TIPTREE INC. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in this section as follows:
•Overview
•Results of Operations •Non-GAAP Measures and 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 largest operating subsidiary, Fortegra, along with its subsidiaries, is a leading provider of specialty insurance underwriting, warranty and service contract products, and related service solutions. We also generate earnings from a diverse group of select investments that we refer to asTiptree Capital , which includes our Mortgage segment and other, non-insurance businesses and assets. We evaluate performance primarily by the comparison of shareholders' long-term total return on capital, as measured by growth in stock price plus dividends paid, in addition to Adjusted Net Income and Adjusted EBITDA.
Highlights for the first nine months of 2021 include:
Overall:
•Net income of$38.6 million increased from a net loss of$43.4 million in 2020, which was driven by growth in insurance, mortgage and shipping operations, in addition to realized and unrealized gains on investments as compared to losses in 2020. •Adjusted net income increased 33.4% to$47.0 million , from$35.2 million in 2020, driven by improvement in insurance, mortgage and shipping operations. Adjusted return on average equity was 16.2%, as compared to 12.2% in 2020. •OnOctober 12, 2021 , Tiptree announced a$200 million strategic investment in its insurance subsidiary, Fortegra, byWarburg Pincus , a leading global growth investor. The investment will giveWarburg Pincus an approximate 24% ownership in Fortegra on an as converted basis and is expected to close in the first quarter 2022, subject to regulatory approvals.
Insurance:
•Gross written premiums and premium equivalents were$1,689.6 million for the nine months endedSeptember 30, 2021 , as compared to$1,176.0 million for the nine months endedSeptember 30, 2020 , up 43.7% as a result of growth in admitted and surplus insurance lines as well as growth in fee-based warranty programs. •Total revenues increased 49.6% to$721.5 million , from$482.3 million in 2020, driven by increases in earned premiums, net, service and administrative fees, and net realized and unrealized gains as compared to losses in the prior year period. •The combined ratio improved to 91.0%, as compared to 92.1% in 2020, driven by the continued scalability of Fortegra's technology and shared service platform, which improved the expense ratio, while the underwriting ratio remained stable. •Income before taxes of$49.6 million increased by$49.2 million as compared to$0.4 million in 2020. Return on average equity was 17.3% in 2021 as compared to 1.5% in 2020. The increase in both metrics was driven by revenue growth and an improved combined ratio, in addition to net realized and unrealized gains on investments as compared to losses in the prior year. •Adjusted net income increased 55.5% to$46.4 million , as compared to$29.8 million in 2020. Adjusted return on average equity was 20.9%, as compared to 14.2% in 2020. The increase in both metrics was driven by revenue growth and the improved combined ratio. •As ofSeptember 30, 2021 , total investments combined with cash and cash equivalents were$832.1 million , as compared to$651.2 million as ofSeptember 30, 2020 . As ofSeptember 30, 2021 , 82% of the portfolio was invested in high-credit quality fixed income securities with an average S&P rating of AA and a weighted average duration of 2.8 years. 1 --------------------------------------------------------------------------------Tiptree Capital : •Mortgage income before taxes was$25.1 million in 2021, as compared to$20.8 million in 2020, with the increase driven by higher servicing fees and positive fair value adjustments on the mortgage servicing portfolio. Return on average equity was 44.4% in the 2021 period. •Maritime transportation income before taxes was$7.7 million in 2021, as compared to$1.0 million in 2020, with the increase driven by a rise in dry-bulk charter rates. 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 endedDecember 31, 2020 . Generally, our businesses are positively affected by a healthyU.S. consumer, stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely, rising 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. Fortegra generally offers 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 Fortegra offers tend to have limited aggregation risk and, thus, limited exposure to catastrophic and residual risk. Underwriting risk is mitigated through a combination of reinsurance and retrospective commission structures with agents, distribution partners and/or third-party reinsurers. To mitigate counterparty risk, Fortegra ensures its distribution partners' captive reinsurance entities are over-collateralized with highly liquid investments, primarily cash and cash equivalents. Insurance results primarily depend on pricing, underwriting, risk retention and the accuracy of reserves, reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. While Fortegra's insurance operations have historically maintained a relatively stable combined ratio which support steady earnings, initiatives to change the business mix along with economic factors could generate different results than the business has historically experienced. We believe there will continue to be growth opportunities to expand Fortegra's specialty insurance and warranty business model to other niche products and markets. Fortegra's investment portfolio primarily serves as a source to pay claims and secondarily as a source of income for operations. Investments include fixed maturity securities, loans, credit investment funds, and equity securities. Many 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 which can result in unrealized gains and losses affecting our results. Our businesses can also be impacted in various ways by changes in interest rates, which can result in fluctuations in the fair value of investments, revenues associated with floating rate investments, volume and revenues in mortgage operations and interest expense associated with floating rate debt used to fund operations. Rising interest rates could impact the value of certain fixed income securities, with any unrealized losses recorded in equity, and if realized, could impact our results of operations. Offsetting the impact of a rising interest rate environment, new investments in fixed rate instruments from both maturities and portfolio growth can result in higher interest income on investments over time. In declining interest rate environments, the opposite impacts could occur. In addition, certain investments are LIBOR based, which has resulted in lower investment income during the recent period of extended low rates. Rising interest rates can also impact the cost of LIBOR based debt obligations, while declining rates can decrease the cost of debt. Our secured revolving and term credit agreements, preferred trust securities and asset-based revolving financing are all floating rate obligations. Authorities that regulate LIBOR have announced plans to phase out LIBOR by the end of 2021, such that LIBOR may cease to exist as a benchmark for floating interest rates. TheFederal Reserve Board and theFederal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD-LIBOR. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets as a replacement reference rate. Such uncertainty may result in a sudden or prolonged increase or decrease in reported LIBOR and/or its replacement rate. To address the phase out of LIBOR, the agreements for substantially all of our debt facilities include a mechanism to replace LIBOR with an alternative reference rate under specified circumstances, whether that replacement is SOFR or another benchmark. If future rates based upon the 2 --------------------------------------------------------------------------------
successor reference rate are higher than LIBOR rates as currently determined due to illiquidity or other factors, our interest expense could increase.
Low mortgage rates due to theFederal Reserve intervention in mortgage markets and rising home prices in certain markets, has resulted in a combination of higher mortgage volumes and margins beginning in the second quarter of 2020 and continuing into the first nine months of 2021, which has been a benefit to mortgage operations. The recent low interest rate environment also benefits interest cost on debt, although corporate debt remains above current LIBOR rates. There can be no assurance that these positive trends will continue, the reversal of which could have a materially negative impact on our results of operations, and which may only be partially mitigated by the benefit to LIBOR based investments. Common shares of Invesque represent a significant asset on our condensed consolidated balance sheet, both as part of insurance investments and separately inTiptree Capital . Our investment in Invesque, which operates in the seniors housing, skilled nursing and medical office industries, is carried on our condensed consolidated balance sheet at fair value. InApril 2020 , in response to the uncertainty in the industry, Invesque suspended its dividend to conserve liquidity. In combination with the impact of the COVID-19 pandemic on occupancy rates, Invesque's stock declined significantly, which had a material impact on the carrying value of the investment and results of operations. While their stock price and the value of the investment increased in the first nine months of 2021, any additional declines in the fair value of Invesque's common stock could have a significant impact on our results of operations and the value of the investment. 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 is affected by events which interrupt production, trade routes, and consumption. The shipping industry is cyclical with high volatility in charter hire rates and profitability, which can change rapidly. 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 there is a current imbalance in supply and demand for shipping capacity, which has led to a cyclical high in dry-bulk charter rates, a change in those factors and/or changes in global economic conditions could result in substantially lower charter rates, which could negatively impact our results of operations and the carrying value of our vessels. RESULTS OF OPERATIONS The following is a summary of our condensed consolidated financial results for the three and nine months endedSeptember 30, 2021 and 2020. In addition to GAAP results, management uses the Non-GAAP measures Adjusted net income, Adjusted return on average equity, 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 and comparison among companies. Management uses Adjusted net income and adjusted return on average equity 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. Adjusted net income represents income before taxes, less provision (benefit) for income taxes, and excluding the after-tax impact of various expenses that we consider to be unique and non-recurring in nature, stock-based compensation, net realized and unrealized gains (losses), and intangibles amortization associated with purchase accounting. The Company defines Adjusted EBITDA as GAAP net income of the Company plus corporate interest expense, plus income taxes, plus depreciation and amortization expense, less the effects of purchase accounting, plus non-cash fair value adjustments, plus significant non-recurring expenses, and plus unrealized gains (losses) on available for sale securities that are reported in other comprehensive income. Adjusted net income, Adjusted return on average equity 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 thousands, except per share Three Months Ended Nine Months Ended information) September 30, September 30, GAAP: 2021 2020 2021 2020 Total revenues$ 286,605 $ 224,041 $ 880,980 $ 552,906 Net income (loss) attributable to common stockholders$ 2,008 $ 12,763 $ 38,558 $ (43,428) Diluted earnings per share$ 0.06 $ 0.35 $ 1.11 $ (1.27) Cash dividends paid per common share$ 0.04 $ 0.04 $ 0.12 $ 0.12 Return on average equity 3.3 % 16.6 % 14.8 % (14.3) % 3
-------------------------------------------------------------------------------- ($ in thousands, except per share Three Months Ended Nine Months Ended information) September 30, September 30, GAAP: 2021 2020 2021 2020 Non-GAAP: (1) Adjusted net income$ 20,730 $ 17,807 $ 47,010 $ 35,240 Adjusted return on average equity 20.5 % 20.1 % 16.2 % 12.2 % Adjusted EBITDA$ 12,356 $ 20,317 $ 84,594 $ (32,789) Book value per share$ 11.37 $ 10.36 $ 11.37 $ 10.36
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Revenues
For the three months endedSeptember 30, 2021 , revenues were$286.6 million , which increased$62.6 million or 27.9% compared to the prior year period, primarily driven by growth in earned premiums, net, and service and administrative fees in the insurance business, partially offset by increased net realized and unrealized losses on Invesque and other investments in the 2021 period compared to the 2020 period.
For the nine months ended
The combination of unearned premiums and deferred revenues on the condensed consolidated balance sheet grew to$1,564.4 million , representing an increase of$413.1 million , or 35.9%, fromSeptember 30, 2020 toSeptember 30, 2021 as a result of Fortegra's growth in gross written premiums and premium equivalents, primarily related to admitted and excess and surplus (E&S) insurance lines as well as warranty service contracts. The table below provides a break down between net realized and unrealized gains and losses from Invesque and other securities which impacted our consolidated results on a pre-tax basis. Many investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect earnings relating to these investments to be relatively volatile between periods. Fixed income securities are primarily marked to market through AOCI in stockholders' equity and do not impact net realized and unrealized gains and losses until they are sold. Three Months Ended Nine Months Ended ($ in thousands) September 30, September 30, 2021 2020 2021 2020 Net realized and unrealized gains (losses)(1)$ (4,267) $ 2,310 $ 9,345 $ (16,270) Net realized and unrealized gains (losses) - Invesque$ (12,566) $ (9,170)
(1) Excludes Invesque and Mortgage realized and unrealized gains and losses.
Net Income (Loss) Attributable to common stockholders
For the three months endedSeptember 30, 2021 , net income attributable to common stockholders was$2.0 million , a decrease of$10.8 million , driven by increased net realized and unrealized losses in the current period, partially offset by improvement in insurance and shipping revenues. For the nine months endedSeptember 30, 2021 , net income attributable to common stockholders was$38.6 million , an increase of$82.0 million from a net loss of$43.4 million for the nine months endedSeptember 30, 2020 , primarily driven by net realized and unrealized gains on Invesque and other investments in the 2021 period compared to losses in the 2020 period, in addition to growth in Fortegra's underwriting and fee operations, increased revenues from our mortgage servicing portfolio and improvement in dry-bulk shipping rates.
Adjusted net income & Adjusted return on average equity - Non-GAAP
Adjusted net income for the three months ended
Adjusted net income for the nine months ended
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average equity was 16.2%, as compared to 12.2% at
Adjusted EBITDA - Non-GAAP
Adjusted EBITDA for the three months endedSeptember 30, 2021 was$12.4 million , a decrease of$8.0 million from 2020, driven by net realized and unrealized losses on Invesque and other investments. Adjusted EBITDA for the nine months endedSeptember 30, 2021 was$84.6 million , an increase of$117.4 million from 2020, driven by realized and unrealized gains in the 2021 period compared to losses in the 2020 period, in addition to the improved operating performance noted above.
Book Value per share - Non-GAAP
Total stockholders' equity was$402.1 million as ofSeptember 30, 2021 compared to$373.5 million as ofDecember 31, 2020 . In the nine months endedSeptember 30, 2021 , Tiptree returned$6.8 million to stockholders through share repurchases and dividends paid. Book value per share for the period endedSeptember 30, 2021 was$11.37 , an increase from book value per share of$10.36 as ofSeptember 30, 2020 . The key drivers of the increase over the past four quarters were net income per share and the purchase of 1.4 million shares at a discount to book value partially offset by dividends paid of$0.16 per share, and issuance of shares related to warrants and vested subsidiary awards. Results by Segment We classify our business into two reportable segments, Insurance and Mortgage, with the remainder of our operations aggregated intoTiptree Capital - Other. Corporate activities include holding company interest expense, corporate employee compensation and benefits, and other expenses, including, but not limited to, public company expenses. For the three and nine months endedSeptember 30, 2021 , Mortgage has been broken out ofTiptree Capital as a reportable segment because for the year endedDecember 31, 2020 it met the quantitative threshold for disclosure. Prior year segments have been conformed to the current year presentation.
The following tables present the components of Revenue, Income (loss) before taxes and Adjusted net income.
Three Months Ended Nine Months Ended
($ in thousands) September 30, September 30,
2021 2020 2021 2020
Revenues:
Insurance $ 246,706 $ 174,005 $ 721,524 $ 482,299
Mortgage 27,425 35,879 87,191 80,911
Tiptree Capital - other 12,474 14,157 72,265 (10,304)
Corporate - - - -
Total revenues $ 286,605 $ 224,041 $ 880,980 $ 552,906
Income (loss) before taxes:
Insurance $ 13,337 $ 13,447 $ 49,569 $ 418
Mortgage 6,267 14,453 25,119 20,768
Tiptree Capital - other (4,700) (4,978) 12,914 (59,407)
Corporate (11,320) (9,025) (33,151) (25,199)
Total income (loss) before taxes $ 3,584 $ 13,897 $
54,451
Non-GAAP - Adjusted net income: Insurance$ 19,533 $ 12,111 $ 46,400$ 29,835 Mortgage 3,961 11,865 15,485 19,488 Tiptree Capital - other 5,522 495 8,153 3,565 Corporate (8,286) (6,664) (23,028) (17,648) Total adjusted net income (1)$ 20,730 $ 17,807 $ 47,010$ 35,240
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
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Insurance
Fortegra is a specialty insurance underwriter and service provider, which focuses on niche programs and fee-oriented services. The combination of specialty insurance underwriting, warranty and service contract products, and related service solutions delivered through a vertically integrated business model creates a blend of traditional underwriting revenues, investment income and unregulated fee revenues. The business is an agent-driven model, distributing products through independent insurance agents, consumer finance companies, online retailers, auto dealers, and regional big box retailers to deliver products that complement the consumer transaction.
The following tables present the Insurance segment results for the three and
nine months ended
Results of Operations - Three Months EndedSeptember 30, 2021 compared to 2020 ($ in thousands) Three Months Ended September 30, 2021 2020 Change % Change Revenues: Earned premiums, net$ 175,026 $ 116,418 $ 58,608 50.3 % Service and administrative fees 69,664 47,701 21,963 46.0 % Ceding commissions 2,722 5,157 (2,435) (47.2) % Net investment income 3,330 3,023 307 10.2 % Net realized and unrealized gains (losses) (7,492) 659 (8,151) NM% Other revenue 3,456 1,047 2,409 230.1 % Total revenues$ 246,706 $ 174,005 $ 72,701 41.8 % Expenses: Net losses and loss adjustment expenses$ 61,252 $ 42,920 $ 18,332 42.7 % Member benefit claims 19,579 14,818 4,761 32.1 % Commission expense 104,392 68,868 35,524 51.6 % Employee compensation and benefits 19,526 15,969 3,557 22.3 % Interest expense 4,268 3,988 280 7.0 % Depreciation and amortization 4,307 2,329 1,978 84.9 % Other expenses 20,045 11,666 8,379 71.8 % Total expenses$ 233,369 $ 160,558 $ 72,811 45.3 % Income (loss) before taxes (1)$ 13,337 $ 13,447 $ (110) (0.8) % Key Performance Metrics: Gross written premiums and premium equivalents$ 613,113 $ 464,669 $ 148,444 31.9 % Return on average equity 13.7 % 15.9 % Underwriting ratio 73.8 % 74.3 % Expense ratio 15.8 % 16.3 % Combined ratio 89.6 % 90.6 % Non-GAAP Financial Measures (2): Adjusted net income$ 19,533 $ 12,111 $ 7,422 61.3 % Adjusted return on average equity 26.8 %
17.1 %
(1) Net income was
Revenues
Earned Premiums, net
Earned premiums, net represent the earned portion of gross written and assumed
premiums, less the earned portion that is ceded to third-party reinsurers under
reinsurance agreements. Fortegra's insurance policies generally have a term of
six months to seven years depending on the underlying product and premiums are
earned pro rata over the term of the policy. At the end of each reporting
period, premiums written but not earned are classified as unearned premiums and
are earned in subsequent periods over the remaining term of the policy.
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--------------------------------------------------------------------------------Service and Administrative Fees
Service and administrative fees represent the earned portion of gross written premiums and premium equivalents, which is generated from non-insurance programs including warranty service contracts, motor club programs and other services offered as part of Fortegra's vertically integrated product offerings. Such fees are typically positively correlated with transaction volume and are recognized as revenue when realized and earned. At the end of each reporting period, gross written premiums and premium equivalents written for service contracts not earned are classified as deferred revenue, which are earned in subsequent periods over the remaining term of the policy.
Ceding Commissions and Other Revenue
Ceding commissions and other revenue consists of commissions earned on policies written on behalf of third-party insurance companies with no exposure to the insured risk and certain fees earned in conjunction with underwriting policies. Other revenue also includes the interest income earned on the premium finance product offering. Net Investment Income We earn investment income on the portfolio of invested assets. Invested assets are primarily comprised of fixed maturity securities, and may also include cash and cash equivalents and equity securities. The principal factors that influence net investment income are the size of the investment portfolio, the yield on that portfolio and expenses due to external investment managers.
Net Realized and Unrealized Gains (Losses)
Net realized and unrealized gains (losses) on investments are a function of the difference between the amount received by us on the sale of a security and the security's cost-basis, as well as any "other-than-temporary" impairments and allowances for credit losses which are recognized in earnings. In addition, equity securities are carried at fair value with unrealized gains and losses included in this line.
Revenues - Three Months Ended
For the three months endedSeptember 30, 2021 , total revenues increased 41.8%, to$246.7 million , as compared to$174.0 million for the three months endedSeptember 30, 2020 . Earned premiums, net of$175.0 million increased$58.6 million , or 50.3%, driven by growth in commercial, credit and warranty insurance programs. Service and administrative fees of$69.7 million increased by 46.0% driven by growth in warranty and consumer goods service contract revenues. Ceding commissions of$2.7 million decreased by$2.4 million , or 47.2%, driven by lower ceding fees as less business was ceded in certain credit insurance and collateral protection programs. Other revenues increased by$2.4 million , or 230.1%, driven by growth in premium and warranty finance product offerings. For the three months endedSeptember 30, 2021 , 30.7% of revenues were derived from fees that were not solely dependent upon the underwriting performance of Fortegra's insurance products, resulting in more diversified earnings. For the three months endedSeptember 30, 2021 , 80.9% of fee-based revenues were generated in non-regulated service companies, with the remainder in regulated insurance companies. For the three months endedSeptember 30, 2021 , net investment income was$3.3 million as compared to$3.0 million in the prior year period, primarily driven by growth in investments. Net realized and unrealized losses were$7.5 million , a decrease of$8.2 million , as compared to net realized and unrealized gains of$0.7 million in the prior year period.
Expenses
Underwriting and fee expenses under insurance and warranty service contracts include losses and loss adjustment expenses, member benefit claims and commissions expense.
Net Losses and Loss Adjustment Expenses
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 insurance lines. Incurred claims are impacted by loss
frequency,
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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
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, and original pricing of the product for purposes
of the loss ratio in relation to loss emergence over time. Losses and loss
adjustment expenses are based on an actuarial analysis of the estimated losses,
including losses incurred during the period and changes in estimates from prior
periods.
Member Benefit Claims
Member benefit claims represent the costs of services and replacement devices
incurred in warranty and motor club service contracts. Member benefit claims
represent claims paid on behalf of contract holders directly to third-party
providers for roadside assistance and for the repair or replacement of covered
products. Claims can also be paid directly to contract holders as a
reimbursement payment, provided supporting documentation of loss is submitted to
the Company. Claims are recognized as expense when incurred.
Commission Expense
Commission expenses reflect commissions paid to retail agents, program administrators and managing general underwriters, net of ceding commissions received on business ceded under certain reinsurance contracts. Commission expenses are deferred and amortized to expense in proportion to the premium earned over the policy life. Commission expense is incurred on most product lines. The majority of commissions are retrospective commissions paid to agents, distributors and retailers selling the Company's products, including credit insurance policies, warranty service contracts and motor club memberships. When claims increase, in most cases distribution partners bear the risk through a reduction in their retrospective commissions. Commission rates are, in many cases, set by state regulators, such as in credit and collateral protection programs and are also impacted by market conditions and the retention levels of distribution partners.
Operating and Other Expenses
Operating and other expenses represent the general and administrative expenses of insurance operations including employee compensation and benefits and other expenses, including, technology costs, office rent, and professional services fees, such as legal, accounting and actuarial services.
Interest Expense
Interest expense consists primarily of interest expense on corporate revolving
debt, notes, preferred trust securities due
Depreciation and Amortization
Depreciation expense is primarily associated with furniture, fixtures and equipment. Amortization expense is primarily associated with purchase accounting amortization including values associated with acquired customer relationships, trade names and internally developed software and technology.
Expenses - Three Months Ended
For the three months endedSeptember 30, 2021 , net losses and loss adjustment expenses were$61.3 million , member benefit claims were$19.6 million and commission expense was$104.4 million , as compared to$42.9 million ,$14.8 million and$68.9 million , respectively, for the three months endedSeptember 30, 2020 . The increases in net losses and loss adjustment expenses of$18.3 million , or 42.7%, and member benefit claims of$4.8 million , or 32.1%, were driven by growth inU.S. Insurance andU.S. Warranty Solutions programs. Commission expense increased by$35.5 million , or 51.6%, driven by growth in revenues and an increase in retrospective commission payments, which were partially offset by lower proportional increases in net losses and loss adjustment expenses. For the three months endedSeptember 30, 2021 , employee compensation and benefits were$19.5 million and other expenses were$20.0 million , as compared to$16.0 million and$11.7 million , respectively, for the three months endedSeptember 30 , 8 -------------------------------------------------------------------------------- 2020. Employee compensation and benefits increased by$3.6 million , or 22.3%, driven by the acquisition of Sky Auto inDecember 2020 and investments in human capital associated with growth in admitted, E&S and warranty programs. Other expenses increased by$8.4 million , or 71.8%, driven primarily by increased marketing and advertising costs aligned with growth in revenues from Sky Auto, and increases in premium taxes, which grew in line with earned premiums. For the three months endedSeptember 30, 2021 , interest expense was$4.3 million as compared to$4.0 million for the three months endedSeptember 30, 2020 . The increase in interest expense of$0.3 million , or 7.0%, was primarily driven by increased asset-based debt for premium and warranty finance programs. For the three months endedSeptember 30, 2021 , depreciation and amortization expense was$4.3 million , including$3.8 million of intangible amortization related to purchase accounting associated with the acquisitions of Fortegra, Smart AutoCare and Sky Auto, as compared to$2.3 million , including$2.3 million of intangible amortization from purchase accounting related to Fortegra and Smart AutoCare for 2020.
Results of Operations - Nine Months Ended
($ in thousands)
Nine Months Ended
2021 2020 Change % Change
Revenues:
Earned premiums, net $ 498,903 $ 344,994 $ 153,909 44.6 %
Service and administrative fees 191,414 134,290 57,124 42.5 %
Ceding commissions 8,827 16,217 (7,390) (45.6) %
Net investment income 9,331 8,803 528 6.0 %
Net realized and unrealized gains (losses) 5,004 (27,310) 32,314 NM%
Other revenue 8,045 5,305 2,740 51.6 %
Total revenues $ 721,524 $ 482,299 $ 239,225 49.6 %
Expenses:
Net losses and loss adjustment expenses $ 181,244 $ 125,354 $ 55,890 44.6 %
Member benefit claims 55,954 42,407 13,547 31.9 %
Commission expense 292,580 207,172 85,408 41.2 %
Employee compensation and benefits 57,007 47,927 9,080 18.9 %
Interest expense 13,097 11,218 1,879 16.7 %
Depreciation and amortization 12,905 7,229 5,676 78.5 %
Other expenses 59,168 40,574 18,594 45.8 %
Total expenses $ 671,955 $ 481,881 $ 190,074 39.4 %
Income (loss) before taxes (1) $ 49,569 $ 418 $ 49,151 NM%
Key Performance Metrics:
Gross written premiums and premium equivalents $ 1,689,592 $ 1,176,022 $ 513,570 43.7 %
Return on average equity 17.3 % 1.5 %
Underwriting ratio 74.9 % 74.9 %
Expense ratio 16.1 % 17.2 %
Combined ratio 91.0 % 92.1 %
Non-GAAP Financial Measures (2):
Adjusted net income $ 46,400 $ 29,835 $ 16,565 55.5 %
Adjusted return on average equity 20.9 % 14.2 %
(1) Net income was
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Revenues - Nine Months Ended
For the nine months endedSeptember 30, 2021 , total revenues increased 49.6%, to$721.5 million , as compared to$482.3 million for the nine months endedSeptember 30, 2020 . Earned premiums, net of$498.9 million increased$153.9 million , or 44.6%, driven by growth in commercial, credit and warranty insurance programs. Service and administrative fees of$191.4 million increased by 42.5% driven by growth in warranty and consumer goods service contract revenues. Ceding commissions of$8.8 million decreased by$7.4 million , or 45.6%, driven by lower ceding fees as less business was ceded in certain credit insurance and collateral protection programs. Other revenues increased by$2.7 million , or 51.6%, driven by growth in premium and warranty finance product offerings. For the nine months endedSeptember 30, 2021 , 28.9% of revenues were derived from fees that were not solely dependent upon the underwriting performance of Fortegra's insurance products, resulting in more diversified earnings. For the nine months endedSeptember 30, 2021 , 80.9% of fee-based revenues were generated in non-regulated service companies, with the remainder in regulated insurance companies. For the nine months endedSeptember 30, 2021 , net investment income was$9.3 million as compared to$8.8 million in the prior year period, driven by growth in investments, partially offset by lower interest rates. Net realized and unrealized gains were$5.0 million , an increase of$32.3 million , driven primarily by realized and unrealized gains on equity securities in the 2021 period, as compared to losses on equity securities and other investments in the 2020 period.
Expenses - Nine Months Ended
For the nine months endedSeptember 30, 2021 , net losses and loss adjustment expenses were$181.2 million , member benefit claims were$56.0 million and commission expense was$292.6 million , as compared to$125.4 million ,$42.4 million and$207.2 million , respectively, for the nine months endedSeptember 30, 2020 . The increases in net losses and loss adjustment expenses of$55.9 million , or 44.6%, and member benefit claims of$13.5 million , or 31.9%, were driven by growth inU.S. Insurance ,U.S. Warranty Solutions and Europe Warranty Solutions programs. Commission expense increased by$85.4 million , or 41.2%, in line with the growth in earned premiums, net and service and administrative fees. For the nine months endedSeptember 30, 2021 , employee compensation and benefits were$57.0 million and other expenses were$59.2 million , as compared to$47.9 million and$40.6 million , respectively, for the nine months endedSeptember 30, 2020 . Employee compensation and benefits increased by$9.1 million , or 18.9%, driven by the acquisition of Sky Auto and investments in human capital associated with growth objectives in admitted, E&S and warranty programs. Other expenses increased by$18.6 million , or 45.8%, driven primarily by increased marketing and advertising costs aligned with growth in revenues from Sky Auto, and increases in premium taxes, which grew in line with earned premiums. Other expenses were elevated by$2.1 million and$2.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively, related to non-recurring professional and audit fees associated with preparation of the registration statement for the potential Fortegra initial public offering which was withdrawn inApril 2021 , and investment banking and legal expenses associated with the acquisition of Smart AutoCare inJanuary 2020 . For the nine months endedSeptember 30, 2021 , interest expense was$13.1 million as compared to$11.2 million for the nine months endedSeptember 30, 2020 . The increase in interest expense of$1.9 million , or 16.7%, was primarily driven by higher average outstanding revolving credit borrowings and increased asset-based debt for premium and warranty finance programs. For the nine months endedSeptember 30, 2021 , depreciation and amortization expense was$12.9 million , including$11.5 million of intangible amortization related to purchase accounting associated with the acquisitions of Fortegra, Smart AutoCare and Sky Auto, as compared to$7.2 million , including$7.0 million of intangible amortization from purchase accounting related to Fortegra and Smart AutoCare for 2020. Key Performance Metrics
We discuss certain key performance metrics, described below, which provide useful information about our business and the operational factors underlying its financial performance.
10
--------------------------------------------------------------------------------Gross Written Premiums and Premium Equivalents
Gross written premiums and premium equivalents represent total gross written premiums from insurance policies and warranty service contracts issued, as well as premium finance volumes during a reporting period. They represent the volume of insurance policies written or assumed and warranty service contracts issued during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. Gross written premiums is a volume measure commonly used in the insurance industry to compare sales performance by period. Premium equivalents are used to compare sales performance of warranty service and administrative contract volumes to gross written premiums. Investors also use these measures to compare sales growth among comparable companies, while management uses these measures to evaluate the relative performance of various sales channels.
The below table shows gross written premiums and premium equivalents by business
mix for the three and nine months ended
Three Months Ended Nine Months Ended
($ in thousands) September 30, September 30,
2021 2020 2021 2020
U.S. Insurance $ 392,119 $ 301,847 $ 1,095,137 $ 741,521
U.S. Warranty Solutions 190,874 149,269 524,568 399,373
Europe Warranty Solutions 30,120 13,553 69,887 35,128
Total $ 613,113 $ 464,669 $ 1,689,592 $ 1,176,022
Total gross written premiums and premium equivalents for the nine months ended
September 30, 2021 were $1,689.6 million as compared to $1,176.0 million in
2020. The growth of $513.6 million , or 43.7%, is driven by a combination of
factors including growing Fortegra's distribution partner network, expanding
admitted and E&S insurance lines, and increasing penetration through the
warranty acquisitions of Smart AutoCare (January 2020 ) and Sky Auto (December
2020 ). Additionally, certain distribution partners were impacted by COVID-19
shutdowns in the second and third quarters 2020, providing for a more favorable
period over period comparison.
For the nine months ended September 30, 2021 , U.S. Insurance increased by $353.6
million , or 47.7%, driven by growth in commercial, credit, collateral protection
and warranty insurance lines. For the nine months ended September 30, 2021 , U.S.
Warranty Solutions increased by $125.2 million , or 31.3%, driven by growth in
auto and consumer goods service contracts, including the acquisition of Sky
Auto. Europe Warranty Solutions increased by $34.8 million , or 98.9%, driven by
growth in auto and consumer goods warranty programs.
The growth in gross written premiums and premium equivalents, combined with
higher retention in select products for the nine months ended September 30,
2021 , has resulted in an increase of $413.1 million , or 35.9%, in unearned
premiums and deferred revenue on the condensed consolidated balance sheets as
compared to September 30, 2020 . As of September 30, 2021 , unearned premiums and
deferred revenues were $1,564.4 million , as compared to $1,151.3 million as of
September 30, 2020 .
Combined Ratio, Underwriting Ratio and Expense Ratio
Combined ratio is an operating measure, which equals the sum of the underwriting ratio and the expense ratio. Underwriting ratio is the ratio of the GAAP line items net losses and loss adjustment expenses, member benefit claims and commission expense to earned premiums, net, service and administrative fees and ceding commissions and other revenue. Expense ratio is the ratio of the GAAP line items employee compensation and benefits and other underwriting, general and administrative expenses to earned premiums, net, service and administrative fees and ceding commissions and other revenue. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. These ratios are commonly used in the insurance industry as a measure of underwriting profitability, excluding earnings on the insurance portfolio. Investors commonly use these measures to compare underwriting performance among companies separate from the performance of the investment portfolio. Management uses these measures to compare the profitability of various products underwritten as well as profitability among programs between various agents and sales channels. The combined ratio was 91.0% for the nine months endedSeptember 30, 2021 , which consisted of an underwriting ratio of 74.9% and an expense ratio of 16.1%, as compared to 92.1%, 74.9% and 17.2%, respectively, for the nine months ended 11 --------------------------------------------------------------------------------
Return on Average Equity
Return on average equity is expressed as the ratio of net income to average stockholders' equity during the period. Management uses this ratio as a measure of the on-going performance of the totality of the Company's operations.
Return on average equity was 17.3% for the nine months endedSeptember 30, 2021 , as compared to 1.5% for the nine months endedSeptember 30, 2020 , with the increase in net income and annualized return on average equity driven by revenue growth and an improved combined ratio, in addition to net realized and unrealized gains in the 2021 period compared to net realized and unrealized losses in the 2020 period.
Non-GAAP Financial Measures
Underwriting and Fee Revenues and Underwriting and
In order to better explain to investors the underwriting performance of the Company's programs and the respective retentions between the Company and its agents and reinsurance partners, we use the non-GAAP metrics - underwriting and fee revenues and underwriting and fee margin. Underwritten exposures are managed using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with Fortegra's agents (e.g., commissions paid are adjusted based on the actual underlying losses incurred). Period-over-period comparisons of revenues and expenses are often impacted by the agents and their PORC's choice as to their risk retention appetite, specifically earned premiums, net, service and administration fees, ceding commissions, and other revenue, all components of revenue, and losses and loss adjustment expenses, member benefit claims, and commissions paid to Fortegra's agents and reinsurers. Generally, when losses are incurred, the risk which is retained by Fortegra's agents and reinsurers is reflected in a reduction in commissions paid. Underwriting and fee revenues represents total revenues excluding net investment income, net realized and unrealized gains (losses). See "-Non-GAAP Reconciliations" for a reconciliation of underwriting and fee revenues to total revenues in accordance with GAAP. Underwriting and fee margin represents income before taxes excluding net investment income, net realized and unrealized gains (losses), employee compensation and benefits, other expenses, interest expense and depreciation and amortization. Fortegra's products and services are delivered on a vertically integrated basis to its agents. As such, underwriting and fee margin exclude general and administrative expenses, interest income, depreciation and amortization and other corporate expenses, including income taxes, as these corporate expenses support the vertically integrated delivery model and are not specifically supporting any individual business line. See "-Non-GAAP Reconciliations" for a reconciliation of underwriting and fee margin to total revenues in accordance with GAAP. The below table shows underwriting and fee revenues and underwriting and fee margin by business mix for the three and nine months endedSeptember 30, 2021 and 2020. Three Months Ended September 30, Underwriting and Fee ($ in thousands) Underwriting and Fee Revenues (1) Margin (1) 2021 2020 2021 2020 U.S. Insurance$ 174,995 $ 122,540 $ 37,003 $ 26,868 U.S. Warranty Solutions 61,342 41,250 23,455 15,007 Europe Warranty Solutions 14,531 6,533 5,185 1,842 Total$ 250,868 $ 170,323 $ 65,643 $ 43,717
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Underwriting and fee revenues were$250.9 million for the three months endedSeptember 30, 2021 as compared to$170.3 million for the three months endedSeptember 30, 2020 . Total underwriting and fee revenues increased$80.5 million , or 47.3%, driven by growth in all business lines. The increase inU.S. Insurance was$52.5 million , or 42.8%, driven by growth in commercial, credit and warranty insurance programs. The increase inU.S. Warranty Solutions was$20.1 million , or 48.7%, driven by growth in auto, consumer goods, and premium and warranty finance programs, including the acquisition of 12 --------------------------------------------------------------------------------
Sky Auto. Europe Warranty Solutions increased by
Underwriting and fee margin was$65.6 million for the three months endedSeptember 30, 2021 as compared to$43.7 million for the three months endedSeptember 30, 2020 . Total underwriting and fee margin increased$21.9 million , or 50.2%, driven by growth in all business lines. The total underwriting ratio of 73.8% decreased by 0.5% driven by growth and improved margins inU.S. and Europe Warranty Solutions.U.S. Insurance underwriting ratio of 78.9% increased by 0.8% driven by business mix factors.U.S. Warranty Solutions underwriting ratio of 61.8% decreased by 1.8% driven by the impact to margin from the acquisition of Sky Auto. Europe Warranty Solutions underwriting ratio of 64.3% decreased by 7.5% driven by reduced commissions expense as a percent of revenues versus the prior year period. Nine Months Ended September 30, Underwriting and Fee ($ in thousands) Underwriting and Fee Revenues (1) Margin (1) 2021 2020 2021 2020 U.S. Insurance$ 504,038 $ 369,230 $ 101,810 $ 77,045 U.S. Warranty Solutions 168,476 116,230 65,453 43,231 Europe Warranty Solutions 34,675 15,345 10,146 5,596 Total$ 707,189 $ 500,805 $ 177,409 $ 125,872
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Underwriting and fee revenues were$707.2 million for the nine months endedSeptember 30, 2021 as compared to$500.8 million for the nine months endedSeptember 30, 2020 . Total underwriting and fee revenues increased$206.4 million , or 41.2%, driven by growth in all business lines. The increase inU.S. Insurance was$134.8 million , or 36.5%, driven by growth in commercial, credit and warranty insurance programs. The increase inU.S. Warranty Solutions was$52.2 million , or 45.0%, driven by growth in auto, consumer goods, and premium and warranty finance programs, including the Sky Auto acquisition.Europe Warranty Solutions increased by$19.3 million , or 126.0%, driven by growth in auto and consumer goods warranty programs. Underwriting and fee margin was$177.4 million for the nine months endedSeptember 30, 2021 as compared to$125.9 million for the nine months endedSeptember 30, 2020 . Total underwriting and fee margin increased$51.5 million , or 40.9%, driven by growth in all business lines. Total underwriting ratio of 74.9% was stable as compared to prior year as a result of maintaining consistent profitability while growing insurance lines and warranty service contracts.U.S. Insurance underwriting ratio of 79.8% increased by 0.7% driven by change in business mix.U.S. Warranty Solutions underwriting ratio of 61.1% decreased by 1.7% driven by the impact to margin from the acquisition of Sky Auto.Europe Warranty Solutions underwriting ratio of 70.7% increased by 7.2% as the growing book of business normalized.
Adjusted Net Income and Adjusted Return on Average Equity
Adjusted net income represents income before taxes, less provision (benefit) for income taxes, and excluding the after-tax impact of various expenses that we consider to be unique and non-recurring in nature, including merger and acquisition related expenses, stock-based compensation, net realized and unrealized gains (losses), and intangibles amortization associated with purchase accounting. Adjusted return on average equity represents adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period. Management uses both these measures for executive compensation and as a measure of the on-going performance of our operations. See "-Non-GAAP Reconciliations" for a reconciliation of adjusted net income and adjusted return on average equity to income before taxes and adjusted return on average equity. For the three months endedSeptember 30, 2021 , adjusted net income and adjusted return on average equity were$19.5 million and 26.8%, respectively, as compared to$12.1 million and 17.1%, respectively, for the three months endedSeptember 30, 2020 . The improvement in both metrics was driven by the growth in underwriting and fee revenues in addition to a 1.0 percentage point improvement in the combined ratio. 13 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , adjusted net income and adjusted return on average equity were$46.4 million and 20.9%, respectively, as compared to$29.8 million and 14.2%, respectively, for the nine months endedSeptember 30, 2020 . The improvement in both metrics was driven by the growth in underwriting and fee revenues in addition to a 1.1 percentage point improvement in the combined ratio.
Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments
The insurance investment portfolio includes investments held in statutory insurance companies and in unregulated entities. The portfolios 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. Fortegra's investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors and geographies while maintaining adequate liquidity to meet 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.
Net investment income includes interest and dividends, net of investment expenses, on invested assets. Net realized and unrealized gains and losses on investments are reported separately from net investment income.
For the three months endedSeptember 30, 2021 , net investment income was$3.3 million as compared to$3.0 million in the prior year period, driven by growth in investments, partially offset by lower interest rates. Net realized and unrealized losses were$7.5 million , a decrease of$8.2 million , driven by realized and unrealized losses on equity securities and other investments in the 2021 period as compared to gains in the 2020 period. For the nine months endedSeptember 30, 2021 , net investment income was$9.3 million as compared to$8.8 million in the prior year period, driven by growth in investments, partially offset by lower interest rates. Net realized and unrealized gains were$5.0 million , an increase of$32.3 million , driven by realized and unrealized gains on equity securities in the 2021 period, as compared to losses on equity securities and other investments in the 2020 period.
Tiptree Capital consists of our Mortgage segment, which includes the operating results of Reliance, our mortgage business, andTiptree Capital - Other, which consists of our other non-insurance operating businesses and investments. As ofSeptember 30, 2021 ,Tiptree Capital - Other includes our Invesque shares, maritime transportation operations, and the mortgage operations of Luxury, which is classified as held for sale on our balance sheet.
Mortgage
Through our Mortgage operating subsidiary, Reliance, we originate, sell, securitize and service one-to-four-family, residential mortgage loans, comprised of conforming mortgage loans,Federal Housing Administration ("FHA"),Veterans Administration ("VA"),United States Department of Agriculture ("USDA"), and to a lesser extent, non-agency jumbo prime. We are an approved seller/servicer for Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Company is also an approved issuer and servicer forGovernment National Mortgage Association ("GNMA" or "Ginnie Mae"). The Company originates residential mortgage loans through its retail distribution channel (directly to consumers) in 39 states and theDistrict of Columbia as ofSeptember 30, 2021 .
The following tables present the Mortgage segment results for the three and nine
months ended
14
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Results of Operations
Three Months Ended Nine Months Ended
($ in thousands) September 30, September 30,
2021 2020 2021 2020
Revenues:
Net realized and unrealized gains (losses)
$ 73,454 $ 69,733 Other revenue 4,774 3,987 13,737 11,178 Total revenues$ 27,425 $ 35,879 $ 87,191 $ 80,911 Expenses: Employee compensation and benefits$ 14,382 $ 15,893 $ 42,849 $ 43,240 Interest expense 276 251 837 891 Depreciation and amortization 218 239 670 715 Other expenses 6,282 5,043 17,716 15,297 Total expenses$ 21,158 $ 21,426 $ 62,072 $ 60,143 Income (loss) before taxes$ 6,267 $ 14,453 $ 25,119 $ 20,768 Key Performance Metrics: Return on average equity 36.5 % 101.1 % 44.4 % 51.8 %
(1) See "Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Revenues
Net Realized and Unrealized Gains (Losses)
Net realized and unrealized gains (losses) include gains on sale of mortgage loans and the fair value adjustment in mortgage servicing rights. Gains on the sale of mortgage loans represent the difference between the selling price and carrying value of loans sold and are recognized upon settlement. Such gains also include the changes in fair value of loans held for sale and loan-related hedges and derivatives. We transfer the risk of loss or default to the loan purchaser, however, in some cases we are required to indemnify purchasers for losses related to non-compliance with borrowers' creditworthiness and collateral requirements. Because of this, we recognize gains on sale net of required indemnification and premium recapture reserves. The fair value adjustment on mortgage servicing rights represents fair value adjustments considering estimated prepayments and other factors associated with changes in interest rates, plus actual run-off in the servicing portfolio. We report these adjustments separate from servicing income and servicing expense.
Other Revenue
Other revenue includes loan origination fees, interest income, and mortgage servicing income. Loan origination fees are earned as mortgage loans are funded. Servicing fees are earned over the life of the loan. Interest income includes interest earned on loans held for sale and interest income on bank balances and short-term investments.
Revenues - Three and Nine Months Ended
For the three months endedSeptember 30, 2021 , we funded$385.0 million of loans, compared to$440.1 million for 2020, a decrease of$55.1 million , or 12.5%. The decrease in origination volumes is driven by lower mortgage refinancing levels across the industry as compared to cyclical highs observed in 2020. Gain on sale margins decreased to 5.5% for the three months endedSeptember 30, 2021 , down approximately 130 basis points from 6.8% for the three months endedSeptember 30, 2020 . Net realized and unrealized gains for the three months endedSeptember 30, 2021 were$22.7 million , compared to$31.9 million for 2020, a decrease of$9.2 million or 29.0%. The primary drivers of the decreased gains on sale revenues were decreases in origination volumes and gain on sale margins, relative to the third quarter of 2020, partially offset by positive fair value adjustments in mortgage servicing rights of$1.1 million as interest rates increased in the third quarter 2021 relative to the prior period. Other revenue for the three months endedSeptember 30, 2021 was$4.8 million , compared to$4.0 million for 2020, an increase of$0.8 million or 19.7% driven by increased servicing fees associated with increased loans serviced. For the nine months endedSeptember 30, 2021 , we funded$1,180.8 million of loans, compared to$1,186.3 million for 2020, a decrease of$5.5 million , or 0.5%. Origination volumes in the 2021 and 2020 periods were primarily attributed to the lower interest rate environment and rising home prices. Gain on sale margins also decreased to 5.7% for the nine months ended 15 --------------------------------------------------------------------------------September 30, 2021 , down approximately 50 basis points from 6.2% for the nine months endedSeptember 30, 2020 . Net realized and unrealized gains for the nine months endedSeptember 30, 2021 were$73.5 million , compared to$69.7 million for 2020, an increase of$3.7 million or 5.3%. The primary driver of increased gain on sale revenues was positive fair value adjustments in mortgage servicing rights of$5.1 million as interest rates increased from year-end 2020, partially offset by slightly lower volumes and margins. Other revenue for the nine months endedSeptember 30, 2021 was$13.7 million , compared to$11.2 million for 2020, an increase of$2.6 million or 22.9% driven primarily by higher servicing fees from an increase in loans serviced.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits includes salaries, commissions, benefits, bonuses, other incentive compensation and related taxes for employees. Commissions expense for sales staff generally varies with loan origination volumes.
Interest Expense
Interest expense represents borrowing costs under warehouse and other credit facilities used primarily to fund loan originations. Amortization of deferred financing costs, including commitment fees, is included in interest expense.
Depreciation and Amortization
Depreciation expense is mainly associated with furniture, fixtures and equipment while amortization expense is primarily associated with a trade name and internally developed software.
Other Expenses
Other expenses include loan origination expenses, namely, leads, appraisals, credit reporting and licensing fees, general and administrative expenses, including office rent, insurance, legal, consulting and payroll processing expenses, and servicing expense.
Expenses - Three and Nine Months Ended
For the three months endedSeptember 30, 2021 , employee compensation and benefits was$14.4 million , compared to$15.9 million in 2020, a decrease of$1.5 million or 9.5%. This decrease was driven primarily by reduced commissions on lower origination volumes, in addition to decreased incentive compensation. For the three months endedSeptember 30, 2021 and 2020, interest expense was$0.3 million and depreciation and amortization expense was$0.2 million . For the three months endedSeptember 30, 2021 , other expenses were$6.3 million compared to$5.0 million in 2020, with the$1.2 million increase driven by increased loan origination expenses, including marketing costs. For the nine months endedSeptember 30, 2021 , employee compensation and benefits was$42.8 million , compared to$43.2 million in 2020, a decrease of$0.4 million or 0.9%. This decrease was driven primarily by reduced commissions on lower origination volumes. For the nine months endedSeptember 30, 2021 , interest expense was$0.8 million compared to$0.9 million in 2020. For the nine months endedSeptember 30, 2021 and 2020, depreciation and amortization expense was$0.7 million . For the nine months endedSeptember 30, 2021 , other expenses were$17.7 million compared to$15.3 million in 2020 with the$2.4 million increase driven by increased loan origination expenses, including marketing costs.
Income (loss) before taxes
Income before taxes for the three months endedSeptember 30, 2021 was$6.3 million , compared to income before taxes of$14.5 million in 2020. The primary driver of the decline was lower volume and gain on sale margins as compared to the 2020 period.
Income before taxes for the nine months ended
16
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The following tables present a summary of
Results of Operations
Three Months Ended
Income (loss) before
($ in thousands) Total revenue taxes
2021 2020 2021 2020
Senior living (Invesque) $ (10,396) $ (7,586) $ (10,396) $ (7,586)
Maritime transportation 11,424 5,517 5,231 138
Other (1) 11,446 16,226 465 2,470
Total $ 12,474 $ 14,157 $ (4,700) $ (4,978)
Nine Months Ended September 30,
($ in thousands) Total revenue Income (loss) before taxes
2021 2020 2021 2020
Senior living (Invesque) $ 3,512 $ (63,437) $ 3,512 $ (63,437)
Maritime transportation 25,041 17,218 7,738 1,041
Other (1) 43,712 35,915 1,664 2,989
Total $ 72,265 $ (10,304) $ 12,914 $ (59,407) (1) Includes our held for sale mortgage originator (Luxury), asset management, and certain intercompany elimination transactions.
Revenues
Revenues for the three months endedSeptember 30, 2021 were$12.5 million compared to revenues of$14.2 million for 2020. The primary drivers of the change in revenues were unrealized losses on Invesque of$10.4 million in the 2021 period compared to unrealized losses of$7.6 million in the 2020 period and lower mortgage gain on sale revenues in the held for sale mortgage originator, partially offset by increased dry-bulk charter rates earned by the maritime transportation business. Revenues for the nine months endedSeptember 30, 2021 were$72.3 million compared to negative revenues of$10.3 million for 2020. The primary driver of the change in revenues for the nine months endedSeptember 30, 2021 was unrealized gains on Invesque in the 2021 period compared to unrealized losses in the 2020 period, partially offset by the suspension of its monthly dividend payment inApril 2020 , increased dry-bulk charter rates earned by the maritime transportation business, and growth in mortgage gain on sale revenues in the held for sale mortgage originator.
Income (loss) before taxes
For the three months endedSeptember 30, 2021 , the loss before taxes fromTiptree Capital - Other was$4.7 million , compared to a loss before taxes of$5.0 million in 2020. The primary drivers were unrealized losses in the 2021 and 2020 periods on the investment in Invesque. Maritime transportation operations earned higher income before taxes in 2021 compared to 2020 driven by increased revenues from higher dry-bulk charter rates. The income before taxes fromTiptree Capital - Other for the nine months endedSeptember 30, 2021 was$12.9 million , compared to a loss before taxes of$59.4 million in 2020. The primary driver of the increase was unrealized gains in the 2021 period compared to losses in the 2020 period on our investment in Invesque, in addition to increased income before taxes in our maritime transportation business due to a rise in dry-bulk charter rates. 17 --------------------------------------------------------------------------------
Adjusted net income - Non-GAAP(1)
Three Months Ended Nine Months Ended
($ in thousands) September 30, September 30,
2021 2020 2021 2020
Senior living (Invesque) $ - $ - $ - $ 2,001
Maritime transportation 5,503 475 8,074 1,536
Other 19 20 79 28
Total $ 5,522 $ 495 $ 8,153 $ 3,565 (1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Adjusted net income increased to$8.2 million for the nine months endedSeptember 30, 2021 compared to$3.6 million in 2020. The increase was driven by improvement in maritime transportation operations from higher dry-bulk charter rates, partially offset by the impact of the discontinuation of the Invesque dividend inApril 2020 .
Corporate
The following table presents a summary of corporate results for the three and
nine months ended
Results of Operations
Three Months Ended Nine Months Ended
($ in thousands) September 30, September 30,
2021 2020 2021 2020
Employee compensation and benefits $ 1,785 $ 1,962 $ 5,621 $ 5,819
Employee incentive compensation expense 4,835 1,922 10,760 4,293
Interest expense 2,553 2,684 7,675 7,365
Depreciation and amortization 203 203 602 603
Other expenses 1,944 2,254 8,493 7,119
Total expenses $ 11,320 $ 9,025 $ 33,151 $ 25,199
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,
was $16.4 million for the nine months ended September 30, 2021 compared to $10.1
million for 2020, driven by an increase in performance related employee
incentive compensation. Interest expense for the nine months ended September 30,
2021 was $7.7 million , up from $7.4 million in 2020, driven by a higher average
outstanding balance during the first quarter of 2021 associated with upsizing
the borrowing facility in February 2020 . As of September 30, 2021 , the
outstanding borrowing was $115.6 million compared to $120.3 million at December
31, 2020 . Other expenses of $8.5 million increased by $1.4 million from the nine
months ended September 30, 2020 primarily driven by $2.2 million of
non-recurring professional and legal fees associated with preparation of the
registration statement for the potential Fortegra initial public offering in
2021 (which registration statement has been withdrawn), compared to $0.4 million
of non-recurring debt extinguishment fees associated with the refinancing of the
corporate credit facility in the prior year.
Provision for Income Taxes
The total income tax expense of$0.2 million for the three months endedSeptember 30, 2021 , and the total income tax benefit of$0.8 million for the three months endedSeptember 30, 2020 are reflected as components of net income (loss). For the three months endedSeptember 30, 2021 , the Company's effective tax rate was equal to 6.6%. The effective rate for the three months endedSeptember 30, 2021 was lower than theU.S. federal statutory income tax rate of 21.0%, primarily from the impact of the effect of foreign operations and discrete items, partially offset by state taxes. For the three months endedSeptember 30, 2020 , the Company's effective tax rate was equal to (6.1)%. The effective rate for the three months endedSeptember 30, 2020 was lower than theU.S. federal statutory income tax rate of 21.0% due to the effect of discrete items, including expected refunds arising from the CARES Act. 18 -------------------------------------------------------------------------------- The total income tax expense of$11.4 million for the nine months endedSeptember 30, 2021 , and the total income tax benefit of$22.0 million for the nine months endedSeptember 30, 2020 are reflected as components of net income (loss). For the nine months endedSeptember 30, 2021 , the Company's effective tax rate was equal to 21.0%. The effective rate for the nine months endedSeptember 30, 2021 was equal to theU.S. federal statutory income tax rate of 21.0%, due to the impact of state taxes offset by other discrete items. For the nine months endedSeptember 30, 2020 , the Company's effective tax rate was equal to 34.7%. The effective rate for the nine months endedSeptember 30, 2020 was higher than theU.S. federal statutory income tax rate of 21.0%, primarily from the impact of state taxes and other discrete items.
Balance Sheet Information
Tiptree's total assets were
Total stockholders' equity was$402.1 million as ofSeptember 30, 2021 , compared to$373.5 million as ofDecember 31, 2020 , primarily driven by net income for nine months endedSeptember 30, 2021 , partially offset by dividends. As ofSeptember 30, 2021 , there were 33,888,810 shares of common stock outstanding as compared to 32,682,462 as ofDecember 31, 2020 .
The following table is a summary of certain balance sheet information:
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