TIPTREE INC. 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 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 principal operating subsidiary and primary source of earnings, 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 our other, non-insurance businesses and assets. We evaluate our performance primarily by the comparison of our shareholders' long-term total return on capital, as measured by Adjusted Net Income, Adjusted EBITDA and growth in book value per share plus dividends.
Highlights for the first half 2021 include:
Overall:
•Net income of$36.6 million increased from a net loss of$56.2 million in 2020, which was driven by growth in insurance underwriting operations and improved volumes and margins in our mortgage business, in addition to realized and unrealized gains on investments as compared to losses in 2020. •Adjusted net income increased 50.7% to$26.3 million , from$17.4 million in 2020, driven by improvement in insurance and mortgage operations. Adjusted return on average equity was 13.5%, as compared to 9.2% in 2020. •Book value per share of$11.59 as ofJune 30, 2021 , when combined with dividends paid, increased 17.9% from the prior year, and 7.1% fromDecember 31, 2020 . •Cash and cash equivalents of$141.7 million as ofJune 30, 2021 , of which$93.9 million resides outside our statutory insurance subsidiaries.
Insurance:
•Gross written premiums and premium equivalents were$1,076.5 million for the six months endedJune 30, 2021 , as compared to$711.4 million for the six months endedJune 30, 2020 , up 51.3% as a result of growth in admitted and surplus insurance lines as well as growth in fee-based warranty programs. •Total revenues increased 54.0% to$474.8 million , from$308.3 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 91.8%, as compared to 92.9% in 2020, driven by the continued scalability of our technology and shared service platform, which improved the expense ratio, while the underwriting ratio remained stable. •Income before taxes of$36.2 million increased by$49.3 million as compared to a loss before taxes of$13.0 million in 2020. Return on average equity was 19.4% in 2021 as compared to (5.9)% in 2020. The increase in both metrics was operationally 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 51.6% to$26.9 million , as compared to$17.7 million in 2020. Adjusted return on average equity was 18.3%, as compared to 12.8% in 2020. The increase in both metrics was driven by revenue growth and the improved combined ratio. •As ofJune 30, 2021 , total investments combined with cash and cash equivalents were$814.5 million , as compared to$597.9 million as ofJune 30, 2020 . As ofJune 30, 2021 , 77% 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 2.3 years.
Mortgage:
•Income before taxes of$18.9 million in 2021, as compared to$6.3 million in 2020, with the increase driven by growth in volumes and margins resulting from a lower interest rate environment and home price appreciation. 1 -------------------------------------------------------------------------------- •Adjusted net income improved by$3.9 million in 2021, driven by the same factors that impacted net income. •Return on average equity of 42.8% and adjusted return on average equity of 34.3% in 2021, as compared to 27.5% and 41.3%, respectively, in 2020.
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. 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 agents, 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 specialty insurance and warranty business model to other niche products and markets. 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. Our businesses 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. Rising interest rates could impact the value of certain of our 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 our investments over time. In declining interest rate environments, the opposite impacts could occur. In addition, certain of our 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 our cost of LIBOR based debt obligations, while declining rates can decrease our cost of debt. Our secured revolving and term credit agreements, preferred trust securities and asset-based revolving financing are all floating rate obligations. 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 half of 2021, which has been a benefit to our mortgage operations. The recent low interest rate environment also benefits our interest cost on debt, although our 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 our LIBOR based investments. Common shares of Invesque represent a significant asset on our condensed consolidated balance sheet, both as part of our 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. In April 2 -------------------------------------------------------------------------------- 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 our investment and results of operations. While their stock price and the value of our investment increased in the first six 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 our 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 in the second quarter of 2021, 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 six months endedJune 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 Six Months Ended information) June 30, June 30, GAAP: 2021 2020 2021 2020 Total revenues$ 299,687 $ 199,194 $ 594,375 $ 328,865 Net income (loss) attributable to common stockholders$ 7,969 $ 3,816 $ 36,550 $ (56,191) Diluted earnings per share$ 0.22 $ 0.10 $ 1.05 $ (1.64) Cash dividends paid per common share$ 0.04 $ 0.04 $ 0.08 $ 0.08 Return on average equity 9.0 % 5.1 % 20.4 % (29.6) % Non-GAAP: (1) Adjusted net income$ 13,125 $ 10,526 $ 26,280 $ 17,433 Adjusted return on average equity 13.1 % 12.2 % 13.5 % 9.2 % Adjusted EBITDA$ 26,555 $ 17,423 $ 72,238 $ (53,106) Book value per share$ 11.59 $ 9.97 $ 11.59 $ 9.97
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Revenues
For the three months endedJune 30, 2021 , revenues were$299.7 million , which increased$100.5 million or 50.4% compared to the prior year period, primarily driven by growth in earned premiums, net, and service and administrative fees in our insurance business and net realized and unrealized gains in the 2021 period compared to losses in the 2020 period.
For the six months ended
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--------------------------------------------------------------------------------to the prior year period. In addition to the factors impacting quarterly revenues, improvement in mortgage volumes and margins led to increased realized gain on sale of mortgage loans for the six month period.
The combination of unearned premiums and deferred revenues on the condensed consolidated balance sheet grew by$408.5 million , or 39.6%, fromJune 30, 2020 toJune 30, 2021 as a result of Fortegra's growth in gross written premiums and premium equivalents, primarily related to admitted and excess and surplus (E&S) insurance lines as well as warranty service contracts. The table below provides a break down between net realized and unrealized gains and losses from Invesque and other securities which impacted our consolidated results on a pre-tax basis. Many of our investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these investments to be relatively volatile between periods. Our fixed income securities are primarily marked to market through AOCI in stockholders' equity and do not impact net realized and unrealized gains and losses until they are sold. Three Months Ended Six Months Ended ($ in thousands) June 30, June 30, 2021 2020 2021 2020 Net realized and unrealized gains (losses)(1)$ 3,397 $ 6,211 $ 13,612 $ (18,580) Net realized and unrealized gains (losses) - Invesque$ 169 $ (11,891)
(1) Excludes Invesque and Mortgage realized and unrealized gains and losses.
Net Income (Loss) Attributable to common stockholders
For the three months endedJune 30, 2021 , net income attributable to common stockholders was$8.0 million , an increase of$4.2 million . For the six months endedJune 30, 2021 , net income attributable to common stockholders was$36.6 million , an increase of$92.7 million from a net loss of$56.2 million for the six months endedJune 30, 2020 , driven by the same factors which drove improvements in revenue, partially offset by higher policy and contract benefits, commission expense and premium taxes associated with higher insurance volumes, higher incentive compensation costs related to the improved performance and higher interest costs.
Adjusted net income & Adjusted return on average equity - Non-GAAP
Adjusted net income for the three months endedJune 30, 2021 was$13.1 million , an increase of$2.6 million , or 24.7%, from the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , adjusted return on average equity was 13.1%, as compared to 12.2% atJune 30, 2020 , with the increase in both metrics driven by improved performance in our insurance and shipping operations. Adjusted net income for the six months endedJune 30, 2021 was$26.3 million , an increase of$8.8 million , or 50.7%, from the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , adjusted return on average equity was 13.5%, as compared to 9.2% atJune 30, 2020 , with the increase in both metrics driven by improved performance in our insurance and mortgage operations.
Adjusted EBITDA - Non-GAAP
Adjusted EBITDA for the three months endedJune 30, 2021 was$26.6 million , an increase of$9.1 million from 2020. Adjusted EBITDA for the six months endedJune 30, 2021 was$72.2 million , an increase of$125.3 million from 2020. The improvement in both periods was substantially driven by realized and unrealized gains in the 2021 periods compared to losses in the 2020 periods, in addition to the improved operating performance noted above.
Book Value per share - Non-GAAP
Total stockholders' equity was$405.0 million as ofJune 30, 2021 compared to$373.5 million as ofDecember 31, 2020 . In the six months endedJune 30, 2021 , Tiptree returned$5.5 million to stockholders through share repurchases and dividends paid. Book value per share for the period endedJune 30, 2021 was$11.59 , an increase from book value per share of$9.97 as ofJune 30, 2020 . The key drivers of the increase over the past four quarters were net income per share and the purchase of 1.6 million shares at a discount to book value partially offset by dividends paid of$0.16 per share, and issuance of shares related to warrants and vested subsidiary awards. Results by Segment We classify our business into two reportable segments, Insurance and Mortgage, with the remainder of our operations aggregated intoTiptree Capital - Other. Corporate activities include holding company interest expense, corporate employee 4 -------------------------------------------------------------------------------- compensation and benefits, and other expenses, including, but not limited to, public company expenses. For the three and six months endedJune 30, 2021 , Mortgage has been broken out ofTiptree Capital as a reportable segment because for the year endedDecember 31, 2020 it met the quantitative threshold for disclosure. Prior year segments have been conformed to the current year presentation.
The following tables present the components of Revenue, Income (loss) before taxes and Adjusted net income.
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2021 2020 2021 2020
Revenues:
Insurance $ 252,255 $ 164,954 $ 474,818 $ 308,294
Mortgage 25,272 28,812 59,766 45,032
Tiptree Capital - other 22,160 5,428 59,791 (24,461)
Corporate - - - -
Total revenues $ 299,687 $ 199,194 $ 594,375 $ 328,865
Income (loss) before taxes:
Insurance $ 14,704 $ 14,088 $ 36,232 $ (13,029)
Mortgage 5,775 7,405 18,852 6,315
Tiptree Capital - other 2,620 (9,188) 17,614 (54,429)
Corporate (11,624) (7,871) (21,831) (16,174)
Total income (loss) before taxes $ 11,475 $ 4,434 $ 50,867 Non-GAAP - Adjusted net income: Insurance$ 14,091 $ 8,988 $ 26,867 $ 17,724 Mortgage 4,059 7,427 11,524 7,623 Tiptree Capital - other 2,064 (221) 2,631 3,070 Corporate (7,089) (5,668) (14,742) (10,984) Total adjusted net income (1)$ 13,125 $ 10,526 $ 26,280 $ 17,433
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Insurance Our principal operating subsidiary, Fortegra, is a specialty insurance program underwriter and service provider, which focuses on niche programs and fee-oriented services. Our 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. We are an agent-driven business model, distributing our 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 six
months ended
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Results of Operations - Three Months Ended
($ in thousands) Three Months Ended June 30,
2021 2020 Change % Change
Revenues:
Earned premiums, net $ 176,958 $ 107,255 $ 69,703 65.0 %
Service and administrative fees 63,700 42,865 20,835 48.6 %
Ceding commissions 3,080 4,535 (1,455) (32.1) %
Net investment income 3,234 2,292 942 41.1 %
Net realized and unrealized gains (losses) 2,824 5,635 (2,811) (49.9) %
Other revenue 2,459 2,372 87 3.7 %
Total revenues $ 252,255 $ 164,954 $ 87,301 52.9 %
Expenses:
Net losses and loss adjustment expenses
$ 33,283 91.3 % Member benefit claims 19,452 12,689 6,763 53.3 % Commission expense 99,543 67,903 31,640 46.6 % Employee compensation and benefits 18,392 14,916 3,476 23.3 % Interest expense 4,525 3,582 943 26.3 % Depreciation and amortization 4,407 2,630 1,777 67.6 % Other expenses 21,491 12,688 8,803 69.4 % Total expenses$ 237,551 $ 150,866 $ 86,685 57.5 % Income (loss) before taxes (1)$ 14,704 $ 14,088 $ 616 4.4 % Key Performance Metrics: Gross written premiums and premium equivalents$ 571,478 $ 318,942 $ 252,536 79.2 % Return on average equity 16.2 % 16.2 % Underwriting ratio 76.7 % 74.5 % Expense ratio 15.5 % 17.6 % Combined ratio 92.1 % 92.1 % Non-GAAP Financial Measures (2): Adjusted net income$ 14,091 $ 8,988 $ 5,103 56.8 % Adjusted return on average equity 20.1 % 12.9 %
(1) Net income was
Revenues Earned Premiums, net Earned premiums, net represent the earned portion of our gross written and assumed premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. Our 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.
Service and Administrative Fees
Service and administrative fees represent the earned portion of our 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 our 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.
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--------------------------------------------------------------------------------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 our premium finance product offering. Net Investment Income We earn investment income on our portfolio of invested assets. Our 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 our 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, we carry our equity securities at fair value with unrealized gains and losses included in this line.
Revenues - Three Months Ended
For the three months endedJune 30, 2021 , total revenues increased 52.9%, to$252.3 million , as compared to$165.0 million for the three months endedJune 30, 2020 . Earned premiums, net of$177.0 million increased$69.7 million , or 65.0%, driven by growth in commercial, credit and warranty insurance programs. Service and administrative fees of$63.7 million increased by 48.6% driven by growth in warranty and consumer goods service contract revenues. Ceding commissions of$3.1 million decreased by$1.5 million , or 32.1%, driven by lower fees associated with higher premium retention in certain credit insurance and collateral protection programs. Other revenues increased by$0.1 million , or 3.7%, driven by growth in our premium and warranty finance programs. For the three months endedJune 30, 2021 , 27.4% of our revenues were derived from fees that were not solely dependent upon the underwriting performance of our insurance products, resulting in more diversified earnings. For the three months endedJune 30, 2021 , 80.9% of our fee-based revenues were generated in non-regulated service companies, with the remainder in our regulated insurance companies. For the three months endedJune 30, 2021 , net investment income was$3.2 million as compared to$2.3 million in the prior year period, primarily driven by growth in investments. Net realized and unrealized gains were$2.8 million , a decrease of$2.8 million . 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, 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, 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.
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--------------------------------------------------------------------------------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 we pay retail agents, program administrators and managing general underwriters, net of ceding commissions we receive on business ceded under certain reinsurance contracts. Commission expenses related to each policy we write 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 our products, including credit insurance policies, warranty 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. 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 our distribution partners.
Operating and Other Expenses
Operating and other expenses represent the general and administrative expenses of our 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 our corporate
revolving debt, our Notes, our 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 endedJune 30, 2021 , net losses and loss adjustment expenses were$69.7 million , member benefit claims were$19.5 million and commission expense was$99.5 million , as compared to$36.5 million ,$12.7 million and$67.9 million , respectively, for the three months endedJune 30, 2020 . The increases in net losses and loss adjustment expenses of$33.3 million , or 91.3%, and member benefit claims of$6.8 million , or 53.3%, were driven by growth in ourU.S. Insurance andU.S. Warranty Solutions programs. Commission expense increased by$31.6 million , or 46.6%, driven by growth in revenues and an increase in retrospective commission payments, which were partially offset by lower proportional net losses and loss adjustment expenses. For the three months endedJune 30, 2021 , employee compensation and benefits were$18.4 million and other expenses were$21.5 million , as compared to$14.9 million and$12.7 million , respectively, for the three months endedJune 30, 2020 . Employee compensation and benefits increased by$3.5 million , or 23.3%, driven by the acquisition of Sky Auto and investments in human capital associated with our growth objectives in admitted, E&S and warranty programs. Other expenses increased by$8.8 million , or 69.4%, driven primarily by increased marketing and advertising costs aligned with growth in revenues from Sky Auto, increases in premium taxes, which grew in line with written premiums, and$1.8 million of non-recurring professional and audit fees associated with preparation of the registration statement for the potential Fortegra initial public offering in 2021 (which registration statement has been withdrawn). 8 -------------------------------------------------------------------------------- For the three months endedJune 30, 2021 , interest expense was$4.5 million as compared to$3.6 million for the three months endedJune 30, 2020 . The increase in interest expense of$0.9 million , or 26.3%, was primarily driven by higher outstanding revolving credit borrowings and increased asset-based debt for our premium and warranty finance programs. For the three months endedJune 30, 2021 , depreciation and amortization expense was$4.4 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$2.6 million , including$2.5 million of intangible amortization from purchase accounting related to Fortegra and Smart AutoCare for 2020.
Results of Operations - Six Months Ended
($ in thousands) Six Months Ended June 30,
2021 2020 Change % Change
Revenues:
Earned premiums, net $ 323,877 $ 228,576 $ 95,301 41.7 %
Service and administrative fees 121,750 86,589 35,161 40.6 %
Ceding commissions 6,105 11,060 (4,955) (44.8) %
Net investment income 6,001 5,780 221 3.8 %
Net realized and unrealized gains (losses) 12,496 (27,968) 40,464 NM%
Other revenue 4,589 4,257 332 7.8 %
Total revenues $ 474,818 $ 308,294 $ 166,524 54.0 %
Expenses:
Net losses and loss adjustment expenses $ 119,992 82,434 $ 37,558 45.6 %
Member benefit claims 36,375 27,589 8,786 31.8 %
Commission expense 188,188 138,304 49,884 36.1 %
Employee compensation and benefits 37,481 31,958 5,523 17.3 %
Interest expense 8,829 7,230 1,599 22.1 %
Depreciation and amortization 8,598 4,900 3,698 75.5 %
Other expenses 39,123 28,908 10,215 35.3 %
Total expenses $ 438,586 $ 321,323 $ 117,263 36.5 %
Income (loss) before taxes (1) $ 36,232 $ (13,029) $ 49,261 NM%
Key Performance Metrics:
Gross written premiums and premium
equivalents $ 1,076,479 $ 711,353 $ 365,126 51.3 %
Return on average equity 19.4 % (5.9) %
Underwriting ratio 75.5 % 75.1 %
Expense ratio 16.3 % 17.7 %
Combined ratio 91.8 % 92.9 %
Non-GAAP Financial Measures (2):
Adjusted net income $ 26,867 $ 17,724 $ 9,143 51.6 %
Adjusted return on average equity 18.3 % 12.8 %
(1) Net income was
Revenues - Six Months Ended
For the six months endedJune 30, 2021 , total revenues increased 54.0%, to$474.8 million , as compared to$308.3 million for the six months endedJune 30, 2020 . Earned premiums, net of$323.9 million increased$95.3 million , or 41.7%, driven by growth in commercial, credit and warranty insurance programs. Service and administrative fees of$121.8 million increased by 40.6% driven by growth in warranty and consumer goods service contract revenues. Ceding commissions of$6.1 million decreased by$5.0 million , or 44.8%, driven by lower fees associated with increased premium retention in certain credit insurance and collateral protection programs. Other revenues increased by$0.3 million , or 7.8%, driven by growth in our premium and warranty finance programs.
For the six months ended
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the underwriting performance of our insurance products, resulting in more
diversified earnings. For the six months ended
For the six months endedJune 30, 2021 , net investment income was$6.0 million as compared to$5.8 million in the prior year period, driven by growth in investments, partially offset by lower interest rates. Net realized and unrealized gains were$12.5 million , an increase of$40.5 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 - Six Months Ended
For the six months endedJune 30, 2021 , net losses and loss adjustment expenses were$120.0 million , member benefit claims were$36.4 million and commission expense was$188.2 million , as compared to$82.4 million ,$27.6 million and$138.3 million , respectively, for the six months endedJune 30, 2020 . The increases in net losses and loss adjustment expenses of$37.6 million , or 45.6%, and member benefit claims of$8.8 million , or 31.8%, were driven by growth in ourU.S. Insurance ,U.S. Warranty Solutions and Europe Warranty Solutions programs. Commission expense increased by$49.9 million , or 36.1%, driven by growth in revenues and an increase in retrospective commission payments, which were partially offset by lower proportional net losses and loss adjustment expenses. For the six months endedJune 30, 2021 , employee compensation and benefits were$37.5 million and other expenses were$39.1 million , as compared to$32.0 million and$28.9 million , respectively, for the six months endedJune 30, 2020 . Employee compensation and benefits increased by$5.5 million , or 17.3%, driven by the acquisition of Sky Auto and investments in human capital associated with our growth objectives in admitted, E&S and warranty programs. Other expenses increased by$10.2 million , or 35.3%, 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 written premiums. Other expenses were elevated by$2.1 million and$2.2 million for the six months endedJune 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 in 2021 (which registration statement has been withdrawn), and investment banking and legal expenses for our acquisition of Smart AutoCare in 2020. For the six months endedJune 30, 2021 , interest expense was$8.8 million as compared to$7.2 million for the six months endedJune 30, 2020 . The increase in interest expense of$1.6 million , or 22.1%, was primarily driven by higher outstanding revolving credit borrowings and increased asset-based debt for our premium and warranty finance programs. For the six months endedJune 30, 2021 , depreciation and amortization expense was$8.6 million , including$7.7 million of intangible amortization related to purchase accounting associated with the acquisitions of Fortegra, Smart AutoCare and Sky Auto, as compared to$4.9 million , including$4.7 million of intangible amortization from purchase accounting related to Fortegra and Smart AutoCare for 2020. Key Performance Metrics
We discuss certain key performance metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.
Gross Written Premiums and Premium Equivalents
Gross written premiums and premium equivalents represent total gross written premiums from insurance policies and warranty service contracts issued, as well as premium finance volumes during a reporting period. They represent the volume of insurance policies written or assumed and warranty service contracts issued during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. Gross written premiums is a volume measure commonly used in the insurance industry to compare sales performance by period. Premium equivalents are used to compare sales performance of warranty service and administrative contract volumes to gross written premiums. Investors also use these measures to compare sales growth among comparable companies, while management uses these measures to evaluate the relative performance of various sales channels.
The below table shows gross written premiums and premium equivalents by business
mix for the three and six months ended
10
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Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2021 2020 2021 2020
U.S. Insurance $ 364,859 $ 193,705 $ 703,018 $ 439,674
U.S. Warranty Solutions 182,908 116,767 333,694 250,104
Europe Warranty Solutions 23,711 8,470 39,767 21,575
Total $ 571,478 $ 318,942 $ 1,076,479 $ 711,353
Total gross written premiums and premium equivalents for the six months ended
June 30, 2021 were $1,076.5 million as compared to $711.4 million in 2020. The
growth of $365.1 million , or 51.3%, is driven by a combination of factors
including growing our distribution partner network, expanding our admitted and
E&S insurance lines, and increasing penetration through our recent 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 quarter 2020, providing for a more favorable period over period
comparison.
For the six months ended June 30, 2021 , U.S. Insurance increased by $263.3
million , or 59.9%, driven by growth in commercial, credit, collateral protection
and warranty insurance lines. For the six months ended June 30, 2021 , U.S.
Warranty Solutions increased by $83.6 million , or 33.4%, driven by growth in
auto and consumer goods service contracts, including the acquisition of Sky
Auto. Europe Warranty Solutions increased by $18.2 million , or 84.3%, 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 June 30, 2021 , has resulted in an
increase of $408.5 million , or 39.6%, in unearned premiums and deferred revenue
on the condensed consolidated balance sheets as compared to June 30, 2020 . As of
June 30, 2021 , unearned premiums and deferred revenues were $1,441.1 million , as
compared to $1,032.6 million as of June 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 we underwrite as well as profitability among programs of our various agents and sales channels. The combined ratio was 91.8% for the six months endedJune 30, 2021 , which consisted of an underwriting ratio of 75.5% and an expense ratio of 16.3%, as compared to 92.9%, 75.1% and 17.7%, respectively, for the six months endedJune 30, 2020 . The improvement in the combined ratio year over year is primarily driven by the continued scalability of our technology and shared service platform, decreasing our expense ratio.
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 19.4% for the six months endedJune 30, 2021 , as compared to (5.9)% for the six months endedJune 30, 2020 , with the increase in net income and annualized return on average equity driven operationally 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. 11 --------------------------------------------------------------------------------
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. We generally manage our exposure to the risks we underwrite using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our agents (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 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 our agents and reinsurers. Generally, when losses are incurred, the risk which is retained by our 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. We deliver our products and services on a vertically integrated basis to our 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 our 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 six months ended
Three
Months Ended
Underwriting and Fee
($ in thousands) Underwriting and Fee Revenues (1) Margin (1)
2021 2020 2021 2020
U.S. Insurance $ 179,230 $ 115,460 $ 34,617 $ 23,694
U.S. Warranty Solutions 56,015 37,319 21,360 14,491
Europe Warranty Solutions 10,952 4,248 1,484 1,792
Total $ 246,197 $ 157,027 $ 57,461 $ 39,977 (1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Underwriting and fee revenues were$246.2 million for the three months endedJune 30, 2021 as compared to$157.0 million for the three months endedJune 30, 2020 . Total underwriting and fee revenues increased$89.2 million , or 56.8%, driven by growth inU.S. Insurance ,U.S. Warranty Solutions and Europe Warranty Solutions. The increase inU.S. Insurance was$63.8 million , or 55.2%, driven by growth in commercial, credit and warranty insurance programs. The increase inU.S. Warranty Solutions was$18.7 million , or 50.1%, driven by growth in auto, consumer goods, and premium and warranty finance programs, including the acquisition of Sky Auto. Europe Warranty Solutions increased by$6.7 million , or 157.8%, driven by growth in auto and consumer goods warranty programs. Underwriting and fee margin was$57.5 million for the three months endedJune 30, 2021 as compared to$40.0 million for the three months endedJune 30, 2020 . Total underwriting and fee margin increased$17.5 million , or 43.7%, driven by growth acrossU.S. Insurance andU.S. Warranty Solutions.U.S. Insurance underwriting ratio of 80.7% increased by 1.2% driven by change in business mix.U.S. Warranty Solutions underwriting ratio of 61.9% remained stable period over period. 12 -------------------------------------------------------------------------------- Six
Months Ended
Underwriting and Fee Revenues Underwriting and Fee
($ in thousands) (1) Margin (1)
2021 2020 2021 2020
U.S. Insurance $ 329,043 $ 246,690 $ 64,807 $ 50,177
U.S. Warranty Solutions 107,134 74,980 41,998 28,224
Europe Warranty Solutions 20,144 8,812 4,961 3,754
Total $ 456,321 $ 330,482 $ 111,766 $ 82,155 (1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Underwriting and fee revenues were$456.3 million for the six months endedJune 30, 2021 as compared to$330.5 million for the six months endedJune 30, 2020 . Total underwriting and fee revenues increased$125.8 million , or 38.1%, driven by growth inU.S. Insurance ,U.S. Warranty Solutions and Europe Warranty Solutions. The increase inU.S. Insurance was$82.4 million , or 33.4%, driven by growth in commercial, credit and warranty insurance programs. The increase inU.S. Warranty Solutions was$32.2 million , or 42.9%, driven by growth in auto, consumer goods, and premium and warranty finance programs, including the Sky Auto acquisition. Europe Warranty Solutions increased by$11.3 million , or 128.6%, driven by growth in auto and consumer goods warranty programs. Underwriting and fee margin was$111.8 million for the six months endedJune 30, 2021 as compared to$82.2 million for the six months endedJune 30, 2020 . Total underwriting and fee margin increased$29.6 million , or 36.0%, driven by growth across all business lines.U.S. Insurance underwriting ratio of 80.3% increased by 0.6% driven by change in mix of business.U.S. Warranty Solutions underwriting ratio of 60.8% decreased by 1.6% driven by the impact to margin from our acquisition of Sky Auto. Europe Warranty Solutions underwriting ratio of 75.4% increased by 18.0% 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 endedJune 30, 2021 , adjusted net income and adjusted return on average equity were$14.1 million and 20.1%, respectively, as compared to$9.0 million and 12.9%, respectively, for the three months endedJune 30, 2020 . The improvement in both metrics was driven by the growth in underwriting and fee revenues. For the six months endedJune 30, 2021 , adjusted net income and adjusted return on average equity were$26.9 million and 18.3%, respectively, as compared to$17.7 million and 12.8%, respectively, for the six months endedJune 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
Our 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. Our investment strategy is designed to achieve attractive risk-adjusted returns 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 lossesmay 13 -------------------------------------------------------------------------------- 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. Our net investment income includes interest and dividends, net of investment expenses, on our invested assets. We report net realized and unrealized gains and losses on our investments separately from our net investment income. For the three months endedJune 30, 2021 , net investment income was$3.2 million as compared to$2.3 million in the prior year period, driven by growth in investments. Net realized and unrealized gains were$2.8 million , a decrease of$2.8 million , driven by reduced realized and unrealized gains on equity securities in the 2021 period as compared to the 2020 period. For the six months endedJune 30, 2021 , net investment income was$6.0 million as compared to$5.8 million in the prior year period, driven by growth in investments, partially offset by lower interest rates. Net realized and unrealized gains were$12.5 million , an increase of$40.5 million , driven by realized and unrealized gains on equity securities in the 2021 period, as compared to losses on equity securities and other investments in the 2020 period.Tiptree Capital Tiptree Capital consists of our Mortgage segment, which includes the operating results of Reliance, our mortgage business, andTiptree Capital - Other, which consists of our other non-insurance operating businesses and investments. As ofJune 30, 2021 ,Tiptree Capital - Other includes our Invesque shares, maritime transportation operations, and the mortgage operations of Luxury, which is classified as held for sale on our balance sheet.
Mortgage
Through our Mortgage operating subsidiary, Reliance, we originate, sell, securitize and service one-to-four-family, residential mortgage loans, comprised of conforming mortgage loans,Federal Housing Administration ("FHA"),Veterans Administration ("VA"),United States Department of Agriculture ("USDA"), and to a lesser extent, non-agency jumbo prime. We are an approved seller/servicer for Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Company is also an approved issuer and servicer forGovernment National Mortgage Association ("GNMA" or "Ginnie Mae"). The Company originates residential mortgage loans through its retail distribution channel (directly to consumers) in 37 states as of the year endedDecember 31, 2020 .
The following tables present the Mortgage segment results for the three and six
months ended
14
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Results of Operations
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2021 2020 2021 2020
Revenues:
Net realized and unrealized gains (losses) $ 20,726 $ 25,129 $ 50,803 $ 37,843
Other revenue 4,546 3,683 8,963 7,189
Total revenues $ 25,272 $ 28,812 $ 59,766 $ 45,032
Expenses:
Employee compensation and benefits $ 13,125 $ 15,847 $ 28,467 $ 27,347
Interest expense 263 217 561 640
Depreciation and amortization 227 241 452 476
Other expenses 5,882 5,102 11,434 10,254
Total expenses $ 19,497 $ 21,407 $ 40,914 $ 38,717
Income (loss) before taxes $ 5,775 $ 7,405 $ 18,852 $ 6,315
Key Performance Metrics:
Return on average equity 24.4 % 61.8 % 42.8 % 27.5 %
Non-GAAP Financial Measures (1):
Adjusted net income $ 4,059 $ 7,427 $ 11,524 $ 7,623
Adjusted return on average equity 22.4 % 81.1 % 34.3 % 41.3 %
(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 Six Months Ended
For the three months endedJune 30, 2021 , we funded$375.9 million of loans, compared to$433.5 million for 2020, a decrease of$57.5 million , or 13.3%. The decrease in origination volumes is primarily attributed to higher interest rates in the three months endedJune 30, 2021 compared to 2020. Gain on sale margins decreased to 5.6% for the three months endedJune 30, 2021 , down approximately 130 basis points from 6.9% for the three months endedJune 30, 2020 . Net realized and unrealized gains (losses) for the three months endedJune 30, 2021 were$20.7 million , compared to$25.1 million for 2020, a decrease of$4.4 million or 17.5%. The primary drivers of the decreased gains on sale revenues were decreases in origination volumes and gains on sale margins, relative to the second quarter of 2020, partially offset by positive fair value adjustments in our mortgage servicing rights of$0.6 million as interest rates increased in the second quarter 2021. Other revenue for the three months endedJune 30, 2021 was$4.5 million , compared to$3.7 million for 2020, an increase of$0.9 million or 23.4% driven by increased servicing fees associated with increased loans serviced. For the six months endedJune 30, 2021 , we funded$795.8 million of loans, compared to$746.2 million for 2020, an increase of$49.6 million , or 6.6%. The increase in origination volumes is primarily attributed to the lower interest rate environment and rising home prices in the six months endedJune 30, 2021 compared to 2020. Gain on sale margins also 15 -------------------------------------------------------------------------------- increased to 5.8% for the six months endedJune 30, 2021 , up approximately 10 basis points from 5.7% for the six months endedJune 30, 2020 . Net realized and unrealized gains (losses) for the six months endedJune 30, 2021 were$50.8 million , compared to$37.8 million for 2020, an increase of$13.0 million or 34.2%. The primary drivers of increased gain on sale revenues were increases in origination volumes and gains on sale margins versus the first half of 2020, in addition to positive fair value adjustments in our mortgage servicing rights of$4.0 million as interest rates increased from year-end 2020. Other revenue for the six months endedJune 30, 2021 was$9.0 million , compared to$7.2 million for 2020, an increase of$1.8 million or 24.7% driven by increased loan origination volumes as compared to the first half of 2020 and 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 our 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 Six Months Ended
For the three months endedJune 30, 2021 , employee compensation and benefits was$13.1 million , compared to$15.8 million in 2020, a decrease of$2.7 million or 17.2%. This decrease was driven primarily by reduced commissions on lower origination volumes, in addition to decreased incentive compensation. For the three months endedJune 30, 2021 , interest expense was$0.3 million compared to$0.2 million in 2020. For the three months endedJune 30, 2021 and 2020, depreciation and amortization expense was$0.2 million . For the three months endedJune 30, 2021 , other expenses were$5.9 million compared to$5.1 million in 2020, with the$0.8 million increase driven by increased loan origination expenses, including marketing costs. For the six months endedJune 30, 2021 , employee compensation and benefits was$28.5 million , compared to$27.3 million in 2020, an increase of$1.1 million or 4.1%. This increase was driven primarily by increased commissions on higher origination volumes. For the six months endedJune 30, 2021 and 2020, interest expense was$0.6 million . For the six months endedJune 30, 2021 and 2020, depreciation and amortization expense was 0.5 million. For the six months endedJune 30, 2021 , other expenses were$11.4 million compared to$10.3 million in 2020 with the$1.1 million increase driven by increased loan origination expenses, including marketing costs.
Income (loss) before taxes
Income before taxes for the three months endedJune 30, 2021 was$5.8 million , compared to income before taxes of$7.4 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 six months endedJune 30, 2021 was$18.9 million , compared to income before taxes of$6.3 million in 2020. The primary driver of the increase was the higher volume and gain on sale margins, in addition to positive fair value adjustments on the mortgage servicing rights asset, as compared to the six month 2020 period.
The following tables present a summary of
16
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and 2020.
Results of Operations
Three Months Ended June 30,
Income (loss)
($ in thousands) Total revenue before taxes
2021 2020 2021 2020
Senior living (Invesque) $ 142 $ (9,833) $ 142 $ (9,833)
Maritime transportation 7,918 4,455 1,994 (263)
Other (1) 14,100 10,806 484 908
Total $ 22,160 $ 5,428 $ 2,620 $ (9,188)
Six Months Ended June 30,
($ in thousands) Total revenue Income (loss) before taxes
2021 2020 2021 2020
Senior living (Invesque) $ 13,908 $ (55,851) $ 13,908 $ (55,851)
Maritime transportation 13,617 11,701 2,507 903
Other (1) 32,266 19,689 1,199 519
Total $ 59,791 $ (24,461) $ 17,614 $ (54,429) (1) Includes our held for sale mortgage originator (Luxury), asset management, and certain intercompany elimination transactions.
Revenues
Tiptree Capital - Other earns revenues from the following sources: net interest income; revenues on our held for sale mortgage originator; realized and unrealized gains and losses on the Company's investment holdings (primarily Invesque); and charter revenue from vessels within our maritime transportation operations. Revenues for the three months endedJune 30, 2021 were$22.2 million compared to revenues of$5.4 million for 2020. The primary driver of the change in revenues was unrealized gains on Invesque in the 2021 period compared to unrealized losses in the 2020 period, increased dry-bulk charter rates earned by our maritime transportation business, and growth in mortgage gain on sale revenues in our held for sale mortgage originator. Revenues for the six months endedJune 30, 2021 were$59.8 million compared to negative revenues of$24.5 million for 2020. The primary driver of the change in revenues for the six months endedJune 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 our maritime transportation business, and growth in mortgage gain on sale revenues in our held for sale mortgage originator.
Income (loss) before taxes
For the three months endedJune 30, 2021 , the income before taxes fromTiptree Capital - Other was$2.6 million , compared to a loss before taxes of$9.2 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. Additionally, our maritime transportation business earned higher income before taxes in 2021 than in 2020 due primarily to increased revenues from higher dry-bulk charter rates. The income before taxes fromTiptree Capital - Other for the six months endedJune 30, 2021 was$17.6 million , compared to a loss before taxes of$54.4 million in 2020. The primary driver of the increase was unrealized gains in the 2021 period compared to losses in the 2020 period on our investment in Invesque, in addition to increased income before taxes in our maritime transportation business due to a rise in dry-bulk charter rates. 17 --------------------------------------------------------------------------------
Adjusted net income - Non-GAAP(1)
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2021 2020 2021 2020
Senior living (Invesque) $ - $ 1 $ - $ 2,001
Maritime transportation 2,050 (256) 2,571 1,061
Other 14 34 60 8
Total $ 2,064 $ (221) $ 2,631 $ 3,070 (1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial measures.
Adjusted net income decreased to$2.6 million for the six months endedJune 30, 2021 compared to$3.1 million in 2020. The key drivers of the decrease were the dividend income on our investment in Invesque which was discontinued inApril 2020 , partially offset by improvement in our maritime transportation business from higher dry-bulk charter rates.
Corporate
The following table presents a summary of corporate results for the three and
six months ended
Results of Operations
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2021 2020 2021 2020
Employee compensation and benefits $ 1,769 $ 1,711 $ 3,836 $ 3,857
Employee incentive compensation expense 2,372 1,004 5,925 2,371
Interest expense 2,558 2,688 5,122 4,681
Depreciation and amortization 201 200 399 400
Other expenses 4,724 2,269 6,549 4,865
Total expenses $ 11,624 $ 7,872 $ 21,831 $ 16,174
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 $9.8 million for the six months ended June 30, 2021 compared to $6.2 million
for 2020, driven by an increase in performance related employee incentive
compensation. Interest expense for the six months ended June 30, 2021 was $5.1
million , up from $4.7 million in 2020, driven by a higher average outstanding
balance during the 2021 periods associated with our increased borrowing in
February 2020 . As of June 30, 2021 , the outstanding borrowing was $117.2 million
compared to $120.3 million at December 31, 2020 . Other expenses of $6.5 million
increased by $1.7 million from the six months ended June 30, 2020 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 our corporate credit facility in the prior year.
Provision for Income Taxes
The total income tax expense of$2.4 million for the three months endedJune 30, 2021 , and the total income tax benefit of$0.01 million for the three months endedJune 30, 2020 are reflected as components of net income (loss). For the three months endedJune 30, 2021 , the Company's effective tax rate was equal to 21.2%. The effective rate for the three months endedJune 30, 2021 was higher than theU.S. federal statutory income tax rate of 21.0%, primarily from the impact of state taxes, partially offset by the effect of foreign operations and discrete items. For the three months endedJune 30, 2020 , the Company's effective tax rate was equal to (0.1)%. The effective rate for the three months endedJune 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$11.2 million for the six months endedJune 30, 2021 , and the total income tax benefit of$21.2 million for the six months endedJune 30, 2020 are reflected as components of net income (loss). For the six months endedJune 30, 2021 , the Company's effective tax rate was equal to 22.0%. The effective rate for the six months endedJune 30, 2021 was higher than theU.S. federal statutory income tax rate of 21.0%, primarily from the impact of state taxes, partially offset by the effect of foreign operations and discrete items. For the six months endedJune 30, 2020 , the Company's effective tax rate was equal to 27.4%. The effective rate for the six months endedJune 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$3,211.6 million as ofJune 30, 2021 , compared to$2,995.8 million as ofDecember 31, 2020 . The$215.8 million increase in assets is primarily attributable to the growth in our Insurance segment. Total stockholders' equity was$405.0 million as ofJune 30, 2021 , compared to$373.5 million as ofDecember 31, 2020 , primarily driven by net income for six months endedJune 30, 2021 , partially offset by stock repurchases and dividends. As ofJune 30, 2021 , there were 33,395,395 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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