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TIPTREE INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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
OVERVIEW
Tiptree allocates capital to select small and middle market companies with the mission of building long-term value. Established in 2007, we have a significant track record investing in the insurance sector and across a variety of other industries, including mortgage origination, specialty finance and shipping. Our largest operating subsidiary, Fortegra, is a leading provider of specialty insurance products and related services. 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 stockholders' 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.
Our 2022 highlights include:
Overall:
•Tiptree reported a net loss of$8.3 million for the year endedDecember 31, 2022 , compared to net income of$38.1 million in the prior year, driven primarily by the gain on sale of five vessels and improved performance in our insurance business more than offset by realized and unrealized losses on the insurance investment portfolio and the deferred tax liability associated with the WP Transaction. •Adjusted net income of$63.4 million decreased 0.7% from$63.9 million in 2021, driven by improvement in insurance and shipping operations more than offset by declines in mortgage volumes and margins. Adjusted return on average equity was 13.6%, as compared to 16.5% in 2021. •Total proceeds from vessel sales in 2022 were$116.7 million , or a net gain of$34.8 million , including the sale of two product tankers in the fourth quarter for an aggregate of$49.0 million , representing an approximate 44% gain as compared to theSeptember 30, 2022 book value. •InJune 2022 , Tiptree closed the previously announced$200 million investment in Fortegra, by Warburg. The investment gives Warburg an approximate 24% ownership in Fortegra on an as converted basis. •As a result of the WP Transaction, Tiptree recognized a$63.2 million pre-tax gain in stockholders' equity in the year endedDecember 31, 2022 , which was partially offset by increased deferred tax liabilities resulting from the tax deconsolidation as Tiptree's ownership of Fortegra was reduced to below 80%. The change in deferred tax liabilities was$44.8 million , with$11.7 million impacting stockholders' equity directly (including AOCI) and$33.1 million impacting net income for the year endedDecember 31, 2022 .
Insurance:
•Gross written premiums and premium equivalents were$2.7 billion for the year endedDecember 31, 2022 , as compared to$2.2 billion for the year endedDecember 31, 2021 , up 22.2% as a result of growth in specialty insurance lines and fee-based service contract offerings. •Total revenues increased 26.9% to$1,248.8 million , from$984.1 million in 2021, driven by increases in earned premiums, net and service and administrative fees. •The combined ratio remained consistent at 90.7%. •Income before taxes of$68.2 million decreased by$1.7 million as compared to$69.9 million in 2021. Return on average equity was 14.6% in 2022 as compared to 17.1% in 2021. The decreases resulted from increased investment losses in 2022 compared to 2021, partially offset by growth in underwriting and fee revenues. •Adjusted net income increased 25.5% to$83.8 million , as compared to$66.8 million in 2021. Adjusted return on average equity was 26.1%, as compared to 22.2% in 2021. •InApril 2022 , Fortegra acquired ITC, a provider of regulatory and compliance services to the retail automotive sector in theUnited Kingdom , for net cash consideration of approximately$15.0 million , plus an earn-out. •InFebruary 2023 , Fortegra acquiredPremia Solutions Limited , one of the largest providers of automotive protection products in theUnited Kingdom , for net cash consideration of approximately$20.8 million . 47 --------------------------------------------------------------------------------Tiptree Capital : •Maritime transportation income before taxes was$49.8 million in 2022, as compared to$11.6 million in 2021, driven by a rise in dry bulk and tanker charter rates and the gain on sale of three dry bulk vessels and two product tankers. •Mortgage income before taxes was$0.9 million in 2022, as compared to$28.4 million in 2021, with the decrease driven by declines in origination volumes and gain on sale margins, partially offset by higher servicing fees and positive fair value adjustments on the mortgage servicing portfolio.
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 this Annual Report on Form 10-K. 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, inflation, 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. In addition, the business has historically generated significant fee-based revenues. The types of products Fortegra offers tend to have limited aggregation risk and 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. Factors affecting these items, including conditions in financial markets, the global economy and the markets in which we operate, fluctuations in exchange rates, interest rates and inflation, including the current period of inflationary pressures, may have a material adverse effect on our results of operations or financial condition. While Fortegra's insurance operations have historically maintained a relatively stable combined ratio, initiatives to change the business mix along with these economic factors could generate different results than the business has historically experienced. In particular, the current period of rising inflation can have an impact on replacement costs associated with claims from our customers. To the extent we are unable to pass the higher costs of claims through higher premiums, lower underwriting margins could adversely affect our profitability. In addition, fluctuations of theU.S. dollar relative to other currencies, including the British pound and Euro, may have an impact on book value between periods, associated with the timing of the recognition of revenues and expenses related to multi-year insurance contracts. Fortegra's investment portfolio includes fixed maturity securities, loans, credit investment funds, and equity securities. Many of those investments are held at fair value. In 2022, theU.S. fixed income markets experienced a significant rise in interest rates. Rising interest rates have and could continue to impact the value of Fortegra's fixed maturity 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. The weighted average duration of our fixed income available for sale securities is less than three years. In 2022, 2-year treasury yields increased significantly, which resulted in unrealized losses on Fortegra's fixed income portfolio and book value. While our asset and liability mix is relatively matched, should we need to liquidate any of these investments before maturity to pay claims, any realized losses could materially negatively impact our results of operations. Changes in fair value for loans, credit investment funds, and equity securities in Fortegra's investment portfolio are reported as unrealized gains or losses in revenues and can be impacted by changes in interest rates, credit risk, currency risk, or market risk, including specific company or industry factors. In addition, 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. Rising 10-year treasury yields, and the tapering of theFederal Reserve's purchases of mortgage-backed securities, has resulted in substantial increases in mortgage interest rates. Low mortgage interest rates driven by theFederal Reserve intervention in mortgage markets, and rising home prices in certain markets, provided tailwinds to the mortgage markets beginning in the second quarter of 2020 and through 2021, which benefited our mortgage operations and margins. The substantial rise in rates in 2022 resulted in a sharp reversal of those trends, with volumes and margins declining significantly. Only partially offsetting the declines in earnings in our origination business is an increase in the fair value of our mortgage servicing portfolio as rising rates slow prepayment speeds, with a resulting increase in servicing income. Continued rising or elevated mortgage rates could have a materially negative impact on our mortgage business results of operations, and is likely 48 --------------------------------------------------------------------------------
to be only partially mitigated by the improvement in mortgage servicing
revenues. A sustained period of negative profitability in the mortgage industry
could also impact the availability of funding sources for our mortgage business.
Rising interest rates can also impact the cost of floating interest rate 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. A continuation of rising rates could have a material impact on our costs of floating rate debt. Common shares of Invesque represent a significant asset on our consolidated balance sheets, 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 consolidated balance sheets at fair value. The combination of the COVID-19 pandemic impacting occupancy rates and other market factors impacting operating costs has resulted in a significant decline in Invesque's stock price over the past three years. Any additional declines in the fair value of Invesque's common stock could continue to have a significant impact on our results of operations and the value of the investment. A discussion of our performance for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 appears below. A discussion of our performance for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 is set forth in Part II, Item 7 of our Form 10-K for the year endedDecember 31, 2021 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
The following is a summary of our consolidated financial results for the years endedDecember 31, 2022 and 2021. 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 For the Year Ended ($ in thousands, except per share information) December 31, GAAP: 2022 2021 Total revenues$ 1,397,752 $ 1,200,514 Net income (loss) attributable to common stockholders$ (8,274) $ 38,132 Diluted earnings per share$ (0.23) $ 1.09 Cash dividends paid per common share$ 0.16 $ 0.16 Return on average equity (2.1) % 11.4 % Non-GAAP: (1) Adjusted net income$ 63,401 $ 63,869 Adjusted return on average equity 13.6 % 16.5 % Adjusted EBITDA$ 81,124 $ 100,776 Book value per share$ 10.92 $ 11.22
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Revenues
For the year endedDecember 31, 2022 , revenues were$1.4 billion , which increased$197.2 million , or 16.4%, compared to the prior year period. The changes were primarily driven by growth in earned premiums, net, and service and administrative fees in our insurance business, increase in charter rates and the gain on sale of five vessels in our maritime transportation operations, and increased revenues from our mortgage servicing portfolio, partially offset by lower mortgage volumes and margins and investment losses on Invesque and other investments in 2022 compared to gains in 2021. 49 -------------------------------------------------------------------------------- The table below highlights net realized and unrealized gains and losses from the sale of vessels, Invesque and other investments, which impacted our consolidated results on a pre-tax basis. Many investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect earnings related to these investments to be relatively volatile between periods. Fixed income securities are primarily marked to market through AOCI in stockholders' equity and do not impact net realized and unrealized gains and losses until they are sold. For the Year Ended ($ in thousands) December 31, 2022 2021 Net realized gains - Maritime transportation$ 34,803 $ - Net realized and unrealized gains (losses) - Invesque$ (19,360) $ 3,736 Net realized and unrealized gains (losses)(1)
(1) Excludes Invesque, Maritime transportation and Mortgage realized and
unrealized gains and losses.
Net Income (Loss) Attributable to common stockholders
For the year endedDecember 31, 2022 , net loss attributable to common stockholders was$8.3 million , a decrease of$46.4 million from net income of$38.1 million for the year endedDecember 31, 2021 , primarily driven by net realized and unrealized losses on Invesque and other investments in 2022 compared to gains in 2021, lower mortgage origination revenues and the tax impacts of the WP Transaction, partially offset by growth in Fortegra's underwriting and fee operations, increased revenues from our mortgage servicing portfolio and improvement in dry bulk and tanker charter rates, and the gain on sale of five vessels.
Adjusted net income & Adjusted return on average equity - Non-GAAP
Adjusted net income for the year endedDecember 31, 2022 was$63.4 million , a decrease of$0.5 million , or 0.7%, from the year endedDecember 31, 2021 , driven by improved performance in our insurance and shipping operations, more than offset by declines in our mortgage business. For the year endedDecember 31, 2022 , adjusted return on average equity was 13.6%, as compared to 16.5% atDecember 31, 2021 .
Adjusted EBITDA - Non-GAAP
Adjusted EBITDA for the year endedDecember 31, 2022 was$81.1 million , a decrease of$19.7 million from 2021, driven by realized and unrealized losses on Invesque and other investments in 2022 (including impacts to AOCI) compared to gains in 2021, partially offset by the WP Transaction gain and improved operating performance noted above.
Book Value per share - Non-GAAP
Total stockholders' equity was$533.6 million as ofDecember 31, 2022 compared to$400.2 million as ofDecember 31, 2021 , with the increase driven by the WP Transaction and cash exercise of Tiptree warrants, partially offset by comprehensive loss in 2022 primarily resulting from unrealized losses on Available for Sale ("AFS") securities and negative impacts from foreign currency translation. In the year endedDecember 31, 2022 , Tiptree returned$7.4 million to stockholders through dividends paid and shares repurchased. Book value per share for the period endedDecember 31, 2022 was$10.92 , a decrease from book value per share of$11.22 as ofDecember 31, 2021 driven by the comprehensive loss per share primarily associated with unrealized losses on AFS securities, dividends paid of$0.16 per share, and issuance of shares as a result of the exercise of warrants and exchanges of vested subsidiary equity awards, partially offset by the net increase toTiptree Inc. stockholders' equity from the WP Transaction.
Results by Segment
We classify our business into two reportable segments, Insurance and Mortgage, with the remainder of our operations aggregated intoTiptree Capital - Other. Corporate activities include holding company interest expense, corporate employee compensation and benefits, and other expenses, including, but not limited to, public company expenses. 50 -------------------------------------------------------------------------------- The following tables present the components of Revenue, Income (loss) before taxes and Adjusted net income for the following periods: ($ in thousands) For the Year Ended December 31, 2022 2021 Revenues: Insurance$ 1,248,796 $ 984,130 Mortgage 70,246 111,295 Tiptree Capital - other 78,710 105,089 Corporate - - Total revenues$ 1,397,752 $ 1,200,514 Income (loss) before taxes: Insurance$ 68,150 $ 69,857 Mortgage 874 28,407 Tiptree Capital - other 31,403 17,210 Corporate (46,416) (50,132) Total income (loss) before taxes $
54,011
Non-GAAP - Adjusted net income (1): Insurance$ 83,832 $ 66,782 Mortgage (4,658) 17,434 Tiptree Capital - other 13,627 10,763 Corporate (29,400) (31,110) Total adjusted net income$ 63,401 $ 63,869
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Insurance Our principal operating subsidiary, Fortegra, is a specialty insurance underwriter and service provider, which focuses on niche business mixes and fee-oriented services. The combination of specialty insurance underwriting, 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 following
periods:
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Results of Operations - 2022 Compared to 2021
($ in thousands) For the Year Ended December 31,
2022 2021 Change % Change
Revenues:
Earned premiums, net $ 904,765 $ 685,552 $ 219,213 32.0 %
Service and administrative fees 320,720 260,525 60,195 23.1 %
Ceding commissions 13,880 11,784 2,096 17.8 %
Net investment income 12,219 17,896 (5,677) (31.7) %
Net realized and unrealized gains (losses) (20,347) (2,006) (18,341) NM%
Other revenue 17,559 10,379 7,180 69.2 %
Total revenues $ 1,248,796 $ 984,130 $ 264,666 26.9 %
Expenses:
Net losses and loss adjustment expenses 361,601 253,473 108,128 42.7 %
Member benefit claims 91,004 73,539 17,465 23.7 %
Commission expense 522,686 396,683 126,003 31.8 %
Employee compensation and benefits 87,918 76,552 11,366 14.8 %
Interest expense 20,054 17,576 2,478 14.1 %
Depreciation and amortization 18,551 17,223 1,328 7.7 %
Other expenses 78,832 79,227 (395) (0.5) %
Total expenses $ 1,180,646 $ 914,273 $ 266,373 29.1 %
Income (loss) before taxes (1) $ 68,150 $ 69,857 $ (1,707) (2.4) %
Key Performance Metrics:
Gross written premiums and premium
equivalents $ 2,680,771 $ 2,194,024 $ 486,747 22.2 %
Return on average equity 14.6 % 17.1 %
Underwriting ratio 77.6 % 74.7 %
Expense ratio 13.1 % 15.9 %
Combined ratio 90.7 % 90.6 %
Non-GAAP Financial Measures (2):
Adjusted net income $ 83,832 $ 66,782 $ 17,050 25.5 %
Adjusted return on average equity 26.1 %
22.2 %
(1) Net income was
and 2021, respectively.
(2) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Revenues Earned Premiums, net represent the earned portion of our gross written premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements, as well as the earned portion of our assumed premiums. 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 represent the earned portion of our gross written premiums and premium equivalents, which is generated from non-insurance products including auto and consumer goods service contracts, motor club contracts 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. 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 interest income earned on premium finance product offerings and cash and cash equivalents.
Net Investment Income is earned on the 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
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net investment income are the size of the investment portfolio, the yield on
investments and expenses of external investment managers.
Net Realized and Unrealized Gains (Losses) on investments are a function of the difference between the amount received 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. Equity securities are carried at fair value with unrealized gains and losses also included in this line.
Revenues - 2022 compared to 2021
For the year endedDecember 31, 2022 , total revenues increased 26.9%, to$1,248.8 million , as compared to$984.1 million for the year endedDecember 31, 2021 . Earned premiums, net of$904.8 million increased$219.2 million , or 32.0%, driven by growth in commercial and personal lines, including E&S insurance offerings. Service and administrative fees of$320.7 million increased by 23.1%, driven by growth in auto and consumer goods service contract revenues. Ceding commissions of$13.9 million increased by$2.1 million , or 17.8%, driven by higher ceding fees as more business was ceded in ourU.S. Insurance lines. Other revenues increased by$7.2 million , or 69.2%, driven by growth in our premium finance lines and interest income on cash and cash equivalents. For the year endedDecember 31, 2022 , net investment income of$12.2 million decreased by$5.7 million from 2021, driven by a reduction in special dividends on equity securities, increases in investment expenses on alternative investments, and a higher allocation to cash and cash equivalents which is recorded in other income. Net realized and unrealized losses were$20.3 million , compared to losses of$2.0 million in 2021, with the increase driven by realized and unrealized losses on equity securities and credit investment funds in 2022. For the year endedDecember 31, 2022 , 28.2% of revenues were derived from fees that are not solely dependent upon the underwriting performance of insurance products, resulting in more diversified and consistent earnings. For the year endedDecember 31, 2022 , 78.0% of fee-based revenues were generated in non-regulated service companies, with the remainder in regulated insurance companies. The combination of unearned premiums and deferred revenues on Fortegra's balance sheet grew to$2.0 billion , representing an increase of$347.8 million , or 21.0%, fromDecember 31, 2021 toDecember 31, 2022 , as a result of growth in gross written premiums and premium equivalents, primarily related to admitted and E&S insurance lines as well as auto and consumer goods service contracts.
Expenses
Underwriting and fee expenses under insurance and service contracts include
losses and loss adjustment expenses, member benefit claims and commissions
expense.
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.
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 represent the costs of services and replacement devices
incurred in auto, consumer goods and roadside 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 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. In addition,
commission expenses include premium-related taxes. 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
53
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majority of which are retrospective commissions paid to agents, distributors and
retailers selling our products, including credit insurance policies, auto and
consumer goods 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 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 consists primarily of interest expense on our corporate
revolving debt, our Notes, our preferred trust securities due
("
business, which is non-recourse to Fortegra.
Depreciation is primarily associated with furniture, fixtures and equipment. Amortization is primarily associated with purchase accounting amortization including values associated with acquired customer relationships, trade names and internally developed software and technology.
Expenses - 2022 compared to 2021
For the year endedDecember 31, 2022 , net losses and loss adjustment expenses were$361.6 million , member benefit claims were$91.0 million and commission expense was$522.7 million , as compared to$253.5 million ,$73.5 million , and$396.7 million , respectively, for the year endedDecember 31, 2021 . The increase in net losses and loss adjustment expenses of$108.1 million , or 42.7%, was driven by growth inU.S. Insurance lines, partially offset by the impact of favorable prior year development of$0.9 million . In 2021, the impact of unfavorable prior year development was$2.6 million driven by higher-than-expected claim severity from business written by a small group of producers in the personal and commercial lines of business. The impact of the prior year development in 2021 increased our ratio of net losses and loss adjustment expenses to earned premiums, net by 0.4%. The increase in member benefit claims of$17.5 million , or 23.7%, was driven by growth in auto and consumer goods service contracts. Commission expense increased by$126.0 million , or 31.8%, in line with growth in earned premiums, net and service and administrative fees. For the year endedDecember 31, 2022 , employee compensation and benefits were$87.9 million and other expenses were$78.8 million , as compared to$76.6 million and$79.2 million , respectively, for the year endedDecember 31, 2021 . Employee compensation and benefits increased by$11.4 million , or 14.8%, driven by investments in human capital associated with our growth objectives in E&S and service contract lines. Other expenses decreased by$0.4 million , or 0.5%, driven primarily by a decrease in fair value of the Fortegra Additional Warrant liability. Included in other expenses were$2.2 million for both the years endedDecember 31, 2022 and 2021, related to acquisition fees in 2022 and professional fees associated with preparation of the registration statement for the Fortegra initial public offering which was withdrawn in 2021. For the year endedDecember 31, 2022 , interest expense was$20.1 million as compared to$17.6 million for the year endedDecember 31, 2021 . The increase in interest expense of$2.5 million , or 14.1%, was driven by increased asset-based borrowings to support growth in our premium finance lines, the increase in floating rate borrowing costs, and higher usage of the revolving working capital facility and letters of credit to support net written premium growth. For the year endedDecember 31, 2022 , depreciation and amortization expense was$18.6 million , including$16.2 million of intangible amortization related to purchase accounting associated with acquisitions of ITC, Sky Auto, Smart AutoCare and Fortegra. For the year endedDecember 31, 2021 , depreciation and amortization expense was$17.2 million , including$15.3 million of intangible amortization from purchase accounting related to acquisitions of Sky Auto, Smart AutoCare and Fortegra. Key Performance Metrics
We discuss certain key performance metrics, described below, which provide
useful information about our business and the operational factors underlying our
financial performance.
Gross Written Premiums and Premium Equivalents
54 -------------------------------------------------------------------------------- Gross written premiums and premium equivalents represent total gross written premiums from insurance policies and service contracts issued, as well as premium finance volumes during a reporting period. They represent the volume of insurance policies written or assumed and service contracts issued during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. Gross written premiums is a volume measure commonly used in the insurance industry to compare sales performance by period. Premium equivalents are used to compare sales performance of service and administrative contract volumes to gross written premiums. Investors also use these measures to compare sales growth among comparable companies, while management uses these measures to evaluate the relative performance of various sales channels.
The below table shows gross written premiums and premium equivalents by business
mix for the following periods:
For the Year Ended December 31,
($ in thousands) Gross Written Premiums and Premium Equivalents
2022 2021
U.S. Insurance $ 1,690,072 $ 1,438,393
U.S. Warranty Solutions 852,839 652,052
Europe 137,860 103,579
Total $ 2,680,771 $ 2,194,024
Total gross written premiums and premium equivalents for the year ended
December 31, 2022 were $2.7 billion as compared to $2.2 billion in 2021. The
growth of $486.7 million , or 22.2%, is driven by a combination of factors
including Fortegra's growing distribution partner network, expanding admitted
and E&S insurance lines, and increasing market penetration in the service
contract sector through the acquisitions of Smart AutoCare (January 2020 ) and
Sky Auto (December 2020 ).
We believe the continued growth in commercial E&S and service contract lines
will result in increased gross written premiums and premium equivalents, and
therefore growth in unearned premiums and deferred revenues on the balance
sheet. The growth in gross written premiums and premium equivalents, combined
with higher retention in select products, has resulted in an increase of $347.8
million , or 21.0%, in Fortegra's unearned premiums and deferred revenue on the
balance sheet. As of December 31, 2022 , Fortegra's unearned premiums and
deferred revenues were $2.0 billion , as compared to $1.7 billion as of
December 31, 2021 .
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 our various agents and sales channels. The combined ratio was 90.7% for the year endedDecember 31, 2022 , which consisted of an underwriting ratio of 77.6% and an expense ratio of 13.1%, as compared to 90.6%, 74.7% and 15.9%, respectively, for the year endedDecember 31, 2021 . The combined ratio remained consistent, driven by the scalability of Fortegra's technology and shared service platform, which improved the expense ratio, while the underwriting ratio increased due to a shift in business mix toward lines with higher loss ratios and lower expense ratios. Our focus on underwriting expertise, A.I. driven lead generation, and technology-enhanced administration improves productivity, lowers administrative costs and results in agent relationships sustained over the long-term.
Return on Average Equity
55 --------------------------------------------------------------------------------
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 14.6% for the year endedDecember 31, 2022 , as compared to 17.1%, for the year endedDecember 31, 2021 , driven by an increase in net realized and unrealized losses in 2022 period compared to 2021 as well as higher average equity balances, partially offset by growth in underwriting and fee revenues. Non-GAAP Financial Measures
Underwriting and Fee Revenues and Underwriting and
In order to better explain to investors the underwriting performance 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 following periods:
For
the Year Ended
Underwriting and Fee
($ in thousands) Underwriting and Fee Revenues (1) Margin (1)
2022 2021 2022 2021
U.S. Insurance $ 922,293 $ 690,154 $ 172,046 $ 141,258
U.S. Warranty Solutions 274,923 230,942 88,264 90,255
Europe 59,708 47,144 21,323 13,032
Total $ 1,256,924 $ 968,240 $ 281,633 $ 244,545
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Underwriting and fee revenues were$1,256.9 million for the year endedDecember 31, 2022 , as compared to$968.2 million , for the year endedDecember 31, 2021 . Total underwriting and fee revenues were up$288.7 million , or 29.8%, driven by growth in all product lines.U.S. Insurance revenues increased$232.1 million , or 33.6%, driven by growth in E&S commercial, collateral protection and credit insurance lines. The increase inU.S. Warranty Solutions was$44.0 million , or 19.0%, driven by growth in auto, consumer goods, and premium finance.Europe increased by$12.6 million , or 26.7%, driven by growth in auto and consumer goods service contracts. Underwriting and fee margin was$281.6 million for the year endedDecember 31, 2022 as compared to$244.5 million for the year endedDecember 31, 2021 , representing an increase of$37.1 million , or 15.2%, driven by growth in U.S Insurance andEurope .U.S. Insurance grew by$30.8 million , or 21.8%, from growth in specialty admitted and E&S lines.U.S. Warranty Solutions decreased by$2.0 million , or 2.2%, primarily driven by the deferral of revenues associated with contracts acquired by Sky Auto. This revenue deferral in 2022 for Sky Auto was partially offset by the deferral of direct marketing 56 -------------------------------------------------------------------------------- costs in other expenses and therefore had minimal impact on the combined ratio or income before taxes in comparing 2022 versus 2021.Europe increased by$8.3 million , or 63.6%, driven by growth in auto and consumer goods service contracts.
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 measures to assess 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 year endedDecember 31, 2022 , adjusted net income and adjusted return on average equity were$83.8 million and 26.1%, respectively, as compared to$66.8 million and 22.2%, respectively, for the year endedDecember 31, 2021 . The improvement in metrics was driven by the growth in revenues and consistent 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 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. 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 year endedDecember 31, 2022 , net investment income was$12.2 million compared to$17.9 million in 2021 with the decrease driven by a reduction in special dividend income on equity securities, increases in investment expenses on alternative investments, and a higher allocation to cash and cash equivalents which is recorded in other income. Net realized and unrealized losses were$20.3 million , compared to losses of$2.0 million in 2021, with the increase driven by realized and unrealized losses on equity securities and credit investment funds in 2022.Tiptree Capital Tiptree Capital consists of our Mortgage segment, which includes the operating results of Reliance, our mortgage business, andTiptree Capital - Other, which consists of our other non-insurance operating businesses and investments. As ofDecember 31, 2022 ,Tiptree Capital - Other includes our Invesque shares and maritime transportation operations.
Mortgage
Through our Mortgage operating subsidiary, Reliance, we originate, sell, securitize and service one-to-four-family, residential mortgage loans, comprised of conforming mortgage loans,Federal Housing Administration ("FHA"),Veterans Administration ("VA"),United States Department of Agriculture ("USDA"), and to a lesser extent, non-agency jumbo prime. We are an approved seller/servicer for Fannie Mae and Freddie Mac. We are also an approved issuer and servicer forGinnie Mae . We originate residential mortgage loans through our retail distribution channel (directly to consumers) in 39 states and theDistrict of Columbia as ofDecember 31, 2022 . 57 -------------------------------------------------------------------------------- The following tables present the Mortgage segment results for the following periods: Results of Operations For the Year Ended ($ in thousands) December 31, 2022 2021 Revenues: Net realized and unrealized gains (losses)$ 51,345 $ 92,307 Other revenue 18,901 18,988 Total revenues$ 70,246 $ 111,295 Expenses: Employee compensation and benefits$ 41,637 $ 56,819 Interest expense 1,631 1,168 Depreciation and amortization 799 885 Other expenses 25,305 24,016 Total expenses$ 69,372 $ 82,888 Income (loss) before taxes$ 874 $ 28,407 Key Performance Metrics: Origination volumes$ 1,134,351 $ 1,608,311 Gain on sale margins 4.7 % 5.6 % Return on average equity 0.9 % 38.9 % Non-GAAP Financial Measures (1): Adjusted net income$ (4,658) $ 17,434 Adjusted return on average equity (8.1) % 28.8 %
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Revenues
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 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 - 2022 compared to 2021
For the year endedDecember 31, 2022 ,$1.1 billion of loans were funded, compared to$1.6 billion for 2021, a decrease of$474.0 million , or 29.5%. Origination volumes for 2022 declined given the rise in mortgage interest rates. Gain on sale margins decreased to 4.7% for the year endedDecember 31, 2022 , down approximately 90 basis points from 5.6% for the year endedDecember 31, 2021 . Net realized and unrealized gains for the year endedDecember 31, 2022 were$51.3 million , compared to$92.3 million for 2021, a decrease of$41.0 million or 44.4%. The primary driver of decreased gain on sale revenues was the decline in volumes and gain on sale margins, partially offset by positive fair value adjustments in mortgage servicing rights of$7.0 million as prepayment speeds declined fromDecember 31, 2021 . Other revenue for the year endedDecember 31, 2022 was$18.9 million , compared to$19.0 million for 2021, a decrease of$0.1 million , or 0.5%. As ofDecember 31, 2022 , the mortgage servicing asset was valued at$41.4 million , an increase from$29.8 million as ofDecember 31, 2021 . 58 --------------------------------------------------------------------------------
Expenses
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 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 is mainly associated with furniture, fixtures and equipment.
Amortization is primarily associated with a trade name and internally developed
software.
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 - 2022 compared to 2021
For the year endedDecember 31, 2022 , employee compensation and benefits were$41.6 million , compared to$56.8 million in 2021, a decrease of$15.2 million or 26.7%. The decrease was driven primarily by reduced commissions on lower origination volumes and lower performance related incentive compensation. For the year endedDecember 31, 2022 , interest expense was at$1.6 million , an increase of$0.5 million or 39.6% driven by higher interest rates. For the year endedDecember 31, 2022 , other expenses were$25.3 million , compared to$24.0 million in 2021, with the$1.3 million increase driven by higher loan origination expense. For the year endedDecember 31, 2022 , depreciation and amortization were$0.8 million , compared to$0.9 million in 2021, with the decrease driven by lower depreciation expense.
Income (loss) before taxes
Income before taxes for the year ended
compared to
decline in volumes and margins, partially offset by higher servicing fees
attributable to the larger servicing portfolio, in addition to positive fair
value adjustments on the mortgage servicing rights asset, as compared to 2021.
The following tables present a summary ofTiptree Capital - Other results for the following periods: Results of Operations For
the Year Ended
Income (loss) before
($ in thousands) Total revenue taxes
2022 2021 2022 2021
Senior living (Invesque) $ (16,015) $ 3,091 $ (16,015) $ 3,091
Maritime transportation(1) 64,947 35,562 49,809 11,635
Other (2) 29,778 66,436 (2,391) 2,484
Total $ 78,710 $ 105,089 $ 31,403 $ 17,210
(1) Includes $15.1 million and $23.9 million of expenses related to our
Maritime transportation operations for the years ended December 31, 2022 and
2021, respectively.
(2) Includes our formerly 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 formerly held for sale mortgage originator (Luxury); realized and unrealized gains and losses on the Company's investment holdings (primarily Invesque); and charter revenues from vessels within the Company's maritime transportation operations. Subsequent to the sale of our dry bulk and tanker vessels, operations include two smaller seaborne vessels and other ancillary assets. 59 -------------------------------------------------------------------------------- Revenues for the year endedDecember 31, 2022 were$78.7 million compared to$105.1 million for 2021 with the decline primarily driven by unrealized losses on our investment in Invesque in the 2022 period compared to gains in the 2021 period and the deconsolidation of Luxury effectiveJuly 1, 2022 , offset by higher charter rates and gain on sale of three dry bulk vessels and two product tankers in our maritime transportation business.
Income (loss) before taxes
The income before taxes fromTiptree Capital - Other for the year endedDecember 31, 2022 was$31.4 million , compared to income before taxes of$17.2 million in 2021, with the increase driven by the gain on sale of three dry bulk vessels and two product tankers, partially offset by the unrealized losses on Invesque.
Adjusted net income - Non-GAAP(1)
($ in thousands) For the Year Ended December 31,
2022 2021
Senior living (Invesque) $ - $ -
Maritime transportation 12,707 10,713
Other 920 50
Total $ 13,627 $ 10,763
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Adjusted net income increased to
2022
improvement in maritime transportation operations.
Corporate
The following table presents a summary of corporate results for the following
periods:
Results of Operations
($ in thousands) For the Year Ended December 31,
2022 2021
Employee compensation and benefits $ 7,948 $ 7,406
Employee incentive compensation expense 19,240 20,654
Interest expense 4,225 10,032
Depreciation and amortization 807 805
Other expenses 14,196 11,235
Total expenses $ 46,416 $ 50,132
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,
were $27.2 million for the year ended December 31, 2022 , compared to $28.1
million for 2021, driven by a decrease in performance related employee incentive
compensation. Of the 2022 and 2021 incentive compensation expense, $7.1 million
and $8.6 million , respectively, was stock-based compensation expense primarily
related to awards granted in third quarter 2021. Interest expense for the year
ended December 31, 2022 and 2021 was $4.2 million and $10.0 million ,
respectively. As of December 31, 2022 , the Company had no outstanding borrowings
at the holding company, compared to $114.1 million at December 31, 2021 . Other
expenses of $14.2 million increased by $2.9 million from the year ended December
31, 2021 , primarily driven by a $2.1 million loss on extinguishment of debt and
increased consulting and professional fees.
60
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Provision for Income Taxes
OnJune 21, 2022 , the WP Transaction was completed, in which Warburg invested$200.0 million in Tiptree's insurance subsidiary, Fortegra. The WP Transaction, along with Fortegra management's ownership, reduced Tiptree's equity ownership in Fortegra below 80% such that, while still consolidated for GAAP financial reporting purposes, Fortegra will no longer be included in the consolidated tax return group with Tiptree. Tiptree has recorded deferred tax liabilities related to the basis difference in Tiptree's investment in Fortegra as ofDecember 31, 2022 . This deferred tax liability represents the tax that would be due, before consideration of loss carryforwards, if Tiptree were to sell any of its Fortegra stock at its carrying value on Tiptree's balance sheet. The increase in deferred tax liabilities was$44.8 million , with$11.7 million impacting stockholders' equity directly (including AOCI) and$33.1 million impacting net income for the year endedDecember 31, 2022 . The total income tax expense of$50.5 million for the year endedDecember 31, 2022 and$21.3 million for the year endedDecember 31, 2021 is reflected as a component of net income (loss). For the year endedDecember 31, 2022 , the Company's effective tax rate was equal to 93.4%. The effective rate for the year endedDecember 31, 2022 was significantly higher than theU.S. statutory income tax rate of 21.0%, primarily from the impact of recording deferred taxes relating to the tax deconsolidation of Fortegra. For the year endedDecember 31, 2021 , the Company's effective tax rate was equal to 32.6%. The effective rate for the year endedDecember 31, 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. OnAugust 16, 2022 , theU.S. government enacted Public Law no. 117-169, commonly referred to as the Inflation Reduction Act, which, among other things, establishes a corporate minimum tax on book earnings and an excise tax on stock buybacks. It is not expected that this legislation will have a material financial impact on the Company or its operations. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses. During the year endedDecember 31, 2020 , the Company recorded a$7.3 million tax benefit related to the ability to carryback net operating losses to prior periods under the CARES Act, resulting in a decrease of our deferred tax asset of$16.8 million and an increase to our current receivable of$24.1 million .
Balance Sheet Information
Tiptree's total assets were$4,039.6 million as ofDecember 31, 2022 , compared to$3,599.1 million as ofDecember 31, 2021 . The$440.4 million increase in assets is primarily attributable to the growth in the Insurance segment, proceeds from the WP Transaction and the increase in cash and equivalents from the sale of our dry bulk vessels and product tankers. Total stockholders' equity was$533.6 million as ofDecember 31, 2022 , compared to$400.2 million as ofDecember 31, 2021 , with the increase primarily driven by the WP Transaction, partially offset by other comprehensive losses on AFS securities for the year endedDecember 31, 2022 . As ofDecember 31, 2022 , there were 36,385,299 shares of common stock outstanding as compared to 34,124,153 shares as ofDecember 31, 2021 , with the increase driven by the exercise of warrants and the vesting of share-based incentive compensation, partially offset by stock repurchases.
The following table is a summary of certain balance sheet information:
As of December 31, 2022
Tiptree Capital
($ in thousands) Insurance Mortgage Other Corporate Total
Total assets $ 3,702,577 $ 156,122 $ 86,402 $ 94,462 $ 4,039,563
Corporate debt $ 160,000 $ - $ - $ - $ 160,000
Asset based debt 60,628 47,454 - - 108,082
$ 71,666 $ 65,290 $ 397,365 Non-controlling interests: Fortegra preferred interests 77,679 - - - 77,679 Common interests 55,364 - 3,165 - 58,529 Total stockholders' equity$ 338,709 $ 54,743 $ 74,831 $ 65,290 $ 533,573 61 --------------------------------------------------------------------------------
NON-GAAP MEASURES AND RECONCILIATIONS
Non-GAAP Reconciliations
In addition to GAAP results, management uses the non-GAAP financial measures underwriting and fee revenues and underwriting and fee margin in order to better explain to investors the underwriting performance and the respective retentions between the Company and its agents and reinsurance partners. We also use the non-GAAP financial measures adjusted net income, adjusted return on average equity and Adjusted EBITDA as measures of operating performance and as part of our resource and capital allocation process, to assess comparative returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company's executive officers. Management believes these measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze financial performance and to compare relative performance among comparable companies. Adjusted net income, adjusted return on average equity, Adjusted EBITDA, underwriting and fee revenues and underwriting and fee margin are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for earned premiums, net income or any other measure derived in accordance with GAAP.
Underwriting and Fee Revenues and Underwriting and
(Insurance only)
We generally manage exposure to underwriting risks written by using both
reinsurance (e.g., quota share and excess of loss) and retrospective commission
agreements with our partners (e.g., commissions paid are adjusted based on the
actual underlying losses incurred), which mitigates Fortegra's risk.
Period-over-period comparisons of revenues and expenses are often impacted by
the PORCs and distribution partners' choice as to whether to retain risk,
specifically service and administration fees and ceding commissions, both
components of revenue, and policy and contract benefits and commissions paid to
our partners and reinsurers. Generally, when losses are incurred, the risk which
is retained by our partners and reinsurers is reflected in a reduction in
commissions paid. In order to better explain to investors the underwriting
performance 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.
Underwriting and Fee Revenues - Non-GAAP - We define underwriting and fee
revenues as total revenues from the Insurance segment excluding net investment
income and net realized and unrealized gains (losses). Underwriting and fee
revenues represents revenues generated by underwriting and fee-based operations
and allows us to evaluate the Company's underwriting performance without regard
to investment income. We use this metric as we believe it gives our management
and other users of our financial information useful insight into our underlying
business performance. Underwriting and fee revenues should not be viewed as a
substitute for total revenues calculated in accordance with GAAP, and other
companies may define underwriting and fee revenues differently.
For the Year Ended
($ in thousands) December 31,
2022 2021
Total revenues $ 1,248,796 $ 984,130
Less: Net investment income (12,219) (17,896)
Less: Net realized and unrealized gains (losses) 20,347 2,006
Underwriting and fee revenues
Underwriting andFee Margin - Non-GAAP - We define underwriting and fee margin as income before taxes from the Insurance segment, excluding net investment income, net realized and unrealized gains (losses), employee compensation and benefits, other expenses, interest expense and depreciation and amortization. Underwriting and fee margin represents the underwriting performance of our underwriting and fee-based lines. As such, underwriting and fee margin excludes general administrative expenses, interest expense, depreciation and amortization and other corporate expenses as those expenses support the vertically integrated business model and not any individual component of the Company's business mix. We use this metric as we believe it gives our management and other users of our financial information useful insight into the specific performance of our underlying business mix. Underwriting and fee margin should not be viewed as a substitute for income before taxes calculated in accordance with GAAP, and other companies may define underwriting and fee margin differently. 62 --------------------------------------------------------------------------------
For the Year Ended
($ in thousands) December 31,
2022 2021
Income (loss) before income taxes $ 68,150 $ 69,857
Less: Net investment income (12,219) (17,896)
Less: Net realized and unrealized gains (losses) 20,347 2,006
Plus: Depreciation and amortization 18,551 17,223
Plus: Interest expense 20,054 17,576
Plus: Employee compensation and benefits 87,918 76,552
Plus: Other expenses 78,832 79,227
Underwriting and fee margin
Adjusted Net Income - Non-GAAP
We define adjusted net income as 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. We use adjusted net income as an internal operating performance measure in the management of business as part of our capital allocation process. We believe adjusted net income provides useful supplemental information to investors as it is frequently used by the financial community to analyze financial performance between periods and for comparison among companies. Adjusted net income should not be viewed as a substitute for income before taxes calculated in accordance with GAAP, and other companies may define adjusted net income differently. Adjusted net income is presented before the impacts of non-controlling interests. We present adjustments for amortization associated with acquired intangible assets. The intangible assets were recorded as part of purchase accounting in connection with Tiptree's acquisition ofFortegra Financial in 2014, Defend in 2019, and Smart AutoCare and Sky Auto in 2020. The intangible assets acquired contribute to overall revenue generation, and the respective purchase accounting adjustments will continue to occur in future periods until such intangible assets are fully amortized in accordance with the respective amortization periods required by GAAP.
Adjusted Return on Average Equity - Non-GAAP
We define adjusted return on average equity as adjusted net income expressed on
an annualized basis as a percentage of average beginning and ending
stockholders' equity during the period. See "-Adjusted Net Income-Non-GAAP"
above. We use adjusted return on average equity as an internal performance
measure in the management of our operations because we believe it gives our
management and other users of our financial information useful insight into our
results of operations and our underlying business performance. Adjusted return
on average equity should not be viewed as a substitute for return on average
equity calculated in accordance with GAAP, and other companies may define
adjusted return on average equity differently.
For the Year Ended December 31, 2022
Tiptree Capital
($ in thousands) Insurance Mortgage Other Corporate Total
Income (loss) before taxes
Less: Income tax (benefit) expense (21,251)
(363) (5,545) (23,291) (50,450) Less: Net realized and unrealized gains (losses) 20,347 (7,003) (18,788) - (5,444) Plus: Intangibles amortization (1) 16,229 - - - 16,229 Plus: Stock-based compensation expense 2,423 - - 7,093 9,516 Plus: Non-recurring expenses 3,374 - (729) 2,108 4,753 Plus: Non-cash fair value adjustments (939) - 3,555 - 2,616 Less: Tax on adjustments (2) (4,501) 1,834 3,731 31,106 32,170 Adjusted net income$ 83,832 $ (4,658) $ 13,627 $ (29,400) $ 63,401 Adjusted net income$ 83,832 $ (4,658) $ 13,627 $ (29,400) $ 63,401 Average stockholders' equity$ 321,320 $ 57,575 $ 98,373 $ (10,390) $ 466,878 Adjusted return on average equity 26.1 % (8.1) % 13.9 % NM % 13.6 % 63
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For the Year ended December 31, 2021
Tiptree Capital
($ in thousands) Insurance Mortgage Other Corporate Total
Income (loss) before taxes
Less: Income tax (benefit) expense (18,438)
(4,882) (1,992) 4,021 (21,291) Less: Net realized and unrealized gains (losses) (3,732) (5,798) (3,091) - (12,621) Plus: Intangibles amortization (1) 15,329 - - - 15,329 Plus: Stock-based compensation expense 2,006 331 213 8,581 11,131 Plus: Non-recurring expenses 2,158 - 938 2,171 5,267 Plus: Non-cash fair value adjustments - - (3,170) - (3,170) Less: Tax on adjustments (2) (398) (624) 655 4,249 3,882 Adjusted net income$ 66,782 $ 17,434 $ 10,763 $ (31,110) $ 63,869 Adjusted net income$ 66,782 $ 17,434 $ 10,763 $ (31,110) $ 63,869 Average stockholders' equity$ 300,820 $ 60,433 $ 113,717 $ (88,111) $ 386,859 Adjusted return on average equity 22.2 % 28.8 % 9.5 % NM% 16.5 %
The footnotes below correspond to the tables above, under "-Adjusted Net Income
- Non-GAAP and "-Adjusted Return on Average Equity - Non-GAAP".
(1) Specifically associated with acquisition purchase accounting. See Note (9)Goodwill and Intangible Assets, net. (2) Tax on adjustments represents the tax applied to the total non-GAAP adjustments and includes adjustments for non-recurring or discrete tax impacts. For the year endedDecember 31, 2022 , included in the adjustment is an add-back of$33.1 million , respectively, related to deferred tax expense from the WP Transaction. Adjusted EBITDA - Non-GAAP The Company defines Adjusted EBITDA as GAAP net income of the Company plus corporate interest expense, plus income taxes, plus depreciation and amortization expense, less the effects of purchase accounting, plus non-cash fair value adjustments, plus significant non-recurring expenses, and plus unrealized gains (losses) on available for sale securities reported in other comprehensive income. Adjusted EBITDA is used to determine incentive compensation for the Company's executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. For the Year Ended ($ in thousands) December 31, 2022 2021 Net income (loss) attributable to common stockholders$ (8,274) $ 38,132 Add: net (loss) income attributable to non-controlling interests 11,835 5,919 Corporate debt related interest expense(1) 19,290 24,426 Consolidated provision (benefit) for income taxes 50,450 21,291 Depreciation and amortization 22,973 24,437 Non-cash fair value adjustments(2) (200) (7,945) Non-recurring expenses(3) 2,556 5,267 Other comprehensive income (loss), pre-tax (62,536) (10,751) Warburg gain to book value(4) 54,013 - Third party non-controlling interests(5) (8,983) - Adjusted EBITDA$ 81,124 $ 100,776
(1) Corporate debt interest expense includes interest expense from secured corporate credit
agreements, junior subordinated notes and preferred trust securities. Interest expense
associated with asset-specific debt is not added-back for Adjusted EBITDA.
(2) For maritime transportation operations, depreciation and amortization is deducted as a
reduction in the value of the vessel. From insurance operations, changes in the fair
value of the Fortegra Additional Warrant liability is added back.
(3) Acquisition, start-up and disposition costs, including debt extinguishment, legal,
taxes, banker fees and other costs.
(4) The pre-tax gain recorded directly to
Adjusted EBITDA, net of add-backs included in prior period Adjusted EBITDA.
(5) Adjusts for the comprehensive income (loss) (including EBITDA and AOCI impacts) for the
non-controlling interests ofThe Fortegra Group .
Book Value per share - Non-GAAP
Management believes the use of this financial measure provides supplemental
information useful to investors as book value is frequently used by the
financial community to analyze company growth on a relative per share basis. The
following table provides a reconciliation between total stockholders' equity and
total shares outstanding, net of treasury shares.
64
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($ in thousands, except per share information) As of December 31,
2022 2021
Total stockholders' equity $ 533,573 $ 400,181
Less: Non-controlling interests 136,208
17,227
Total stockholders' equity, net of non-controlling interests
Total common shares outstanding 36,385 34,124 Book value per share$ 10.92 $ 11.22
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to fund our operations and grow our businesses. We may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level. We are a holding company and our liquidity needs are primarily for compensation, professional fees, office rent and insurance costs. Our subsidiaries' ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in agreements for the strategic investment by Warburg in Fortegra, our subsidiaries' financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings. We expect our cash and cash equivalents and distributions from operating subsidiaries, our subsidiaries' access to financing, and sales of investments to be adequate to fund our operations for at least the next 12 months, as well as the long term. As ofDecember 31, 2022 , cash and cash equivalents, excluding restricted cash, were$538.1 million , compared to$175.7 million atDecember 31, 2021 , an increase of$362.3 million primarily as a result of the WP Transaction, growth in gross written premium and premium equivalents at Fortegra, sales and maturities of investments within Fortegra and the sale of three dry bulk vessels and two product tankers in our maritime transportation business. Our mortgage business relies on short term uncommitted sources of financing as a part of their normal course of operations. To date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw on other sources of liquidity to fund our mortgage business. See Note (11) Debt, net in the notes to consolidated financial statements, for additional information regarding our mortgage warehouse borrowings. We believe that cash flow from operations will provide sufficient capital to continue to grow the business and fund interest on the outstanding debt, capital expenditures and other general corporate needs over the next several years. As we continue to expand our business, including by any acquisitions we may make, we may, in the future, require additional working capital for increased costs. For purposes of determining enterprise value and Adjusted EBITDA, we consider corporate credit agreements and preferred trust securities, which we refer to as corporate debt, as corporate financing and associated interest expense is added back. The below table outlines this amount by debt outstanding and interest expense at the insurance company and corporate level. Corporate Debt Corporate Debt Outstanding Interest Expense for the ($ in thousands) as of December 31, year ended December 31, 2022 2021 2022 2021 Insurance$ 160,000 $ 162,160 $ 14,675 $ 14,232 Corporate - 114,063 4,615 10,193 Total$ 160,000 $ 276,223 $ 19,290 $ 24,425
The balance of the corporate credit facility was repaid during
of the WP Transaction. See Note (11) Debt, net in the notes to consolidated
financial statements for details for prior periods.
OnOctober 21, 2022 , Fortegra entered into a Second Amended and Restated Credit Agreement by and amongFortegra Financial , and its subsidiary,LOTS Intermediate Co. , as borrowers, the lenders from time to time party thereto, certain of Fortegra's subsidiaries, as guarantors, andFifth Third Bank , National Association, as the administrative agent and issuing 65 -------------------------------------------------------------------------------- lender (the "Fortegra Credit Agreement"). The Fortegra Credit Agreement provides for a$200 million revolving credit facility, all of which is available for the issuance of letters of credit, with a sub-limit of$25 million for swing loans and matures onOctober 21, 2027 .
Consolidated Comparison of Cash Flows
($ in thousands) For the Year Ended December 31, Total cash provided by (used in): 2022 2021 Net cash (used in) provided by: Operating activities$ 463,073 $ 204,316 Investing activities 9,514 (273,759) Financing activities (115,186) 73,735 Net increase (decrease) in cash, cash equivalents and restricted cash$ 357,401 $ 4,292 Operating Activities
Cash provided by operating activities was
activities included proceeds from mortgage loans outpacing originations and
growth in insurance premiums written resulting in increases in unearned
premiums, policy liabilities and unpaid claims and deferred revenues, which were
partially offset by increases in deferred acquisition costs and reinsurance
receivables.
Cash provided by operating activities was
activities included consolidated net income (excluding unrealized gains and
losses), proceeds from mortgage loans outpacing originations and growth in
insurance company unearned premiums and net deferred revenues, partially offset
by increases in deferred acquisition costs and reinsurance receivables.
Investing Activities
Cash provided by investing activities was$9.5 million for the year endedDecember 31, 2022 . In 2022, the primary sources of cash were proceeds from the sale of investments outpacing the purchases of investments. The primary uses of cash from investing activities were the issuance of notes receivable outpacing proceeds and the acquisition of ITC. Cash used in investing activities was$273.8 million for the year endedDecember 31, 2021 . In 2021, the primary uses of cash from investing activities were the purchase of investments outpacing proceeds from the sales of investments in our insurance investment portfolio, and the issuance of notes receivable outpacing proceeds. Financing Activities Cash used in financing activities was$115.2 million for the year endedDecember 31, 2022 . In 2022, the cash usage was from a combination of principal repayments on corporate borrowings and mortgage warehouse facilities exceeded proceeds from borrowings, the repurchase of the Company's common stock and the payment of dividends, which was partially offset by cash received from the WP Transaction and the exercise of warrants. Cash provided by financing activities was$73.7 million for the year endedDecember 31, 2021 . In 2021, proceeds from borrowings exceeded principal repayments on mortgage warehouse facilities and asset-based debt supporting our premium finance operations in the insurance business, partially offset by net redemptions of non-controlling interest, the repurchase of the Company's common stock and the payment of dividends.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note (2) Summary of Significant Accounting Policies. As disclosed in Note (2), the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments.
Impairment
66 --------------------------------------------------------------------------------
The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities.Goodwill and indefinite-lived intangible assets are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Finite-lived intangible assets are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. At bothDecember 31, 2022 and 2021, we had two reporting units for goodwill impairment testing, of which the fair value substantially exceeded carrying value as of that date. See Note (9)Goodwill and Intangible Assets, net. Reserves Unpaid claims are reserve estimates that are established in accordance with GAAP using generally accepted actuarial methods. Credit life and accidental death and destruction (AD&D) unpaid claims reserves include claims in the course of settlement and incurred but not reported (IBNR) claims. Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other Fortegra product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables or a combination of these factors. In arriving at the unpaid claims reserves, the Company conducts an actuarial analysis on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method. The unpaid claims reserves represent the Company's best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented. During the year endedDecember 31, 2022 the Company experienced favorable prior year development of$0.9 million , compared to unfavorable prior year development of$2.6 million and$5.4 million for the years endedDecember 31, 2021 and 2020, respectively. In 2022, the$0.9 million favorable prior year development is primarily due to lower-than-expected claim severity in our commercial lines business. In 2021, the$2.6 million increase in prior year development is primarily due to higher-than-expected claim severity from business written by a small group of producers of our personal and commercial lines of business. In 2020, the$5.4 million increase was due to higher than expected claim frequency from business written by a small group of producers of our personal and commercial lines of business, of which$2.2 million related to our non-standard auto business. The underlying cause of the 2020 prior year development was the result of a subset of risk where the loss ratio pegs used in our year end actuarial determination was low given the ultimate frequency that emerged. The non-standard programs which contributed to the prior year development in 2020 experienced loss emergence in excess of levels contemplated when originally pricing the products. The Company responded to this emergence by filing for increased rates for the one underperforming active program and non-renewing all business for the two programs in run-off. Management considers the prior year development for all three years to be insignificant when considered in the context of our annual earned premiums, net as well as our net losses and loss adjustment expenses and member benefit claims expenses. Earned premiums, net in 2022 were$904.8 million and net losses and loss adjustment expenses were$361.6 million , which resulted to a loss ratio of 40.0%. Without the$0.9 million of favorable prior year development, the calendar year loss ratio would have been approximately 0.1% higher. For comparison, the 2021 and 2020 loss ratios were 37.0% and 37.2%, respectively. In general, the Company's loss ratio results have been predictable and consistent over time. Actuarial estimates are subject to estimation variability, and while management uses its best judgment in establishing the estimate of required unpaid claims, different assumptions and variables could lead to significantly different unpaid claims estimates. The variability in these estimates can, and have in the past, been significant to pretax income. 67 -------------------------------------------------------------------------------- We analyze our development on a quarterly basis and given the short duration nature of our products, favorable or adverse development emerges quickly and allows for timely reserve strengthening, if necessary, or modifications to our product pricing or offerings. Based upon our internal analysis and our review of the statement of actuarial opinions provided by our actuarial consultants, we believe that the amounts recorded for policy liabilities and unpaid claims reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date. While management has used its best judgment in establishing the estimate of required unpaid claims, different assumptions and variables could lead to significantly different unpaid claims estimates. The determination of best estimates is affected by many factors, including but not limited to: •the quality and applicability of historical data, •current and future economic conditions, •trends in loss frequencies and severities for various causes of loss, •changes in claims reporting patterns, •claims settlement patterns and timing, •regulatory, legislative and judicial decisions, •morbidity patterns, and •the attitudes of claimants towards settlements. The adequacy of our unpaid claims reserves will be impacted by future trends that impact these factors. Two key measures of loss activity are loss frequency, which is the measure of the number of claims per unit of insured exposure, and loss severity, which is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls, changes in economic activity and weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be different than management's estimate. Based on our actuarial analysis, we have determined that an aggregate change that is greater than 5% in loss frequency and loss severity is not reasonably likely given the Company's low limit underwriting and low severity philosophies. The effect of higher and lower levels of loss frequency and severity on our ultimate costs for claims occurring in 2021 would be as follows: Accident Year 2022 Sensitivity Test Change in Loss & Frequency & Severity on Ultimate ($ in thousands) Scenario Ultimate Cost Change 5% higher $ 380$ 18,073 3% higher $ 372$ 10,844 1% higher $ 365$ 3,615 Base scenario $ 361 $ - 1% lower $ 358$ (3,615) 3% lower $ 351$ (10,844) 5% lower $ 343$ (18,073) Based upon our internal analysis and our review of the statement of actuarial opinions provided by our actuarial consultants, we believe that the amounts recorded for policy liabilities and unpaid claims reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date.
Deferred Acquisition Costs
The Company defers certain costs of acquiring new and renewal insurance
policies, and other products as follows:
Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These capitalized costs are amortized as the related premium is earned.
Other deferred acquisition costs are limited to prepaid direct costs, typically
commissions and contract transaction fees, that
68 -------------------------------------------------------------------------------- resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned. The Company evaluates whether all deferred acquisition costs are recoverable at year end, and considers investment income in the recoverability analysis for insurance policy related deferred acquisition costs. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years endedDecember 31, 2022 and 2021.
Amortization of deferred acquisition costs was
for the years ended
Revenue Recognition
The Company earns revenues from a variety of sources:
Earned Premiums, net
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance policies by the Company's distributors and premiums written for insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including PORCs, earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.
Service and Administrative Fees
The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated with transaction volume and are recognized as revenue as they become both realized and earned. Revenues from contracts with customers were$300.2 million and$258.6 million for the years endedDecember 31, 2022 and 2021, respectively, and include auto and consumer goods service contracts, motor clubs, other service and administrative fees, vessel related revenue and management fee income. See Note (14) Revenue from Contracts with Customers for more detailed disclosure regarding these revenues. Service fee revenue is recognized as the services are performed. Administrative fee revenue includes the administration of premium associated with our producers and their PORCs. In addition, we also earn fee revenue from debt cancellation, motor club, and auto and consumer goods service contracts. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts, vehicle service contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other actuarial methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in the tax rates
is recognized in earnings in the period that includes the enactment date.
Additionally, taxing jurisdictions could retroactively disagree with our tax
treatment of certain items, and some historical transactions have income tax
effects going forward. Accounting guidance requires these future effects to be
evaluated using current laws, rules and regulations, each of which can change at
any time and in an unpredictable manner.
The Company establishes valuation allowances for deferred tax assets when, in
its judgment, it concludes that it is more likely than not that the deferred tax
assets will not be realized. These judgments are based on projections of future
income,
69
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including tax-planning strategies, by individual tax jurisdictions. Changes in
economic conditions and the competitive environment may impact the accuracy of
the Company's projections. On a quarterly basis, the Company assesses the
likelihood that its deferred tax assets will be realized and determines if
adjustments to the Company's valuation allowance is appropriate.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note (2) Summary
of Significant Accounting Policies, in the accompanying consolidated financial
statements.
70
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GREENLIGHT CAPITAL RE, LTD. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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