabilities and unpaid claims | 211,198 | 144,384 | |||||||||
| Deferred revenue | 358,734 | 94,601 | |||||||||
| Reinsurance payable | 189,500 | 143,869 | |||||||||
| Other liabilities and accrued expenses | 351,234 | 172,140 | |||||||||
| Liabilities held for sale | 132,212 | 102,430 | |||||||||
| Total liabilities | $ | 2,433,175 | $ | 1,786,871 | |||||||
| Stockholders’ Equity: | |||||||||||
| Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding | $ | — | $ | — | |||||||
| Common stock: $0.001 par value, 200,000,000 shares authorized, 33,563,019 and 34,562,553 shares issued and outstanding, respectively | 34 | 35 | |||||||||
| Additional paid-in capital | 319,522 | 326,140 | |||||||||
| Accumulated other comprehensive income (loss), net of tax | 5,662 | 1,698 | |||||||||
| Retained earnings | 22,520 | 70,189 | |||||||||
| Total Tiptree Inc. stockholders’ equity | 347,738 | 398,062 | |||||||||
| Non-controlling interests | 13,953 | 13,353 | |||||||||
| Total stockholders’ equity | 361,691 | 411,415 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,794,866 | $ | 2,198,286 | |||||||
See accompanying notes to condensed consolidated financial statements.
F - 3
TIPTREE INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Earned premiums, net | $ | 116,418 | $ | 129,163 | $ | 344,994 | $ | 364,712 | |||||||||||||||
| Service and administrative fees | 47,701 | 26,058 | 134,290 | 78,681 | |||||||||||||||||||
| Ceding commissions | 5,157 | 1,598 | 16,217 | 7,150 | |||||||||||||||||||
| Net investment income | 3,023 | 2,984 | 8,803 | 10,713 | |||||||||||||||||||
| Net realized and unrealized gains (losses) | 38,959 | 15,302 | 6,628 | 58,746 | |||||||||||||||||||
| Other revenue | 12,783 | 14,080 | 41,974 | 44,158 | |||||||||||||||||||
| Total revenues | 224,041 | 189,185 | 552,906 | 564,160 | |||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Policy and contract benefits | 57,738 | 43,993 | 167,761 | 124,256 | |||||||||||||||||||
| Commission expense | 68,868 | 77,430 | 207,172 | 225,070 | |||||||||||||||||||
| Employee compensation and benefits | 45,715 | 34,176 | 124,894 | 94,298 | |||||||||||||||||||
| Interest expense | 8,321 | 6,731 | 23,518 | 20,183 | |||||||||||||||||||
| Depreciation and amortization | 4,010 | 3,523 | 12,244 | 9,908 | |||||||||||||||||||
| Other expenses | 25,492 | 24,930 | 80,737 | 71,183 | |||||||||||||||||||
| Total expenses | 210,144 | 190,783 | 616,326 | 544,898 | |||||||||||||||||||
| Income (loss) before taxes | 13,897 | (1,598) | (63,420) | 19,262 | |||||||||||||||||||
| Less: provision (benefit) for income taxes | (844) | (649) | (22,030) | 3,706 | |||||||||||||||||||
| Net income (loss) before non-controlling interests | 14,741 | (949) | (41,390) | 15,556 | |||||||||||||||||||
| Less: net income (loss) attributable to non-controlling interests | 1,978 | 508 | 2,038 | 1,342 | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 12,763 | $ | (1,457) | $ | (43,428) | $ | 14,214 | |||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||
| Basic earnings per share | $ | 0.37 | $ | (0.04) | $ | (1.27) | $ | 0.40 | |||||||||||||||
| Diluted earnings per share | $ | 0.35 | $ | (0.04) | $ | (1.27) | $ | 0.39 | |||||||||||||||
| Weighted average number of common shares: | |||||||||||||||||||||||
| Basic | 33,684,301 | 34,552,171 | 34,076,837 | 34,583,709 | |||||||||||||||||||
| Diluted | 33,684,301 | 34,552,171 | 34,076,837 | 34,583,709 | |||||||||||||||||||
| Dividends declared per common share | $ | 0.04 | $ | 0.04 | $ | 0.12 | $ | 0.12 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
F - 4
TIPTREE INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income (loss) before non-controlling interests | $ | 14,741 | $ | (949) | $ | (41,390) | $ | 15,556 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Unrealized gains (losses) on available for sale securities: | |||||||||||||||||||||||
| Unrealized holding gains (losses) arising during the period | (95) | 863 | 5,262 | 6,522 | |||||||||||||||||||
| Related tax (expense) benefit | 25 | (181) | (1,154) | (1,455) | |||||||||||||||||||
| Reclassification of (gains) losses included in net income | (115) | (187) | (211) | (1,228) | |||||||||||||||||||
| Related tax expense (benefit) | 20 | 37 | 46 | 258 | |||||||||||||||||||
| Unrealized gains (losses) on available for sale securities, net of tax | (165) | 532 | 3,943 | 4,097 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (165) | 532 | 3,943 | 4,097 | |||||||||||||||||||
| Comprehensive income (loss) | 14,576 | (417) | (37,447) | 19,653 | |||||||||||||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests | 1,978 | 513 | 2,059 | 1,366 | |||||||||||||||||||
| Comprehensive income (loss) attributable to common stockholders | $ | 12,598 | $ | (930) | $ | (39,506) | $ | 18,287 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
F - 5
TIPTREE INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except shares)
| Common stock | |||||||||||||||||||||||||||||||||||||||||||||||
| Number of shares | Par value | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total Tiptree Inc. stockholders’ equity | Non-controlling interests | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 34,562,553 | $ | 35 | $ | 326,140 | $ | 1,698 | $ | 70,189 | $ | 398,062 | $ | 13,353 | $ | 411,415 | ||||||||||||||||||||||||||||||||
Adoption of accounting standard (1) | — | — | — | 42 | (42) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based incentive compensation | — | — | 2,691 | — | — | 2,691 | 3,059 | 5,750 | |||||||||||||||||||||||||||||||||||||||
Vesting of share-based incentive compensation (2) | 477,768 | — | (33) | — | — | (33) | (2,223) | (2,256) | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under stock purchase plan | (1,477,302) | (1) | (9,164) | — | — | (9,165) | — | (9,165) | |||||||||||||||||||||||||||||||||||||||
Non-controlling interest distributions (2) | — | — | (587) | — | — | (587) | (1,220) | (1,807) | |||||||||||||||||||||||||||||||||||||||
| Net change in non-controlling interests | — | — | 475 | — | — | 475 | (1,075) | (600) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | (4,199) | (4,199) | — | (4,199) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | 3,922 | — | 3,922 | 21 | 3,943 | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | (43,428) | (43,428) | 2,038 | (41,390) | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 33,563,019 | $ | 34 | $ | 319,522 | $ | 5,662 | $ | 22,520 | $ | 347,738 | $ | 13,953 | $ | 361,691 | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 33,676,183 | $ | 34 | $ | 318,817 | $ | 5,827 | $ | 11,143 | $ | 335,821 | $ | 11,368 | $ | 347,189 | ||||||||||||||||||||||||||||||||
| Amortization of share-based incentive compensation | — | — | 750 | — | — | 750 | 1,537 | 2,287 | |||||||||||||||||||||||||||||||||||||||
| Vesting of share-based incentive compensation | 21,970 | — | 145 | — | — | 145 | (355) | (210) | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under stock purchase plan | (135,134) | — | (665) | — | — | (665) | — | (665) | |||||||||||||||||||||||||||||||||||||||
Non-controlling interest distributions (2) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net change in non-controlling interests | — | — | 475 | — | — | 475 | (575) | (100) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | (1,386) | (1,386) | — | (1,386) | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | (165) | — | (165) | — | (165) | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | 12,763 | 12,763 | 1,978 | 14,741 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 33,563,019 | $ | 34 | $ | 319,522 | $ | 5,662 | $ | 22,520 | $ | 347,738 | $ | 13,953 | $ | 361,691 | ||||||||||||||||||||||||||||||||
(1) Amounts reclassified due to adoption of ASU 2016-13. See Note (2) Summary of Significant Accounting Policies.
(2) Includes subsidiary RSU exchanges. See Note (19) Stock Based Compensation.
F - 6
TIPTREE INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except shares)
| Common stock | |||||||||||||||||||||||||||||||||||||||||||||||
| Number of shares | Par value | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total Tiptree Inc. stockholders’ equity | Non-controlling interests | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 35,870,348 | $ | 36 | $ | 331,892 | $ | (2,058) | $ | 57,231 | $ | 387,101 | $ | 12,158 | $ | 399,259 | ||||||||||||||||||||||||||||||||
Adoption of accounting standard (1) | — | — | — | (99) | 99 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based incentive compensation | — | — | 2,408 | — | — | 2,408 | 1,877 | 4,285 | |||||||||||||||||||||||||||||||||||||||
Vesting of share-based incentive compensation (2) | 154,683 | — | 143 | — | — | 143 | (2,483) | (2,340) | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under stock purchase plan | (1,472,730) | (1) | (9,084) | — | — | (9,085) | — | (9,085) | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest contributions | — | — | — | — | — | — | 53 | 53 | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest distributions | — | — | — | — | — | — | (2,834) | (2,834) | |||||||||||||||||||||||||||||||||||||||
| Net change in non-controlling interest | — | — | — | — | — | — | 2,500 | 2,500 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | (4,079) | (4,079) | — | (4,079) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | 4,073 | — | 4,073 | 24 | 4,097 | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | 14,214 | 14,214 | 1,342 | 15,556 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 34,552,301 | $ | 35 | $ | 325,359 | $ | 1,916 | $ | 67,465 | $ | 394,775 | $ | 12,637 | $ | 407,412 | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 34,540,432 | $ | 35 | $ | 324,321 | $ | 1,389 | $ | 70,340 | $ | 396,085 | $ | 10,953 | $ | 407,038 | ||||||||||||||||||||||||||||||||
| Amortization of share-based incentive compensation | — | — | 875 | — | — | 875 | 564 | 1,439 | |||||||||||||||||||||||||||||||||||||||
Vesting of share-based incentive compensation (2) | 11,869 | — | 163 | — | — | 163 | (247) | (84) | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest contributions | — | — | — | — | — | — | 3 | 3 | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest distributions | — | — | — | — | — | — | (1,649) | (1,649) | |||||||||||||||||||||||||||||||||||||||
| Net change in non-controlling interest | — | 2,500 | 2,500 | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | (1,418) | (1,418) | — | (1,418) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | 527 | — | 527 | 5 | 532 | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | (1,457) | (1,457) | 508 | (949) | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 34,552,301 | $ | 35 | $ | 325,359 | $ | 1,916 | $ | 67,465 | $ | 394,775 | $ | 12,637 | $ | 407,412 | ||||||||||||||||||||||||||||||||
(1) Amounts reclassified due to adoption of ASU 2018-02. See Note (2) Summary of Significant Accounting Policies.
(2) Includes subsidiary RSU exchanges. See Note (19) Stock Based Compensation.
See accompanying notes to condensed consolidated financial statements.
F - 7
TIPTREE INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating Activities: | |||||||||||
| Net income (loss) attributable to common stockholders | $ | (43,428) | $ | 14,214 | |||||||
| Net income (loss) attributable to non-controlling interests | 2,038 | 1,342 | |||||||||
| Net income (loss) | (41,390) | 15,556 | |||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | |||||||||||
| Net realized and unrealized (gains) losses | (6,628) | (58,746) | |||||||||
| Net (gain) on sale of businesses | — | (7,598) | |||||||||
| Non-cash compensation expense | 6,158 | 4,512 | |||||||||
| Amortization/accretion of premiums and discounts | 1,614 | 822 | |||||||||
| Depreciation and amortization expense | 12,244 | 9,908 | |||||||||
| Non-cash lease expense | 5,196 | 5,513 | |||||||||
| Dividend reinvestment plan income | (953) | — | |||||||||
| Bad debt expense | 192 | 108 | |||||||||
| Amortization of deferred financing costs | 608 | 543 | |||||||||
| Loss on extinguishment of debt | 353 | 1,241 | |||||||||
| Deferred tax expense (benefit) | (2,841) | 3,087 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Mortgage loans originated for sale | (2,104,377) | (1,391,638) | |||||||||
| Proceeds from the sale of mortgage loans originated for sale | 2,164,731 | 1,387,723 | |||||||||
| (Increase) decrease in notes and accounts receivable | (50,399) | (13,706) | |||||||||
| (Increase) decrease in reinsurance receivables | (35,401) | (32,531) | |||||||||
| (Increase) decrease in deferred acquisition costs | (37,903) | (31,740) | |||||||||
| (Increase) decrease in other assets | (17,773) | 920 | |||||||||
| Increase (decrease) in unearned premiums | 37,540 | 103,677 | |||||||||
| Increase (decrease) in policy liabilities and unpaid claims | 15,528 | 2,890 | |||||||||
| Increase (decrease) in deferred revenue | 81,565 | 8,488 | |||||||||
| Increase (decrease) in reinsurance payable | 18,556 | 13,837 | |||||||||
| Increase (decrease) in other liabilities and accrued expenses | 21,595 | (3,440) | |||||||||
| Net cash provided by (used in) operating activities | 68,215 | 19,426 | |||||||||
| Investing Activities: | |||||||||||
| Purchases of investments | (1,053,359) | (267,733) | |||||||||
| Proceeds from sales and maturities of investments | 988,594 | 343,011 | |||||||||
| Proceeds from the sale of real estate | 1,266 | 9,627 | |||||||||
| Purchases of property, plant and equipment | (4,709) | (7,866) | |||||||||
| Proceeds from the sale of businesses | 375 | 18,204 | |||||||||
| Proceeds from notes receivable | 30,290 | 27,428 | |||||||||
| Issuance of notes receivable | (48,787) | (50,354) | |||||||||
Business and asset acquisitions, net of cash, restricted cash and deposits (1) | 20,900 | (4,633) | |||||||||
| Net cash provided by (used in) investing activities | (65,430) | 67,684 | |||||||||
| Financing Activities: | |||||||||||
| Dividends paid | (4,199) | (4,079) | |||||||||
| Non-controlling interest contributions | — | 53 | |||||||||
| Non-controlling interest distributions | (1,907) | (2,834) | |||||||||
| Payment of debt issuance costs | (3,640) | (118) | |||||||||
| Proceeds from borrowings and mortgage notes payable | 2,382,569 | 1,496,480 | |||||||||
| Principal paydowns of borrowings and mortgage notes payable | (2,330,395) | (1,508,182) | |||||||||
| Repurchases of common stock | (9,165) | (9,085) | |||||||||
| Net cash provided by (used in) financing activities | 33,263 | (27,765) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 36,048 | 59,345 | |||||||||
| Cash, cash equivalents and restricted cash – beginning of period | 144,590 | 96,524 | |||||||||
| Cash, cash equivalents and restricted cash – beginning of period - held for sale | 7,137 | 2,860 | |||||||||
Cash, cash equivalents and restricted cash – end of period (2) | 187,775 | 158,729 | |||||||||
| Less: Reclassification of cash to assets held for sale | 6,178 | 4,772 | |||||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 181,597 | $ | 153,957 | |||||||
| Supplemental Schedule of Non-Cash Investing and Financing Activities: | |||||||||||
| Right-of-use asset obtained in exchange for lease liability | $ | 1,109 | $ | 33,558 | |||||||
| Equity securities acquired as part of a dividend reinvestment plan | $ | 953 | $ | — | |||||||
| Acquired real estate properties through, or in lieu of, foreclosure of the related loan | $ | — | $ | 2,596 | |||||||
| Acquisition of non-controlling interest | $ | — | $ | 2,500 | |||||||
| As of | |||||||||||
| Reconciliation of cash, cash equivalents and restricted cash shown in the statement of cash flows | September 30, 2020 | December 31, 2019 | |||||||||
| Cash and cash equivalents | $ | 103,502 | $ | 133,117 | |||||||
| Restricted cash | 78,095 | 11,473 | |||||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 181,597 | $ | 144,590 | |||||||
(1) Changes in balance sheet balances due to the acquisition of Smart AutoCare have been netted down in the respective line items for the nine months ended September 30, 2020. See Note (3) Acquisitions for additional information.
(2) Includes cash in assets held for sale.
See accompanying notes to condensed consolidated financial statements.
F - 8
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(1) Organization
Tiptree Inc. (together with its consolidated subsidiaries, collectively, Tiptree, the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree’s common stock trades on the Nasdaq Capital Market under the symbol “TIPT”. Tiptree is a holding company that combines specialty insurance operations with investment management capabilities. We allocate our capital across our insurance operations and other investments. We classify our business into one reportable segment: Tiptree Insurance. We refer to our non-insurance operations, assets and other investments, which is comprised of our non-reportable segments and other business activities, as Tiptree Capital.
On July 17, 2020, Operating Company merged into Tiptree, with Tiptree as the surviving entity (the Reorganization). In connection with the Reorganization, Operating Company contributed all of its assets to Caroline Holdings LLC., a wholly owned subsidiary of Operating Company, which was renamed Tiptree Holdings.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. The condensed consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited condensed consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2020.
As a result of changes in presentation made in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations.
Tiptree consolidates those entities in which it has an investment of 50% or more of voting rights or has control over significant operating, financial and investing decisions of the entity as well as variable interest entities (VIEs) in which Tiptree is determined to be the primary beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Tiptree’s consolidated VIEs are entities which Tiptree is considered the primary beneficiary through its controlling financial interests.
Non-controlling interests on the condensed consolidated balance sheets represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Tiptree. Accounts and transactions between consolidated entities have been eliminated.
Business Combination Accounting
The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of the purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. Contingent consideration, if any, is measured at
F - 9
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
fair value on the date of acquisition. The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other expenses in the consolidated statements of operations. Acquisition and transaction costs are expensed as incurred.
In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a preliminary estimate of fair value, which may be adjusted during the measurement period, primarily due to the results of valuation studies applicable to the business combination.
Acquisitions that do not meet the criteria for the acquisition method of accounting are accounted for as acquisitions of assets.
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 amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Management makes estimates and assumptions that include, but are not limited to, the determination of the following significant items:
•Fair value of financial assets and liabilities, including, but not limited to, securities, loans and derivatives;
•Value of acquired assets and liabilities (including contingent consideration);
•Carrying value of goodwill and other intangibles, including estimated amortization period and useful lives;
•Vessel valuations, residual value of vessels and the useful lives of vessels;
•Reserves for unpaid losses and loss adjustment expenses, estimated future claims and losses, potential litigation and other claims;
•Deferred acquisition costs and value of business acquired (VOBA);
•Valuation of contingent share issuances for compensation, including estimates of number of shares and vesting schedules;
•Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service and administration fees, and loan origination fees; and
•Other matters that affect the reported amounts and disclosure of contingencies in the condensed consolidated financial statements.
Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:
•Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at Level 2 are valued based on one or more of the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in nonactive markets;
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability;
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
F - 10
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
•Level 3 – Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data and assumptions that are used in pricing the asset or liability.
Fair Value Option
In addition to the financial instruments the Company is required to measure at fair value, the Company has elected to make an irrevocable election to utilize fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized and unrealized gains (losses) within the condensed consolidated statements of operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected.
Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In January 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL). Issued in June 2016, the new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale (AFS) debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For AFS debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 requires that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU 2016-13 were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments affect loans, AFS debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The adoption of this standard resulted in an immaterial reclassification from Accumulated Other Comprehensive Income (AOCI) to retained earnings in the Company’s condensed consolidated financial statements.
In January 2020, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 does not change the qualitative assessment; however, it removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Therefore, as the FASB notes in the ASU’s Basis for Conclusions, the goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units. The amendments in ASU 2017-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In January 2020, the Company adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). Issued in February 2018, the new standard permits companies to reclassify stranded tax effects caused by Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act), from AOCI to retained earnings. Deferred tax assets (DTA) on unrealized gains and losses related to AFS securities that were revalued as of December 31, 2017 created stranded tax effects in AOCI due to the enactment of the Tax Act, due to the nature of the then existing GAAP requiring recognition of tax rate change effects on the DTA revaluation related to AFS securities as an adjustment to the provision for income taxes. Specifically, ASU 2018-02 permits a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. Additionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. The amendments in ASU 2018-02 were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard effective January 1, 2019 and reclassified the
F - 11
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
stranded tax effects caused by the Tax Act from AOCI to retained earnings. The standard was applied in the period of adoption, and the impact to the Company’s condensed consolidated financial statements in the period of adoption was not material. The Company’s accounting policy for the release of stranded tax effects in AOCI is the aggregate portfolio approach.
In January 2020, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. Issued in August 2019, the new standard modifies the disclosure requirements on fair value measurements in Topic 820. The modifications include the removal of certain requirements, modifications to existing requirements and additional requirements. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In January 2019, the Company adopted ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The new guidance was issued in March 2017 and was effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption was permitted for interim or annual reporting periods beginning after December 15, 2017. The guidance was to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In January 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Issued in August 2017, the new standard amends the guidance on hedge accounting. The amendment will make more financial and nonfinancial hedging strategies eligible for hedge accounting and amend the presentation and disclosure requirements. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 can be adopted immediately in any interim or annual period. The mandatory effective date for calendar year-end public companies was January 1, 2019. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In January 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard, issued in February 2016, requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard was effective on January 1, 2019, with early adoption permitted. The Company adopted the standard in the first quarter of 2019 under the modified retrospective approach without restating prior comparative periods. The adoption of the updated guidance resulted in the Company recognizing a right of use asset of $32,052 as part of other assets and a lease liability of $33,558 as part of other liabilities and accrued expenses in the condensed consolidated balance sheets, as well as de-recognizing the liability for deferred rent that was required under the previous guidance for its operating lease agreements at January 1, 2019. We elected the practical expedient to not separate lease components and non-lease components, and leases with an initial term of 12 months or less are not recorded on the balance sheet. The cumulative effect adjustment to the opening balance of retained earnings was zero.
Recently Issued Accounting Pronouncements, Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the application of Topic 740 while maintaining or improving the usefulness of the information provided to users of financial statements. The modifications include the removal of certain exceptions and simplification to existing requirements. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal
F - 12
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The amendments in ASU 2020-04 were effective beginning on March 12, 2020; however, the Company has not elected to implement these amendments as of September 30, 2020. The Company may elect to apply the amendments prospectively through December 31, 2022, and is currently evaluating the effect on its condensed consolidated financial statements.
(3) Acquisitions
On January 3, 2020, a subsidiary of the Company acquired (the Acquisition) all of the equity interests of Accelerated Service Enterprise LLC., SAC Holdings Inc., Dealer Motor Services, Inc., Independent Dealer Group, Inc., Ownershield, Inc., Freedom Insurance Company, Ltd., SAC Admin, Inc., SAC Insurance Company, Inc., Smart AutoCare, Inc. and Smart AutoCare Administration Solutions, Inc. (together Smart AutoCare), pursuant to the Equity Interest Purchase Agreement (the Purchase Agreement) between Tiptree Warranty Holdings, LLC. (Buyer) and Peter Masi (Seller), dated as of December 16, 2019. Concurrent with the Acquisition, Freedom Insurance Company, Ltd, (Freedom) terminated reinsurance agreements with affiliates of Seller (the Commutation Transaction).
Tiptree paid Seller $111,804, net of working capital true-ups, in cash at closing, $8,250 of which will be held in an escrow account for 18 months to satisfy indemnity claims. Simultaneously, pursuant to the Commutation Transaction, affiliates of Seller paid Freedom $102,000 in cash. The Purchase Agreement also provides for an earn out of up to $50,000 in cash based on Smart AutoCare achieving specified performance metrics measured on the 3-year and 5-year anniversary of closing (Reserve Based Earn-Out Amount) and an additional earn out of up to $30,000 payable in cash or Tiptree common stock based on Smart AutoCare achieving other certain specified performance metrics measured on the 4-year and 5-year anniversary of closing (Profits Based Earn-Out Amount). In addition, the purchase price will be subject to a true-up following the 5-year anniversary of the closing (Underwriting Profitability True-Up) based on the adequacy of certain legacy reserves, offset by certain earnings on new business. Tiptree may hold back all or a portion of any Reserve Based Earn-Out Amounts until final determination of the legacy reserves used to calculate the Underwriting Profitability True-Up if in Tiptree’s reasonable opinion such amount may be needed to offset a deficiency in such legacy reserves. In addition, if the deficiency in the legacy reserves used to calculate the Underwriting Profitability True-Up is greater than the aggregate amount owing to Seller for the Reserve-Based Earn-Out Amount and Profits-Based Earn-Out Amount, Seller shall pay Tiptree an amount equal to the lesser of such difference and $10,000.
Smart AutoCare’s results are included in the Company’s Tiptree Insurance segment. The financial results of Smart AutoCare have been included in the Company's results as of the acquisition date. For the period from the Acquisition until September 30, 2020, Smart AutoCare total revenue was $47,996 and the loss before taxes was $1.
The preliminary purchase price allocation below has been developed based on preliminary estimates of fair value using the historical financial statements of Smart AutoCare as of the acquisition date. In addition, the allocation of the purchase price to intangible assets is based on preliminary fair value estimates and subject to the completion of management’s final analysis.
Management’s preliminary allocation of the purchase price to the net assets acquired resulted in the recording of intangible assets. Because valuations of acquired assets and liabilities are still in process, information may become available within the measurement period about facts and circumstances that existed as of the acquisition date which may or may not change these valuations and, accordingly, the purchase price allocation is subject to adjustment. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are determined. The residual amount of the purchase price after preliminary allocation to net assets acquired and identifiable intangibles has been allocated to goodwill. This goodwill is included in the Tiptree Insurance segment.
F - 13
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the preliminary determination of the acquisition date fair value amounts for the identifiable assets acquired, liabilities assumed, and goodwill recorded in connection with the Acquisition, in accordance with the acquisition method of accounting:
| As of January 3, 2020 | |||||
| Assets: | |||||
| Investments: | |||||
| Available for sale securities, at fair value | $ | 110 | |||
| Total investments | 110 | ||||
| Cash and cash equivalents | 120,934 | ||||
| Restricted cash | 764 | ||||
| Notes and accounts receivable, net | 6,214 | ||||
| Reinsurance receivables | 71,337 | ||||
| Intangible assets, net | 93,700 | ||||
| Other assets | 28,558 | ||||
| Total assets | $ | 321,617 | |||
| Liabilities: | |||||
| Policy liabilities and unpaid claims | $ | 51,286 | |||
| Deferred revenue | 182,568 | ||||
| Reinsurance payable | 27,075 | ||||
| Other liabilities and accrued expenses | 13,360 | ||||
| Total liabilities | 274,289 | ||||
| Net assets acquired | 47,328 | ||||
| Goodwill | 64,476 | ||||
| $ | 111,804 | ||||
| Acquisition costs | $ | 3,539 | |||
Supplemental pro forma results of operations have not been presented for the Acquisition as they are not material in relation to the Company’s reported results.
The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and the range of their estimated amortization period:
| Intangible Assets | Weighted Average Amortization Period (in Years) | Value as of acquisition date | |||||||||
| Customer relationships | 7.2 | $ | 86,000 | ||||||||
| Software licensing | 5.0 | 600 | |||||||||
| Trade names | 13.5 | 7,100 | |||||||||
| Total acquired finite-lived intangible assets | 7.7 | $ | 93,700 | ||||||||
(4) Dispositions and Assets Held for Sale
On April 10, 2019, the Company completed the sale of the management contracts and related assets for the CLOs managed by Telos Asset Management, LLC (Telos). The pre-tax gain on sale for the nine months ended September 30, 2019 was $7,598, which is included in other revenue. See Note (16) Other Revenue and Other Expenses. The sale did not meet the requirements to be classified as a discontinued operation.
The sale agreement also contains a provision which provides for contingent consideration if the Telos business achieves specific performance metrics. This contingent consideration represents a gain contingency, and the Company will not recognize any additional gain unless such consideration is realized.
F - 14
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The Company has entered into a definitive agreement to sell Luxury, and it is classified as held for sale at September 30, 2020 and December 31, 2019. The following table presents detail of Luxury’s assets and liabilities held for sale in the condensed consolidated balance sheets for the following periods:
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets: | |||||||||||
| Investments: | |||||||||||
| Loans, at fair value | $ | 125,905 | $ | 98,272 | |||||||
| Other investments | 4,604 | 1,019 | |||||||||
| Total investments | 130,509 | 99,291 | |||||||||
| Cash and cash equivalents | 6,145 | 7,137 | |||||||||
| Restricted cash | 33 | — | |||||||||
| Notes and accounts receivable, net | 384 | 238 | |||||||||
| Other assets | 3,507 | 1,169 | |||||||||
| Assets held for sale | $ | 140,578 | $ | 107,835 | |||||||
| Liabilities: | |||||||||||
| Debt, net | $ | 125,203 | $ | 97,822 | |||||||
| Other liabilities and accrued expenses | 7,009 | 4,608 | |||||||||
| Liabilities held for sale | $ | 132,212 | $ | 102,430 | |||||||
As of September 30, 2020 and December 31, 2019, the Company did not record any impairments with respect to assets held for sale during such period.
(5) Operating Segment Data
Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Tiptree’s principal operating subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider of specialty insurance, warranty products and related administration services. We classify our business into one reportable segment – Tiptree Insurance. We refer to our non-insurance operations, assets and other investments, which is comprised of our non-reportable operating segments and other business activities, as Tiptree Capital. Corporate activities include holding company interest expense, employee compensation and benefits, and other expenses.
Our reportable segment’s income or loss is reported before income taxes and non-controlling interests. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired. Intercompany transactions are eliminated.
Descriptions of our reportable segment and of Tiptree Capital are as follows:
Tiptree Insurance operations are conducted through Tiptree Insurance, which includes Fortegra Financial Corporation (Fortegra) and Tiptree Warranty. Fortegra underwrites and administers specialty insurance programs and products, and is a leading provider of credit and asset protection products and administration services. Fortegra’s programs are provided across a diverse range of products and services including credit protection insurance, warranty and service contract products, premium finance, and niche personal and commercial lines of insurance. On January 3, 2020, Tiptree Warranty acquired Smart AutoCare, a vehicle warranty solutions provider in the United States. See Note (3) Acquisitions.
Tiptree Capital includes our asset management, mortgage and shipping operations, and other investments (including our Invesque shares).
F - 15
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The tables below present the components of revenue, expense, pre-tax income (loss), and assets for our reportable segment as well as Tiptree Capital for the following periods:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Tiptree Capital | Total | Tiptree Insurance | Tiptree Capital | Total | ||||||||||||||||||||||||||||||
| Total revenues | 174,005 | 50,036 | 224,041 | 160,050 | 29,135 | 189,185 | |||||||||||||||||||||||||||||
| Total expenses | (160,558) | (40,561) | (201,119) | (151,652) | (30,535) | (182,187) | |||||||||||||||||||||||||||||
| Corporate expenses | — | — | (9,025) | — | — | (8,596) | |||||||||||||||||||||||||||||
| Income (loss) before taxes | $ | 13,447 | $ | 9,475 | $ | 13,897 | $ | 8,398 | $ | (1,400) | $ | (1,598) | |||||||||||||||||||||||
| Less: provision (benefit) for income taxes | (844) | (649) | |||||||||||||||||||||||||||||||||
| Net income (loss) before non-controlling interests | $ | 14,741 | $ | (949) | |||||||||||||||||||||||||||||||
| Less: net income (loss) attributable to non-controlling interests | 1,978 | 508 | |||||||||||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 12,763 | $ | (1,457) | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Tiptree Capital | Total | Tiptree Insurance | Tiptree Capital | Total | ||||||||||||||||||||||||||||||
| Total revenues | $ | 482,299 | $ | 70,607 | $ | 552,906 | $ | 469,027 | $ | 95,133 | $ | 564,160 | |||||||||||||||||||||||
| Total expenses | (481,881) | (109,246) | (591,127) | (440,581) | (78,916) | (519,497) | |||||||||||||||||||||||||||||
| Corporate expenses | — | — | (25,199) | — | — | (25,401) | |||||||||||||||||||||||||||||
| Income (loss) before taxes | $ | 418 | $ | (38,639) | $ | (63,420) | $ | 28,446 | $ | 16,217 | $ | 19,262 | |||||||||||||||||||||||
| Less: provision (benefit) for income taxes | (22,030) | 3,706 | |||||||||||||||||||||||||||||||||
| Net income (loss) before non-controlling interests | $ | (41,390) | $ | 15,556 | |||||||||||||||||||||||||||||||
| Less: net income (loss) attributable to non-controlling interests | 2,038 | 1,342 | |||||||||||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | (43,428) | $ | 14,214 | |||||||||||||||||||||||||||||||
The following table presents sources of revenue from Tiptree Capital:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Net realized and unrealized gains (losses) (1) | $ | 38,300 | $ | 16,358 | $ | 33,938 | $ | 54,043 | |||||||||||||||
Other investment income (2) | 11,667 | 12,626 | 36,414 | 31,781 | |||||||||||||||||||
Gain on sale of businesses (3) | — | — | — | 7,598 | |||||||||||||||||||
| Management fee income | — | — | — | 1,267 | |||||||||||||||||||
| Other | 69 | 151 | 255 | 444 | |||||||||||||||||||
| Total revenues | $ | 50,036 | $ | 29,135 | $ | 70,607 | $ | 95,133 | |||||||||||||||
(1) See Note (6) Investments for the components of Net realized and unrealized gains (losses) related to Tiptree Capital.
(2) See Note (6) Investments for the components of Other investment income.
(3) Related to the sale of Telos. See Note (4) Dispositions and Assets Held for Sale.
The following table presents the reportable segment and Tiptree Capital assets for the following periods:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Tiptree Capital | Corporate | Total | Tiptree Insurance | Tiptree Capital | Corporate | Total | ||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,259,617 | $ | 491,996 | $ | 43,253 | $ | 2,794,866 | $ | 1,721,669 | $ | 451,249 | $ | 25,368 | $ | 2,198,286 | |||||||||||||||||||||||||||||||
F - 16
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(6) Investments
The following table presents the Company's investments related to insurance operations (Tiptree Insurance) and investments from other Tiptree investing activities (Tiptree Capital), measured at fair value as of the following periods:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Tiptree Capital | Total | Tiptree Insurance | Tiptree Capital | Total | ||||||||||||||||||||||||||||||
| Available for sale securities, at fair value, net of allowance for credit losses | $ | 369,914 | $ | — | $ | 369,914 | $ | 335,192 | $ | — | $ | 335,192 | |||||||||||||||||||||||
| Loans, at fair value | 5,349 | 110,123 | 115,472 | 10,174 | 98,720 | 108,894 | |||||||||||||||||||||||||||||
| Equity securities | 84,265 | 27,394 | 111,659 | 62,816 | 92,562 | 155,378 | |||||||||||||||||||||||||||||
| Other investments | 117,700 | 96,492 | 214,192 | 42,452 | 95,020 | 137,472 | |||||||||||||||||||||||||||||
| Total investments | $ | 577,228 | $ | 234,009 | $ | 811,237 | $ | 450,634 | $ | 286,302 | $ | 736,936 | |||||||||||||||||||||||
Available for Sale Securities, at fair value, net of allowance for credit losses
All of the Company’s investments in Available for Sale Securities, at fair value, net of allowance for credit losses (AFS securities) as of September 30, 2020 and December 31, 2019 are held by subsidiaries in the insurance business. The following tables present the Company's investments in AFS securities:
| As of September 30, 2020 | |||||||||||||||||||||||||||||
| Amortized cost | Allowance for Credit Losses (1) | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 204,763 | $ | — | $ | 5,930 | $ | (89) | $ | 210,604 | |||||||||||||||||||
| Obligations of state and political subdivisions | 38,577 | — | 1,861 | (1) | 40,437 | ||||||||||||||||||||||||
| Corporate securities | 76,056 | (10) | 2,200 | (22) | 78,224 | ||||||||||||||||||||||||
| Asset backed securities | 39,380 | — | 343 | (2,955) | 36,768 | ||||||||||||||||||||||||
| Certificates of deposit | 855 | — | — | — | 855 | ||||||||||||||||||||||||
| Obligations of foreign governments | 2,985 | — | 41 | — | 3,026 | ||||||||||||||||||||||||
| Total | $ | 362,616 | $ | (10) | $ | 10,375 | $ | (3,067) | $ | 369,914 | |||||||||||||||||||
(1) - Represents the amount of impairment that has resulted from credit-related factors, and therefore was recognized in the condensed consolidated statements of operations (as a credit loss on AFS securities). Amount excludes unrealized losses relating to non-credit factors. | |||||||||||||||||||||||||||||
| As of December 31, 2019 | |||||||||||||||||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 189,596 | $ | 2,138 | $ | (144) | $ | 191,590 | |||||||||||||||||||||
| Obligations of state and political subdivisions | 45,249 | 1,104 | (15) | 46,338 | |||||||||||||||||||||||||
| Corporate securities | 50,514 | 719 | (2) | 51,231 | |||||||||||||||||||||||||
| Asset backed securities | 45,634 | 89 | (1,705) | 44,018 | |||||||||||||||||||||||||
| Certificates of deposit | 896 | — | — | 896 | |||||||||||||||||||||||||
| Obligations of foreign governments | 1,099 | 20 | — | 1,119 | |||||||||||||||||||||||||
| Total | $ | 332,988 | $ | 4,070 | $ | (1,866) | $ | 335,192 | |||||||||||||||||||||
F - 17
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The amortized cost and fair values of AFS securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| As of | |||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| Due in one year or less | $ | 23,027 | $ | 23,325 | $ | 9,584 | $ | 9,602 | |||||||||||||||
| Due after one year through five years | 147,464 | 151,777 | 130,223 | 131,952 | |||||||||||||||||||
| Due after five years through ten years | 22,944 | 24,018 | 19,508 | 20,125 | |||||||||||||||||||
| Due after ten years | 129,801 | 134,026 | 128,039 | 129,495 | |||||||||||||||||||
| Asset backed securities | 39,380 | 36,768 | 45,634 | 44,018 | |||||||||||||||||||
| Total | $ | 362,616 | $ | 369,914 | $ | 332,988 | $ | 335,192 | |||||||||||||||
The following tables present the gross unrealized losses on AFS securities by length of time that individual AFS securities have been in a continuous unrealized loss position for less than twelve months, and twelve months or greater and do not have an allowance for credit losses:
| As of September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Less Than or Equal to One Year | More Than One Year | ||||||||||||||||||||||||||||||||||
| Fair value | Gross unrealized losses | # of Securities | Fair value | Gross unrealized losses | # of Securities | ||||||||||||||||||||||||||||||
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 18,969 | $ | (89) | 42 | $ | 14 | $ | — | 5 | |||||||||||||||||||||||||
| Obligations of state and political subdivisions | 584 | (1) | 5 | — | — | — | |||||||||||||||||||||||||||||
| Corporate securities | 9,560 | (22) | 35 | — | — | — | |||||||||||||||||||||||||||||
| Asset backed securities | — | — | — | 24,743 | (2,955) | 11 | |||||||||||||||||||||||||||||
| Obligations of foreign governments | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total | $ | 29,113 | $ | (112) | 82 | $ | 24,757 | $ | (2,955) | 16 | |||||||||||||||||||||||||
| As of December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Less Than or Equal to One Year | More Than One Year | ||||||||||||||||||||||||||||||||||
| Fair value | Gross unrealized losses | # of Securities | Fair value | Gross unrealized losses | # of Securities | ||||||||||||||||||||||||||||||
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 31,416 | $ | (132) | 75 | $ | 3,888 | $ | (12) | 38 | |||||||||||||||||||||||||
| Obligations of state and political subdivisions | 3,774 | (15) | 20 | — | — | — | |||||||||||||||||||||||||||||
| Corporate securities | 2,820 | (2) | 12 | 742 | — | 7 | |||||||||||||||||||||||||||||
| Asset backed securities | 3,878 | (11) | 17 | 19,480 | (1,694) | 11 | |||||||||||||||||||||||||||||
| Obligations of foreign governments | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total | $ | 41,888 | $ | (160) | 124 | $ | 24,110 | $ | (1,706) | 56 | |||||||||||||||||||||||||
Management believes that it is more likely than not that the Company will be able to hold the fixed maturity AFS securities that were in an unrealized loss position as of September 30, 2020 until full recovery of their amortized cost basis.
F - 18
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The table below presents a roll-forward of the activity in the allowance for credit losses on AFS securities by type as of September 30, 2020:
| Obligations of state and political subdivisions | Corporate securities | Asset backed securities | Total | ||||||||||||||||||||
| Increase in the allowance for the initial adoption of ASU 2016-13 | $ | (1) | $ | (50) | $ | (2) | $ | (53) | |||||||||||||||
| Reduction in credit losses due to AFS securities sold during the year | — | 3 | — | 3 | |||||||||||||||||||
| Recoveries of amounts previously written off during the year | 1 | 37 | 2 | 40 | |||||||||||||||||||
| Ending balance of the allowance for credit losses on AFS securities | $ | — | $ | (10) | $ | — | $ | (10) | |||||||||||||||
The Company applies a discounted cash flow model, based on assumptions and model outputs provided by an investment management company, in determining its lifetime expected credit losses on AFS securities. This includes determining the present value of expected future cash flows discounted at the book yield of the security.
The table below presents the amount of credit losses (gains from recoveries) on AFS securities recorded by the Company for the following period:
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||
| Credit losses (gains from recoveries) on AFS securities | $ | 8 | $ | (43) | |||||||
Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company cannot remove or replace investments in regulatory deposit accounts without prior approval of the contractual party or regulatory authority, as applicable. The following table presents the Company's restricted investments included in the Company's AFS securities:
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Fair value of restricted investments for special deposits required by state insurance departments | $ | 9,465 | $ | 6,275 | |||||||
| Fair value of restricted investments in trust pursuant to reinsurance agreements | 44,106 | 33,478 | |||||||||
| Total fair value of restricted investments | $ | 53,571 | $ | 39,753 | |||||||
The following table presents additional information on the Company’s AFS securities:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Purchases of AFS securities | $ | 49,285 | $ | 72,409 | $ | 111,280 | $ | 211,984 | |||||||||||||||
| Proceeds from maturities, calls and prepayments of AFS securities | $ | 21,643 | $ | 5,890 | $ | 65,492 | $ | 23,169 | |||||||||||||||
| Gross proceeds from sales of AFS securities | $ | 2,873 | $ | 20,947 | $ | 15,249 | $ | 162,862 | |||||||||||||||
| Gains (losses) realized on sales of AFS securities | $ | 115 | $ | 187 | $ | 211 | $ | 1,228 | |||||||||||||||
F - 19
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Loans, at fair value
The following tables present the Company’s investments in loans measured at fair value and the Company’s investments in loans measured at fair value pledged as collateral:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Fair value | Unpaid principal balance (UPB) | Fair value exceeds / (below) UPB | Pledged as Collateral | Fair value | Unpaid principal balance (UPB) | Fair value exceeds / (below) UPB | Pledged as Collateral | ||||||||||||||||||||||||||||||||||||||||
| Tiptree Insurance: | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate loans (1) | $ | 5,349 | $ | 9,428 | $ | (4,079) | $ | — | $ | 9,787 | $ | 12,006 | $ | (2,219) | $ | — | |||||||||||||||||||||||||||||||
Non-performing loans (2) | — | — | — | — | 387 | 409 | (22) | — | |||||||||||||||||||||||||||||||||||||||
| Tiptree Capital: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans held for sale (3) | 110,123 | 104,744 | 5,379 | 109,126 | 98,720 | 95,680 | 3,040 | 98,086 | |||||||||||||||||||||||||||||||||||||||
| Total loans, at fair value | $ | 115,472 | $ | 114,172 | $ | 1,300 | $ | 109,126 | $ | 108,894 | $ | 108,095 | $ | 799 | $ | 98,086 | |||||||||||||||||||||||||||||||
(1) The UPB of these loans approximates cost basis.
(2) The cost basis of NPLs was approximately $0 and $282 at September 30, 2020 and December 31, 2019, respectively.
(3) As of September 30, 2020 and December 31, 2019, there were two mortgage loans held for sale and one mortgage loan held for sale that were 90 days or more past due, respectively, with a fair value of $337 and $198, respectively.
Equity securities
Equity securities represents the carrying amount of the Company's basis in equity investments. Included within the equity securities balance are 17.0 million shares of Invesque as of September 30, 2020, and 16.6 million as of December 31, 2019, for which the Company has elected to apply the fair value option. The following table presents the Company’s equity securities related to insurance operations and other Tiptree investing activity as of the following periods:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Tiptree Capital | Total | Tiptree Insurance | Tiptree Capital | Total | ||||||||||||||||||||||||||||||
| Invesque | $ | 5,722 | $ | 27,394 | $ | 33,116 | $ | 19,376 | $ | 92,562 | $ | 111,938 | |||||||||||||||||||||||
| Fixed income exchange traded fund | 56,030 | — | 56,030 | 25,039 | — | 25,039 | |||||||||||||||||||||||||||||
| Other equity securities | 22,513 | — | 22,513 | 18,401 | — | 18,401 | |||||||||||||||||||||||||||||
| Total equity securities | $ | 84,265 | $ | 27,394 | $ | 111,659 | $ | 62,816 | $ | 92,562 | $ | 155,378 | |||||||||||||||||||||||
Other Investments
The following table contains information regarding the Company’s other investments as of the following periods:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Tiptree Capital | Total | Tiptree Insurance | Tiptree Capital | Total | ||||||||||||||||||||||||||||||
Vessels, net (1) | $ | — | $ | 83,404 | $ | 83,404 | $ | — | $ | 85,991 | $ | 85,991 | |||||||||||||||||||||||
| Corporate bonds, at fair value | 96,186 | — | 96,186 | 20,705 | — | 20,705 | |||||||||||||||||||||||||||||
| Other | 21,514 | 13,088 | 34,602 | 21,747 | 9,029 | 30,776 | |||||||||||||||||||||||||||||
| Total other investments | $ | 117,700 | $ | 96,492 | $ | 214,192 | $ | 42,452 | $ | 95,020 | $ | 137,472 | |||||||||||||||||||||||
(1) Net of accumulated depreciation of $7,221 and $3,817 as of September 30, 2020 and December 31, 2019, respectively.
F - 20
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Net Investment Income - Tiptree Insurance
Net investment income represents investment income and expense from investments related to insurance operations as disclosed within net investment income on the condensed consolidated statements of operations. The following tables present the components of net investment income by source of income:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest: | |||||||||||||||||||||||
| AFS securities | $ | 1,748 | $ | 2,032 | $ | 6,003 | $ | 6,243 | |||||||||||||||
| Loans, at fair value | 113 | 360 | 509 | 2,968 | |||||||||||||||||||
| Other investments | 1,718 | 452 | 2,868 | 662 | |||||||||||||||||||
| Dividends from equity securities | 74 | 612 | 1,142 | 2,041 | |||||||||||||||||||
| Subtotal | 3,653 | 3,456 | 10,522 | 11,914 | |||||||||||||||||||
| Less: investment expenses | 630 | 472 | 1,719 | 1,201 | |||||||||||||||||||
| Net investment income | $ | 3,023 | $ | 2,984 | $ | 8,803 | $ | 10,713 | |||||||||||||||
Other Investment Income - Tiptree Capital
Other investment income represents other income from other Tiptree non-insurance activities as disclosed within other revenue on the condensed consolidated statements of operations, see Note (16) Other Revenue and Other Expenses. The following tables present the components of other investment income by type:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest: | |||||||||||||||||||||||
| Loans, at fair value | $ | 1,333 | $ | 1,596 | $ | 4,020 | $ | 4,473 | |||||||||||||||
| Other | — | 95 | — | 225 | |||||||||||||||||||
| Dividends from equity securities | — | 2,533 | 2,533 | 7,599 | |||||||||||||||||||
| Loan fee income | 4,817 | 3,595 | 12,643 | 8,726 | |||||||||||||||||||
| Vessel related revenue | 5,517 | 4,807 | 17,218 | 10,758 | |||||||||||||||||||
| Other investment income | $ | 11,667 | $ | 12,626 | $ | 36,414 | $ | 31,781 | |||||||||||||||
F - 21
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Net realized and unrealized gains (losses)
The following table presents the components of net realized and unrealized gains (losses) recorded on the condensed consolidated statements of operations. Net unrealized gains (losses) on AFS securities are included within other comprehensive income, and as such, are not included in this table. Net realized and unrealized gains (losses) on non-investment financial assets and liabilities are included below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net realized gains (losses) | |||||||||||||||||||||||
| Tiptree Insurance: | |||||||||||||||||||||||
| Reclass of unrealized gains (losses) on AFS securities from OCI | $ | 115 | $ | 187 | $ | 211 | $ | 1,228 | |||||||||||||||
| Gains from recoveries (credit losses) on AFS securities | (7) | — | 44 | — | |||||||||||||||||||
| Net realized gains (losses) on loans | 202 | 1,316 | (1,305) | 3,332 | |||||||||||||||||||
| Net realized gains (losses) on equity securities | (1,540) | 553 | (22,429) | 1,035 | |||||||||||||||||||
| Other | 1,769 | 235 | 5,076 | 235 | |||||||||||||||||||
| Tiptree Capital: | |||||||||||||||||||||||
| Net realized gains (losses) on loans | 40,229 | 21,449 | 91,238 | 51,897 | |||||||||||||||||||
| Total net realized gains (losses) | 40,768 | 23,740 | 72,835 | 57,727 | |||||||||||||||||||
| Net unrealized gains (losses) | |||||||||||||||||||||||
| Tiptree Insurance: | |||||||||||||||||||||||
| Net change in unrealized gains (losses) on loans | 157 | (1,424) | (2,063) | (4,832) | |||||||||||||||||||
| Net unrealized gains (losses) on equity securities held at period end | (2,135) | (1,354) | (26,875) | 3,937 | |||||||||||||||||||
| Reclass of unrealized (gains) losses from prior periods for equity securities sold | 281 | (404) | 17,290 | (807) | |||||||||||||||||||
| Other | 1,817 | (165) | 2,741 | 575 | |||||||||||||||||||
| Tiptree Capital: | |||||||||||||||||||||||
| Net change in unrealized gains (losses) on loans | 2,602 | 466 | 3,577 | 1,361 | |||||||||||||||||||
| Net unrealized gains (losses) on equity securities held at period end | (7,586) | (6,513) | (65,970) | (1,405) | |||||||||||||||||||
| Other | 3,055 | 956 | 5,093 | 2,190 | |||||||||||||||||||
| Total net unrealized gains (losses) | (1,809) | (8,438) | (66,207) | 1,019 | |||||||||||||||||||
| Total net realized and unrealized gains (losses) | $ | 38,959 | $ | 15,302 | $ | 6,628 | $ | 58,746 | |||||||||||||||
(7) Notes and Accounts Receivable, net
The following table presents the total notes and accounts receivable, net:
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Notes receivable, net - premium financing program | $ | 60,523 | $ | 42,192 | |||||||
| Accounts and premiums receivable, net | 93,316 | 50,712 | |||||||||
| Retrospective commissions receivable | 128,906 | 105,387 | |||||||||
| Trust receivables | 51,715 | 63,925 | |||||||||
| Other receivables | 27,287 | 24,752 | |||||||||
| Total notes and accounts receivable, net | $ | 361,747 | $ | 286,968 | |||||||
F - 22
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the total valuation allowance and bad debt expense for the following periods:
| Valuation allowance | Bad debt expense | ||||||||||||||||||||||||||||||||||
| As of | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Notes receivable, net - premium financing program (1) | $ | 103 | $ | 95 | $ | 54 | $ | 21 | $ | 165 | $ | 137 | |||||||||||||||||||||||
| Accounts and premiums receivable, net | $ | 165 | $ | 109 | $ | 6 | $ | 25 | $ | 19 | $ | 45 | |||||||||||||||||||||||
(1) As of September 30, 2020 and December 31, 2019, there were $258 and $93 in balances classified as 90 days plus past due, respectively.
(8) Reinsurance Receivables
The following table presents the effect of reinsurance on premiums written and earned by our insurance business for the following periods:
| Direct amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount - assumed to net | |||||||||||||||||||||||||
| For the Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Premiums written: | |||||||||||||||||||||||||||||
| Life insurance | $ | 19,268 | $ | 11,551 | $ | 414 | $ | 8,131 | 5.1 | % | |||||||||||||||||||
| Accident and health insurance | 32,308 | 21,749 | 748 | 11,307 | 6.6 | % | |||||||||||||||||||||||
| Property and liability insurance | 229,518 | 154,201 | 51,721 | 127,038 | 40.7 | % | |||||||||||||||||||||||
| Total premiums written | 281,094 | 187,501 | 52,883 | 146,476 | 36.1 | % | |||||||||||||||||||||||
| Premiums earned: | |||||||||||||||||||||||||||||
| Life insurance | 16,725 | 9,073 | 348 | 8,000 | 4.4 | % | |||||||||||||||||||||||
| Accident and health insurance | 28,134 | 18,502 | 2,413 | 12,045 | 20.0 | % | |||||||||||||||||||||||
| Property and liability insurance | 170,806 | 103,482 | 29,049 | 96,373 | 30.1 | % | |||||||||||||||||||||||
| Total premiums earned | $ | 215,665 | $ | 131,057 | $ | 31,810 | $ | 116,418 | 27.3 | % | |||||||||||||||||||
| For the Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Premiums written: | |||||||||||||||||||||||||||||
| Life insurance | $ | 20,714 | $ | 11,345 | $ | 423 | $ | 9,792 | 4.3 | % | |||||||||||||||||||
| Accident and health insurance | 36,884 | 24,350 | 800 | 13,334 | 6.0 | % | |||||||||||||||||||||||
| Property and liability insurance | 185,188 | 79,215 | 31,042 | 137,015 | 22.7 | % | |||||||||||||||||||||||
| Total premiums written | 242,786 | 114,910 | 32,265 | 160,141 | 20.1 | % | |||||||||||||||||||||||
| Premiums earned: | |||||||||||||||||||||||||||||
| Life insurance | 17,305 | 9,106 | 391 | 8,590 | 4.6 | % | |||||||||||||||||||||||
| Accident and health insurance | 31,153 | 20,914 | 775 | 11,014 | 7.0 | % | |||||||||||||||||||||||
| Property and liability insurance | 152,262 | 58,384 | 15,681 | 109,559 | 14.3 | % | |||||||||||||||||||||||
| Total premiums earned | $ | 200,720 | $ | 88,404 | $ | 16,847 | $ | 129,163 | 13.0 | % | |||||||||||||||||||
| For the Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Premiums written: | |||||||||||||||||||||||||||||
| Life insurance | $ | 46,695 | $ | 25,905 | $ | 1,104 | $ | 21,894 | 5.0 | % | |||||||||||||||||||
| Accident and health insurance | 80,466 | 52,449 | 8,989 | 37,006 | 24.3 | % | |||||||||||||||||||||||
| Property and liability insurance | 584,983 | 361,095 | 96,683 | 320,571 | 30.2 | % | |||||||||||||||||||||||
| Total premiums written | 712,144 | 439,449 | 106,776 | 379,471 | 28.1 | % | |||||||||||||||||||||||
| Premiums earned: | |||||||||||||||||||||||||||||
| Life insurance | 51,015 | 27,369 | 1,087 | 24,733 | 4.4 | % | |||||||||||||||||||||||
| Accident and health insurance | 88,640 | 58,599 | 9,008 | 39,049 | 23.1 | % | |||||||||||||||||||||||
| Property and liability insurance | 500,465 | 288,863 | 69,610 | 281,212 | 24.8 | % | |||||||||||||||||||||||
| Total premiums earned | $ | 640,120 | $ | 374,831 | $ | 79,705 | $ | 344,994 | 23.1 | % | |||||||||||||||||||
F - 23
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
| Direct amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount - assumed to net | |||||||||||||||||||||||||
| For the Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Premiums written: | |||||||||||||||||||||||||||||
| Life insurance | $ | 54,549 | $ | 29,401 | $ | 1,258 | $ | 26,406 | 4.8 | % | |||||||||||||||||||
| Accident and health insurance | 97,044 | 63,430 | 2,366 | 35,980 | 6.6 | % | |||||||||||||||||||||||
| Property and liability insurance | 514,659 | 208,485 | 66,202 | 372,376 | 17.8 | % | |||||||||||||||||||||||
| Total premiums written | 666,252 | 301,316 | 69,826 | 434,762 | 16.1 | % | |||||||||||||||||||||||
| Premiums earned: | |||||||||||||||||||||||||||||
| Life insurance | 50,408 | 26,368 | 1,211 | 25,251 | 4.8 | % | |||||||||||||||||||||||
| Accident and health insurance | 91,443 | 61,279 | 2,363 | 32,527 | 7.3 | % | |||||||||||||||||||||||
| Property and liability insurance | 440,867 | 178,926 | 44,993 | 306,934 | 14.7 | % | |||||||||||||||||||||||
| Total premiums earned | $ | 582,718 | $ | 266,573 | $ | 48,567 | $ | 364,712 | 13.3 | % | |||||||||||||||||||
The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and loss adjustment expenses (LAE) incurred:
| Direct amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount - assumed to net | |||||||||||||||||||||||||
| For the Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Losses Incurred | |||||||||||||||||||||||||||||
| Life insurance | $ | 12,945 | $ | 7,505 | $ | 135 | $ | 5,575 | 2.4 | % | |||||||||||||||||||
| Accident and health insurance | 5,854 | 4,922 | 1,436 | 2,368 | 60.6 | % | |||||||||||||||||||||||
| Property and liability insurance | 78,206 | 56,500 | 13,271 | 34,977 | 37.9 | % | |||||||||||||||||||||||
| Total losses incurred | 97,005 | 68,927 | 14,842 | 42,920 | 34.6 | % | |||||||||||||||||||||||
Member benefit claims (1) | 14,818 | ||||||||||||||||||||||||||||
| Total policy and contract benefits | $ | 57,738 | |||||||||||||||||||||||||||
| For the Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Losses Incurred | |||||||||||||||||||||||||||||
| Life insurance | $ | 9,420 | $ | 5,445 | $ | 152 | $ | 4,127 | 3.7 | % | |||||||||||||||||||
| Accident and health insurance | 5,607 | 4,717 | 136 | 1,026 | 13.3 | % | |||||||||||||||||||||||
| Property and liability insurance | 51,993 | 31,479 | 13,679 | 34,193 | 40.0 | % | |||||||||||||||||||||||
| Total losses incurred | 67,020 | 41,641 | 13,967 | 39,346 | 35.5 | % | |||||||||||||||||||||||
Member benefit claims (1) | 4,647 | ||||||||||||||||||||||||||||
| Total policy and contract benefits | $ | 43,993 | |||||||||||||||||||||||||||
| For the Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Losses and LAE Incurred | |||||||||||||||||||||||||||||
| Life insurance | $ | 33,600 | $ | 19,493 | $ | 416 | $ | 14,523 | 2.9 | % | |||||||||||||||||||
| Accident and health insurance | 13,471 | 11,225 | 5,458 | 7,704 | 70.8 | % | |||||||||||||||||||||||
| Property and liability insurance | 204,917 | 133,798 | 32,008 | 103,127 | 31.0 | % | |||||||||||||||||||||||
| Total losses and LAE incurred | 251,988 | 164,516 | 37,882 | 125,354 | 30.2 | % | |||||||||||||||||||||||
Member benefit claims (1) | 42,407 | ||||||||||||||||||||||||||||
| Total policy and contract benefits | $ | 167,761 | |||||||||||||||||||||||||||
| For the Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Losses and LAE Incurred | |||||||||||||||||||||||||||||
| Life insurance | $ | 28,861 | $ | 16,964 | $ | 338 | $ | 12,235 | 2.8 | % | |||||||||||||||||||
| Accident and health insurance | 12,538 | 9,991 | 276 | 2,823 | 9.8 | % | |||||||||||||||||||||||
| Property and liability insurance | 161,552 | 102,232 | 35,085 | 94,405 | 37.2 | % | |||||||||||||||||||||||
| Total losses and LAE incurred | 202,951 | 129,187 | 35,699 | 109,463 | 32.6 | % | |||||||||||||||||||||||
Member benefit claims (1) | 14,793 | ||||||||||||||||||||||||||||
| Total policy and contract benefits | $ | 124,256 | |||||||||||||||||||||||||||
(1) Member benefit claims are not covered by reinsurance.
F - 24
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the components of the reinsurance receivables:
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Prepaid reinsurance premiums: | |||||||||||
Life (1) | $ | 67,380 | $ | 72,675 | |||||||
Accident and health (1) | 60,242 | 66,393 | |||||||||
| Property | 375,680 | 286,411 | |||||||||
| Total | 503,302 | 425,479 | |||||||||
| Ceded claim reserves: | |||||||||||
| Life | 3,721 | 3,350 | |||||||||
| Accident and health | 10,987 | 11,065 | |||||||||
| Property | 89,202 | 74,384 | |||||||||
| Total ceded claim reserves recoverable | 103,910 | 88,799 | |||||||||
| Other reinsurance settlements recoverable | 39,359 | 25,555 | |||||||||
Reinsurance receivables (2) | $ | 646,571 | $ | 539,833 | |||||||
(1) Including policyholder account balances ceded.
(2) Includes $71,337 from the acquired balance sheet of Smart AutoCare. See Note (3) Acquisitions.
The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from non-affiliated reinsurers:
| As of | |||||
| September 30, 2020 | |||||
| Total of the three largest receivable balances from non-affiliated reinsurers | $ | 147,726 | |||
As of September 30, 2020, the non-affiliated reinsurers from whom our insurance business has the largest receivable balances were: MFI Insurance Company, LTD (A. M. Best Rating: Not rated), Frandisco Property and Casualty Company (A. M. Best Rating: Not rated) and London Life International Reinsurance Corporation (A. M. Best Rating: Not rated). The related receivables of these reinsurers are collateralized by assets on hand, assets held in trust accounts and letters of credit. As of September 30, 2020, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the collateralization.
F - 25
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(9) Goodwill and Intangible Assets, net
The following table presents identifiable finite and indefinite-lived intangible assets, accumulated amortization, and goodwill by operating segment and/or reporting unit, as appropriate:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Tiptree Insurance | Other (1) | Total | Tiptree Insurance | Other (1) | Total | ||||||||||||||||||||||||||||||
| Customer relationships | $ | 139,500 | $ | — | $ | 139,500 | $ | 53,500 | $ | — | $ | 53,500 | |||||||||||||||||||||||
| Accumulated amortization | (30,319) | — | (30,319) | (24,318) | — | (24,318) | |||||||||||||||||||||||||||||
| Trade names | 13,850 | 800 | 14,650 | 6,750 | 800 | 7,550 | |||||||||||||||||||||||||||||
| Accumulated amortization | (4,107) | (420) | (4,527) | (3,273) | (360) | (3,633) | |||||||||||||||||||||||||||||
| Software licensing | 9,300 | 640 | 9,940 | 8,500 | 640 | 9,140 | |||||||||||||||||||||||||||||
| Accumulated amortization | (8,615) | (480) | (9,095) | (8,500) | (411) | (8,911) | |||||||||||||||||||||||||||||
| Insurance policies and contracts acquired | 36,500 | — | 36,500 | 36,500 | — | 36,500 | |||||||||||||||||||||||||||||
| Accumulated amortization | (36,211) | — | (36,211) | (36,115) | — | (36,115) | |||||||||||||||||||||||||||||
Insurance licensing agreements(2) | 13,761 | — | 13,761 | 14,261 | — | 14,261 | |||||||||||||||||||||||||||||
| Intangible assets, net | 133,659 | 540 | 134,199 | 47,305 | 669 | 47,974 | |||||||||||||||||||||||||||||
| Goodwill | 161,658 | 1,708 | 163,366 | 97,439 | 1,708 | 99,147 | |||||||||||||||||||||||||||||
| Total goodwill and intangible assets, net | $ | 295,317 | $ | 2,248 | $ | 297,565 | $ | 144,744 | $ | 2,377 | $ | 147,121 | |||||||||||||||||||||||
(1) Other is primarily comprised of mortgage operations.
(2) Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
Goodwill
The following table presents the activity in goodwill, by operating segment and/or reporting unit, as appropriate, and includes the adjustments made to the balance of goodwill to reflect the effect of the final valuation adjustments made for acquisitions, as well as the reduction to any goodwill attributable to impairment related charges:
| Tiptree Insurance | Other | Total | |||||||||||||||
| Balance at December 31, 2019 | $ | 97,439 | $ | 1,708 | $ | 99,147 | |||||||||||
Goodwill acquired (1) | 64,476 | — | 64,476 | ||||||||||||||
Purchase accounting adjustment (2) | (257) | — | (257) | ||||||||||||||
| Balance at September 30, 2020 | $ | 161,658 | $ | 1,708 | $ | 163,366 | |||||||||||
Accumulated impairments (3) | $ | — | $ | 699 | $ | 699 | |||||||||||
(1) Relates to an acquisition in our insurance business as of January 3, 2020 based on the initial valuation, and may be adjusted during the measurement period as permitted under ASC 805. See Note (3) Acquisitions.
(2) Relates to adjustments during the measurement period as permitted under ASC 805 for the final valuation of acquisition in our insurance business as of July 1, 2019.
(3) This impairment occurred at Luxury prior to being classified as held for sale. Luxury does not carry a goodwill balance as of September 30, 2020 and December 31, 2019.
The Company conducts annual impairment tests of its goodwill as of October 1. For the three and nine months ended September 30, 2020 and 2019, respectively, no impairment was recorded on the Company’s goodwill or intangibles.
Intangible Assets, net
The following table presents the activity, by operating segment and/or reporting unit, as appropriate, in finite and indefinite-lived other intangible assets and includes the adjustments made to the balance to reflect the effect of any final valuation adjustments made for acquisitions, as well as any reduction attributable to impairment-related charges:
| Tiptree Insurance | Other | Total | |||||||||||||||
| Balance at December 31, 2019 | $ | 47,305 | $ | 669 | $ | 47,974 | |||||||||||
Intangible assets acquired (1) | 93,700 | — | 93,700 | ||||||||||||||
Purchase accounting adjustment (2) | (300) | — | (300) | ||||||||||||||
| Less: amortization expense | (7,046) | (129) | (7,175) | ||||||||||||||
| Balance at September 30, 2020 | $ | 133,659 | $ | 540 | $ | 134,199 | |||||||||||
(1) Relates to an acquisition in our insurance business as of January 3, 2020 based on the initial valuation, and may be adjusted during the measurement period as permitted
F - 26
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
under ASC 805. See Note (3) Acquisitions.
(2) Relates to adjustments during the measurement period as permitted under ASC 805 for the final valuation of acquisition in our insurance business as of July 1, 2019.
The following table presents the amortization expense on finite-lived intangible assets for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Amortization expense on intangible assets | $ | 2,326 | $ | 2,004 | $ | 7,175 | $ | 6,041 | |||||||||||||||
The following table presents the amortization expense on finite-lived intangible assets for the next five years by operating segment and/or reporting unit, as appropriate:
| As of September 30, 2020 | |||||||||||||||||
| Tiptree Insurance | Other | Total | |||||||||||||||
| Remainder of 2020 | $ | 2,280 | $ | 42 | $ | 2,322 | |||||||||||
| 2021 | 12,952 | 171 | 13,123 | ||||||||||||||
| 2022 | 14,459 | 127 | 14,586 | ||||||||||||||
| 2023 | 14,198 | 80 | 14,278 | ||||||||||||||
| 2024 | 12,811 | 80 | 12,891 | ||||||||||||||
| 2025 and thereafter | 63,198 | 40 | 63,238 | ||||||||||||||
| Total | $ | 119,898 | $ | 540 | $ | 120,438 | |||||||||||
(10) Derivative Financial Instruments and Hedging
The Company utilizes derivative financial instruments as part of its overall investment and hedging activities. Derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are reported in other investments. Derivative liabilities are reported within other liabilities and accrued expenses.
Derivatives, at fair value
Interest Rate Lock Commitments
The Company enters into interest rate lock commitments (IRLCs) with customers in connection with its mortgage banking activities to fund residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain when the Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan commitment will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from the fair value of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this risk, the Company utilizes forward delivery contracts and to be announced (TBA) mortgage backed securities to economically hedge the risk of potential changes in the value of the loans that would result from the commitments.
Forward Delivery Contracts and TBA Mortgage Backed Securities
The Company enters into forward delivery contracts with loan aggregators and other investors as one of the tools to manage the interest rate risk associated with IRLCs and loans held for sale. In addition, the Company enters into TBA mortgage backed securities which facilitate hedging and funding by allowing the Company to prearrange prices for mortgages that are in the process of originating. The Company utilizes these hedging instruments for Agency (Fannie Mae and Freddie Mac) and FHA/VA (Ginnie Mae) eligible IRLCs.
F - 27
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying risk:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Notional values | Asset derivatives | Liability derivatives | Notional values | Asset derivatives | Liability derivatives | ||||||||||||||||||||||||||||||
| Interest rate lock commitments | $ | 290,277 | $ | 11,485 | $ | — | $ | 279,048 | $ | 7,336 | $ | — | |||||||||||||||||||||||
| Forward delivery contracts | 56,330 | 41 | — | 87,773 | 36 | — | |||||||||||||||||||||||||||||
| TBA mortgage backed securities | 299,000 | 167 | 727 | 235,000 | 118 | 428 | |||||||||||||||||||||||||||||
| Other | 5,942 | 1,047 | — | 10,360 | — | 3,330 | |||||||||||||||||||||||||||||
| Total | $ | 651,549 | $ | 12,740 | $ | 727 | $ | 612,181 | $ | 7,490 | $ | 3,758 | |||||||||||||||||||||||
(11) Debt, net
The following table presents the balance of the Company’s debt obligations, net of discounts and deferred financing costs.
| Stated interest rate or range of rates | Maximum borrowing capacity as of | As of | |||||||||||||||||||||||||||||||||
| Debt Type | Stated maturity date | September 30, 2020 | September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Corporate debt | |||||||||||||||||||||||||||||||||||
| Secured revolving credit agreements | August 2023 | LIBOR + | 2.25% | $ | 200,000 | $ | — | $ | 25,000 | ||||||||||||||||||||||||||
| Secured term credit agreements | February 2025 | LIBOR + | 6.75% | 121,875 | 121,875 | 68,210 | |||||||||||||||||||||||||||||
| Preferred trust securities | June 2037 | LIBOR + | 4.10% | 35,000 | 35,000 | 35,000 | |||||||||||||||||||||||||||||
| Junior subordinated notes | October 2057 | 8.50% | 125,000 | 125,000 | 125,000 | ||||||||||||||||||||||||||||||
| Total corporate debt | 281,875 | 253,210 | |||||||||||||||||||||||||||||||||
Asset based debt (1) | |||||||||||||||||||||||||||||||||||
| Asset based revolving financing | April 2021 | LIBOR + | 2.40% | 40,000 | 26,689 | 21,576 | |||||||||||||||||||||||||||||
Residential mortgage warehouse borrowings (2) | April 2021 - | LIBOR + | 2.00% | 110,000 | 85,837 | 90,673 | |||||||||||||||||||||||||||||
| August 2021 | to LIBOR + | 3.00% | |||||||||||||||||||||||||||||||||
| Vessel backed term loan | November 2024 | LIBOR + | 4.75% | 16,350 | 16,350 | 18,000 | |||||||||||||||||||||||||||||
| Total asset based debt | 128,876 | 130,249 | |||||||||||||||||||||||||||||||||
| Total debt, face value | 410,751 | 383,459 | |||||||||||||||||||||||||||||||||
| Unamortized discount, net | (2,175) | (198) | |||||||||||||||||||||||||||||||||
| Unamortized deferred financing costs | (10,812) | (8,807) | |||||||||||||||||||||||||||||||||
| Total debt, net | $ | 397,764 | $ | 374,454 | |||||||||||||||||||||||||||||||
(1) Asset based debt is generally recourse only to specific assets and related cash flows.
(2) The weighted average coupon rate for residential mortgage warehouse borrowings was 2.76% and 3.83% at September 30, 2020 and December 31, 2019, respectively.
The following table presents the amount of interest expense the Company incurred on its debt for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest expense - corporate debt | $ | 6,110 | $ | 4,923 | $ | 17,278 | $ | 14,850 | |||||||||||||||
| Interest expense - asset based debt | 2,211 | 1,808 | 6,240 | 5,333 | |||||||||||||||||||
| Interest expense on debt | $ | 8,321 | $ | 6,731 | $ | 23,518 | $ | 20,183 | |||||||||||||||
F - 28
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the future maturities of the unpaid principal balance on the Company’s debt for the following period:
| As of | |||||
| September 30, 2020 | |||||
| Remainder of 2020 | $ | — | |||
| 2021 | 112,526 | ||||
| 2022 | — | ||||
| 2023 | — | ||||
| 2024 | 16,350 | ||||
| 2025 and thereafter | 281,875 | ||||
| Total | $ | 410,751 | |||
The following narrative is a summary of certain terms of our debt agreements for the period ended September 30, 2020:
Corporate Debt
Secured Revolving Credit Agreement
As of September 30, 2020 and December 31, 2019, a total of $0 and $25,000, respectively, was outstanding under the revolving line of credit in our insurance business.
On August 4, 2020, Fortegra entered into an Amended and Restated Credit Agreement by and among Fortegra and its subsidiary, LOTS Intermediate Co., as borrowers, the lenders from time to time party thereto, certain of Fortegra’s subsidiaries, as guarantors, and Fifth Third Bank, National Association, as the administrative agent and issuing lender (the Fortegra Credit Agreement). The Fortegra Credit Agreement provides for a $200,000 revolving credit facility, all of which is available for the issuance of letters of credit, with a sub-limit of $17,500 for swing loans and matures on August 4, 2023. The Amended and Restated Credit Agreement replaced the $30,000 revolving line of credit.
Secured Term Credit Agreement
On February 21, 2020, the Operating Company borrowed $125,000 under a new credit agreement (Credit Agreement) with Fortress Credit Corp. (Fortress). The proceeds were used to repay the Company’s prior credit agreement with Fortress, with a balance of $68,210 as of December 31, 2019, and for working capital and general corporate purposes. Pursuant to an Amendment, Assumption and Consent Agreement, dated July 17, 2020 by and among Tiptree, certain of its subsidiaries and Fortress, Tiptree Holdings became the borrower under the Credit Agreement, dated as of February 21, 2020, by and among Tiptree, certain of its subsidiaries and Fortress. The Credit Agreement will mature on February 21, 2025, with principal amounts of the loans to be repaid in consecutive quarterly installments. Loans under the Credit Agreement bear interest at a variable rate per annum equal to LIBOR (with a minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum. The obligations under the Credit Agreement are secured by liens on substantially all of the assets of Tiptree Holdings and guaranteed by the Company and Tiptree Holdings’ direct wholly owned first tier subsidiaries (Guarantors).
The Credit Agreement contains various customary affirmative and negative covenants of the Company, Tiptree Holdings and the other Guarantors (subject to customary exceptions), including, but not limited to, limitations on indebtedness, liens, investments and acquisitions, negative pledges, junior payments, conduct of business, transactions with affiliates, dispositions of assets, prepayment of certain indebtedness and limits on guarantees by subsidiaries of Tiptree Holdings’ and the Guarantors’ indebtedness. The Credit Agreement also contains a financial covenant which limits corporate leverage as defined by its Corporate Leverage Ratio (as defined in the Credit Agreement).
The Credit Agreement also contains customary mandatory repayment provisions (subject to customary exceptions) and requires that net cash proceeds from the sale by Tiptree and certain of its subsidiaries of capital stock of Invesque be applied to prepay loans until the outstanding principal amount of loans is $62,500, with remaining proceeds subject to reinvestment rights. Prepayments, whether mandatory or voluntary, reduce future scheduled amortization payments in the order they come due. The Credit Agreement also requires the payment of a prepayment fee upon a repricing transaction or equity issuance consummated after the closing date, or the sale of Tiptree Insurance, or any of its material subsidiaries. As of September 30, 2020, a total of $121,875 was outstanding under this agreement.
F - 29
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Asset Based Debt
Asset Backed Revolving Financing
As of September 30, 2020 and December 31, 2019, a total of $10,220 and $9,840, respectively, was outstanding under the borrowing related to our premium finance business in our insurance business.
As of September 30, 2020 and December 31, 2019, a total of $16,469 and $11,736, respectively, was outstanding under the borrowing related to our warranty service contract finance business in our insurance business.
Residential Mortgage Warehouse Borrowings
In April 2020, a subsidiary in our mortgage business renewed a $60,000 warehouse line of credit, extending the maturity date to April 2021 and establishing a LIBOR floor of 1.0%. Additionally, during March 2020, another warehouse line maturing in August 2020 temporarily raised the maximum borrowing capacity to $65,000, returning to a maximum borrowing capacity of $50,000 in May 2020 and establishing a LIBOR floor of 0.50%. In August 2020, the $50,000 warehouse line of credit was extended to August 2021, and established a LIBOR floor of 0.50% to 1.00%. As of September 30, 2020 and December 31, 2019, a total of $85,837 and $90,673, respectively, was outstanding under such financing agreements.
As of September 30, 2020, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.
(12) Fair Value of Financial Instruments
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note (2) Summary of Significant Accounting Policies which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy.
The Company’s fair value measurement is based primarily on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include third party pricing services, independent broker quotations and pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources.
The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs may include: benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. Broker quotes are obtained from sources recognized to be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand considerations and market volatility.
Available for Sale Securities, at fair value
F - 30
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The fair values of available for sale securities are based on prices provided by an independent pricing service and a third party investment manager. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service and the third party investment manager by analyzing the investment manager-provided pricing report.
The following details the methods and assumptions used to estimate the fair value of each class of AFS securities and the applicable level each security falls within the fair value hierarchy:
U.S Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Obligations of State and Political Subdivisions, Corporate Securities, Asset Backed Securities, and Obligations of Foreign Governments: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service and third party investment manager are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 or Level 3 in the fair value hierarchy.
Certificates of Deposit: The estimated fair value of certificates of deposit approximate carrying value and fall under Level 1 of the fair value hierarchy.
Equity Securities
The fair values of publicly traded common and preferred stocks are obtained from market value quotations provided by an independent pricing service and fall under Level 1 in the fair value hierarchy. The fair values of non-publicly traded common and preferred stocks are based on prices obtained from an independent pricing service using unobservable inputs and fall under Level 3 in the fair value hierarchy.
Loans, at fair value
Corporate Loans: These loans are comprised of a diversified portfolio of middle market and broadly syndicated leveraged loans and are generally classified under either Level 2 or Level 3 in the fair value hierarchy. To determine fair value, the Company uses quoted prices which include those provided from pricing vendors, where available. We perform internal price verification procedures to ensure that the prices and quotes provided from the independent pricing vendors are reasonable. Such verification procedures include comparison of pricing sources and analysis of variances among pricing sources. The Company has evaluated each loan’s respective liquidity and has additionally performed valuation benchmarking. The key characteristics which were evaluated as part of this determination were liquidity ratings, price changes to index benchmarks, depth of quotes, credit ratings and industry trends.
Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified under Level 2 in the fair value hierarchy and fair value is based upon forward sales contracts with third party investors, including estimated loan costs.
Derivative Assets and Liabilities
Derivatives are primarily comprised of IRLCs, forward delivery contracts and TBA mortgage backed securities. The fair value of these instruments is based upon valuation pricing models, which represent the amount the Company would expect to receive or pay at the balance sheet date to exit the position. Our mortgage origination subsidiaries issue IRLCs to their customers, which are carried at estimated fair value on the Company’s condensed consolidated balance sheet. The estimated fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the IRLC net of costs to produce and an expected pull through assumption. The fair values of these commitments generally fall under Level 3 in the fair value hierarchy. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors. For loans not locked with investors under a forward delivery commitment, the Company enters into hedge instruments, primarily TBAs, to protect against movements in interest rates. The fair values of TBA mortgage backed securities and forward delivery contracts generally fall under Level 2 in the fair value hierarchy.
F - 31
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Corporate Bonds
Corporate bonds are generally classified under Level 2 in the fair value hierarchy and fair value is provided by a third party investment manager, based on quoted market prices. We perform internal price verification procedures to ensure that the prices provided are reasonable.
Securities Sold, Not Yet Purchased
Securities sold, not yet purchased are generally classified under Level 1 or Level 2 in the fair value hierarchy, based on the leveling of the securities sold short, and fair value is provided by a third party investment manager, based on quoted market prices. We perform internal price verification procedures to ensure that the prices provided are reasonable.
Mortgage Servicing Rights
Mortgage servicing rights are classified under Level 3 in the fair value hierarchy and fair value is provided by a third party valuation service. Various observable and unobservable inputs are used to determine fair value, including discount rate, cost to service and weighted average prepayment speed.
The following tables present the Company’s fair value hierarchies for financial assets and liabilities, measured on a recurring basis:
| As of September 30, 2020 | |||||||||||||||||||||||
| Quoted prices in active markets Level 1 | Other significant observable inputs Level 2 | Significant unobservable inputs Level 3 | Fair value | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Available for sale securities, at fair value: | |||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | — | $ | 210,604 | $ | — | $ | 210,604 | |||||||||||||||
| Obligations of state and political subdivisions | — | 40,437 | — | 40,437 | |||||||||||||||||||
| Obligations of foreign governments | — | 3,026 | — | 3,026 | |||||||||||||||||||
| Certificates of deposit | 855 | — | — | 855 | |||||||||||||||||||
| Asset backed securities | — | 36,266 | 502 | 36,768 | |||||||||||||||||||
| Corporate securities | — | 78,224 | — | 78,224 | |||||||||||||||||||
| Total available for sale securities, at fair value | 855 | 368,557 | 502 | 369,914 | |||||||||||||||||||
| Loans, at fair value: | |||||||||||||||||||||||
| Corporate loans | — | — | 5,349 | 5,349 | |||||||||||||||||||
| Mortgage loans held for sale | — | 110,123 | — | 110,123 | |||||||||||||||||||
| Total loans, at fair value | — | 110,123 | 5,349 | 115,472 | |||||||||||||||||||
| Equity securities | 111,624 | — | 35 | 111,659 | |||||||||||||||||||
| Other investments, at fair value: | |||||||||||||||||||||||
| Corporate bonds | — | 96,186 | — | 96,186 | |||||||||||||||||||
| Derivative assets | — | 1,255 | 11,485 | 12,740 | |||||||||||||||||||
| CLOs | — | — | 1,313 | 1,313 | |||||||||||||||||||
| Total other investments, at fair value | — | 97,441 | 12,798 | 110,239 | |||||||||||||||||||
Mortgage servicing rights (1) | — | — | 12,476 | 12,476 | |||||||||||||||||||
| Total | $ | 112,479 | $ | 576,121 | $ | 31,160 | $ | 719,760 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Derivative liabilities (2) | $ | — | $ | 727 | $ | — | $ | 727 | |||||||||||||||
Securities sold, not yet purchased (2) | 21,234 | 45,865 | — | 67,099 | |||||||||||||||||||
Contingent consideration payable (2) | — | — | 200 | 200 | |||||||||||||||||||
| Total | $ | 21,234 | $ | 46,592 | $ | 200 | $ | 68,026 | |||||||||||||||
F - 32
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(1) Included in other assets.
(2) Included in other liabilities and accrued expenses.
| As of December 31, 2019 | |||||||||||||||||||||||
| Quoted prices in active markets Level 1 | Other significant observable inputs Level 2 | Significant unobservable inputs Level 3 | Fair value | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Available for sale securities, at fair value: | |||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | — | $ | 191,590 | $ | — | $ | 191,590 | |||||||||||||||
| Obligations of state and political subdivisions | — | 46,338 | — | 46,338 | |||||||||||||||||||
| Obligations of foreign governments | — | 1,119 | — | 1,119 | |||||||||||||||||||
| Certificates of deposit | 896 | — | — | 896 | |||||||||||||||||||
| Asset backed securities | — | 42,833 | 1,185 | 44,018 | |||||||||||||||||||
| Corporate securities | — | 51,231 | — | 51,231 | |||||||||||||||||||
| Total available for sale securities, at fair value | 896 | 333,111 | 1,185 | 335,192 | |||||||||||||||||||
| Loans, at fair value: | |||||||||||||||||||||||
| Corporate loans | — | — | 9,787 | 9,787 | |||||||||||||||||||
| Mortgage loans held for sale | — | 98,720 | — | 98,720 | |||||||||||||||||||
| Non-performing loans | — | — | 387 | 387 | |||||||||||||||||||
| Total loans, at fair value | — | 98,720 | 10,174 | 108,894 | |||||||||||||||||||
| Equity securities | 155,135 | — | 243 | 155,378 | |||||||||||||||||||
| Other investments, at fair value: | |||||||||||||||||||||||
| Corporate bonds | — | 20,705 | — | 20,705 | |||||||||||||||||||
| Derivative assets | — | 154 | 7,336 | 7,490 | |||||||||||||||||||
| CLOs | — | — | 4,768 | 4,768 | |||||||||||||||||||
| Total other investments, at fair value | — | 20,859 | 12,104 | 32,963 | |||||||||||||||||||
Mortgage servicing rights (1) | — | — | 8,764 | 8,764 | |||||||||||||||||||
| Total | $ | 156,031 | $ | 452,690 | $ | 32,470 | $ | 641,191 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Derivative liabilities (2) | $ | — | $ | 3,758 | $ | — | $ | 3,758 | |||||||||||||||
| Total | $ | — | $ | 3,758 | $ | — | $ | 3,758 | |||||||||||||||
(1) Included in other assets. (2) Included in other liabilities and accrued expenses. | |||||||||||||||||||||||
F - 33
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:
| Nine Months Ended September 30, | |||||||||||
2020 (1) | 2019 (1) | ||||||||||
| Balance at January 1, | $ | 32,470 | $ | 152,845 | |||||||
| Net realized gains (losses) | 7,316 | 8,423 | |||||||||
| Net unrealized gains (losses) | (8,499) | (6,413) | |||||||||
| Origination of IRLCs | 90,474 | 54,179 | |||||||||
| Purchases | 684 | 113 | |||||||||
| Sales | (4,960) | (118,382) | |||||||||
| Issuances | — | 107 | |||||||||
Transfers into Level 3 (1) | — | 1,332 | |||||||||
| Conversions to real estate owned | — | (2,596) | |||||||||
| Conversions to mortgage loans held for sale | (86,325) | (50,265) | |||||||||
| Balance at September 30, | $ | 31,160 | $ | 39,343 | |||||||
| Changes in unrealized gains (losses) included in earnings related to assets still held at period end | $ | (7,739) | $ | (1,669) | |||||||
(1) Transfers between Level 2 and 3 were a result of subjecting third party pricing on assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.
The following is quantitative information about Level 3 assets and liabilities with significant unobservable inputs used in fair valuation.
| Fair Value as of | Actual or Range (Weighted average) | ||||||||||||||||||||||||||||||||||||||||||||||
| Assets | September 30, 2020 | December 31, 2019 | Valuation technique | Unobservable input(s) | September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| IRLCs | $ | 11,485 | $ | 7,336 | Internal model | Pull through rate | 50 | % | to | 95% | 50 | % | to | 95% | |||||||||||||||||||||||||||||||||
| Mortgage servicing rights | 12,476 | 8,764 | External model | Discount rate | 10 | % | to | 13% | 10 | % | to | 13% | |||||||||||||||||||||||||||||||||||
| Cost to service | $75 | to | $90 | $75 | to | $90 | |||||||||||||||||||||||||||||||||||||||||
| Weighted average prepayment speed | 8 | % | to | 69% | 7 | % | to | 50% | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 23,961 | $ | 16,100 | |||||||||||||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Contingent consideration payable - Smart AutoCare | $ | 200 | $ | — | Cash Flow Model | Forecast Cash EBITDA | $20,000 | to | $ | 30,000 | N/A | ||||||||||||||||||||||||||||||||||||
| Actuarial Analysis | Assumed Claim Liabilities | 51,000 | N/A | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 200 | $ | — | |||||||||||||||||||||||||||||||||||||||||||
F - 34
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value and their respective levels within the fair value hierarchy:
| As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Level within fair value hierarchy | Fair value | Carrying value | Level within fair value hierarchy | Fair value | Carrying value | ||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
Debentures (1) | 2 | $ | 18,414 | $ | 18,414 | 2 | $ | 15,423 | $ | 15,423 | |||||||||||||||||||||||||
| Notes and accounts receivable, net | 2 | 60,523 | 60,523 | 2 | 42,192 | 42,192 | |||||||||||||||||||||||||||||
| Total assets | $ | 78,937 | $ | 78,937 | $ | 57,615 | $ | 57,615 | |||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Debt, net | 3 | $ | 420,851 | $ | 408,576 | 3 | $ | 396,699 | $ | 383,261 | |||||||||||||||||||||||||
| Total liabilities | $ | 420,851 | $ | 408,576 | $ | 396,699 | $ | 383,261 | |||||||||||||||||||||||||||
(1) Included in other investments.
Debentures: Since interest rates on debentures are at current market rates for similar credit risks, the carrying amount approximates fair value. These values are net of allowance for doubtful accounts.
Notes and Accounts Receivable: To the extent that carrying amounts differ from fair value, fair value is determined based on contractual cash flows discounted at market rates for similar credits. Categorized under Level 2 in the fair value hierarchy.
Debt: The carrying value, which approximates fair value of LIBOR based debt, represents the total debt balance at face value excluding the unamortized discount. The fair value of the Junior subordinated notes is determined based on dealer quotes. Categorized under Level 3 in the fair value hierarchy.
Additionally, the following financial assets and liabilities on the condensed consolidated balance sheets are not carried at fair value, but whose carrying amounts approximate their fair value:
Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair value. Categorized under Level 1 in the fair value hierarchy.
Accounts and Premiums Receivable, net, Retrospective Commissions Receivable and Other Receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized under Level 2 in the fair value hierarchy. See Note (7) Notes and Accounts Receivable, net.
Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts are included in other assets and other liabilities and accrued expenses and approximate their fair value due to their short term nature. Categorized under Level 2 in the fair value hierarchy.
F - 35
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(13) Liability for Unpaid Claims and Claim Adjustment Expenses
Roll forward of Claim Liability
The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short duration contracts for the following periods:
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Policy liabilities and unpaid claims balance as of January 1, | $ | 144,384 | $ | 131,611 | |||||||
| Less: liabilities of policy-holder accounts balances, gross | (11,589) | (13,659) | |||||||||
| Less: non-insurance warranty benefit claim liabilities | (85) | (94) | |||||||||
| Gross liabilities for unpaid losses and loss adjustment expenses | 132,710 | 117,858 | |||||||||
| Less: reinsurance recoverable on unpaid losses - short duration | (88,599) | (90,016) | |||||||||
| Less: other lines, gross | (230) | (227) | |||||||||
| Net balance as of January 1, short duration | 43,881 | 27,615 | |||||||||
| Incurred (short duration) related to: | |||||||||||
| Current year | 111,979 | 104,506 | |||||||||
| Prior years | 12,924 | 4,126 | |||||||||
| Total incurred | 124,903 | 108,632 | |||||||||
| Paid (short duration) related to: | |||||||||||
| Current year | 92,541 | 89,315 | |||||||||
| Prior years | 8,206 | 9,909 | |||||||||
| Total paid | 100,747 | 99,224 | |||||||||
| Net balance as of September 30, short duration | 68,037 | 37,023 | |||||||||
| Plus: reinsurance recoverable on unpaid losses - short duration | 103,372 | 85,318 | |||||||||
| Plus: other lines, gross | 581 | 220 | |||||||||
| Gross liabilities for unpaid losses and loss adjustment expenses | 171,990 | 122,561 | |||||||||
| Plus: liabilities of policy-holder accounts balances, gross | 6,806 | 11,877 | |||||||||
Plus: non-insurance warranty benefit claim liabilities (1) | 32,402 | 63 | |||||||||
| Policy liabilities and unpaid claims balance as of September 30, | $ | 211,198 | $ | 134,501 | |||||||
(1) Primarily relates to Smart AutoCare which was acquired on January 3, 2020. See Note (3) Acquisitions for more information.
The following schedule reconciles the total short duration contracts per the table above to the amount of total losses incurred as presented in the condensed consolidated statement of operations, excluding the amount for member benefit claims:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Short duration incurred | $ | 42,559 | $ | 39,213 | $ | 124,903 | $ | 108,632 | |||||||||||||||
| Other lines incurred | 1 | (11) | 1 | 180 | |||||||||||||||||||
| Unallocated loss adjustment expense | 360 | 144 | 450 | 651 | |||||||||||||||||||
| Total losses incurred | $ | 42,920 | $ | 39,346 | $ | 125,354 | $ | 109,463 | |||||||||||||||
For the nine months ended September 30, 2020, the Company’s insurance business experienced an increase in prior year case development of $12,924, primarily from its non-standard auto, light commercial and collateral protection lines of business.
For the nine months ended September 30, 2019, the Company’s insurance business experienced an increase in prior year case development of $4,126, primarily from its non-standard auto business.
F - 36
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(14) Revenue from Contracts with Customers
Revenue from contracts with customers is primarily comprised of asset management fee income included as a part of other revenue, vessel related revenue included as a part of other revenue, and warranty coverage, motor club and other revenues included as a part of service and administrative fees in our insurance business. The following table presents the disaggregated amounts of revenue from contracts with customers by product type for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Motor club revenue | $ | 8,566 | $ | 9,130 | $ | 27,329 | $ | 26,675 | |||||||||||||||
| Warranty coverage revenue | 25,888 | 6,423 | 68,318 | 20,367 | |||||||||||||||||||
| Vessel related revenue | 5,517 | 4,807 | 17,218 | 10,758 | |||||||||||||||||||
| Management fee income | — | — | — | 1,267 | |||||||||||||||||||
| Other | 1,495 | 1,767 | 4,586 | 5,495 | |||||||||||||||||||
| Revenue from contracts with customers | $ | 41,466 | $ | 22,127 | $ | 117,451 | $ | 64,562 | |||||||||||||||
Service and Administrative Fees
Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.
Administrative fee revenue includes the administration of premium associated with our producers and their producer owned reinsurance companies (PORCs). In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.
Information on Remaining Performance Obligations
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at September 30, 2020.
Contract Balances
The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.
Charter Revenue
The Company generates its revenues from charterers for the charter hire of its vessels. Vessels are chartered under time or voyage charters, where a contract is entered into for the use of a vessel for a specific voyage or a specific period of time and at a specified daily charter rate. Charter revenues are recognized as earned on the straight-line basis over the term of the charter as service is provided.
Revenue is recognized when a charter agreement exists, the vessel is made available to the charterer and collection of the related revenue is reasonably assured. Unearned revenue includes revenue received prior to the balance sheet date relating to services to be rendered after the balance sheet date.
F - 37
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Management Fees
The Company earned management fee income in the form of base management fees and incentive fees from the CLOs it managed. These base management fees were billed as the services were provided and paid periodically in accordance with the terms of the individual management agreements for as long as the Company managed the funds. Base management fees typically consisted of fees based on the amount of assets held in the CLOs. Base management fees were recognized as revenue when earned. The Company did not recognize incentive fees until all contractual contingencies were removed.
The following table presents the activity in the significant deferred assets and liabilities related to revenue from contracts with customers for the nine months ended September 30, 2020.
| January 1, 2020 | September 30, 2020 | ||||||||||||||||||||||
| Beginning balance | Additions | Amortizations | Ending balance | ||||||||||||||||||||
| Deferred acquisition costs | |||||||||||||||||||||||
| Motor club revenue | $ | 13,700 | $ | 17,707 | $ | 20,326 | $ | 11,081 | |||||||||||||||
| Warranty coverage revenue | 1,027 | 42,765 | 7,348 | 36,444 | |||||||||||||||||||
| Total | $ | 14,727 | $ | 60,472 | $ | 27,674 | $ | 47,525 | |||||||||||||||
| Deferred revenue | |||||||||||||||||||||||
| Motor club revenue | $ | 17,910 | $ | 23,907 | $ | 27,329 | $ | 14,488 | |||||||||||||||
Warranty coverage revenue (1) | 49,368 | 338,105 | 74,278 | $ | 313,195 | ||||||||||||||||||
| Total | $ | 67,278 | $ | 362,012 | $ | 101,607 | $ | 327,683 | |||||||||||||||
(1) Additions include $182,568 from the acquired balance sheet of Smart AutoCare. See Note (3) Acquisitions.
Write-offs were not material for any period presented.
(15) Other Assets and Other Liabilities and Accrued Expenses
Other Assets
The following table presents the components of other assets as reported in the condensed consolidated balance sheets:
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
Right of use asset - Operating leases (1) | $ | 20,550 | $ | 23,832 | |||||||
| Furniture, fixtures and equipment, net | 14,858 | 12,305 | |||||||||
| Income tax receivable | 20,529 | 817 | |||||||||
| Mortgage servicing rights | 12,476 | 8,764 | |||||||||
| Prepaid expenses | 7,858 | 8,461 | |||||||||
| Loans eligible for repurchase | 63,676 | 6,733 | |||||||||
| Other | 11,228 | 7,598 | |||||||||
| Total other assets | $ | 151,175 | $ | 68,510 | |||||||
(1) See Note (21) Commitments and Contingencies for additional information.
The following table presents the depreciation expense related to furniture, fixtures and equipment for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Depreciation expense related to furniture, fixtures and equipment | $ | 743 | $ | 769 | $ | 2,254 | $ | 1,928 | |||||||||||||||
F - 38
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Other Liabilities and Accrued Expenses
The following table presents the components of other liabilities and accrued expenses as reported in the condensed consolidated balance sheets:
| As of | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Accounts payable and accrued expenses | $ | 99,260 | $ | 68,829 | |||||||
Operating lease liability (1) | 26,233 | 29,491 | |||||||||
| Deferred tax liabilities, net | 15,403 | 32,306 | |||||||||
| Securities sold, not yet purchased | 67,099 | — | |||||||||
| Due to brokers | 41,856 | 1,140 | |||||||||
| Loans eligible for repurchase liability | 63,676 | 6,733 | |||||||||
| Commissions payable | 17,920 | 9,179 | |||||||||
| Other | 19,787 | 24,462 | |||||||||
| Total other liabilities and accrued expenses | $ | 351,234 | $ | 172,140 | |||||||
(1) See Note (21) Commitments and Contingencies for additional information.
(16) Other Revenue and Other Expenses
Other Revenue
The following table presents the components of other revenue as reported in the condensed consolidated statement of operations. Other revenue is primarily generated by Tiptree Capital’s non-insurance activities except as noted in the footnote to the table.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Other investment income (1) | $ | 11,667 | $ | 12,626 | $ | 36,414 | $ | 31,781 | |||||||||||||||
Gain on sale of businesses (2) | — | — | — | 7,598 | |||||||||||||||||||
| Management fee income | — | — | — | 1,267 | |||||||||||||||||||
Other (3) | 1,116 | 1,454 | 5,560 | 3,512 | |||||||||||||||||||
| Total other revenue | $ | 12,783 | $ | 14,080 | $ | 41,974 | $ | 44,158 | |||||||||||||||
(1) See Note (6) Investments for the components of Other investment income.
(2) Related to the sale of Telos. See Note (4) Dispositions and Assets Held for Sale.
(3) Includes $1,047 and $1,303 for the three months ended September 30, 2020 and 2019, respectively, and $5,305 and $3,068 for the nine months ended September 30, 2020 and 2019, respectively, related to Tiptree Insurance.
Other Expenses
The following table presents the components of other expenses as reported in the condensed consolidated statement of operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Professional fees | $ | 3,837 | $ | 6,137 | $ | 15,709 | $ | 13,975 | |||||||||||||||
| General and administrative | 5,523 | 3,855 | 16,376 | 14,098 | |||||||||||||||||||
| Premium taxes | 4,201 | 3,990 | 11,746 | 11,102 | |||||||||||||||||||
| Mortgage origination expenses | 3,673 | 3,099 | 10,811 | 8,657 | |||||||||||||||||||
| Rent and related | 3,529 | 3,110 | 10,326 | 9,329 | |||||||||||||||||||
| Operating expenses from vessels | 3,318 | 2,508 | 10,226 | 6,130 | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | 353 | 1,241 | |||||||||||||||||||
| Other | 1,411 | 2,231 | 5,190 | 6,651 | |||||||||||||||||||
| Total other expenses | $ | 25,492 | $ | 24,930 | $ | 80,737 | $ | 71,183 | |||||||||||||||
F - 39
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(17) Stockholders’ Equity
Stock Repurchases
The Board of Directors authorized the Company to make repurchases of up to $20,000 of shares of the Company’s outstanding common stock in the aggregate, at the discretion of the Company's Executive Committee. The following table presents the Company’s stock repurchase activity and remaining authorization.
| Nine Months Ended September 30, 2020 | |||||||||||
| Number of shares purchased | Average price per share | ||||||||||
| Share repurchase plan | 977,302 | $ | 5.80 | ||||||||
| Block repurchase | 500,000 | 7.00 | |||||||||
| Total | 1,477,302 | $ | 6.20 | ||||||||
| Remaining repurchase authorization | $ | 10,796 | |||||||||
Dividends
The Company declared cash dividends per share for the following periods presented below:
| Dividends per share for the | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| First quarter | $ | 0.04 | $ | 0.04 | |||||||
| Second quarter | 0.04 | 0.04 | |||||||||
Third quarter (1) | 0.04 | 0.04 | |||||||||
| Total cash dividends declared | $ | 0.12 | $ | 0.12 | |||||||
(1) See Note (24) Subsequent Events for when dividend was declared.
Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions
The Company’s U.S. insurance subsidiaries prepare financial statements in accordance with Statutory Accounting Principles (SAP) prescribed or permitted by the insurance departments of their states of domicile. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (the NAIC) as well as state laws, regulations and administrative rules.
Statutory Capital and Surplus
The Company’s insurance company subsidiaries must maintain minimum amounts of statutory capital and surplus as required by regulatory authorities, including the NAIC; their capital and surplus levels exceeded respective minimum requirements as of September 30, 2020 and December 31, 2019.
F - 40
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
Statutory Dividends
The Company’s U.S. domiciled insurance company subsidiaries may pay dividends to the Company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior approval of the insurance department of the applicable state of domicile. The Company eliminates all dividends from its subsidiaries in the condensed consolidated financial statements. The following table presents the dividends paid to the Company by its U.S domiciled insurance company subsidiaries and the combined amount available for ordinary dividends of the Company's U.S. domiciled insurance company subsidiaries for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Ordinary dividends | — | — | $ | — | $ | 9,001 | |||||||||||||||||
| Extraordinary dividends | — | — | — | 1,188 | |||||||||||||||||||
| Total dividends | $ | — | $ | — | $ | — | $ | 10,189 | |||||||||||||||
| As of | |||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Amount available for ordinary dividends of the Company's insurance company subsidiaries | $ | 13,418 | $ | 4,527 | |||||||||||||||||||
At September 30, 2020, the maximum amount of dividends that our U.S. domiciled regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $13,418. The Company may seek regulatory approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company would receive regulatory approval if sought.
(18) Accumulated Other Comprehensive Income (Loss)
The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following periods:
| Total AOCI (loss) related to Unrealized gains (losses) on AFS securities | Amount attributable to non-controlling interests | Total AOCI (loss) to Tiptree Inc. | |||||||||||||||
| Balance at December 31, 2018 | $ | (2,069) | $ | 11 | $ | (2,058) | |||||||||||
| Other comprehensive income (losses) before reclassifications | 5,067 | (24) | 5,043 | ||||||||||||||
| Amounts reclassified from AOCI | (970) | — | (970) | ||||||||||||||
| Period change | 4,097 | (24) | 4,073 | ||||||||||||||
Adoption of accounting standard (1) | (99) | — | (99) | ||||||||||||||
| Balance at September 30, 2019 | $ | 1,929 | $ | (13) | $ | 1,916 | |||||||||||
| Balance at December 31, 2019 | $ | 1,711 | $ | (13) | $ | 1,698 | |||||||||||
| Other comprehensive income (losses) before reclassifications | 4,108 | (21) | 4,087 | ||||||||||||||
| Amounts reclassified from AOCI | (165) | — | (165) | ||||||||||||||
| Period change | 3,943 | (21) | 3,922 | ||||||||||||||
Adoption of accounting standard (1) | 42 | — | 42 | ||||||||||||||
| Balance at September 30, 2020 | $ | 5,696 | $ | (34) | $ | 5,662 | |||||||||||
(1) Due to adoption of 2018-02 and 2016-13, respectively. See Note (2) Summary of Significant Accounting Policies.
F - 41
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the condensed consolidated statement of operations for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | Affected line item in condensed consolidated statement of operations | ||||||||||||||||||||||||
| Components of AOCI | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Unrealized gains (losses) on available for sale securities | $ | 115 | $ | 187 | $ | 211 | $ | 1,228 | Net realized and unrealized gains (losses) | |||||||||||||||||
| Related tax (expense) benefit | (20) | (37) | (46) | (258) | Provision for income tax | |||||||||||||||||||||
| Net of tax | $ | 95 | $ | 150 | $ | 165 | $ | 970 | ||||||||||||||||||
(19) Stock Based Compensation
Equity Plans
2017 Omnibus Incentive Plan
The Company adopted the Tiptree 2017 Omnibus Incentive Plan (2017 Equity Plan) on June 6, 2017, which permits the grant of restricted stock units (RSUs), stock, and stock options up to a maximum of 6,100,000 shares of common stock. The general purpose of the 2017 Equity Plan is to attract, motivate and retain selected employees and directors for the Company and its subsidiaries, to provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders. Unless otherwise extended, the 2017 Equity Plan terminates automatically on June 6, 2027. The table below summarizes changes to the issuances under the Company’s 2017 Equity Plan for the periods indicated, excluding awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree common stock:
| 2017 Equity Plan | Number of shares (1) | ||||
| Available for issuance as of December 31, 2019 | 4,765,863 | ||||
| RSU, stock and option awards granted | (951,019) | ||||
| Available for issuance as of September 30, 2020 | 3,814,844 | ||||
(1) Excludes awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree common stock.
Restricted Stock Units and Stock Awards
Tiptree Corporate Incentive Plans
The Company values RSUs at their grant-date fair value as measured by Tiptree’s common stock price. Generally, the Tiptree RSUs vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the one, two and three year anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period.
Stock Awards - Directors’ Compensation
The Company values the stock awards at their issuance-date fair value as measured by Tiptree’s common stock price. Upon issuance, the awards are deemed to be granted and immediately vested.
The following table presents changes to the issuances of RSUs and stock awards under the 2017 Equity Plan for the periods indicated:
| Number of shares issuable | Weighted average grant date fair value | ||||||||||
| Unvested units as of December 31, 2019 | 958,610 | $ | 6.23 | ||||||||
Granted | 525,742 | 7.13 | |||||||||
| Vested | (531,206) | 6.61 | |||||||||
| Unvested units as of September 30, 2020 | 953,146 | $ | 6.52 | ||||||||
F - 42
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following tables present the detail of the granted and vested RSUs and stock awards for the periods indicated:
| Granted | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Vested | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||
| Directors | 21,970 | 56,485 | Directors | 21,970 | 56,485 | |||||||||||||||||||||
Employees (1) | — | 469,257 | Employees | — | 474,721 | |||||||||||||||||||||
| Total Granted | 21,970 | 525,742 | Total Vested | 21,970 | 531,206 | |||||||||||||||||||||
| Taxes | — | (53,438) | ||||||||||||||||||||||||
| Exchanged | — | — | ||||||||||||||||||||||||
| Net Vested | 21,970 | 477,768 | ||||||||||||||||||||||||
(1) Includes 256,619 shares that vest ratably over three years and 212,638 shares that cliff vest in February 2021.
Subsidiary Incentive Plans
Certain of the Company’s subsidiaries have established incentive plans under which they are authorized to issue equity of those subsidiaries to certain of their employees. Such awards are accounted for as equity. These awards are subject to performance-vesting criteria based on the performance of the subsidiary (performance vesting awards) and time-vesting subject to continued employment (time vesting awards). Following the service period, such vested awards may be exchanged at fair market value, at the option of the holder, for Tiptree common stock under the 2017 Equity Plan. The service period for certain grants has been achieved and those vested subsidiary awards are currently eligible for exchange. The Company has the option, but not the obligation to settle the exchange right in cash.
The following table presents changes to the issuances of subsidiary awards under the subsidiary incentive plans for the periods indicated:
| Grant date fair value of equity shares issuable | |||||
| Unvested balance as of December 31, 2019 | $ | 4,279 | |||
| Granted | 1,108 | ||||
| Vested | (4,230) | ||||
| Performance assumption adjustment | 2,772 | ||||
| Unvested balance as of September 30, 2020 | $ | 3,929 | |||
The net vested and unvested balance of subsidiary awards (assuming full vesting) translates to an aggregate of 4,928,704 shares of common stock if converted as of September 30, 2020, of which 2,995,566 are vested and eligible for exchange as of September 30, 2020.
Stock Option Awards
Tiptree Corporate Incentive Plans
Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our common stock on the date of grant. The option awards have a 10-year term and are subject the recipient’s continuous service, a market requirement, and vest one third on each of the three, four and five year anniversaries of the grant date. The market requirement is a book value per share target that can be met at any time before the option expires and it only needs to be met once for the option to remain exercisable for the remainder of its term. If the service condition is met, the full amount of the compensation expense will be recognized over the appropriate vesting period whether the market requirement is met or not. The options granted after 2017 include a retirement provision and are amortized over the lesser of the service condition or expected retirement date. Book value targets for grants in 2020, 2019, 2018, 2017 and 2016 are $11.52, $10.79, $9.97, $10.14 and $8.96, respectively.
The fair value option grants are estimated on the date of grant using a Black-Scholes-Merton option pricing formula embedded within a Monte Carlo model used to simulate the future stock prices of the Company, which assumes that the
F - 43
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
market requirement is achieved. Historical volatility was computed based on historical daily returns of the Company’s stock between the grant date and July 1, 2013, the date of the business combination through which Tiptree became a public company. The valuation is done under a risk-neutral framework using the 10-year zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the grant date. The current quarterly dividend rates in effect as of the date of the grant are used to calculate a spot dividend yield as of the date of grant for use in the model.
The following table presents the assumptions used to estimate the fair values of the stock options granted for the following periods:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| Valuation Input | 2020 | 2019 | ||||||||||||||||||||||||
| Assumption | Average | Assumption | Average | |||||||||||||||||||||||
| Historical volatility | 27.60% | N/A | 27.69% | N/A | ||||||||||||||||||||||
| Risk-free rate | 1.51% | N/A | 2.62% | N/A | ||||||||||||||||||||||
| Dividend yield | 2.20% | N/A | 2.21% | N/A | ||||||||||||||||||||||
| Expected term (years) | 7.0 | 6.5 | ||||||||||||||||||||||||
The following table presents the Company's stock option activity for the current period:
| Options outstanding | Weighted average exercise price (in dollars per stock option) | Weighted average grant date value (in dollars per stock option) | Options exercisable | ||||||||||||||||||||
| Balance, December 31, 2019 | 1,290,342 | $ | 6.24 | $ | 2.45 | — | |||||||||||||||||
| Granted | 425,277 | 7.25 | 1.83 | — | |||||||||||||||||||
| Balance, September 30, 2020 | 1,715,619 | $ | 6.49 | $ | 2.29 | — | |||||||||||||||||
| Weighted average remaining contractual term at September 30, 2020 (in years) | 7.4 | ||||||||||||||||||||||
Stock Based Compensation Expense
The following table presents total stock based compensation expense and the related income tax benefit recognized on the condensed consolidated statements of operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Employee compensation and benefits | $ | 2,287 | $ | 1,439 | $ | 5,750 | $ | 4,285 | |||||||||||||||
| Director compensation | 202 | 75 | 408 | 227 | |||||||||||||||||||
| Income tax benefit | (538) | (327) | (1,330) | (975) | |||||||||||||||||||
| Net stock based compensation expense | $ | 1,951 | $ | 1,187 | $ | 4,828 | $ | 3,537 | |||||||||||||||
Additional information on total non-vested stock based compensation is as follows:
| As of | |||||||||||
| September 30, 2020 | |||||||||||
| Stock options | Restricted stock awards and RSUs | ||||||||||
| Unrecognized compensation cost related to non-vested awards | $ | 639 | $ | 5,890 | |||||||
| Weighted - average recognition period (in years) | 2.19 | 1.77 | |||||||||
F - 44
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
(20) Income Taxes
The following table presents the Company’s provision (benefit) for income taxes reflected as a component of income (loss):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Total income tax expense (benefit) | $ | (844) | $ | (649) | $ | (22,030) | $ | 3,706 | |||||||||||||||||||||||||||
| Effective tax rate (ETR) | (6.1) | % | (1) | 38.8 | % | (2) | 34.7 | % | (3) | 19.2 | % | (4) | |||||||||||||||||||||||
(1) Lower than the U.S. federal statutory income tax rate of 21% due to the effect of discrete items, including expected refunds arising from the CARES Act.
(2) Higher than the U.S. federal statutory income tax rate of 21% due to the dividends received deduction increasing the tax benefit and other discrete items, partially offset by state income taxes and the impact of foreign operations.
(3) Higher than the U.S. federal statutory income tax rate of 21% due to the effect of discrete items, including expected refunds arising from the CARES Act.
(4) Slightly lower than the U.S. federal statutory income tax rate of 21% due to the effect of the dividends received deduction and other discrete items, largely offset by the state income taxes and the impact of foreign operations.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses. During the nine months ended September 30, 2020, the Company recorded a $5,979 tax benefit related to the ability to carryback net operating losses to prior periods under the CARES Act, resulting in a decrease of our deferred tax asset of $14,343 and an increase to our current receivable of $20,413. The Company continues to assess the potential tax impacts of this legislation on its financial position and results of operations.
(21) Commitments and Contingencies
Operating Leases
All leases are office space leases and are classified as operating leases that expire through 2028. Some of our office leases include the option to extend for up to 5 years or less at management’s discretion. Such extension options were not included in the measurement of the lease liability. Below is a summary of our right of use asset and lease liability as of September 30, 2020:
| As of | |||||
| September 30, 2020 | |||||
| Right of use asset - Operating leases | $ | 20,550 | |||
| Operating lease liability | $ | 26,233 | |||
| Weighted-average remaining lease term (years) | 6.2 | ||||
Weighted-average discount rate (1) | 7.2 | % | |||
(1) Discount rate was determined by applying available market rates to lease obligations based upon their term.
As of September 30, 2020, the approximate aggregate minimum future lease payments required for our lease liability over the remaining lease periods are as follows:
| September 30, 2020 | |||||
| Remainder of 2020 | $ | 1,854 | |||
| 2021 | 7,410 | ||||
| 2022 | 6,199 | ||||
| 2023 | 5,527 | ||||
| 2024 | 4,692 | ||||
| 2025 and thereafter | 11,798 | ||||
| Total minimum payments | 37,480 | ||||
| Less: liabilities held for sale | (219) | ||||
| Less: present value adjustment | (11,028) | ||||
| Total | $ | 26,233 | |||
F - 45
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
The following table presents rent expense for the Company’s office leases recorded on the condensed consolidated statements of operations for the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Rent expense for office leases (1) | $ | 959 | $ | 2,094 | $ | 5,196 | $ | 6,508 | |||||||||||||||
(1) Includes lease expense of $53 and $122 for the three and nine months ended September 30, 2020 for assets held for sale.
Litigation
The Company is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015, the trial court issued an Order denying the Company’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied the Company’s Motion for Summary Judgment as to certain disability insurance policies. In January 2018, the court vacated its November 2017 order granting Company’s Motion for Summary Judgment as to the life certificates at issue with leave to refile. No trial or additional hearings are currently scheduled.
The Company considers such litigation customary in the insurance industry. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of the Company. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.
The Company and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although the Company’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the Company’s financial position.
(22) Earnings Per Share
The Company calculates basic net income per share of common stock (common share) based on the weighted average number of common shares outstanding, which includes vested corporate restricted share units. Unvested corporate restricted share units have a non-forfeitable right to participate in dividends declared and paid on the Company’s common stock on an as vested basis and are therefore considered a participating security. The Company calculates basic earnings per share using the “two-class” method under which the income available to common stockholders is allocated to the unvested corporate restricted stock units.
Diluted net income attributable to Common Stockholders includes the effect of unvested subsidiaries’ RSUs, when dilutive. The assumed exercise of all potentially dilutive instruments are included in the diluted net income per common share calculation, if dilutive.
The following table presents a reconciliation of basic and diluted net income per common share for the following periods:
F - 46
TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2020
(in thousands, except share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income (loss) before non-controlling interests | $ | 14,741 | $ | (949) | $ | (41,390) | $ | 15,556 | |||||||||||||||
| Less: | |||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | 1,978 | 508 | 2,038 | 1,342 | |||||||||||||||||||
| Net income allocated to participating securities | 351 | — | — | 359 | |||||||||||||||||||
| Net income (loss) attributable to common shares | 12,412 | (1,457) | (43,428) | 13,855 | |||||||||||||||||||
| Effect of Dilutive Securities: | |||||||||||||||||||||||
| Securities of subsidiaries | (461) | — | — | (507) | |||||||||||||||||||
| Net income (loss) attributable to common shares - diluted | $ | 11,951 | $ | (1,457) | $ | (43,428) | $ | 13,348 | |||||||||||||||
| Weighted average number of shares of common stock outstanding - basic | 33,684,301 | 34,552,171 | 34,076,837 | 34,583,709 | |||||||||||||||||||
| Weighted average number of incremental shares of common stock issuable from exchangeable interests and contingent considerations | — | — | — | — | |||||||||||||||||||
Weighted average number of shares of common stock outstanding - diluted | 33,684,301 | 34,552,171 | 34,076,837 | 34,583,709 | |||||||||||||||||||
| Basic net income (loss) attributable to common shares | $ | 0.37 | $ | (0.04) | $ | (1.27) | $ | 0.40 | |||||||||||||||
| Diluted net income (loss) attributable to common shares | $ | 0.35 | $ | (0.04) | $ | (1.27) | $ | 0.39 | |||||||||||||||
(23) Related Party Transactions
Corvid Peak is a related party of the Company because Corvid Peak is deemed to be controlled by Michael Barnes, the Company’s Executive Chairman. Tiptree agreed to invest $75,000 to seed new investment funds to be managed by Corvid Peak, which was completely funded in the first quarter of 2020. The Company will pay Corvid Peak an annual management fee of 1.25% of the net asset value of invested capital and an incentive fee equal to 20% of the net profits, subject to a conventional high water mark. The Company incurred $230 and $233 of management and incentive fees to Corvid Peak for the three months ended September 30, 2020 and 2019, respectively, and $667 and $702 of management and incentive fees to Corvid Peak for the nine months ended September 30, 2020 and 2019, respectively.
Pursuant to the Transition Services Agreement, Tiptree and Corvid Peak have mutually agreed to provide certain services to one another. Payments under the Transition Services Agreement in the three and nine months ended September 30, 2020 and 2019 were not material.
Pursuant to the Emeritus Agreement, Tiptree agreed to provide Mr. Inayatullah, a greater than 5% stockholder of the Company, office space and support services, and reimburse Mr. Inayatullah for a portion of benefit expenses in exchange for advice and other consulting services as requested by the Company’s Executive Committee. Transactions related to the Emeritus Agreement in the three and nine months ended September 30, 2020 were not material.
(24) Subsequent Events
On November 2, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.04 per share to holders of common stock with a record date of November 23, 2020, and a payment date of November 30, 2020.
On October 16, 2020, South Bay Financial Corporation (SBAC) and South Bay Funding LLC (SBF); together with SBAC (the Borrowers), subsidiaries of Fortegra, entered into a three-year $75,000 secured credit agreement (the South Bay Credit Agreement) with the lenders from time to time party thereto and Fifth Third Bank, National Association. The South Bay Credit Agreement is secured by substantially all of the assets of the Borrowers. The obligations under the South Bay Credit Agreement are non-recourse to Fortegra and its subsidiaries (other than SBAC and its subsidiaries).
F - 47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows:
•Overview
•Results of Operations
•Non-GAAP Reconciliations
•Liquidity and Capital Resources
•Critical Accounting Policies and Estimates
•Off-Balance Sheet Arrangements
OVERVIEW
Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Our principal operating subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider of specialty insurance, warranty products and related administration services. We also generate earnings from a diverse group of select investments that we refer to as Tiptree Capital. We evaluate our performance primarily by the comparison of our shareholders’ long-term total return on capital, as measured by Adjusted EBITDA, Operating EBITDA and growth in book value per share plus dividends.
Summary factors impacting quarterly results were:
Overall:
•Net income was $12.8 million for the quarter, an increase of $14.3 million over prior year period driven by increases in operational performance.
•Operating EBITDA of $31.9 million, up $14.6 million over the prior year period, from growth in insurance and mortgage operations.
•Book value per share of $10.36 as of September 30, 2020, when combined with dividends paid, increased 4.3% from the prior quarter, driven by a combination of earnings and share repurchases in the quarter. Book value per share as of September 30, 2020, when combined with dividends paid, represents a decrease of 8.0% from September 30, 2019, primarily driven by the unrealized mark-to-market losses on our investment in Invesque.
•Year-to-date 2020, we purchased and retired 1,477,302 shares of our common stock for $9.2 million, at an average 37% discount to book value.
•Cash and cash equivalents of $103.5 million as of September 30, 2020, of which $72.4 million resides outside our statutory insurance subsidiaries.
Insurance:
•Gross written premiums and premium equivalents for the quarter were $464.6 million, up 25.0% versus the prior year period, driven by growth in warranty and specialty programs. Excluding the incremental premium equivalents from our acquisition of Smart AutoCare, premiums and equivalents increased 7.4% for the quarter.
•Operating EBITDA was $19.1 million for the quarter, up $3.1 million over prior year period from growth in warranty and specialty programs.
•Combined ratio of 90.4% declined from 92.1% in the prior year period driven by improved underwriting performance and the overall shift in product mix.
•In September 2020, we announced the formation of a new excess and surplus lines subsidiary, Fortegra Specialty Insurance Company, which we expect will broaden our product reach and scope within the U.S.
•In October 2020, we refinanced and increased our premium finance asset based facility to support future growth.
Tiptree Capital:
•Operating EBITDA improved year over year by $11.2 million, driven primarily by higher loan origination volume and margins in our mortgage business.
Key Trends:
Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions and GDP growth, market liquidity and volatility, consumer confidence, U.S. demographics, employment and wage growth, business confidence and investment, inflation, interest rates and spreads, the impact of the regulatory environment, and the other factors set forth in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part II, Item 1A in this Form 10-Q. Generally, our businesses are positively affected by a healthy U.S. consumer, stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely, rising
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unemployment, volatile markets, rapidly rising interest rates, changing regulatory requirements and slowing business conditions can have a material adverse effect on our results of operations or financial condition.
Our insurance business generally focuses on products which have low severity but high frequency loss experiences and are short duration. As a result, the business has historically generated significant fee-based revenues. In general, the types of products we offer tend to have limited aggregation risk and, thus, limited exposure to catastrophic and residual risk. We mitigate our underwriting risk through a combination of reinsurance and retrospective commission structures with our distribution partners and/or third party reinsurers. To mitigate counterparty risk, we ensure our distribution partners’ captive reinsurance entities are over-collateralized with highly liquid investments, primarily cash and cash equivalents. Our insurance results primarily depend on our pricing, underwriting, risk retention and the accuracy of reserves, reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. While our insurance operations have historically maintained a relatively stable combined ratio which support steady earnings, our initiatives to change our business mix along with economic factors could generate different results than we have historically experienced. We believe there will continue to be growth opportunities to expand our warranty and specialty programs insurance business model to other niche products and markets.
In the first half of this year, widespread business closures, travel limitations, and stay-at-home orders due to the global spread of COVID-19 created significant market volatility, uncertainty and economic disruption. The economic impact of COVID-19 during this period caused temporary disruption to certain of our distribution partners’ businesses in our insurance business, particularly auto dealerships and retail partners who rely on brick and mortar outlets to sell their products. Conversely, those same partners have experienced reduced claims, as consumers have reduced miles driven and warranty service visits. During the same period, sales of credit protection products also declined in reaction to slowing growth in consumer credit, partially driven from the government stimulus provided to consumers. Less than 5% of our credit insurance products are exposed to increases in unemployment rates and over 50% of our credit insurance products protect underlying property, claims on which are not related to COVID-19. While we saw sales volume declines in many of our credit and warranty programs in response to the reduced economic activity in the second quarter of 2020, warranty programs returned to normalized sales volumes in the third quarter as parts of the economy re-opened. Growth in credit protection sales volumes, which tends to follow growth in consumer credit, recovered at a slower pace. Despite the improved sales volumes in the third quarter, as COVID-19 cases across the country continue to rise, should economic shutdowns reappear in response, there can be no assurance that we would not see volume declines in our insurance business similar to those we experienced earlier in the year.
Our insurance investment portfolio primarily serves as a source to pay claims and secondarily as a source of income for our operations. Our investments include fixed maturity securities, loans, credit investment funds, and equity securities. Many of our investments are held at fair value. Changes in fair value for loans, credit investment funds, and equity securities are reported quarterly as unrealized gains or losses in revenues and can be impacted by changes in interest rates, credit risk, or market risk, including specific company or industry factors. Our equity holdings are relatively concentrated. General equity market trends, along with company and industry specific factors, can impact the fair value of our holdings and can result in unrealized gains and losses affecting our results.
In the first half of the year, our insurance investment portfolio experienced negative unrealized mark-to-market fair value adjustments as securities and equity markets declined in response to concerns about the economic effects of the social distancing measures associated with COVID-19 mitigation efforts. Despite the unrealized marks, our overall capital position remains strong and we expect to continue to be able to support growth in our insurance business. While markets have recovered to some extent since the first half of the year, they remain volatile and any economic impacts resulting from the current trend of rising cases could result in additional unrealized or realized losses on these securities.
Common shares of Invesque represent a significant asset on our consolidated balance sheet, both as part of our insurance investment portfolio and separately in Tiptree Capital. Our investment in Invesque, which operates in the seniors housing and skilled nursing industries, is carried on our balance sheet at fair value. The decline in Invesque’s stock price had a material impact on the carrying value of our investment. In response to the uncertainty in the industry, Invesque announced in early April that it was suspending dividends to conserve liquidity until the impact of COVID-19 on occupancy rates and its operations is better known. While Invesque has announced that they are continuing to collect rents on its properties at approximately 94% of contractual obligations, any changes in their operations or ability to collect rents could continue to have a significant impact on their stock price and delay any potential restoration of their dividend. Decreases in the fair value of Invesque’s common stock and changes to its dividend payout levels, which we experienced during the first half of the year, had a significant impact on our results of operations, and could continue to do so should Invesque’s operations continue to be negatively affected as a result of the pandemic.
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The maritime transportation industry is highly competitive and fragmented. Demand for shipping capacity is a function of global economic conditions and the related demand for commodities, production and consumption patterns, and affected by events which interrupt production, trade routes, and consumption. The COVID-19 pandemic significantly impacted economic activity in China, the United States, Europe, and across developing markets, reducing demand for oil and other commodities. The sharp reduction in demand negatively affected charter rates for dry-bulk commodities, other than grains, in the first half of the year. The oversupply in oil markets initially led to significant demand for floating storage, increasing charter rates for product tankers. Both of these trends began to reverse in the second half of the year, with rates for dry bulk vessels improving and rates for product tankers softening. The shipping industry is cyclical with high volatility in charter hire rates and profitability, which can change rapidly as the economic impact of the pandemic and the surplus supply of oil unfolds during the remainder of the year. General global economic conditions, along with company and industry specific factors, are expected to continue to impact the fair value of our vessels and associated operating results.
While the overall impacts to our business operations to date from the COVID-19 pandemic have been relatively modest, and we have begun to see some improvement in certain of our businesses as sectors of the economy started to re-open, should a widespread economic shutdown reoccur and continue for an extended period, our business could be adversely impacted.
Our business can also be impacted in various ways by changes in interest rates, which can result in fluctuations in the fair value of our investments, revenues associated with floating rate investments, volume and revenues in our mortgage business and interest expense associated with floating rate debt used to fund many of our operations. Low mortgage rates due to the Federal Reserve intervention in mortgage markets, combined with limitations on operating capacity in the mortgage industry due to the COVID-19 pandemic, and rising home prices in certain markets has resulted in a combination of higher mortgage volumes and margins, which has been a benefit to our mortgage operations. The current low interest rate environment also benefits our interest cost on debt, although our corporate debt facility with Fortress is subject to a LIBOR floor, which limits further decline in our interest cost at the corporate level. There can be no assurance that these trends will continue, the reversal of which could have a materially negative impact to our results of operations. Separately, certain of our investments are LIBOR based, which has resulted in lower investment income during a period of extended low rates.
RESULTS OF OPERATIONS
The following is a summary of our consolidated financial results for the three and nine months ended September 30, 2020 and 2019. In addition to GAAP results, management uses the Non-GAAP measures Operating EBITDA, Adjusted EBITDA and book value per share as measurements of operating performance. Management believes these measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze financial performance, debt service and comparison among companies. Management uses Operating EBITDA as part of its capital allocation process and to assess comparative returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive officers. The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted (i) to add back corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) for the effect of purchase accounting, (iii) for non-cash fair value adjustments, and (iv) for any significant non-recurring expenses. Operating EBITDA represents Adjusted EBITDA plus stock based compensation expense, less realized and unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. See “Non-GAAP Reconciliations” for a reconciliation of these measures to their GAAP equivalents.
Selected Key Metrics
| ($ in millions, except per share information) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| GAAP: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Total revenues | $ | 224.0 | $ | 189.2 | $ | 552.9 | $ | 564.2 | |||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 12.8 | $ | (1.5) | $ | (43.4) | $ | 14.2 | |||||||||||||||
| Diluted earnings per share | $ | 0.35 | $ | (0.04) | $ | (1.27) | $ | 0.39 | |||||||||||||||
| Cash dividends paid per common share | $ | 0.04 | $ | 0.04 | $ | 0.12 | $ | 0.115 | |||||||||||||||
Non-GAAP: (1) | |||||||||||||||||||||||
| Operating EBITDA | $ | 31.9 | $ | 17.3 | $ | 69.9 | $ | 42.6 | |||||||||||||||
| Adjusted EBITDA | $ | 20.4 | $ | 6.2 | $ | (37.9) | $ | 43.7 | |||||||||||||||
| Book value per share | $ | 10.36 | $ | 11.43 | $ | 10.36 | $ | 11.43 | |||||||||||||||
(1) For information relating to Operating and Adjusted EBITDA and book value per share, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
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Revenues
For the three months ended September 30, 2020, revenues were $224.0 million, which increased $34.8 million, or 18.4% compared to the prior year period primarily due to a combination of growth in service and administrative fees related to our warranty programs and gains on mortgage loans sold in our mortgage business. For the nine months ended September 30, 2020, revenues were $552.9 million, which decreased $11.3 million, or 2.0% compared to the prior year period, primarily due to net realized and unrealized losses on Invesque and other securities held at fair value. Earned premiums and service and administrative fees were $164.1 million for the three months ended September 30, 2020, up $8.8 million, or 5.7%, and $479.3 million for the nine months ended September 30, 2020, up $35.9 million, or 8.1%, driven by growth in warranty service contracts and light commercial specialty programs. Also contributing to higher revenues in the quarter and the year to date were increases in net realized and unrealized gains on mortgage loans, which were up $21.7 million and $41.6 million, respectively. Offsetting all of these increases were net realized and unrealized losses of $7.7 million and $97.9 million for the three and nine month periods ended September 30, 2020, respectively, on Invesque and other equity holdings.
The combination of unearned premiums and deferred revenues on the balance sheet grew by $361.5 million, or 45.8%, from September 30, 2019 to September 30, 2020 as a result of increased written premiums and premium equivalents, primarily in warranty programs, including the acquisition of Smart AutoCare, which contributed $205.9 million of growth in deferred revenues, and in light commercial specialty programs.
The table below provides a break down between net realized and unrealized gains and losses from Invesque and from other securities which impacted our consolidated results on a pre-tax basis. Many of our investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these investments to be relatively volatile between periods, which was highlighted by the market volatility in the first half of the year caused by uncertainly regarding the impact of COVID-19. Our fixed income securities are primarily marked to market through accumulated other comprehensive income (AOCI) in stockholders’ equity and do not impact net realized and unrealized gains and losses until they are sold.
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Net realized and unrealized gains (losses)(1) | $ | 1.5 | $ | (8.9) | $ | (18.1) | $ | 1.3 | |||||||||||||||
| Net realized and unrealized gains (losses) - Invesque | $ | (9.2) | $ | — | $ | (79.8) | $ | 6.2 | |||||||||||||||
(1) Excludes Invesque, Mortgage realized and unrealized gains and losses and NPLs.
Net Income (Loss) Attributable to Common Stockholders
For the three months ended September 30, 2020, net income available to common stockholders was $12.8 million, an increase of $14.3 million. For the nine months ended September 30, 2020, net loss available to common stockholders was $43.4 million, a decrease of $57.6 million. The increase in the quarter and the decrease year to date were primarily driven by the same factors that impacted revenues in the respective periods.
Operating and Adjusted EBITDA - Non-GAAP
Operating EBITDA for the three months ended September 30, 2020 was $31.9 million, an increase of $14.6 million, or 84.4% from the prior year period, and $69.9 million for the nine months ended September 30, 2020, an increase of $27.3 million, or 64.1%. For the three and nine months ended September 30, 2020, the key drivers of the increases were growth in warranty and specialty programs in our insurance business, and increases in volumes and margins in our mortgage business in Tiptree Capital.
Adjusted EBITDA for the three months ended September 30, 2020 was $20.4 million, an increase of $14.2 million. The increase was driven by the same factors that drove improvement in Operating EBITDA. Adjusted EBITDA for the nine month period was a loss of $37.9 million, a decrease of $81.6 million, which was substantially driven by unrealized losses on Invesque and other equity securities. See “— Non-GAAP Reconciliations” for a reconciliation of Operating and Adjusted EBITDA to GAAP net income.
Book Value per share - Non-GAAP
Total stockholders’ equity was $361.7 million as of September 30, 2020 compared to $407.4 million as of September 30, 2019. Over the past twelve months, Tiptree returned $14.6 million to shareholders through share repurchases and dividends paid. Book value per share for the period ended September 30, 2020 was $10.36, a decrease from book value per share of
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$11.43 as of September 30, 2019, but up $0.39 per share versus the second quarter. The key drivers of the reduction from the prior year period were losses per share and dividends paid of $0.16 per share. The decrease was partially offset by the purchase of 1.477 million shares at an average 37% discount to book value. The key driver of the improvement versus the prior quarter was positive net income, as our business operations showed positive momentum relative to the impact from COVID-19 in the first half of 2020.
Results by Segment
We classify our business into one reportable segment, Tiptree Insurance, with the remainder of our non-insurance operations aggregated into Tiptree Capital. Corporate activities include holding company interest expense, corporate employee compensation and benefits, and other expenses, including, but not limited to, public company expenses. The following table presents the components of total pre-tax income.
Pre-tax Income
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Tiptree Insurance | $ | 13.4 | $ | 8.3 | $ | 0.4 | $ | 28.4 | |||||||||||||||
| Tiptree Capital | 9.5 | (1.4) | (38.6) | 16.2 | |||||||||||||||||||
| Corporate | (9.0) | (8.6) | (25.2) | (25.4) | |||||||||||||||||||
| Pre-tax income (loss) | $ | 13.9 | $ | (1.7) | $ | (63.4) | $ | 19.2 | |||||||||||||||
Invested Capital, Total Capital and Operating EBITDA - Non-GAAP (1)
Management evaluates the return on Invested Capital and Total Capital, which are non-GAAP financial measures, when making capital decisions. Invested Capital represents the total equity investment, including any re-investment of earnings, and acquisition costs, net of tax. Total Capital represents Invested Capital plus Corporate Debt. Management believes the use of these financial measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze how a company has allocated capital over time and provide a basis for determining the return on capital to shareholders. Management uses both of these measures when making capital decisions, including reinvesting cash, and evaluating the relative performance of its businesses and investments. The following tables present the components of Invested Capital, Total Capital, Operating EBITDA and Adjusted EBITDA. The increase in negative Invested Capital at the corporate level is a combination of the investment of the net proceeds from our corporate debt refinancing into Tiptree Insurance to fund our warranty business and the increased investment in vessels in Tiptree Capital since the same period in the prior year.
| As of September 30, | |||||||||||||||||||||||
| ($ in millions) | Invested Capital (1) | Total Capital (1) | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Tiptree Insurance | $ | 339.9 | $ | 304.1 | $ | 499.9 | $ | 464.1 | |||||||||||||||
| Tiptree Capital | 148.9 | 198.3 | 148.9 | 198.3 | |||||||||||||||||||
| Corporate | (82.2) | (55.5) | 39.7 | 13.7 | |||||||||||||||||||
| Total Tiptree | $ | 406.6 | $ | 446.9 | $ | 688.5 | $ | 676.1 | |||||||||||||||
Operating and Adjusted EBITDA
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Tiptree Insurance | $ | 19.1 | $ | 16.0 | $ | 48.1 | $ | 44.5 | |||||||||||||||
| Tiptree Capital | 18.2 | 7.0 | 36.1 | 15.3 | |||||||||||||||||||
| Corporate | (5.4) | (5.7) | (14.3) | (17.2) | |||||||||||||||||||
Operating EBITDA (1) | $ | 31.9 | $ | 17.3 | $ | 69.9 | $ | 42.6 | |||||||||||||||
| Stock based compensation expense | (2.6) | (1.5) | (6.2) | (4.5) | |||||||||||||||||||
| Vessel depreciation, net of capital expenditures | (1.2) | (0.7) | (3.6) | (1.9) | |||||||||||||||||||
Realized and unrealized gains (losses) (2) | (7.7) | (8.9) | (97.9) | 7.5 | |||||||||||||||||||
Third party non-controlling interests (3) | — | — | (0.1) | — | |||||||||||||||||||
Adjusted EBITDA (1) | $ | 20.4 | $ | 6.2 | $ | (37.9) | $ | 43.7 | |||||||||||||||
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(1) For further information relating to Invested Capital, Total Capital, Operating EBITDA and Adjusted EBITDA, including a reconciliation to GAAP total stockholders’ equity and pre-tax income, see “—Non-GAAP Reconciliations.”
(2) Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs.
(3) Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee-based shares.
Tiptree Insurance
Our principal operating subsidiary, Tiptree Insurance, is a provider of specialty insurance products and related services, including credit protection insurance, warranty products, and insurance programs which underwrite niche personal and commercial lines of insurance. We also offer fee-based administration and fronting services for our self-insured clients who own captive producer owned reinsurance companies (PORCs). We generate income from insurance underwriting operations and our investment portfolio. Insurance underwriting revenues are primarily generated from net earned premiums, service and administrative fees and ceding commissions. We measure insurance underwriting operations performance by underwriting margin, combined ratio and Operating EBITDA. The investment portfolio income consists of investment income and gains and losses, and is measured by net portfolio income.
The following tables present the insurance segment results for the three and nine months ended September 30, 2020 and 2019.
Operating Results
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Gross written premiums and equivalents | $ | 464.6 | $ | 371.7 | $ | 1,175.6 | $ | 936.7 | |||||||||||||||
| Net written premiums | 146.5 | 160.1 | 379.4 | 434.8 | |||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Net earned premiums | $ | 116.4 | $ | 129.2 | $ | 345.0 | $ | 364.7 | |||||||||||||||
| Service and administrative fees | 47.7 | 26.1 | 134.3 | 78.7 | |||||||||||||||||||
| Ceding commissions | 5.1 | 1.6 | 16.2 | 7.2 | |||||||||||||||||||
| Net investment income | 3.0 | 3.0 | 8.8 | 10.7 | |||||||||||||||||||
| Net realized and unrealized gains (losses) | 0.7 | (1.1) | (27.3) | 4.7 | |||||||||||||||||||
| Other income | 1.0 | 1.3 | 5.3 | 3.1 | |||||||||||||||||||
| Total revenues | $ | 173.9 | $ | 160.1 | $ | 482.3 | $ | 469.1 | |||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Policy and contract benefits | 57.8 | 44.0 | 167.8 | 124.3 | |||||||||||||||||||
| Commission expense | 68.9 | 77.5 | 207.2 | 225.1 | |||||||||||||||||||
| Employee compensation and benefits | 15.9 | 12.6 | 47.9 | 36.7 | |||||||||||||||||||
| Interest expense | 4.0 | 3.6 | 11.2 | 11.2 | |||||||||||||||||||
| Depreciation and amortization expense | 2.3 | 2.3 | 7.2 | 6.9 | |||||||||||||||||||
| Other expenses | 11.6 | 11.8 | 40.6 | 36.5 | |||||||||||||||||||
| Total expenses | $ | 160.5 | $ | 151.8 | $ | 481.9 | $ | 440.7 | |||||||||||||||
| Pre-tax income (loss) | $ | 13.4 | $ | 8.3 | $ | 0.4 | $ | 28.4 | |||||||||||||||
Results
Our insurance operations are currently expanding product lines in an effort to increase written premiums and premium equivalents, such as service and administrative fees, and commensurately grow the insurance portfolio. As part of this process, the business is investing to grow warranty and specialty programs, including through the acquisition of Smart AutoCare, while maintaining a leading position in our credit protection markets. That, combined with the earnings performance of the investment portfolio, is a key driver in comparing 2020 versus 2019 results. The growth in written premiums and service and administrative fees, combined with higher retention in select products, has resulted in an increase of unearned premiums and deferred revenue on the balance sheet of $361.5 million, or 45.8%, from $789.8 million as of September 30, 2019 to $1,151.3 million as of September 30, 2020. The first quarter 2020 acquisition of Smart AutoCare represented growth of $205.9 million of deferred revenues for the current period.
Pre-tax income was $13.4 million for the three months ended September 30, 2020, an increase of $5.1 million. Underwriting margin was up $6.8 million, or 18.5% from the prior year period, driven by increases in warranty and specialty programs. Partially offsetting this growth were increased operating expenses of $3.1 million, primarily as a result of increased
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headcount from the Smart AutoCare acquisition. Pre-tax contributions from investments increased $1.8 million over the prior year period, driven by unrealized gains in the three months ended September 30, 2020.
Pre-tax income was $0.4 million for the nine months ended September 30, 2020, a decrease of $28.0 million. The primary drivers of the decrease were net realized and unrealized losses of $27.3 million in the nine months ended September 30, 2020 versus gains of $4.7 million for the nine months ended September 30, 2019, primarily related to Invesque, and other equities and loans held at fair value in the portfolio. Insurance underwriting results improved by $21.5 million, or 20.6% for the nine months ended September 30, 2020, primarily as a result of growth in warranty and specialty programs. This was partially offset by increases in operating expenses of $15.3 million, primarily associated with the growth in premiums and equivalents, including the acquisition of Smart AutoCare.
Revenues
Revenues are generated by the sale of the following products: credit protection, warranty, specialty, services and other. Credit protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include vehicle service contracts, furniture and appliance service contracts and mobile device protection. Specialty programs are primarily personal and commercial lines and other property-casualty products.
For the three months ended September 30, 2020, total revenues were $173.9 million, up $13.8 million, or 8.6%, primarily driven by increases in service and administrative fees of $21.6 million related to growth in warranty and specialty programs, partially offset by declines in net earned premiums of $12.8 million, primarily related to the retrocession of a portion of our credit protection book at year-end 2019.
For the nine months ended September 30, 2020, total revenues were $482.3 million, up $13.2 million, or 2.8%, primarily driven by increases in service and administrative fees of $55.6 million, partially offset by declines in net earned premiums of $19.7 million, both related to the same factors as those impacting the quarter. Further dampening revenue growth in the nine month period was an increase in net realized and unrealized losses on the investment portfolio of $27.3 million. See “—Tiptree Insurance Investment Portfolio” for a further discussion of the investment results.
Expenses
Total expenses include policy and contract benefits, commissions expense and operating expenses. For the three months ended September 30, 2020, total expenses were $160.5 million, up $8.7 million, or 5.7%, and for the nine months ended September 30, 2020, total expenses were $481.9 million, up $41.2 million, or 9.3%, primary driven by increases in policy and contract benefits, partially offset by reduced commission expense, and increased employee compensation and benefits, including impacts from the acquisition of Smart AutoCare.
There are two types of claims expenses under insurance and warranty service contracts included in policy and contract benefits: member benefit claims, and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in warranty protection and motor club service contracts. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering claims for credit life and other insurance lines. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Loss occurrences in our insurance products are characterized by low severity and high frequency. Factors affecting loss frequency and loss severity include the volume of underwritten contracts, changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
For the three months ended September 30, 2020, policy and contract benefits were $57.8 million, up $13.8 million, or 31.4%, and for the nine months ended September 30, 2020, policy and contract benefits were $167.8 million, up $43.5 million, or 35%, primarily as a result of growth in written premiums, including growth related to the acquisition of Smart AutoCare.
Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to agents, distributors and retailers selling our products, including credit insurance policies, warranty and mobile device protection service contracts, and motor club memberships. When claims increase, in most cases our distribution partners bear the risk through a reduction in their retrospective commissions. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions and retention levels.
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Total commission expense for the three months ended September 30, 2020 was $68.9 million, down $8.6 million, or 11.1%, and for the nine months ended September 30, 2020 was $207.2 million, down $17.9 million, or 8.0%, primarily due to a combination of higher claims borne by our distribution partners, through a reduction of retrospective commissions, and the ceding of a portion of our credit protection insurance book at year-end 2019.
Operating expenses include employee compensation and benefits, interest expense, depreciation and amortization expense and other expenses. For the three months ended September 30, 2020, employee compensation and benefits were $15.9 million, up $3.3 million, or 26.2%, and for the nine months ended September 30, 2020, employee compensation and benefits were $47.9 million, up $11.2 million, or 30.5%, primarily from increased headcount in connection with the acquisition of Smart AutoCare. Interest expense of $4.0 million in the three months ended September 30, 2020 increased by $0.4 million, or 11.1%, primarily from higher average outstanding balances. Interest expense was consistent at $11.2 million for each of the nine months ended September 30, 2020 and 2019. Other expenses for the three months ended September 30, 2020 were $11.6 million, down $0.2 million, or 1.7%, and for the nine months ended September 30, 2020 were $40.6 million, up $4.1 million, or 11.2%, primarily from higher premium taxes due to growth in written premiums and professional fees incurred in connection with the acquisition.
Key Operating Metrics and Non-GAAP Operating Results
Gross & Net Written Premiums
Gross written premiums and equivalents represent total premiums from insurance policies and warranty service contracts written, as well as premium finance volumes during a reporting period. Net written premiums are gross written premiums and equivalents less that portion of premiums ceded to third party reinsurers or PORCs. The amount ceded is based on the individual reinsurance agreements. Net earned premiums are the earned portion of our net written premiums. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy.
Written Premium Metrics
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Gross Written Premiums and Equivalents | Net Written Premiums | Gross Written Premiums and Equivalents | Net Written Premiums | |||||||||||||||||||||||||||||||||||||||||||
| Insurance Products: | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Credit protection | $ | 167.1 | $ | 191.1 | $ | 77.0 | $ | 113.3 | $ | 449.4 | $ | 504.2 | $ | 216.7 | $ | 303.1 | |||||||||||||||||||||||||||||||
| Warranty | 185.6 | 104.6 | 38.1 | 26.7 | 445.3 | 268.4 | 89.5 | 87.8 | |||||||||||||||||||||||||||||||||||||||
| Specialty | 82.4 | 43.2 | 31.4 | 20.1 | 187.9 | 103.5 | 73.2 | 43.9 | |||||||||||||||||||||||||||||||||||||||
| Services and other | 29.5 | 32.8 | — | — | 93.0 | 60.6 | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 464.6 | $ | 371.7 | $ | 146.5 | $ | 160.1 | $ | 1,175.6 | $ | 936.7 | $ | 379.4 | $ | 434.8 | |||||||||||||||||||||||||||||||
Total gross written premiums and equivalents for the three months ended September 30, 2020 were $464.6 million, which represented an increase of $92.9 million, or 25.0% over the prior year period. Total gross written premiums and equivalents for the nine months ended September 30, 2020 were $1,175.6 million, which represented an increase of $238.9 million, or 25.5%. The increases in both periods were driven by growth in warranty, specialty programs, and services and other volumes, offset by credit protection related to lower growth in consumer credit due to the impact of COVID-19. Excluding the incremental premium equivalents from our acquisition of Smart AutoCare, premiums and equivalents increased 7.4% for the quarter and 9.7% for the year-to-date period.
Total net premiums written for the three months ended September 30, 2020 were $146.5 million, down $13.6 million, or 8.5%, and for the nine months ended September 30, 2020 were $379.4 million, down $55.4 million, or 12.7%, driven by decreases in credit protection, offset by an increase in specialty programs. The amount of business retained for the nine months ended September 30, 2020 was 32.3%, down from 46.4% in the prior year period, as we ceded a portion of our credit protection policies at year-end 2019.
We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion. While growth in these areas has recovered in the third quarter as compared to the second quarter impact from the COVID-19 economic shutdowns, should rising cases result in additional disruptions to economic activity, we could experience a dampening of our near term rate of growth in these areas.
Product Underwriting Margin - Non-GAAP
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The following table presents product specific revenue and expenses within the Tiptree Insurance segment. We generally manage our exposure to the underwriting risk we assume using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid are adjusted based on the actual underlying losses incurred), which mitigate our risk. Period-over-period comparisons of revenues and expenses are often impacted by the PORCs and distribution partners choice as to whether to retain risk, specifically service and administration expenses and ceding commissions, both components of revenue, and policy and contract benefits and commissions paid to our partners and reinsurers. Generally, when losses are incurred, the risk which is retained by our partners and reinsurers is reflected in a reduction in commissions paid. In order to better explain to investors the net financial impact of the risk retained by the Company of the insurance contracts written and the impact on profitability, we use the Non-GAAP metric - Underwriting Margin.
Underwriting Revenues and Underwriting Margin - Non-GAAP(1)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Underwriting Revenues | Underwriting Margin | Underwriting Revenues | Underwriting Margin | |||||||||||||||||||||||||||||||||||||||||||
| Insurance products: | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Credit protection | $ | 89.9 | $ | 110.2 | $ | 21.7 | $ | 23.0 | $ | 283.4 | $ | 323.9 | $ | 62.6 | $ | 65.0 | |||||||||||||||||||||||||||||||
| Warranty | 54.5 | 31.9 | 15.5 | 8.7 | 144.7 | 86.8 | 44.0 | 25.1 | |||||||||||||||||||||||||||||||||||||||
| Specialty | 23.3 | 13.3 | 3.9 | 2.2 | 64.1 | 35.4 | 10.8 | 6.5 | |||||||||||||||||||||||||||||||||||||||
| Services and other | 2.5 | 2.8 | 2.4 | 2.8 | 8.6 | 7.6 | 8.4 | 7.7 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 170.2 | $ | 158.2 | $ | 43.5 | $ | 36.7 | $ | 500.8 | $ | 453.7 | $ | 125.8 | $ | 104.3 | |||||||||||||||||||||||||||||||
(1) For further information relating to the Company’s underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
Underwriting margin for the three months ended September 30, 2020 was $43.5 million, up $6.8 million, or 18.5%, and for the nine months ended September 30, 2020 was $125.8 million, up $21.5 million, or 20.6%. Credit protection underwriting margin was $21.7 million for the three months ended September 30, 2020, a decrease of $1.3 million, or 5.7%, and $62.6 million for the nine months ended September 30, 2020, a decrease of $2.4 million, or 3.7%. Credit protection was impacted by lower sales volumes in the second and third quarters of 2020, which we believe was related to reduced consumer lending activity as a result of stimulus payments received and social distancing measures associated with COVID-19. Underwriting margin for warranty products for the three months ended September 30, 2020 was $15.5 million, up $6.8 million, or 78.2%, and for the nine months ended September 30, 2020 was $44.0 million, up $18.9 million, or 75.3%, driven primarily by the acquisition of Smart AutoCare. Specialty underwriting margin for the three months ended September 30, 2020 was $3.9 million, up $1.7 million, or 77.3%, and for the nine months ended September 30, 2020 was $10.8 million, up $4.3 million, or 66.2%, driven by growth in our light commercial specialty programs. Services and other contributed $2.4 million in the three months ended September 30, 2020, which was down $0.4 million, or 14.3%, and $8.4 million in the nine months ended September 30, 2020, which was up $0.7 million, or 9.1%.
Invested Capital, Total Capital, Operating EBITDA and Insurance Operating Ratios
We use the combined ratio as an operating metric to evaluate our insurance underwriting performance, both overall and relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and other income (excluding returns on the investment portfolio). Investors use this ratio to evaluate the ability of insurers to profitably underwrite the risks they assume over time and manage operating costs. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. The below table outlines the insurance operating ratios, capital invested and the drivers of Operating EBITDA split between underwriting and investments, as management evaluates the return on the investment portfolio separately from the returns from underwriting activities.
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Invested Capital, Total Capital, Operating EBITDA and Operating Ratios - Non-GAAP(1)
| ($ in millions) | As of September 30, | ||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
Invested Capital(1) | $ | 339.9 | $ | 304.1 | |||||||||||||||||||
Total Capital(1) | $ | 499.9 | $ | 464.1 | |||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Operating EBITDA drivers: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Underwriting | $ | 16.5 | $ | 12.6 | $ | 40.0 | $ | 33.1 | |||||||||||||||
| Investments | 2.6 | 3.4 | 8.1 | 11.4 | |||||||||||||||||||
Tiptree Insurance Operating EBITDA(1) | $ | 19.1 | $ | 16.0 | $ | 48.1 | $ | 44.5 | |||||||||||||||
| Insurance operating ratios: | |||||||||||||||||||||||
Combined ratio (1) | 90.4 | % | 92.1 | % | 91.8 | % | 92.8 | % | |||||||||||||||
(1) For further information relating to the Company’s Operating EBITDA, Invested and Total Capital, and combined ratio, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
The combined ratio was 90.4% for the three months ended September 30, 2020, compared to 92.1% for the prior year period, and 91.8% for the nine months ended September 30, 2020, compared to 92.8% for the prior year period. The improved ratio in both periods was primarily related to the shift in product mix toward warranty and specialty, which tend to have slightly higher product margins. See “—Insurance Investment Portfolio” for a further discussion of the investment results and “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
Insurance Investment Portfolio
Our insurance investment portfolio includes investments held in statutory insurance companies and in unregulated entities. The portfolio held in statutory insurance companies are subject to different regulatory considerations, including with respect to types of assets, concentration limits, affiliate transactions and the use of leverage. Our investment strategy is designed to achieve attractive risk-adjusted returns over the entire investment horizon across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations. As such, volatility from realized and unrealized gains and losses may impact period-over-period performance. Unrealized gains and losses on equity securities and loans held at fair value impact current period net income, while unrealized gains and losses on AFS securities impact AOCI.
In managing our investment portfolio, we analyze net investments and net portfolio income, which are non-GAAP measures. Our presentation of net investments equals total investments plus cash and cash equivalents minus asset based financing related to certain investments. Our presentation of net portfolio income equals net investment income plus realized and unrealized gains and losses, including unrealized gains and losses on securities which are taken to AOCI, and minus interest expense associated with asset based financing of investments. Net investments and net portfolio income are used to calculate year to date portfolio return, which is one of the measures management uses to analyze the profitability of our investment portfolio. Management believes this information on a cumulative basis is useful since it allows investors to evaluate the performance of our investment portfolio based on the capital at risk and on a non-consolidated basis. Our calculation of net investments and net portfolio income may differ from similarly titled non-GAAP financial measures used by other companies. Net investments and net portfolio income are not measures of financial performance or liquidity under GAAP and should not be considered a substitute for total investments or net investment income. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP total investments and investment income.
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Tiptree Insurance Investment Portfolio - Non-GAAP
| ($ in millions) | As of September 30, | ||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
Cash and cash equivalents (1) | $ | 101.1 | $ | 99.4 | |||||||||||||||||||
| Available for sale securities, at fair value | 369.9 | 315.2 | |||||||||||||||||||||
| Equity securities | 84.3 | 55.3 | |||||||||||||||||||||
| Corporate bonds, at fair value | 96.2 | — | |||||||||||||||||||||
Loans, at fair value (2) | 5.3 | 16.5 | |||||||||||||||||||||
| Real estate, net | 1.3 | 4.3 | |||||||||||||||||||||
| Other investments | 20.2 | 23.0 | |||||||||||||||||||||
| Securities sold, not yet purchased | (67.1) | — | |||||||||||||||||||||
| Net investments | $ | 611.2 | $ | 513.7 | |||||||||||||||||||
(1) Cash and cash equivalents, plus restricted cash, net of due from/due to brokers and investment portfolio debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials. | |||||||||||||||||||||||
(2) Loans, at fair value, net of asset based debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials. | |||||||||||||||||||||||
| Tiptree Insurance Net Investment Portfolio Income - Non-GAAP | |||||||||||||||||||||||
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net investment income | $ | 3.0 | $ | 3.0 | $ | 8.8 | $ | 10.7 | |||||||||||||||
| Other income | (0.6) | 0.3 | (0.6) | 0.8 | |||||||||||||||||||
| Realized gains (losses) | 0.3 | 2.2 | (14.9) | 5.8 | |||||||||||||||||||
| Unrealized gains (losses) | 0.4 | (3.3) | (12.4) | (1.1) | |||||||||||||||||||
| Unrealized gains (losses) on available for sale securities | (0.2) | — | 5.1 | 5.3 | |||||||||||||||||||
| Interest expense | — | — | — | (0.6) | |||||||||||||||||||
| Net portfolio income (loss) | $ | 2.9 | $ | 2.2 | $ | (14.0) | $ | 20.9 | |||||||||||||||
Portfolio return % (1) | 0.5 | % | 0.5 | % | (2.5) | % | 4.4 | % | |||||||||||||||
(1) Portfolio return % represents the ratio of net investment income, realized and unrealized gains (losses) (including realized and unrealized gains (losses) on available for sale securities included in AOCI), less investment portfolio interest expense to the average of the prior two quarters total investments less investment portfolio debt plus cash.
Net investments of $611.2 million have grown 19.0% from September 30, 2019 through a combination of organic growth in written premiums and the acquisition of Smart AutoCare.
Our net investment income includes interest and dividends, net of investment expenses, on our invested assets. Our loans, at fair value, are generally floating rate and therefore earn LIBOR plus a spread. Generally, our interest income on those loans will increase in a rising interest rate environment, or decrease in a declining rate environment, subject to any LIBOR floors. Our held-to-maturity investments generally carry fixed coupons, which can impact our returns on investment. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We report net unrealized gains and losses on securities classified as AFS separately within AOCI on our balance sheet. For loans, at fair value, and equity securities, we report unrealized gains and losses within net realized gains and losses on the condensed consolidated statement of operations.
For the three months ended September 30, 2020, the net portfolio income was $2.9 million, up $0.7 million from the 2019 period. Net investment income was $3.0 million, consistent period over period. For the three months ended September 30, 2020, fair market value changes on equities and other securities carried at fair value resulted in unrealized and realized gains of $0.7 million compared to losses of $1.1 million for the prior year period. The portfolio return for the three months stayed consistent at 0.5%.
For the nine months ended September 30, 2020, the net portfolio loss was $14.0 million, down $34.9 million from the 2019 period, due to realized and unrealized losses. Net investment income was $8.8 million for the nine months ended September 30, 2020, down $1.9 million, or 17.8%. The reduction in the nine month period was driven primarily by our efforts to reduce exposure to levered credit through the sale of loans held at fair value, combined with an overall decline in interest rates. For the nine month period, we experienced net realized and unrealized losses on equities and other securities carried at fair value of $27.3 million, compared to gains of $4.7 million in the prior year. The portfolio return for the nine months decreased from 4.4% in 2019 to negative 2.5% in 2020, driven by both lower net investment income and realized and unrealized losses
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versus gains in the prior year.
Tiptree Capital
Tiptree Capital consists of our non-insurance operating businesses and investments. As of September 30, 2020, Tiptree Capital includes our Invesque shares, maritime transportation operations, and mortgage operations. We manage Tiptree Capital on a return to capital basis, balancing current cash flow and long-term value appreciation relative to capital invested.
The following table summarizes total revenues and pre-tax income from Tiptree Capital.
Operating Results
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Total revenues | $ | 50.0 | $ | 29.1 | $ | 70.6 | $ | 95.1 | |||||||||||||||
| Pre-tax income (loss) | $ | 9.5 | $ | (1.4) | $ | (38.6) | $ | 16.2 | |||||||||||||||
Drivers of pre-tax income
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Asset management fees and credit investments | $ | — | $ | — | $ | — | $ | 8.0 | |||||||||||||||
| Maritime transportation | $ | 0.2 | $ | 0.5 | $ | 1.2 | $ | 1.0 | |||||||||||||||
| Specialty finance and other | $ | 16.9 | $ | 2.1 | $ | 23.7 | $ | 1.0 | |||||||||||||||
Senior living (Invesque)(1) | $ | (7.6) | $ | (4.0) | $ | (63.5) | $ | 6.2 | |||||||||||||||
(1) Includes $0.0 million of dividends (due to the suspension of Invesque’s dividend announced in April 2020) and $7.6 million of unrealized losses for the three months ended September 30, 2020, and $2.5 million of dividends and $6.5 million of unrealized losses for the three months ended September 30, 2019. Includes $2.5 million of dividends and $66.0 million of unrealized losses for the nine months ended September 30, 2020, and $7.6 million of dividends and $1.4 million of unrealized losses for the nine months ended September 30, 2019.
Results from Operations
Tiptree Capital earns revenues from the following sources: net interest income; mortgage gains and origination fees; asset management fees from CLOs under management (prior to the sale of our Telos asset management business which occurred on April 26, 2019); distributions and realized and unrealized gains on the Company’s investment holdings (primarily Invesque); and charter revenue from vessels within our maritime transportation operations.
Revenues for the three months ended September 30, 2020 were $50.0 million, an increase of $20.9 million from the prior year period driven primarily by revenues of $52.0 million from growth in mortgage volumes and margins. Revenues for the nine months ended September 30, 2020 were $70.6 million, a decrease of $24.5 million from the prior year period. The primary driver of revenues for the nine months ended September 30, 2020 were $116.6 million from growth in mortgage volumes and margins, offset by unrealized losses of $66.0 million on Invesque.
Pre-tax income for the three months ended September 30, 2020 was $9.5 million, compared to a loss of $1.4 million in the 2019 period. The primary driver of pre-tax income for the period was the same as revenues. Pre-tax loss for nine months ended September 30, 2020 was $38.6 million, compared to income of $16.2 million in the 2019 period. The primary driver of the decrease was unrealized losses on our investment in Invesque, partially offset by significant growth in our mortgage operations associated with the lower interest rate environment.
Tiptree Capital - Invested Capital and Operating EBITDA - Non-GAAP(1)
| ($ in millions) | Invested Capital(1) | Operating EBITDA(1) | |||||||||||||||||||||||||||||||||
| As of September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Senior living (Invesque) | $ | 27.6 | $ | 95.0 | $ | — | $ | 2.5 | $ | 2.5 | $ | 7.6 | |||||||||||||||||||||||
| Maritime transportation | 73.8 | 73.9 | 1.7 | 1.2 | 5.4 | 2.9 | |||||||||||||||||||||||||||||
| Specialty finance and other | 47.5 | 29.4 | 16.5 | 3.3 | 28.2 | 4.8 | |||||||||||||||||||||||||||||
| Total | $ | 148.9 | $ | 198.3 | $ | 18.2 | $ | 7.0 | $ | 36.1 | $ | 15.3 | |||||||||||||||||||||||
12
(1) For information relating to Invested Capital and Operating EBITDA, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
Invested Capital
Invested Capital decreased from $198.3 million as of September 30, 2019 to $148.9 million as of September 30, 2020, primarily due to unrealized losses as a result of the decline in Invesque’s share price, offset by the purchase of an additional vessel in the fourth quarter of 2019 for a net aggregate purchase price of $19.1 million, and improved earnings in specialty finance.
Operating EBITDA
Operating EBITDA increased $11.2 million, or 160.0%, to $18.2 million for the three months ended September 30, 2020, and increased $20.8 million, or 135.9%, to $36.1 million for the nine months ended September 30, 2020. The key driver of the Operating EBITDA increases were increased mortgage volumes and margins. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.
Corporate
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Employee compensation and benefits | $ | 2.0 | $ | 2.0 | $ | 5.8 | $ | 5.3 | |||||||||||||||
| Employee incentive compensation expense | 1.9 | 2.0 | 4.3 | 7.0 | |||||||||||||||||||
| Interest expense | 2.7 | 1.6 | 7.4 | 4.8 | |||||||||||||||||||
| Depreciation and amortization expense | 0.2 | 0.3 | 0.6 | 0.5 | |||||||||||||||||||
| Other expenses | 2.2 | 2.7 | 7.1 | 7.8 | |||||||||||||||||||
| Total expenses | $ | 9.0 | $ | 8.6 | $ | 25.2 | $ | 25.4 | |||||||||||||||
Results
Corporate expenses include expenses of the holding company for interest expense, employee compensation and benefits, and public company and other expenses. Corporate employee compensation and benefits includes the expense of management, legal and accounting staff. Other expenses primarily consisted of audit and professional fees, insurance, office rent and other related expenses.
Employee compensation and benefits, including incentive compensation expense, decreased $0.1 million and $2.2 million for the three and nine months ended September 30, 2020, respectively, driven primarily by a reduction in employee incentive compensation. Interest expense for the three and nine months ended September 30, 2020 was $2.7 million and $7.4 million, respectively, an increase of $1.1 million and $2.6 million from the same periods in the prior year, driven by a higher average outstanding balance during the 2020 periods. As of September 30, 2020, the outstanding borrowing was $121.9 million, compared to $69.2 million at September 30, 2019.
Provision for Income Taxes
The total income tax benefit of $22.0 million for the nine months ended September 30, 2020 and total income tax expense of $3.7 million for the nine months ended September 30, 2019 are reflected as components of net income (loss).
For the three months ended September 30, 2020, the Company’s effective tax rate was equal to (6.1)%. The effective rate for the three months ended September 30, 2020 was lower than the U.S. federal statutory income tax rate of 21.0%, primarily from the impact of expected refunds arising from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). For the three months ended September 30, 2019, the Company’s effective tax rate was equal to 38.8%. The effective rate for the three months ended September 30, 2019 was higher than the statutory rate of 21.0%, primarily due to the dividends received deduction and other discrete items.
For the nine months ended September 30, 2020, the Company’s effective tax rate was equal to 34.7%. The effective rate for the nine months ended September 30, 2020 was higher than the U.S. federal statutory income tax rate of 21.0%, primarily from the impact of expected refunds arising from the CARES Act. For the nine months ended September 30, 2019, the Company’s effective tax rate was equal to 19.2%. The effective rate for the nine months ended September 30, 2019 was lower than the statutory rate of 21.0%, primarily due to the dividends received deduction and other discrete items.
13
On March 27, 2020, the CARES Act was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses. During the nine months ended September 30, 2020, the Company recorded a $6.0 million tax benefit related to the ability to carry back net operating losses to prior periods under the CARES Act, resulting in a decrease of our deferred tax asset of $14.4 million and increase to our current receivable of $20.4 million. The Company continues to assess the potential tax impacts of this legislation on its financial position and results of operations.
Balance Sheet Information - as of September 30, 2020 compared to the year ended December 31, 2019
Tiptree’s total assets were $2,794.9 million as of September 30, 2020, compared to $2,198.3 million as of December 31, 2019. The $596.6 million increase in assets is primarily attributable to the growth in our Insurance segment, in particular the acquisition of Smart AutoCare.
Total stockholders’ equity was $361.7 million as of September 30, 2020, compared to $411.4 million as of December 31, 2019, primarily driven by the year to date net loss, stock repurchases and dividends. As of September 30, 2020, there were 33,563,019 shares of common stock outstanding, as compared to 34,562,553 as of December 31, 2019.
The following table is a summary of certain balance sheet information:
| As of September 30, 2020 | |||||||||||||||||||||||
| ($ in millions) | Tiptree Insurance | Tiptree Capital | Corporate | Total | |||||||||||||||||||
| Total assets | $ | 2,259.6 | $ | 492.0 | $ | 43.3 | $ | 2,794.9 | |||||||||||||||
| Corporate debt | $ | 160.0 | $ | — | $ | 121.9 | $ | 281.9 | |||||||||||||||
| Asset based debt | 26.7 | 102.2 | — | 128.9 | |||||||||||||||||||
| Tiptree Inc. stockholders’ equity | $ | 281.0 | $ | 148.9 | $ | (82.2) | $ | 347.7 | |||||||||||||||
| Non-controlling interests - Other | 9.1 | 4.9 | — | 14.0 | |||||||||||||||||||
| Total stockholders’ equity | $ | 290.1 | $ | 153.8 | $ | (82.2) | $ | 361.7 | |||||||||||||||
NON-GAAP RECONCILIATIONS
Adjusted EBITDA and Operating EBITDA - Non-GAAP
The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted to add (i) corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) adjust for the effect of purchase accounting, (iii) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses. Operating EBITDA represents Adjusted EBITDA plus stock based compensation expense and vessel depreciation expense, less realized and unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income.
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 12.8 | $ | (1.5) | $ | (43.4) | $ | 14.2 | |||||||||||||||
| Add: net (loss) income attributable to non-controlling interests | 1.9 | 0.5 | 2.0 | 1.3 | |||||||||||||||||||
| Income (loss) | $ | 14.7 | $ | (1.0) | $ | (41.4) | $ | 15.5 | |||||||||||||||
Corporate debt related interest expense(1) | 6.1 | 5.0 | 17.3 | 14.9 | |||||||||||||||||||
| Consolidated income tax expense (benefit) | (0.8) | (0.7) | (22.0) | 3.7 | |||||||||||||||||||
Depreciation and amortization expense(2) | 3.9 | 3.4 | 12.0 | 9.5 | |||||||||||||||||||
Non-cash fair value adjustments(3) | (3.7) | (1.0) | (6.7) | (2.4) | |||||||||||||||||||
Non-recurring expenses(4) | 0.2 | 0.5 | 2.9 | 2.5 | |||||||||||||||||||
| Adjusted EBITDA | $ | 20.4 | $ | 6.2 | $ | (37.9) | $ | 43.7 | |||||||||||||||
| Add: Stock based compensation expense | 2.6 | 1.5 | 6.2 | 4.5 | |||||||||||||||||||
| Add: Vessel depreciation, net of capital expenditures | 1.2 | 0.7 | 3.6 | 1.9 | |||||||||||||||||||
Less: Realized and unrealized gains (losses)(5) | (7.7) | (8.9) | (97.9) | 7.5 | |||||||||||||||||||
Less: Third party non-controlling interests(6) | — | — | (0.1) | — | |||||||||||||||||||
| Operating EBITDA | $ | 31.9 | $ | 17.3 | $ | 69.9 | $ | 42.6 | |||||||||||||||
14
_______________________________
| (1) | Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in Tiptree Insurance and Tiptree Capital is not added-back for Adjusted EBITDA and Operating EBITDA. | ||||
| (2) | Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues were less favorably stated. Thus, the purchase accounting effect related to our insurance companies increased EBITDA above what the historical basis of accounting would have generated. | ||||
| (3) | For our maritime transportation operations, depreciation and amortization is deducted as a reduction in the value of the vessel. | ||||
| (4) | Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs. | ||||
| (5) | Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs, as those are recurring in nature and align with those business models. | ||||
| (6) | Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee-based shares. | ||||
Adjusted EBITDA and Operating EBITDA - Non-GAAP
The tables below present Adjusted EBITDA and Operating EBITDA by business component.
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| ($ in millions) | Tiptree Insurance | Tiptree Capital | Corporate Expenses | Total | |||||||||||||||||||
| Pre-tax income (loss) | $ | 13.4 | $ | 9.5 | $ | (9.0) | $ | 13.9 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Corporate debt related interest expense(1) | 3.4 | — | 2.7 | 6.1 | |||||||||||||||||||
Depreciation and amortization expenses(2) | 2.2 | 1.5 | 0.2 | 3.9 | |||||||||||||||||||
Non-cash fair value adjustments(3) | — | (3.7) | — | (3.7) | |||||||||||||||||||
Non-recurring expenses(4) | (0.1) | 0.3 | — | 0.2 | |||||||||||||||||||
| Adjusted EBITDA | $ | 18.9 | $ | 7.6 | $ | (6.1) | $ | 20.4 | |||||||||||||||
| Add: Stock-based compensation expense | 0.6 | 1.3 | 0.7 | 2.6 | |||||||||||||||||||
| Add: Vessel depreciation, net of capital expenditures | — | 1.2 | — | 1.2 | |||||||||||||||||||
Less: Realized and unrealized gains (losses)(5) | 0.4 | (8.1) | — | (7.7) | |||||||||||||||||||
Less: Third party non-controlling interests(6) | — | — | — | — | |||||||||||||||||||
| Operating EBITDA | $ | 19.1 | $ | 18.2 | $ | (5.4) | $ | 31.9 | |||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
| ($ in millions) | Tiptree Insurance | Tiptree Capital | Corporate Expenses | Total | |||||||||||||||||||
| Pre-tax income (loss) | $ | 0.4 | $ | (38.6) | $ | (25.2) | $ | (63.4) | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Corporate debt related interest expense(1) | 9.9 | — | 7.4 | 17.3 | |||||||||||||||||||
Depreciation and amortization expense (2) | 7.0 | 4.4 | 0.6 | 12.0 | |||||||||||||||||||
Non-cash fair value adjustments(3) | — | (6.7) | — | (6.7) | |||||||||||||||||||
Non-recurring expenses(4) | 2.2 | 0.3 | 0.4 | 2.9 | |||||||||||||||||||
| Adjusted EBITDA | $ | 19.5 | $ | (40.6) | $ | (16.8) | $ | (37.9) | |||||||||||||||
| Add: Stock based compensation expense | 1.4 | 2.3 | 2.5 | 6.2 | |||||||||||||||||||
| Add: Vessel depreciation, net of capital expenditures | — | 3.6 | — | 3.6 | |||||||||||||||||||
Less: Realized and unrealized gains (losses)(5) | (27.2) | (70.7) | — | (97.9) | |||||||||||||||||||
Less: Third party non-controlling interests(6) | — | (0.1) | — | (0.1) | |||||||||||||||||||
| Operating EBITDA | $ | 48.1 | $ | 36.1 | $ | (14.3) | $ | 69.9 | |||||||||||||||
15
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||
| ($ in millions) | Tiptree Insurance | Tiptree Capital | Corporate Expenses | Total | |||||||||||||||||||
| Pre-tax income (loss) | $ | 8.3 | $ | (1.4) | $ | (8.6) | $ | (1.7) | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Corporate debt related interest expense(1) | 3.4 | — | 1.6 | 5.0 | |||||||||||||||||||
Depreciation and amortization expenses(2) | 2.2 | 0.9 | 0.3 | 3.4 | |||||||||||||||||||
Non-cash fair value adjustments(3) | — | (1.0) | — | (1.0) | |||||||||||||||||||
Non-recurring expenses(4) | 0.3 | — | 0.2 | 0.5 | |||||||||||||||||||
| Adjusted EBITDA | $ | 14.2 | $ | (1.5) | $ | (6.5) | $ | 6.2 | |||||||||||||||
| Add: Stock-based compensation expense | 0.7 | — | 0.8 | 1.5 | |||||||||||||||||||
| Add: Vessel depreciation, net of capital expenditures | — | 0.7 | — | 0.7 | |||||||||||||||||||
Less: Realized and unrealized gains (losses)(5) | (1.1) | (7.8) | — | (8.9) | |||||||||||||||||||
Less: Third party non-controlling interests(6) | — | — | — | — | |||||||||||||||||||
| Operating EBITDA | $ | 16.0 | $ | 7.0 | $ | (5.7) | $ | 17.3 | |||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
| ($ in millions) | Tiptree Insurance | Tiptree Capital | Corporate Expenses | Total | |||||||||||||||||||
| Pre-tax income (loss) | $ | 28.4 | $ | 16.2 | $ | (25.4) | $ | 19.2 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Corporate debt related interest expense(1) | 10.1 | — | 4.8 | 14.9 | |||||||||||||||||||
Depreciation and amortization expense(2) | 6.5 | 2.5 | 0.5 | 9.5 | |||||||||||||||||||
Non-cash fair value adjustments(3) | — | (2.4) | — | (2.4) | |||||||||||||||||||
Non-recurring expenses(4) | 1.7 | 0.2 | 0.6 | 2.5 | |||||||||||||||||||
| Adjusted EBITDA | $ | 46.7 | $ | 16.5 | $ | (19.5) | $ | 43.7 | |||||||||||||||
| Add: Stock based compensation expense | 2.0 | 0.2 | 2.3 | 4.5 | |||||||||||||||||||
| Add: Vessel depreciation, net of capital expenditures | — | 1.9 | — | 1.9 | |||||||||||||||||||
Less: Realized and unrealized gains (losses)(5) | 4.2 | 3.3 | — | 7.5 | |||||||||||||||||||
Less: Third party non-controlling interests(6) | — | — | — | — | |||||||||||||||||||
| Operating EBITDA | $ | 44.5 | $ | 15.3 | $ | (17.2) | $ | 42.6 | |||||||||||||||
___________________________
The footnotes below correspond to the tables above, under “—Adjusted EBITDA and Operating EBITDA - Non-GAAP”
| (1) | Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in Tiptree Insurance and Tiptree Capital is not added-back for Adjusted EBITDA and Operating EBITDA. | ||||
| (2) | Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues were less favorably stated. Thus, the purchase accounting effect related to our insurance companies increased EBITDA above what the historical basis of accounting would have generated. | ||||
| (3) | For our maritime transportation operations, depreciation and amortization is deducted as a reduction in the value of the vessel. | ||||
| (4) | Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs. | ||||
| (5) | Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs, as those are recurring in nature and align with those business models. | ||||
| (6) | Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee-based shares. | ||||
Book Value per share - Non-GAAP
Management believes the use of this financial measure provides supplemental information useful to investors as book value is frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares.
($ in millions, except per share information) | As of September 30, | ||||||||||
| 2020 | 2019 | ||||||||||
| Total stockholders’ equity | $ | 361.7 | $ | 407.4 | |||||||
| Less: Non-controlling interests | 14.0 | 12.6 | |||||||||
| Total stockholders’ equity, net of non-controlling interests | $ | 347.7 | $ | 394.8 | |||||||
| Total common shares outstanding | 33.6 | 34.6 | |||||||||
| Book value per share | $ | 10.36 | $ | 11.43 | |||||||
16
Invested & Total Capital - Non-GAAP
Invested Capital represents its total cash investment, including any re-investment of earnings, and acquisition costs, net of tax. Total Capital represents Invested Capital plus corporate debt.
| ($ in millions) | As of September 30, | ||||||||||
| 2020 | 2019 | ||||||||||
| Total stockholders’ equity | $ | 361.7 | $ | 407.4 | |||||||
| Less: Non-controlling interests | 14.0 | 12.6 | |||||||||
| Total stockholders’ equity, net of non-controlling interests - other | $ | 347.7 | $ | 394.8 | |||||||
| Plus: Tiptree Insurance accumulated depreciation and amortization, net of tax | 54.9 | 47.9 | |||||||||
| Plus: Acquisition costs | 4.0 | 4.2 | |||||||||
| Invested Capital | $ | 406.6 | $ | 446.9 | |||||||
| Plus: Corporate debt | 281.9 | 229.2 | |||||||||
| Total Capital | $ | 688.5 | $ | 676.1 | |||||||
Tiptree Insurance - Underwriting Margin - Non-GAAP
Underwriting margin is a measure of the underwriting profitability of our insurance operations. It represents net earned premiums, service and administrative fees, ceding commissions and other income less policy and contract benefits and commission expense. We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and other income.
The following table provides a reconciliation between underwriting margin and pre-tax income for the following periods:
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| Revenues: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net earned premiums | $ | 116.4 | $ | 129.2 | $ | 345.0 | $ | 364.7 | |||||||||||||||
| Service and administrative fees | 47.7 | 26.1 | 134.3 | 78.7 | |||||||||||||||||||
| Ceding commissions | 5.1 | 1.6 | 16.2 | 7.2 | |||||||||||||||||||
| Other income | 1.0 | 1.3 | 5.3 | 3.1 | |||||||||||||||||||
| Underwriting revenues - Non-GAAP | $ | 170.2 | $ | 158.2 | $ | 500.8 | $ | 453.7 | |||||||||||||||
| Less underwriting expenses: | |||||||||||||||||||||||
| Policy and contract benefits | 57.8 | 44.0 | 167.8 | 124.3 | |||||||||||||||||||
| Commission expense | 68.9 | 77.5 | 207.2 | 225.1 | |||||||||||||||||||
| Underwriting margin - Non-GAAP | $ | 43.5 | $ | 36.7 | $ | 125.8 | $ | 104.3 | |||||||||||||||
| Less operating expenses: | |||||||||||||||||||||||
| Employee compensation and benefits | 15.9 | 12.6 | 47.9 | 36.7 | |||||||||||||||||||
| Other expenses (excluding non-recurring expenses) | 11.7 | 11.8 | 38.4 | 35.3 | |||||||||||||||||||
| Combined Ratio | 90.4 | % | 92.1 | % | 91.8 | % | 92.8 | % | |||||||||||||||
| Plus investment revenues: | |||||||||||||||||||||||
| Net investment income | 3.0 | 3.0 | 8.8 | 10.7 | |||||||||||||||||||
| Net realized and unrealized gains | 0.7 | (1.1) | (27.3) | 4.7 | |||||||||||||||||||
| Less other expenses: | |||||||||||||||||||||||
| Interest expense | 4.0 | 3.6 | 11.2 | 11.2 | |||||||||||||||||||
| Non-recurring expenses | (0.1) | — | 2.2 | 1.2 | |||||||||||||||||||
| Depreciation and amortization expense | 2.3 | 2.3 | 7.2 | 6.9 | |||||||||||||||||||
| Pre-tax income (loss) | $ | 13.4 | $ | 8.3 | $ | 0.4 | $ | 28.4 | |||||||||||||||
17
Tiptree Insurance Investment Portfolio - Non-GAAP
The following table provides a reconciliation between total investments and net investments for the following periods:
| ($ in millions) | As of September 30, | ||||||||||
| 2020 | 2019 | ||||||||||
| Total Investments | $ | 577.2 | $ | 414.3 | |||||||
Investment portfolio debt (1) | — | — | |||||||||
| Securities sold, not yet purchased | (67.1) | — | |||||||||
| Cash and cash equivalents | 74.0 | 117.8 | |||||||||
Restricted cash (2) | 64.6 | — | |||||||||
Receivable due from brokers (3) | 4.4 | 3.1 | |||||||||
Liability due to brokers (3) | (41.9) | (21.5) | |||||||||
| Net investments - Non-GAAP | $ | 611.2 | $ | 513.7 | |||||||
(1) Consists of asset based financing on loans, including certain credit investments, and working capital facilities. See Note (11) Debt, net in the notes to the condensed consolidated financial statements for further details.
(2) Restricted cash available to invest within certain credit investment funds which are consolidated under GAAP.
(3) Receivable due from and Liability due to brokers for unsettled trades within certain credit investment funds which are consolidated under GAAP.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to fund our operations and grow our businesses. We may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs. In February 2020, we refinanced our existing facility with Fortress, extending the maturity to February 2025 and increasing the principal amount to $125 million, generating approximately $53 million of cash after repaying the existing facility and expenses. A portion of those funds were invested in Tiptree Insurance to fund our warranty business, with the remainder used to provide additional liquidity.
Our subsidiaries’ ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings. In April 2020, Invesque suspended its dividend to conserve liquidity until the impact of COVID-19 on occupancy rates and its operations is better known. The suspension has negatively impacted our cash flow. However, we expect our cash and cash equivalents and distributions from operating subsidiaries and our subsidiaries’ access to financing to be adequate to fund our operations for at least the next 12 months.
As of September 30, 2020, cash and cash equivalents, excluding restricted cash, were $103.5 million, compared to $133.1 million at December 31, 2019, a decrease of $29.6 million primarily as a result of increased investments, including our acquisition of Smart AutoCare, partially offset by the refinancing of the Fortress credit facility.
Our mortgage business relies on short term uncommitted sources of financing as a part of their normal course of operations. To date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw on other sources of liquidity to fund our mortgage business. See Note (11) Debt, net in the notes to condensed consolidated financial statements, for additional information regarding our mortgage warehouse borrowings.
For purposes of determining enterprise value and Adjusted EBITDA, we consider corporate credit agreements and preferred trust securities, which we refer to as corporate debt, as corporate financing and associated interest expense is added back. The below table outlines this amount by debt outstanding and interest expense at the insurance company and corporate level.
18
Corporate Debt
| ($ in millions) | Corporate Debt Outstanding as of September 30, | Interest Expense for the Three Months Ended September 30, | Interest Expense for the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Tiptree Insurance | $ | 160.0 | $ | 160.0 | $ | 3.4 | $ | 3.3 | $ | 9.9 | $ | 10.0 | ||||||||||||||||||||||||||
| Corporate | 121.9 | 69.2 | 2.7 | 1.6 | 7.4 | 4.8 | ||||||||||||||||||||||||||||||||
| Total | $ | 281.9 | $ | 229.2 | $ | 6.1 | $ | 4.9 | $ | 17.3 | $ | 14.8 | ||||||||||||||||||||||||||
As of September 30, 2020, our $125 million credit facility with Fortress carries a rate of LIBOR (with a minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum. We are required to make quarterly principal payments of approximately $1.56 million. See Note (11) Debt, net in the notes to condensed consolidated financial statements for details.
On August 4, 2020, Fortegra entered into an Amended and Restated Credit Agreement by and among Fortegra and its wholly-owned subsidiary, LOTS Intermediate Co., as borrowers, the lenders from time to time party thereto, certain of Fortegra’s subsidiaries, as guarantors, and Fifth Third Bank, National Association, as the administrative agent and issuing lender (the “Fortegra Credit Agreement”). The Fortegra Credit Agreement provides for a $200.0 million revolving credit facility, all of which is available for the issuance of letters of credit, with a sub-limit of $17.5 million for swing loans and matures on August 4, 2023.
Consolidated Comparison of Cash Flows
| ($ in millions) | Nine Months Ended September 30, | ||||||||||
| Total cash provided by (used in): | 2020 | 2019 | |||||||||
| Net cash (used in) provided by: | |||||||||||
| Operating activities | $ | 68.2 | $ | 19.4 | |||||||
| Investing activities | (65.4) | 67.7 | |||||||||
| Financing activities | 33.3 | (27.8) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 36.1 | $ | 59.3 | |||||||
Cash provided by operating activities was $68.2 million for the nine months ended September 30, 2020 compared to $19.4 million of cash provided by operating activities in the prior year period. In the first nine months of 2020, the primary sources of cash from operating activities included proceeds from mortgage loans outpacing originations and growth in warranty net deferred revenues, partially offset by increases in notes and accounts receivable from our insurance operations. In 2019, the primary sources of cash from operating activities included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums and deferred revenues, offset by increases in notes and accounts receivable and reinsurance receivables related to growth in our insurance operations.
Cash used in investing activities was $65.4 million for the nine months ended September 30, 2020 compared to $67.7 million of cash provided by investing activities for the prior year period. In the first nine months of 2020, the primary use of cash from investing activities was the purchase of investments outpacing proceeds from the sales of investments in our insurance investment portfolio, and the growth in notes receivables. During 2019, we reduced our investments in loans and used a substantial portion of the proceeds to repay asset based debt. We also received proceeds associated with a contingent earn-out from our sale of Care.
Cash provided by financing activities was $33.3 million for the nine months ended September 30, 2020 compared to cash used in financing activities of $27.8 million in the prior year period. In the first nine months of 2020, proceeds from borrowings outpaced principal repayments, which was partially offset by the repurchase of $9.2 million of the Company’s common stock and payment of $4.2 million in dividends. In 2019, we fully repaid outstanding asset based borrowings in our credit loan fund held within our insurance investment portfolio and we repurchased $9.1 million of the Company’s common stock.
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Contractual Obligations
The table below summarizes consolidated contractual obligations by period for payments that are due as of September 30, 2020:
| ($ in millions) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||||||||||
Corporate debt | $ | — | $ | — | $ | — | $ | 281.9 | $ | 281.9 | |||||||||||||||||||
Asset based debt | — | 112.5 | 16.4 | — | 128.9 | ||||||||||||||||||||||||
Total debt (1) | $ | — | $ | 112.5 | $ | 16.4 | $ | 281.9 | $ | 410.8 | |||||||||||||||||||
Operating lease obligations (2) | 7.4 | 12.3 | 9.1 | 8.7 | 37.5 | ||||||||||||||||||||||||
| Total | $ | 7.4 | $ | 124.8 | $ | 25.5 | $ | 290.6 | $ | 448.3 | |||||||||||||||||||
(1) See Note (11) Debt, net, in the accompanying condensed consolidated financial statements for additional information.
(2) Minimum rental obligation for office leases. The total rent expense for the three months ended September 30, 2020 and 2019 was $1.0 million and $2.1 million, respectively, and total rent expense for the nine months ended September 30, 2020 and 2019 was $5.2 million and $6.5 million, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. There have been no material changes to the critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Recently Adopted and Issued Accounting Standards
For a discussion of recently adopted and issued accounting standards, see the section “Recent Accounting Standards” in Note (2) Summary of Significant Accounting Policies of the notes to the accompanying condensed consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we enter into various off-balance sheet arrangements including entering into derivative financial instruments and hedging transactions, operating leases and sponsoring and owning interests in consolidated and non-consolidated variable interest entities.
Further disclosure on our off-balance sheet arrangements as of September 30, 2020 is presented in the “Notes to Condensed Consolidated Financial Statements” in “Part I. Item 1. Financial Statements (Unaudited)” of this filing as follows:
•Note (10) Derivative Financial Instruments and Hedging
•Note (21) Commitments and Contingencies
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 described our Quantitative and Qualitative Disclosures About Market Risk. There were no material changes to the assumptions or risks during the nine months ended September 30, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that material information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
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Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Fortegra is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability insurance policies. In January 2018, in response to a Plaintiffs’ motion, the court vacated its November 2017 order granting Fortegra’s Motion for Summary Judgment as to the life certificates at issue with leave to refile. No trial or additional hearings are currently scheduled.
In management’s opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot reasonably estimate a range of loss.
Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position or results of operations.
Item 1A. Risk Factors
For information regarding factors that could affect our Company, results of operations and financial condition, see the risk factors discussed under Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no material changes in those risk factors. The following risk is in addition to those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Our results of operations could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19).
The global spread of the coronavirus (COVID-19) has created significant market volatility and uncertainty and economic disruption. In addition, the impact of COVID-19 and measures to prevent its spread have caused, and may continue to cause, substantial disruption to distribution channels, auto dealer partners and contract counterparties, and may limit our access to capital and customers through self-isolation, travel limitations, business restrictions, margin calls, and otherwise. While the re-opening of the US and global economies began in the second quarter of 2020, a resurgence of the virus has either slowed or in some cases resulted in a roll back of the re-opening of some businesses. As a result, it is currently unclear as to how much and when these economies will recover in the near term. Some ports used in our shipping business may adopt measures in reaction to COVID-19 that delay our ability to operate our vessels efficiently. Our investment in Invesque, which operates in the senior housing, medical office and skilled nursing industry, is reported at fair market value on a quarterly basis and has been and could continue to be materially negatively affected by the market decline in equity securities in these industry sectors. Invesque’s business may be adversely affected by the impact of COVID-19 on occupancy rates and the operations of Invesque and its tenants and operators. Though many of our employees are able to work remotely, the impact on the economy as a result of COVID-19 has nevertheless negatively affected many of our customers and channels through which we sell our products and services, which could result in significant declines in sales. In addition, operating remotely may slow or otherwise limit our ability to add new products and customers. Further, actions of regulators and other governmental authorities may delay or limit our ability to exercise remedies under our policies or loans in the event of defaults or
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cancellations. These effects, individually or in the aggregate, could materially adversely impact our businesses, financial condition, operating results, liquidity and cash flows and such adverse impacts may be material to our results of operations and liquidity position. Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our sales and damage the Company’s results of operations and its liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity for the three months ended September 30, 2020 was as follows:
| Period | Purchaser | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||
| July 1, 2020 to July 30, 2020 | Tiptree Inc. | — | $ | — | — | ||||||||||||
| August 1, 2020 to August 31, 2020 | Tiptree Inc. | — | $ | — | — | ||||||||||||
| September 1, 2020 to September 30, 2020: Open Market Purchases | Tiptree Inc. | 135,134 | $ | 4.92 | 135,134 | ||||||||||||
| Total | 135,134 | $ | — | 135,134 | $ | 10,825,215 | |||||||||||
(1)On May 2, 2019, the Board of Directors of Tiptree authorized Tiptree’s Executive Committee to repurchase up to $20 million of its outstanding common stock in the aggregate from time to time.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits, Financial Statement Schedules
| The following documents are filed as a part of this Form 10-Q: | |||||
| Financial Statements (Unaudited): | |||||
| Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 | F- 3 | ||||
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 | F- 4 | ||||
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 | F- 5 | ||||
| Condensed Consolidated Statements of Changes in Stockholders’ Equity for the periods ended September 30, 2020 and 2019 | F- 6 | ||||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 | F- 8 | ||||
F- 9 | |||||
| Exhibits: | |||||
| The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page, is incorporated herein by reference and is filed as part of this Form 10-Q. | |||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Tiptree Inc. has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
| Tiptree Inc. | ||||||||||||||
| Date: | November 4, 2020 | By:/s/ Michael Barnes | ||||||||||||
| Michael Barnes | ||||||||||||||
| Executive Chairman | ||||||||||||||
| Date: | November 4, 2020 | By:/s/ Jonathan Ilany | ||||||||||||
| Jonathan Ilany | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| Date: | November 4, 2020 | By:/s/ Sandra Bell | ||||||||||||
| Sandra Bell | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
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EXHIBIT INDEX
Exhibit No. | Description | ||||
| 31.1 | |||||
| 31.2 | |||||
| 31.3 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 32.3 | |||||
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* | ||||
* Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020 and 2019, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2020 and 2019, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2020 and 2019, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 and (vi) the Notes to the Condensed Consolidated Financial Statements.
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