2019
Annual Report to Shareholders
April 22, 2020
To Our Fellow Shareholders,
Tiptree’s book value per-share as of year-end 2019 was $11.52, which combined with dividends,
resulted in a total return for the year of 8.2%. Investors who participated in our June 2007 initial capital
raise have experienced a compounded annual return of 9.5% through the end of 2019 (as measured
by growth in book value per share plus dividends received), as compared to 8.6% for the S&P 500
and 7.3% for the Russell 2000 over the same period. In 2019, we increased the amount of annual
cash dividends for the third consecutive year to 15.5 cents per share (a 14.8% increase).
More recently, as investors struggle to fully understand the impact of Covid-19 on different business
sectors, there has been extraordinary market price volatility. This uncertainty is likely to continue for
some time, and may result in unanticipated risks and challenges. Although no industry is unaffected
from the dramatic social constraints enacted globally to contain the virus, we currently see a modest
direct impact to our own businesses and liquidity positions and believe we are positioned to absorb
the significant changing outlooks for interest rates, commodity prices, global trade and consumer
demand. In short, we believe we are positioned to ride out this storm as it evolves but continue to
closely monitor the ever changing crisis as it relates to our businesses.
For the 2019 year, we earned $18.4 million of net income and $63.6 million of Operating EBITDA1
from our operations and investing activities. After deducting corporate interest expense, that equates
to a 10.0% cash earnings return on our invested capital. Most importantly, we made significant
progress on our strategic goals of expanding our insurance operations, improving our returns on
insurance float, and growing while refining investments held within Tiptree Capital. We manage
Tiptree with a long-term perspective, with our primary goal to maximize intrinsic value per share. We
believe this is achieved by growing our cash earnings per share in the businesses we own, in addition
to realizing capital appreciation on our investments over a longer-term horizon.
We view the foundation of our business consisting of three key cornerstones that will be the drivers of
cash earnings growth and total return for shareholders: (1) insurance underwriting and fee business,
(2) insurance portfolio investment returns, and (3) returns on investments held at Tiptree Capital. We
manage each with a long-term perspective and as owners with our executive officers, directors and
related trusts holding more than 30% of Tiptree’s outstanding shares.
Our consolidated results for 2019 are summarized below:
TIPTREE CONSOLIDATED RESULTS
GAAP FINANCIAL HIGHLIGHTS
(dollars in millions, except per share data)
2019
2018
2017
2016
2015
Net income attributable to Common Stockholders
Diluted earnings per Common Share
Cash dividends paid per share
18.4
0.50
0.155
23.9
0.69
0.135
3.6
0.11
0.12
25.3
0.78
0.10
5.8
0.17
0.10
Total assets
Total investments and cash and cash equivalents
Debt
Total stockholders’ equity
2,198.3 1,864.9 1,989.7 2,890.1 2,495.0
739.4
636.0
870.1
502.3
346.1
374.5
397.7
396.8
411.4
782.9
354.1
399.3
778.5
554.9
390.1
1 For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 41 of the attached Form 10-K.
1
NON-GAAP FINANCIAL HIGHLIGHTS1
2019
2018
2017
2016
2015
Adjusted EBITDA
Operating EBITDA
Total Capital
Shares outstanding2
Book Value per share2
Total cash returned to shareholders
63.0
63.6
704.8
34.6
11.52
14.4
28.8
54.9
666.5
35.9
10.79
19.1
38.0
60.9
641.1
37.9
9.97
11.8
78.9
60.5
625.8
36.4
10.14
47.8
58.4
53.1
598.1
42.9
8.90
8.2
TIPTREE INSURANCE
Our focus is on providing niche and specialty insurance coverages which are generally underserved
or require specialized product knowledge. We prioritize high frequency contracts which experience
low severity claims activity and have limited exposure to catastrophic events. Over the last 3 years,
which were record years for catastrophes, our underwriting results were not materially impacted, as
we have been able to maintain a high portion of fee earnings and successfully deploy risk mitigation
strategies which have contributed to a combined ratio that remains in the low 90’s.
Extended service contracts (warranties) are a natural extension of Fortegra’s product offerings and
share characteristics that have generated success. We believe offering a vertically integrated product
set (including insurance, administration, roadside assistance, and premium finance) gives us a
competitive advantage versus other market players. On January 3rd, 2020, we completed the
acquisition of Smart AutoCare which advances Tiptree to a leading position in warranty and niche
insurance products. In addition, the expansion of our insurance operations to Europe gained solid
traction in 2019 generating $32 million of premiums.
The table below highlights results since Tiptree acquired Fortegra in December 2014.
Year
20143
2015
2016
2017
2018
2019
Compound Annual Growth Rate
Gross Written
Premiums
Operating
EBITDA1
Combined
Ratio1
$525.0
686.0
708.3
768.3
868.1
1,015.3
14.1%
$38.9
42.8
49.3
53.3
64.5
63.3
10.2%
89.8%
87.4
89.5
93.2
92.5
92.6
For the year, gross written premiums grew to $1.015 billion, up 17.0% over 2018 and net written
premiums were up 15.1% to $537.2 million. Operating EBITDA1 was $63.3 million, which represents a
13.4% return on total capital. And as previously mentioned, we maintained our combined ratio in the
1 For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 41 of the attached Form 10-K. Combined ratio has
been adjusted for impacts of purchase price accounting amortization for 2014-2017.
2 For periods prior to April 10, 2018, book value per share assumes the full exchange of the limited partner units of TFP for Common Stock.
3 Reflects Fortegra results for 2014 prior to adjustments for purchase accounting and inclusion in Tiptree’s financial statements.
2
low 90’s, demonstrating our continued ability to underwrite profitably, while increasing written
premiums.
INSURANCE RELATED INVESTMENT PORTFOLIO
Fortegra’s investment portfolio was $540 million at year-end 2019, up 16.5% from 2018 as a result of
increases in retained paid-in-premiums. Our total return for 2019 was 5.4%, up from 0.3% in 2018.
The majority of our investments are high quality, short duration fixed income securities (to match our
liabilities at roughly 2.3 years) and therefore performed well against relative benchmarks. Throughout
2019 we actively reduced exposure to corporate credit, particularly in the middle market sector, and
increased allocations to higher-rated government and agency backed securities. As we look to 2020
and beyond, we believe the corporate distressed sector will present significant investment
opportunities. We have recently completed the allocation of $75 million to that strategy, and our
colleagues at Corvid Peak (formerly Tricadia) will lead the efforts on that front.
Year
2014
2015
2016
2017
2018
2019
Insurance
Investments1
Total
Stockholders’
Equity
Investment
leverage
$186
274
358
396
463
540
$402
398
390
397
399
411
0.5x
0.7x
0.9x
1.0x
1.2x
1.3x
Much has been written regarding the value of insurance related “float” which can be regarded as the
equivalent of interest free leverage available for investment. When combined with core insurance
underwriting profits, the added returns on “float” can make for very attractive returns on stockholder
equity. Although we are pleased with the growth in the insurance and warranty business and
corresponding “float”, we have not yet realized our full potential in this arena.
TIPTREE CAPITAL
Over the years, Tiptree has invested in a broad range of businesses and assets including asset
management, specialty finance originators and servicers, real estate, shipping, insurance and a broad
range of specialized credit investments. Realized investments since our founding have yielded an
aggregate 24.5% gross IRR2, with the holding periods for those investments ranging from 5-10 years.
Unlike typical private equity buyers, our investment horizon is not limited to a specific time period, but
instead driven by optimizing returns.
Tiptree Capital currently holds three primary investments: publicly listed shares in Invesque Inc. (a
senior housing investment platform), shipping related investments (Tiptree Marine) and a residential
1 For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 41 of the attached Form 10-K.
2 IRR presented gross before corporate taxes and corporate expenses. IRR represents the internal rate of return on invested capital based
on the realized proceeds of cash or marketable securities and including the timing of contributions and distributions. Our IRR calculation
reflects the impact of asset specific leverage and may differ from those used by others. Past performance is not indicative of future results.
3
mortgage originator and servicer (Reliance First Capital). 2019 was a good year with Operating
EBITDA of $22.8 million, up from $13.7 million in 2018 and with all businesses performing profitably.
LOOKING AHEAD
We are excited for Tiptree’s future and confident in the long-term trajectory of the company. We are
focused on long-term total investment returns, understanding that short-term market volatility (like that
we are currently experiencing) may present temporary challenges to our performance objectives.
However, we believe our ability to provide consistent returns as measured by Operating EBITDA1 and
our shareholders’ total return as measured by growth in book value per share and dividends received
makes Tiptree an attractive long-term investment.
We like speaking with our investors and welcome thoughts on the markets or ideas that we can
incorporate into our investment process. As always, please reach out if you have new investment
ideas or any suggestions or inquiries.
We would also like to thank the employees of Tiptree and our subsidiaries for their efforts in 2019. We
had a successful year moving our strategic objectives forward – one that we believe will position
Tiptree for growth in years to come.
With best regards,
Michael Barnes
Executive Chairman
Jonathan Ilany
Chief Executive Officer
1 For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 41 of the attached Form 10-K.
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of Incorporation of Organization)
299 Park Avenue, 13th Floor, New York, New York
(Address of Principal Executive Offices)
38-3754322
(IRS Employer Identification No.)
10171
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (212) 446-1400
Former Address: 780 Third Avenue, 21st Floor, New York, New York, 10017
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
TIPT
Nasdaq Capital Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging Growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes
No
As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and non-
voting common equity held by non-affiliates of the registrant was approximately $165,548,439, based upon the closing sales price of $6.30 per share as reported on the
Nasdaq Capital Market. For purposes of this calculation, all of the registrant’s directors and executive officers were deemed to be affiliates of the registrant.
As of March 10, 2020, there were 34,425,847 shares, par value $0.001, of the registrant’s Common Stock outstanding.
Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relating to the registrant’s 2020 Annual Meeting
of Stockholders is incorporated by reference into Part III.
TIPTREE INC.
Annual Report on Form 10-K
December 31, 2019
Table of Contents
ITEM
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets for December 31, 2019 and December 31, 2018
Consolidated Statements of Operations for the three years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2019, 2018 and 2017
Consolidated Statement of Changes in Stockholders’ Equity for the three years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the three years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(1) Organization
(2) Summary of Significant Accounting Policies
(3) Dispositions, Assets Held for Sale and Discontinued Operations
(4) Operating Segment Data
(5) Investments
(6) Notes and Accounts Receivable, net
(7) Reinsurance Receivables
(8) Goodwill and Intangible Assets, net
(9) Derivative Financial Instruments and Hedging
(10) Debt, net
(11) Fair Value of Financial Instruments
(12) Liability for Unpaid Claims and Claim Adjustment Expenses
(13) Revenue From Contracts with Customers
(14) Other Assets and Other Liabilities and Accrued Expenses
(15) Other Revenue, Other Expenses and Other Income
(16) Stockholders’ Equity
(17) Accumulated Other Comprehensive Income (Loss)
(18) Stock Based Compensation
(19) Income Taxes
(20) Commitments and Contingencies
(21) Earnings Per Share
(22) Related Party Transactions
(23) Summarized Quarterly Information (Unaudited)
(24) Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
2
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F- 4
F- 5
F- 6
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F- 11
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F- 11
F- 25
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F- 29
F- 34
F- 35
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TIPTREE INC.
Annual Report on Form 10-K
December 31, 2019
Table of Contents
ITEM
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Page
Number
57
57
59
60
3
PART I
Forward-Looking Statements
Except for the historical information included and incorporated by reference in this Annual Report on Form 10-K, the information
included and incorporated by reference herein are “forward-looking statements” within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events
and are not statements of historical fact. These forward-looking statements include information about possible or assumed future
events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic
plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “may,” “might,”
“plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many
of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” and
elsewhere in this Annual Report on Form 10-K and in our other public filings with the SEC.
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ
materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could affect
our forward-looking statements. Consequently, our actual performance could be materially different from the results described or
anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-
looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.
Market and Industry Data
Certain market data and industry data included in this Annual Report on Form 10-K were obtained from reports of governmental
agencies and industry publications and surveys. We believe the data from third party sources to be reliable based upon our management’s
knowledge of the industry, but have not independently verified such data and as such, make no guarantees as to its accuracy,
completeness or timeliness.
Note to Reader
In reading this Annual Report on Form 10-K, references to:
“1940 Act” means the Investment Company Act of 1940, as amended.
“A.M. Best” means A.M. Best Company, Inc.
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CFPB” means the Consumer Financial Protection Bureau.
“CLOs” means collateralized loan obligations.
“Code” means the Internal Revenue Code of 1986, as amended.
“Common Stock” or “Common Shares” means Tiptree’s Class A common stock $0.001 par value for periods prior to June 7, 2018
and thereafter the common stock $0.001 par value.
“consolidated CLOs” means, for the year ended December 31, 2015: Telos 2, Telos 4, Telos 5 and Telos 6; and for the years ended
December 31, 2016 and 2017, Telos 5, Telos 6 and Telos 7. During 2017, the Company exited all consolidated CLOs.
“Corvid Peak” means collectively: Corvid Peak Holdings, L.P., Corvid Peak Capital Management, LLC, Corvid Peak GP Holdings,
LLC and Corvid Peak Holdings GP, LLC, formerly known as “Tricadia”.
“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“EU” means European Union.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are
lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“GSE” means government-sponsored enterprise.
“Invesque” means Invesque Inc.
“Luxury” means Luxury Mortgage Corp.
“NAIC” means the National Association of Insurance Commissioners.
4
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Smart AutoCare” means the following entities and their subsidiaries operating under the Smart AutoCare brand: SAC Holdings,
Inc., Freedom Insurance Company, Ltd., Dealer Motor Services, Inc., Independent Dealer Group, Inc., Ownershield, Inc. and
Accelerated Service Enterprises, LLC.
“TAMCO” means Tiptree Asset Management Company, LLC.
“Tax Act” means Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act.
“Telos” means Telos Asset Management, LLC.
“Telos 2” means Telos CLO 2007-2, Ltd.
“Telos 4” means Telos CLO 2013-4, Ltd.
“Telos 5” means Telos CLO 2014-5, Ltd.
“Telos 6” means Telos CLO 2014-6, Ltd.
“Telos 7” means Telos CLO 2016-7, Ltd.
“TFP” means Tiptree Financial Partners, L.P.
“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means, unless otherwise indicated by the context, Tiptree Inc. and its
consolidated subsidiaries.
“Transition Services Agreement” means the Amended and Restated Transition Services Agreement between Corvid Peak and
Tiptree Inc., effective as of January 1, 2019.”
“Tricadia” means collectively, Tricadia Holdings, L.P., Tricadia Capital Management, LLC, Tricadia Holdings GP, LLC, Tricadia
Holdings and Tricadia GP Holdings LLC.
Item 1. Business
OVERVIEW
Our Business
Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Our principal
operating subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider of specialty
insurance, warranty products and related administration services. We also generate earnings from a diverse group of select investments
that we refer to as Tiptree Capital.
Our business is comprised of the following:
• Tiptree Insurance
– Operations - We underwrite and administer programs, including credit protection, warranty and service contracts,
and niche commercial and consumer insurance lines. The significant majority of our products are sold through
independent agents. Tiptree Insurance includes the Fortegra and, as of January 3, 2020, the Smart AutoCare brands.
Investments - We invest a majority of our insurance related investment assets in high quality fixed income securities
to support our claims paying activities. To enhance our investment return objectives, we selectively allocate a portion
of our insurance portfolio to higher yielding alternative investments.
–
• Tiptree Capital - We also own a diverse group of investments, which includes control investments in businesses, investments
in securities and other assets, all of which are managed on a total return basis. We view these investment decisions as distinctly
separate from our core insurance operations. We expect the investments within Tiptree Capital to change over time as we
exit investments and our outlook on investment opportunities changes. Today, Tiptree Capital consists primarily of investments
in shares of Invesque, maritime transportation and mortgage origination operations.
As of December 31, 2019, Tiptree and its consolidated subsidiaries had 1,009 employees (979 on a full time basis), 32 of which were
at our corporate headquarters. Corporate employees are responsible for corporate strategy, capital allocation and investment decisions,
as well as all public company reporting and compliance.
Our businesses are subject to regulation as described below. The 1940 Act may limit the types and nature of businesses that we engage
in and assets that we may acquire. See “Risk Factors-Risks Related to Regulatory and Legal Matters-Maintenance of our 1940 Act
exemption will impose limits on our operations.”
5
Our Operating Principles
At Tiptree, we are continually looking for investment opportunities that fit within our operating principles and make capital allocation
decisions for the most efficient deployment of our capital.
Underwrite to a Profit. Our principal strategic objective is to continue expanding our core insurance operations, particularly the
specialty insurance and warranty businesses. Our highest priority is to maintain strong underwriting practices, with attention paid to
the insurance disciplines of pricing, underwriting and claims management.
Invest for Total Return. Our financial goals are to generate consistent and growing earnings and cash flow, and to enhance shareholder
value as measured by growth in book value per share plus dividends. We manage Tiptree with a long-term perspective, balancing
cash-flowing investments with opportunities for capital appreciation. We focus on long-term total investment returns, understanding
that temporary accounting gains and losses may vary significantly from one period to the next.
Think Like Owners. Efficient deployment of capital is our top priority. We aim to find the best use of capital to create long-term value
for our shareholders. We hope to achieve this through a combination of acquisitions, investments in our existing businesses,
opportunistic share repurchases and paying a consistent dividend. As of March 10, 2020, directors, officers, employees and related
trusts owned 30% of the Company.
Tiptree Insurance
Overview
We conduct our insurance operations through Tiptree Insurance, which includes Fortegra Financial Corporation (together with its
subsidiaries, “Fortegra”), an insurance holding company incorporated in 1981, and Tiptree Warranty. Our insurance business
underwrites and administers specialty insurance programs and products, and is a leading provider of credit and asset protection products
and administration services. Our programs are provided across a diverse range of products and services including credit protection
insurance, warranty and service contract products, premium finance, and niche personal and commercial lines of insurance. On January
3, 2020, Tiptree Warranty acquired Smart AutoCare, a rapidly growing vehicle warranty solutions provider in the United States.
Products and Services
Credit Protection Insurance - Our credit protection insurance products are designed to offer consumers protection from life events
that limit a borrower’s ability to make payments on outstanding loan balances. These products offer consumers the option to protect
installment and credit card loan balances or payments in the event of death, involuntary unemployment, disability, or covered losses
on property securing the loans.
Warranty and Service Contracts - Our warranty and service contract products provide consumers with coverage on automobiles,
consumer electronics, mobile devices, appliances, and furniture and bedding, protecting them from certain covered losses. These
products offer replacement, service or repair coverage in the event of mechanical breakdown, accidental damage, theft and water
damage. Our warranty and service contracts are extensions of select warranty coverage initially provided by original equipment
manufacturers.
Specialty Programs - We offer insurance programs focused on fronting and underwriting certain niche light commercial and personal
lines insurance coverages for general agents and other program managers that require broad licensure, an “A-” or better A.M. Best
rating, and specialized knowledge and expertise to distribute their products. We grant these general agents and program managers’
authority to produce, underwrite and administer policies subject to our underwriting and pricing guidelines. We typically transfer all
or a substantial portion of the underwriting risk on these programs to third party reinsurers for which we are paid a fee.
Services and Other - We have several other products which provide value-add services to our customers, including premium finance
and business processing services.
Marketing and Distribution
We distribute our credit and warranty products through independent agents and distribution partnerships with our clients, including
consumer finance companies, retailers, automobile dealers, credit card issuers, credit unions and regional and community banks. We
leverage our clients’ brand and customer base to distribute multiple products and services. Our specialty light commercial and personal
6
program insurance products are generally marketed through a network of independent insurance brokers and managing general
agencies. In each case, we pay a commission-based fee to our marketing partners.
We generally target markets that are niche and specialty in nature, which we believe are underserved by competitors and have high
barriers to entry. We focus on establishing quality client relationships and emphasizing customer service. This focus, along with our
ability to help clients enhance revenue and reduce costs, has enabled us to develop and maintain numerous long-term client relationships.
A significant portion of our marketing partnership commission agreements are on a variable or retrospective commission basis, which
allows us to adjust commissions on the basis of claims experience. Under these types of arrangements, the compensation to our
marketing partners is based upon the actual losses incurred compared to premiums earned. We believe these types of contractual
arrangements align their economic interests with ours, help us to better manage our risk exposure and deliver more consistent profit
margins with respect to these types of arrangements.
Investment Portfolio
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. We rely on conservative underwriting practices to
generate investable funds while minimizing our underwriting risk. We invest a majority of our investable assets in high quality fixed
income securities with relatively short durations, designed to deliver sufficient liquidity to meet claims as incurred. The balance of
our investable assets are invested in asset classes that we believe will produce higher risk-adjusted returns over the long term, a
significant portion of which are self-managed using internal asset management professionals and resources.
Risk Management
Consistent with standard industry practice for most insurance companies, we use reinsurance to manage our underwriting risk and
efficiently utilize capital. A significant portion of our distribution partners of credit protection insurance and warranty products use
captive reinsurance companies to assume the insurance risk on the products they distribute. These captive reinsurance companies are
known as producer owned reinsurance companies (“PORC”) and in many instances each PORC assumes nearly all of the underwriting
risk associated with the insurance products they distribute. In these instances, we act in a fronting and administrative capacity on
behalf of each PORC, providing underwriting and claims management services. We receive an administration fee that compensates
us for our expenses associated with underwriting and servicing the underlying policies and provides us with stable margins for these
services. We generally require cash collateral to secure the reinsurance receivable in the event that a PORC is unable to pay the claims
it has assumed. In our niche light commercial and personal insurance program business, our reinsurers are highly rated, well-capitalized
professional third party reinsurers.
Our Competitive Strengths
Specialty Focus
We have a history of operating in niche insurance markets that require specialized knowledge, administrative capabilities and expertise
to profitably service and/or underwrite policies or insurance coverages. Our expertise and focus, developed over Fortegra’s 35-year
history, has contributed to our position as one of the leading providers of credit insurance products in the United States. In addition,
our “A-” (Excellent) (stable outlook) rating by A.M. Best and broad licensure provide us the opportunity to write niche commercial
and personal lines insurance programs through managing general agents and other program managers to whom we have granted
authority to produce, underwrite and administer policies that meet our underwriting and pricing guidelines. In the markets we serve,
we focus on underwriting small premium policies and contracts where we can utilize our technology and refined administration
processes to efficiently manage the high volume of policies and claims that result from serving large numbers of small policyholders
and contract holders. We believe these markets have fewer competitors and higher barriers to entry than other segments of the insurance
market, providing us with greater flexibility on pricing and terms, and better, more consistent underwriting margins. We intend to
continue to expand into other niche markets where we believe we can capitalize on opportunities presented by our underwriting
expertise and operating platform.
Broad Service Delivery Expertise
Over the years, we have invested resources and developed the expertise to provide a variety of products and services for our marketing
and distribution partners, including policy underwriting and issuance, administration and claims management, back office processing
and premium financing. Integrated, proprietary technology delivers low cost, highly automated services to our clients, while our
scalable technology infrastructure affords us the opportunity to add new clients and services without significant additional expense.
The breadth of our capabilities enables us to provide multiple services to each client, thus creating the opportunity to generate more
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revenue and establish more entrenched relationships with clients. We believe our broad capabilities and consistent service delivery
are key drivers of our high client retention rates. In our credit protection insurance products, our annual renewal rates are consistently
in excess of 90%, which we believe is among the highest in the industry and distinguishes us from many of our peers.
Significant Fee-based Revenue
We seek to complement our underwriting income with substantial fee-based revenues from the various value-added services we
provide our marketing and distribution partners. A significant portion of our revenues are derived from fees and are not solely dependent
upon the underwriting performance of our insurance products, resulting in more diversified and consistent earnings. Our fee-based
revenues are primarily generated in both our regulated insurance entities as well as non-regulated service companies. We believe fees
generated outside of regulated insurance entities provide us greater financial flexibility than traditional insurance carriers.
Investment Capabilities
Our investment management operations provide access to broad investment expertise and a range of investment opportunities. We
believe our ability to source a broader universe of investments, provides us the opportunity to generate superior risk-adjusted investment
returns over the long term versus other competition.
Market Opportunity
Credit Insurance
We are a leading provider of credit insurance protection products in the United States and believe we are well positioned to increase
our market share both organically and potentially through acquisition. We believe our capabilities and reputation have allowed us to
better position ourselves competitively for new business and renewals in the marketplace. We also believe our market position,
capabilities and reputation will make us a preferred acquisition partner for smaller competitors that may choose to exit the market or
desire a partner with more resources.
Warranty Products
We believe we can significantly increase our market presence in the warranty sector. We entered the warranty market as a natural
extension of our insurance products given that it possesses similar attributes and distribution channels. Our warranty market gross
premiums written equivalents grew to $233.0 million in the year ended December 31, 2019, compared to $50.5 million in the year
ended December 31, 2015, which represents a 46.6% compounded annual growth rate. We believe the demand from consumers for
extended service contracts on products such as automobiles, furniture, mobile phones and electronics will continue to drive long-term
growth opportunities. We believe our acquisition of Smart AutoCare, combined with Fortegra, position us as a leading provider of
automobile extended service contracts.
International Markets
We are in the process of selectively expanding our product offerings to international markets such as Europe, Asia and Canada, where
we believe profitable opportunities exist. In 2018, we expanded into Europe where we believe our existing product offerings can be
successfully distributed while maintaining similar levels of our existing underwriting performance.
Competition
We operate in several markets, and believe that no single competitor competes against us in all of our business lines. The competition
in the markets in which we operate is a function of many factors, including price, industry knowledge, quality of client service, sales
force effectiveness, technology platforms and processes, the security and integrity of information systems, financial strength ratings,
breadth of products and services, brand recognition and reputation. Our credit protection products and warranty service contracts
compete with similar products of insurance companies, warranty companies and other insurance service providers. Many of our
competitors are significantly larger, have greater access to capital and may possess other competitive advantages. We compete with
several multi-national and regional insurance companies that may have expertise in our niche products. Our competitors include:
Assurant, Inc., Asurion, LLC, AmTrust Financial Services, Inc., eSecuritel Holdings, LLC, State National Companies Inc. (acquired
by Markel in 2017) and several regional companies.
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Regulation
We are subject to federal, state, local and foreign regulation and supervision. Our insurance subsidiaries are generally restricted by
the insurance laws of their respective domiciles as to the amount of dividends they may pay without the prior approval of the respective
regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior
regulatory approval is limited to a stated percentage of that subsidiary’s statutory surplus as of a certain date, or net income of the
subsidiary for the preceding year.
Our insurance company subsidiaries are domiciled in several states, including California, Delaware, Georgia, Kentucky, Louisiana
and Wisconsin. The regulation, supervision and administration by state departments of insurance relate, among other things, to:
standards of solvency that must be met and maintained, restrictions on the payment of dividends, changes in control of insurance
companies, the licensing of insurers and their agents and other producers, the types of insurance that may be written, privacy practices,
the ability to enter and exit certain insurance markets, the nature of and limitations on investments and premium rates, or restrictions
on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other
obligations, deposits of securities for the benefit of policyholders, payment of sales compensation to third parties, approval of policy
forms and the regulation of market conduct, including underwriting and claims practices. As part of their routine regulatory oversight
process, state insurance departments conduct periodic detailed examinations of the books, records, accounts and operations of insurance
companies that are domiciled in their states.
Our insurance company subsidiaries are also subject to certain state regulations which require diversification of our investment
portfolios and concentration limits among asset classes. Failure to comply with these regulations would cause non-conforming
investments to be treated as non-admitted assets in the states in which we are licensed to sell insurance policies for purposes of
measuring statutory surplus and, in some instances, would require us to sell those investments. Such investment laws are generally
permissive with respect to federal, state and municipal obligations, and more restrictive with respect to corporate obligations,
particularly non-investment grade obligations, foreign investment, equity securities and real estate investments. Each insurance
company is therefore limited by the investment laws of its state of domicile from making excessive investments in any given security
(such as single issuer limitations) or in certain classes or riskier investments (such as aggregate limitation in non-investment grade
bonds).
The NAIC provides model insurance laws and regulations for adoption by the states and standardized insurance industry accounting
and reporting guidance. However, model insurance laws and regulations only become effective when adopted and enacted by the
states, and statutory accounting and reporting principles continue to be established by individual state laws, regulations and permitted
practices. The NAIC has adopted a model act with risk-based capital (“RBC”) formulas to be applied to insurance companies to
measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of
its size and risk profile. State insurance regulators use RBC standards to determine appropriate actions relating to insurers that show
signs of weak or deteriorating conditions. The domiciliary states of our insurance company subsidiaries have adopted laws substantially
similar to the NAIC’s RBC model act.
Our insurance holding company is subject to the respective state insurance holding company statutes which may require prior regulatory
approval or non-disapproval of material transactions between an insurance company and an affiliate or of an acquisition of control
of a domestic insurer and payments of extraordinary dividends or distributions.
Our insurance and warranty businesses are subject to U.S. federal and state regulations governing the protection of personal confidential
information and data security, including the Gramm-Leach-Bliley Act, New York Department of Financial Services Cybersecurity
Regulation and California Consumer Privacy Act.
Our subsidiaries operating in the EU are subject to the General Data Protection Regulation, or the “GDPR,” which regulates data
protection for all individuals within the EU, which became effective on May 25, 2018.
Our insurance subsidiaries that are domiciled in Turks and Caicos must satisfy local regulatory requirements, such as filing annual
financial statements, filing annual certificates of compliance and paying annual fees.
We are also subject to federal and state laws and regulations related to the administration of insurance products on behalf of other
insurers. In order for us to process and administer insurance products of other companies, we are required to maintain licenses of a
third party administrator in the states where those insurance companies operate. We are also subject to the related federal and state
privacy laws and must comply with federal and state data protection and privacy laws. We are also subject to laws and regulations
related to call center services.
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Seasonality
Our financial results historically have been, and we expect to continue to be, affected by seasonal variations. Revenues may fluctuate
seasonally based on consumer spending, which has historically been higher in September and December, corresponding to the back-
to-school and holiday seasons. Accordingly, our revenues have historically been higher in the third and fourth quarters than in the
first half of the year. Member benefit claims on mobile device protection are typically more frequent in the summer months, and
accordingly, claims expense from those products have historically been higher in the second and third quarters than other times of the
year.
Intellectual Property
We own or license a number of trademarks, patents, trade names, copyrights, service marks, trade secrets and other intellectual property
rights that relate to our services and products. Although we believe that these intellectual property rights are, in the aggregate, of
material importance to our business, we also believe that our business is not materially dependent upon any particular trademark,
trade name, copyright, service mark, license or other intellectual property right. Our insurance subsidiaries have entered into
confidentiality agreements with their clients that impose restrictions on client use of our proprietary software and other intellectual
property rights.
Employees
At December 31, 2019, Tiptree Insurance employed 399 employees, of which 395 were on a full time basis.
Tiptree Capital
We own a diversified group of investments across a broad spectrum of businesses and assets. These investments are owned and
managed separately as Tiptree Capital. We manage Tiptree Capital on a total return basis, balancing current cash flow and long-term
value appreciation.
When assessing potential acquisitions and investments, we look for opportunities that:
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have strong and experienced management teams;
can generate long term attractive total returns;
complement existing businesses or strategies; and
have sustainable and scalable business models.
We expect the investments within Tiptree Capital to change over time as we exit investments and reallocate capital to new investment
opportunities. Though we do not have any specific sector focus, historically, the majority of our investments have occurred within
four major sectors: asset management, real assets, specialty finance and credit investments.
Tiptree Capital currently includes:
• Our share holdings of Invesque, a publicly traded real estate investment company that specializes in health care and senior
living property investment throughout North America.
• Our investment holdings in the maritime transportation sector, specifically in dry bulk vessels and product tankers that
transport commodities, such as coal, grains and clean petroleum products.
• Our investment in the mortgage finance sector, primarily our ownership of Reliance, an originator of conforming and
government single family, residential mortgage loans.
Competitive Strengths
The depth and breadth of experience of our management team enables us to source, structure, execute and manage the capital allocated
to Tiptree Capital. In addition, in each of our investments, we benefit by partnering with experienced management teams and third
party managers, which we have hired or chosen based on their depth of experience in their respective sectors.
Competition
In the sectors in which Tiptree Capital participates, the markets are highly competitive. There are a large number of competitors
offering similar products and services, including many that operate on an international scale, and which are often affiliated with major
multi-national companies, commercial financial institutions or investment banks. Many of these organizations have substantially more
personnel and greater financial and commercial resources than we do. Some of these competitors have proprietary products and
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distribution capabilities that may make it more difficult for us to compete with them. Some competitors also have greater name
recognition, have managed their businesses for longer periods of time, have greater experience over a wider range of products or have
other competitive advantages.
Regulation
In the sectors in which Tiptree Capital participates, we are subject to extensive regulation by international, federal, state and local
governmental authorities, including the SEC, CFPB, the Federal Trade Commission, the EU, the UK and various state agencies. Our
asset manager is registered with the SEC as an investment advisor and is subject to various federal and state laws and regulations and
rules of various securities regulators and exchanges. These laws and regulations primarily are intended to protect clients and generally
grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure
to comply with such laws and regulations.
Our investments in maritime transportation are regulated under international conventions, classification societies, national, state and
local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their
registration, that mandate safety and environmental protection policies. Government regulation of vessels, particularly environmental
regulations, have become more stringent and may require us to incur significant capital expenditures on our vessels. Our international
operations and activities also expose us to risks associated with trade and economic sanctions, prohibitions or other restrictions imposed
by the United States or other governments or organizations, including the United Nations, the EU and its member countries. Under
economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices
and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may
subject us to fines and other penalties. In our international activities, we are subject to anti-corruption, anti-bribery, anti-money
laundering and similar laws and regulations in various jurisdictions in which we conduct business, including the U.S. Foreign Corrupt
Practices Act and the U.K. Bribery Act 2010. We operate in countries known to present heightened risks for corruption, and our dry
bulk shipping and related operations requires us to interact with government officials, including port officials, harbor masters, maritime
regulators, customs officials and pilots.
Our investment in the mortgage sector must comply with a number of federal, state and local consumer protection and privacy laws
including laws that apply to loan origination, fair lending, debt collection, use of credit reports, safeguarding of non-public personally
identifiable information about customers, foreclosure and claims handling, investment of and interest payments on escrow balances
and escrow payment features, and mandate certain disclosures and notices to borrowers.
Employees
At December 31, 2019, Tiptree Capital’s combined operations had 583 employees of which 557 were on a full time basis.
AVAILABLE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are also available free of charge on our
Internet site at www.tiptreeinc.com as soon as reasonably practicable after such reports are electronically filed with or furnished to
the SEC. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our
other filings with the SEC.
Our Investor Relations Department can be contacted at Tiptree Inc., 299 Park Avenue, 13th Floor, New York, NY, 10171, Attn: Investor
Relations, telephone: (212) 446-1400, email: IR@tiptreeinc.com.
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Item 1A. Risk Factors
We are subject to certain risks and uncertainties in our business operations which are described below. The risks and
uncertainties described below are not the only risks we face. Additional risks and uncertainties that are not presently known or are
currently deemed immaterial may also impair our business, results of operations and financial condition.
Risks Related to our Businesses
A portion of our assets are illiquid or have limited liquidity, which may limit our ability to sell those assets at favorable
prices or at all and creates uncertainty in connection with valuing such assets.
Our assets include equity securities, real estate, dry-bulk vessels and product tankers, non-controlling interests in credit assets
and related equity interests which may be illiquid or have limited liquidity. It may be difficult for us to dispose of assets with limited
liquidity rapidly, or at favorable prices, if at all. In addition, assets with limited liquidity may be more difficult to value and may be
sold at a substantial discount or experience more volatility than more liquid assets. We may not be able to dispose of assets at the
carrying value reflected in our financial statements. Our results of operations and cash flows may be materially and adversely affected
if our determinations regarding the fair value of our illiquid assets are materially higher than the values ultimately realized upon their
disposal.
Our investment in Invesque shares is subject to market volatility and the risk that Invesque changes its dividend policy.
As of December 31, 2019, we owned 16.6 million shares, or approximately 31%, of Invesque, a real estate investment
company that specializes in health care real estate and senior living property investment throughout North America. The value of our
Invesque shares is reported at fair market value on a quarterly basis and fluctuates. Invesque has historically paid monthly dividends
but there can be no assurance that Invesque will continue to pay dividends in the same frequency or amount. A loss in the fair market
value of our Invesque shares or a reduction or discontinuation in the dividends paid on our Invesque shares could have a material
adverse effect on our financial condition and results of operations. To the extent we determine to sell all or a portion of our Invesque
shares, there can be no assurance that we will be able to do so on a timely basis or at acceptable prices.
We operate in highly competitive markets for business opportunities and personnel, which could impede our growth and
negatively impact our results of operations.
We operate in highly competitive markets for business opportunities in each of our areas of focus. Many of our competitors
have financial, personnel and other resource advantages relative to us and may be better able to react to market conditions. These
factors may place us at a competitive disadvantage in successfully competing for future business opportunities and personnel, which
could impede our growth and negatively impact our business, financial condition and results of operations.
We are exposed to risks associated with acquiring or divesting businesses or business operations.
We regularly evaluate strategic acquisition opportunities for growth. Acquired companies and operations may have unforeseen
operating difficulties and may require greater than expected financial and other resources. In addition, potential issues associated with
acquisitions, including Smart AutoCare, could among other things, include:
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our ability to realize the full extent of the benefits, synergies or cost savings that we expect to realize as a result of
the completion of an acquisition within the anticipated time frame, or at all;
receipt of necessary consents, clearances and approvals in connection with the acquisition;
diversion of management’s attention from other strategies and objectives;
motivating, recruiting and retaining executives and key employees; and
conforming and integrating financial reporting, standards, controls, procedures and policies, business cultures and
compensation structures.
If an acquisition is not successfully completed or integrated into our existing operations, our business, results of operations
and financial condition could be materially adversely effected.
We have also divested, and may in the future divest, businesses or business operations. Any divestitures may involve a number
of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash
flow, and the disruption of the affected business or business operations. Failure to timely complete or to consummate a divestiture
may negatively affect the valuation of the affected business or business operations or result in restructuring charges.
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The amount of statutory capital and reserve requirements applicable to our insurance subsidiaries can increase due to
factors outside of our control.
Our insurance subsidiaries are subject to statutory capital and reserve requirements established by applicable insurance
regulators based on RBC formulas. In any particular year, these requirements may increase or decrease depending on a variety of
factors, most of which are outside our control, such as the amount of statutory income or losses generated, changes in equity market
levels, the value of fixed-income and equity securities in the subsidiary’s investment portfolio, changes in interest rates and foreign
currency exchange rates, as well as changes to the RBC formulas used by insurance regulators. Increases in the amount of additional
statutory reserves that our insurance subsidiaries are required to hold may adversely affect our financial condition and results of
operations.
Our insurance subsidiaries’ actual claims losses may exceed their reserves for claims, which may require them to establish
additional reserves that may materially and adversely affect their business, results of operations and financial condition.
Our insurance subsidiaries maintain reserves to cover their estimated ultimate exposure for claims with respect to reported
claims, and incurred, but not reported, claims as of the end of each accounting period. Reserves, whether calculated under GAAP or
statutory accounting principles, do not represent an exact calculation of exposure. Instead, they represent our insurance subsidiaries’
best estimates, generally involving actuarial projections, of the ultimate settlement and administration costs for a claim or group of
claims, based on our assessment of facts and circumstances known at the time of calculation. The adequacy of reserves will be impacted
by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by external
factors such as changes in the economic cycle, unemployment, inflation, judicial trends, legislative changes, as well as changes in
claims handling procedures. Many of these items are not directly quantifiable, particularly on a prospective basis. Reserve estimates
are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement of operations
of the period in which such estimates are updated. Because the establishment of reserves is an inherently uncertain process involving
estimates of future losses, we can give no assurances that ultimate losses will not exceed existing claims reserves. In general, future
loss development could require reserves to be increased, which could have a material adverse effect on our insurance subsidiaries’
business, results of operations and financial condition.
We may need to raise additional capital in the future or may need to refinance existing indebtedness, but there is no
assurance that such capital will be available on a timely basis, on acceptable terms or at all.
We may need to raise additional funds or refinance our indebtedness in order to grow our business or fund our strategy or
acquisitions. Additional financing may not be available in sufficient amounts, if at all, or on terms acceptable to us and may be dilutive
to existing stockholders. Additionally, any securities issued to raise such funds may have rights, preferences and privileges senior to
those of our existing stockholders. If adequate funds are not available on a timely basis, if at all, or on acceptable terms, our ability
to expand, develop or enhance our subsidiaries’ services and products, enter new markets, consummate acquisitions or respond to
competitive pressures could be materially limited.
Our information systems may fail or their security may be compromised, which could damage our specialty insurance
business and materially and adversely affect our results of operations and financial condition.
Our specialty insurance business is highly dependent upon the effective operation of our information systems and our ability
to store, retrieve, process and manage significant databases and expand and upgrade our information systems. Our specialty insurance
business relies on these systems for a variety of functions, including marketing and selling our products and services, performing our
services, managing our operations, processing claims and applications, providing information to clients, performing actuarial analyses
and maintaining financial records. The interruption or loss of our information processing capabilities through the loss of stored data,
programming errors, the breakdown or malfunctioning of computer equipment or software systems, telecommunications failure or
damage caused by weather or natural disasters or any other significant disruptions could harm our specialty insurance business by
hampering its ability to generate revenues and could negatively affect client relationships, competitive position and reputation. In
addition, our information systems may be vulnerable to physical or electronic intrusions, computer viruses or other attacks which
could disable our information systems and our security measures may not prevent such attacks. The failure of our systems as a result
of any security breaches, intrusions or attacks could cause significant interruptions to our operations, which could result in a material
adverse effect on our business, results of operations and financial condition.
Our insurance business is dependent on independent financial institutions, lenders and retailers for distribution of its
products and services, and the loss of these distribution sources, or their failure to sell our insurance business’s products and
services could materially and adversely affect its business, results of operations and financial condition.
Our insurance business is dependent on financial institutions, lenders and retailers to distribute its products and services and
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its revenue is dependent on the level of business conducted by such distributors as well as the effectiveness of their sales efforts, each
of which is beyond our insurance business’s control because such distributors typically do not have any minimum performance or
sales requirements. Further, although its contracts with these distributors are typically exclusive, they can be canceled on relatively
short notice. Therefore, our insurance business’s growth is dependent, in part, on its ability to identify and attract new distribution
relationships and successfully implement its information systems with those of its new distributors. The impairment of our insurance
business’s distribution relationships, the loss of a significant number of its distribution relationships, the failure to establish new
distribution relationships, the failure to offer increasingly competitive products, the increase in sales of competitors’ services and
products by these distributors or the decline in their overall business activity or the effectiveness of their sales of our insurance
business’s products could materially reduce our insurance business’s sales and revenues and have a material adverse effect on its
business, results of operations and financial condition.
Our insurance business may lose clients or business as a result of consolidation within the financial services industry.
There has been considerable consolidation in the financial services industry, driven primarily by the acquisition of small and
mid-size organizations by larger entities. We expect this trend to continue. Our insurance business may lose business or suffer decreased
revenues if one or more of its significant clients or distributors consolidate or align themselves with other companies. While our
insurance business has not been materially affected by consolidation to date, it may be affected by industry consolidation that occurs
in the future, particularly if any of its significant clients are acquired by organizations that already possess the operations, services
and products that it provides.
A downgrade in our insurance subsidiaries’ claims paying ability or financial strength ratings could increase policy
surrenders and withdrawals, adversely affecting relationships with distributors and reducing new policy sales.
Claims paying ability ratings, sometimes referred to as financial strength ratings, indicate a rating agency’s view of an
insurance company’s ability to meet its obligations to its policy holders. These ratings are therefore key factors underlying the
competitive position of insurers. Some distributors of insurance products may choose not to do business with insurance companies
that are rated below certain financial strength ratings. Our insurance subsidiaries currently have a rating of “A-” from A.M. Best.
Rating agencies can be expected to continue to monitor our insurance subsidiaries’ financial strength and claims paying ability, and
no assurances can be given that future ratings downgrades will not occur, whether due to changes in their performance, changes in
rating agencies’ industry views or ratings methodologies, or a combination of such factors. A ratings downgrade or the potential for
such a downgrade in a rating could, to the extent applicable to a particular type of policy, adversely affect relationships with distributors
of insurance products, reduce new policy sales and adversely affect our ability to compete in the insurance industry.
Our insurance subsidiaries may incur losses if reinsurers are unwilling or unable to meet their obligations under
reinsurance contracts.
Our insurance subsidiaries use reinsurance to reduce the severity and incidence of claims costs, and to provide relief with
regard to certain reserves. Under these reinsurance arrangements, other insurers assume a portion of our losses and related expenses;
however, we remain liable as the direct insurer on all risks reinsured. Consequently, reinsurance arrangements do not eliminate our
obligation to pay claims and we assume credit risk with respect to our ability to recover amounts due from reinsurers. The inability
or unwillingness of any reinsurer to meet its financial obligations could negatively affect our financial condition and results of
operations.
Our insurance business’s reinsurance facilities are generally subject to annual renewal. Our insurance business may not be
able to maintain its current reinsurance facilities and its clients may not be able to continue to operate their captive reinsurance
companies. As a result, even where highly desirable or necessary, our insurance business may not be able to obtain other reinsurance
facilities in adequate amounts and at favorable rates. If our insurance business is unable to renew its expiring facilities or to obtain or
structure new reinsurance facilities, either its net exposures would increase or, if it is unwilling to bear an increase in net exposures,
it may have to reduce the level of its underwriting commitments. Either of these potential developments could have a material adverse
effect on our results of operations and financial condition.
Due to the structure of some of our insurance business’s commissions, it is exposed to risks related to the creditworthiness
of some of its agents.
Our insurance business is subject to the credit risk of some of the agents with which it contracts to sell its products and
services. Our insurance business typically advances agents’ commissions as part of its product offerings. These advances are a
percentage of the premiums charged. If our insurance business over-advances such commissions to agents, the agents may not be able
to fulfill their payback obligations, which could have a material adverse effect on our insurance business’s results of operations and
financial condition.
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A significant decrease of the market values of our vessels could cause us to incur an impairment loss.
We review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the
vessels may not be recoverable. Such indicators include declines in the fair market value of vessels, decreases in market charter rates,
vessel sale and purchase considerations, fleet utilization, vessels’ useful lives, scrap values, regulatory changes in the dry bulk and
product tanker shipping industry or changes in business plans or overall market conditions that may adversely affect cash flows. We
may be required to record an impairment charge with respect to our vessels and any such impairment charge may have a material
adverse effect on our business, financial condition and results of operations.
Charter hire rates for dry bulk vessels and product tankers are volatile.
The dry bulk and product tanker shipping industry is cyclical with high volatility in charter hire rates and profitability. The
degree of charter hire rate volatility among different types of dry bulk vessels and product tankers has varied widely. Fluctuations in
charter rates result from changes in the supply of and demand for vessel capacity and changes in the supply of and demand for the
major commodities carried by dry bulk vessels internationally and for oil, oil products and chemicals carried by product tankers.
Demand is a function of world economic conditions and the consequent requirement for commodities, oil and oil products, production
and consumption patterns, as well as events, which interrupt production, trade routes, and consumption. The factors affecting the
supply of and demand for vessels are outside of our control and are unpredictable. We may not be able to employ our vessels at charter
rates as favorable to us as historical rates or operate our vessels profitably. Significant declines in dry bulk or product tanker charter
rates could adversely affect our revenues and profitability.
Our vessels may suffer damage and we may face unexpected drydocking costs.
If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are
unpredictable and can be substantial. The loss of earnings while a vessel is being repaired and repositioned, as well as the actual cost
of these repairs not covered by our insurance, would decrease our earnings and available cash. While we carry insurance on our vessels,
that insurance may not be sufficient to cover all or any of the costs or losses for damages to our vessels and we may have to pay
drydocking costs not covered by our insurance.
The operation of dry bulk vessels and product tankers has certain unique operational risks.
With a dry bulk vessel, the cargo itself and its interaction with the vessel may create operational risks. By their nature, dry
bulk cargoes are often heavy, dense and easily shifted, and they may react badly to water exposure. In addition, dry bulk vessels are
often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold)
and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures
may be more susceptible to breach while at sea. Breaches of a dry bulk vessel’s hull may lead to the flooding of the vessel’s holds. If
a dry bulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may
buckle the vessel’s bulkheads, leading to the loss of a vessel. If we do not adequately maintain our vessels, we may be unable to
prevent these events.
In addition, the operation of product tankers has unique operational risks associated with the transportation of oil and chemical
products. An oil or chemical spill may cause significant environmental damage, and the associated costs could exceed the insurance
coverage available to us. Compared to other types of vessels, tankers are exposed to a higher risk of damage and loss by fire, whether
ignited by a terrorist attack, collision, or other cause, due to the high flammability and high volume of the oil or chemicals transported
in tankers. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results
of operations.
Acts of piracy on ocean-going vessels occur and may increase in frequency.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea,
the Indian Ocean and in the Gulf of Aden off the coast of Somalia. Although the frequency of sea piracy worldwide has generally
decreased since 2013, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly
in the Sulu Sea and the Gulf of Guinea, with dry bulk vessels and tankers particularly vulnerable to such attacks. Acts of piracy could
result in harm or danger to the crews that man our vessels.
If these piracy attacks occur in regions in which our vessels are deployed that insurers characterized as “war risk” zones or
Joint War Committee “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance
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coverage may be more difficult to obtain. In addition, crew costs, including the employment of onboard security guards, could increase
in such circumstances. Furthermore, while we believe the charterer remains liable for charter payments when a vessel is seized by
pirates, the charterer may dispute this and withhold payment until the vessel is released. A charterer may also claim that a vessel seized
by pirates was not “on-hire” for a certain number of days and is therefore entitled to cancel the charter. We may not be adequately
insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, any detention hijacking
as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels, could have a
material adverse impact on our business, financial condition and earnings.
Some of our investments are made jointly with other persons or entities, which may limit our flexibility with respect to
such jointly owned investments and could, thereby, have a material adverse effect on our business, results of operations and
financial condition and our ability to sell these investments.
Some of our current investments are, and future investments may be, made jointly with other persons or entities when
circumstances warrant the use of such structures and we may continue to do so in the future. Our participation in such joint investments
is subject to the risks that:
• we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could
•
•
•
•
•
•
require us to expend additional resources on resolving such impasses or potential disputes;
our partners could have investment goals that are not consistent with our investment objectives, including the timing, terms
and strategies for any investments;
our partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations
as partners, which may require us to infuse our own capital into such venture(s) on behalf of the partner(s) despite other
competing uses for such capital;
our partners may have competing interests in our markets that could create conflict of interest issues;
any sale or other disposition of our interest in such a venture may require consents which we may not be able to obtain;
such transactions may also trigger other contractual rights held by a partner, lender or other third party depending on how
the transaction is structured; and
there may be disagreements as to whether consents and/or approvals are required in connection with the consummation of
a particular transaction with a partner, lender and/or other third party, or whether such transaction triggers other contractual
rights held by a partner, lender and/or other third party, and in either case, those disagreements may result in litigation.
The volume of our mortgage loan originations is subject to a variety of factors, which include the level of interest rates,
overall conditions in the housing market and general economic trends.
Changes in interest rates and the level of interest rates are key drivers that impact the volatility of our mortgage loan
originations. The historically low interest rate environment over the last several years has created strong demand for mortgages.
Increases in interest rates could result in us having lower revenue or profitability. The overwhelming majority of our mortgage loan
originations have historically been refinancing existing homeowner’s mortgage loans. With rates at or near historically low levels,
we have been able to continue to grow our mortgage loan originations by focusing on refinances. With rising interest rates, we may
not be able to continue to do so in the future.
Our mortgage business is highly dependent upon programs administered by GSEs, such as Fannie Mae and Freddie
Mac, as well as Ginnie Mae, to generate revenues through mortgage loan sales to institutional investors. Any changes in existing
U.S. government-sponsored mortgage programs could materially and adversely affect our mortgage business, financial condition
and results of operations.
There is uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will
continue to be in existence, the extent of their roles in the market and what forms they will have. The future roles of Fannie Mae and
Freddie Mac could be reduced or eliminated and the nature of their guarantees could be limited or eliminated relative to historical
measurements. The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could adversely affect our
mortgage business, financial condition and results of operations. Furthermore, any discontinuation of, or significant reduction in, the
operation of these GSEs and Ginnie Mae, or any significant adverse change in the level of activity of these agencies in the primary
or secondary mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect our business,
financial condition and results of operations.
We may be unable to obtain sufficient capital to meet the financing requirements of our mortgage business.
We fund substantially all of the loans which we originate through borrowings under warehouse financing and repurchase
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facilities. Our borrowings are in turn repaid with the proceeds we receive from selling such loans through whole loan sales. As we
expand our operations, we will require increased financing.
There can be no assurance that such financing will be available on terms reasonably satisfactory to us or at all. An event of
default, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit-
similar to the market conditions experienced in recent years-may increase our cost of funds and make it difficult for us to obtain new,
or retain existing, warehouse financing facilities. If we fail to maintain, renew or obtain adequate funding under these warehouse
financing facilities or other financing arrangements, or there is a substantial reduction in the size of or increase in the cost of such
facilities, we would have to curtail our mortgage loan production activities, which could have a material adverse effect on our business,
financial condition and operating results in our mortgage business.
In our mortgage business, we may sustain losses and/or be required to indemnify or repurchase loans we originated, or
will originate, if, among other things, our loans fail to meet certain criteria or characteristics.
The contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related
loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
•
our representations and warranties concerning loan quality and loan circumstances are inaccurate, including
representations concerning the licensing of a mortgage broker;
• we fail to secure adequate mortgage insurance within a certain period after closing;
•
• we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory
a mortgage insurance provider denies coverage; or
environment.
We maintain reserves that we believe are appropriate to cover potential loan repurchase or indemnification losses, but there
can be no assurance that such reserves will, in fact, be sufficient to cover future repurchase and indemnification claims. If we are
required to indemnify or repurchase loans that we originate and sell that result in losses that exceed our reserve, this could adversely
affect our business, financial condition and results of operations.
Furthermore, in the ordinary course of our mortgage business, we are subject to claims made against us by borrowers and
private investors arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and agents (including our appraisers),
incomplete documentation and our failure to comply with various laws and regulations applicable to our business.
In addition, should the mortgage loans we originate sustain higher levels of delinquencies and/or defaults, we may lose the
ability to originate and/or sell FHA loans, or to do so profitably and investors to whom we currently sell our mortgage loans may
refuse to continue to do business with us, or may reduce the prices they are willing to purchase our mortgage loans and it may be
difficult or impossible to sell any of our mortgage loans in the future. Any of the foregoing risks could adversely affect our business,
financial condition and results of operations in our mortgage business.
We may be limited in the future in utilizing net operating losses incurred during prior periods to offset taxable income.
We previously incurred net operating losses. In the event that we experience an “ownership change” within the meaning of
Section 382 of the Code, our ability to use those net operating losses to offset taxable income could be subject to an annual limitation.
The annual limitation would be equal to a percentage of our equity value at the time the ownership change occurred. In general, such
an “ownership change” would occur if the percentage of our stock owned by one or more 5% stockholders (including certain groups
or persons acting in concert) were to increase by 50 percentage points during any three-year period. All stockholders that own less
than 5% of our stock are treated as a single 5% stockholder. In addition, the Treasury Regulations under Section 382 of the Code
contain additional rules the effect of which is to make it more likely that an ownership change could be deemed to occur. Accordingly,
our ability to use prior net operating losses to offset future taxable income would be subject to a limitation if we experience an
ownership change.
We may leverage certain of our assets and a decline in the fair value of such assets may adversely affect our financial
condition and results of operations.
We leverage certain of our assets, including through borrowings, generally through warehouse credit facilities, secured loans,
securitizations and other borrowings. A rapid decline in the fair value of our leveraged assets may adversely affect us. Lenders may
require us to post additional collateral to support the borrowing. If we cannot post the additional collateral, we may have to rapidly
liquidate assets, which we may be unable to do on favorable terms or at all. Even after liquidating assets, we may still be unable to
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post the required collateral, further harming our liquidity and subjecting us to liability to lenders for the declines in the fair values of
the collateral. A reduction in credit availability may adversely affect our business, financial condition and results of operations.
Certain of our and our subsidiaries’ assets are subject to credit risk, market risk, interest rate risk, credit spread risk, call
and redemption risk and refinancing risk, and any one of these risks may materially and adversely affect the value of our assets,
our results of operations and our financial condition.
Some of our assets, including our direct investments, are subject to credit risk, market risk, interest rate risk, credit spread
risk, call and redemption risk and refinancing risk.
Credit risk is the risk that the obligor will be unable to pay scheduled principal and/or interest payments. Defaults by third
parties in the payment or performance of their obligations could reduce our income and realized gains or result in the recognition of
losses. The fair value of our assets may be materially and adversely affected by increases in interest rates, downgrades in our direct
investments and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may
cause us to reduce the fair value of our assets.
Interest rate risk is the risk that general interest rates will rise or that the risk spread used in our financings will increase.
Although interest rates have been at historically low levels for the last several years, a period of sharply rising interest rates could
have an adverse impact on our business by negatively impacting demand for mortgages and increasing our cost of borrowing to finance
operations.
In addition, in July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR,
announced its intent to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of
LIBOR after 2021. Due to the uncertainty surrounding the future of LIBOR, it is expected that a transition away from the use of
LIBOR to alternative benchmark rates will occur by the end of 2021. We have exposure to LIBOR–based contracts within certain of
our finance receivables and loans primarily related to commercial automotive loans, corporate finance loans, and mortgage loans, as
well as certain investment securities, derivative contracts, and trust preferred securities, among other arrangements. The discontinuation
of LIBOR or LIBOR–based rates will present risks to our business.
Market risk is the risk that one or more markets to which the assets relate will decline in value, including the possibility that
such markets will deteriorate sharply and unpredictably, which will likely impair the market value of the related instruments.
Credit spread risk is the risk that the market value of fixed income investments will change in response to changes in perceived
or actual credit risk beyond changes that would be attributable to changes, if any, in interest rates.
Call and redemption risk is the risk that fixed income investments will be called or redeemed prior to maturity at a time when
yields on other debt instruments in which the call or redemption proceeds could be invested are lower than the yield on the called or
redeemed investments.
Refinancing risk is the risk that we will be unable to refinance some or all of our indebtedness or that any refinancing will
not be on terms as favorable as those of our existing indebtedness, which could increase our funding costs, limit our ability to borrow,
or result in a sale of the leveraged asset on disadvantageous terms.
Any one of the risks described above may materially and adversely affect the value of our assets, our results of operations
and our financial condition.
Our risk mitigation or hedging strategies could result in our experiencing significant losses that may materially adversely
affect us.
We may pursue risk mitigation and hedging strategies to seek to reduce our exposure to losses from adverse credit events,
interest rate changes, market risk and other risks. These strategies may include short Treasury positions, interest rate swaps, foreign
exchange derivatives, credit derivatives, freight forward agreements, fuel oil swaps and other derivative hedging instruments. Since
we account for derivatives at fair market value, changes in fair market value are reflected in net income other than derivative hedging
instruments which are reflected in accumulated other comprehensive income in stockholders’ equity. Some of these strategies could
result in our experiencing significant losses that may materially adversely affect our business, financial condition and results of
operations.
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The values we record for certain investments and liabilities are based on estimates of fair value made by our management,
which may cause our operating results to fluctuate and may not be indicative of the value we can realize on a sale.
Some of our investments and liabilities are not actively traded and the fair value of such investments and liabilities are not
readily determinable. Each of these carrying values is based on an estimate of fair value by our management. Management reports
the estimated fair value of these investments and liabilities quarterly, which may cause our quarterly operating results to fluctuate.
Therefore, our past quarterly results may not be indicative of our performance in future quarters. In addition, because such valuations
are inherently uncertain, in some cases based on internal models and unobservable inputs, may fluctuate over short periods of time
and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if
a ready market for these investments and liabilities existed. As such, we may be unable to realize the carrying value upon a sale of
these investments or liabilities.
The accounting rules applicable to certain of our transactions are highly complex and require the application of significant
judgment and assumptions by our management. In addition, changes in accounting interpretations or assumptions could impact
our financial statements.
Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets and other aspects of
our operations are highly complex and require the application of judgment and assumptions by our management. In addition, changes
in accounting rules, interpretations or assumptions could materially impact the presentation, disclosure and usability of our financial
statements. For more information see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Critical Accounting Policies and Estimates”.
Catastrophic events could significantly impact the Company's business.
Unforeseen or catastrophic events, such as severe weather, natural disasters, pandemic, cyberattacks, acts of war or terrorism
and other adverse external events could have a significant impact on the Company's ability to conduct business. Although the Company
and its subsidiaries have established disaster recovery plans, there is no guarantee that such plans will allow the Company and its
subsidiaries to operate without disruption if such an event was to occur and the occurrence of any such event could have a material
adverse effect on the Company's business, which, in turn, could have a material adverse effect on the Company's financial condition
and results of operations.
Risks Related to our Structure
Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders will depend on
distributions from our subsidiaries that may be subject to restrictions and income from assets.
We are a holding company and do not have any significant operations of our own, other than our principal investments. Our
ability to meet our obligations will depend on distributions from our subsidiaries and income from assets. The amount of dividends
and other distributions that our subsidiaries may distribute to us may be subject to restrictions imposed by state law, restrictions that
may be imposed by state regulators and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries
may incur. Such restrictions would also affect our ability to pay dividends to stockholders, if and when we choose to do so.
Our insurance business’s Junior Subordinated Notes due 2057 restrict dividends to us based on the leverage ratio of our
insurance business and its subsidiaries. Our regulated insurance company subsidiaries are required to satisfy minimum capital and
surplus requirements according to the laws and regulations of the states in which they operate, which regulate the amount of dividends
and distributions we receive from them. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require
insurance regulatory approval. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts
determined by a formula, which varies by state. Some states have an additional stipulation that dividends may only be paid out of
earned surplus. States also regulate transactions between our insurance company subsidiaries and us or our other subsidiaries, such
as those relating to shared services, and in some instances, require prior approval of such transactions within the holding company
structure. If insurance regulators determine that payment of an ordinary dividend or any other payments by our insurance company
subsidiaries to us or our other subsidiaries (such as payments for employee or other services) would be adverse to policyholders or
creditors, the regulators may block or otherwise restrict such payments that would otherwise be permitted without prior approval. In
addition, there could be future regulatory actions restricting the ability of our insurance company subsidiaries to pay dividends or
share services.
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Some provisions of our charter may delay, deter or prevent takeovers and business combinations that stockholders consider
in their best interests.
Our charter restricts any person that owns 9.8% or more of our capital stock, other than stockholders approved by applicable
state insurance regulators, from voting in excess of 9.8% of our voting securities. This provision is intended to satisfy the requirements
of applicable state regulators in connection with insurance laws and regulations that prohibit any person from acquiring control of a
regulated insurance company without the prior approval of the insurance regulators. In addition, our charter provides for the
classification of our board of directors into three classes, one of which is to be elected each year. Our charter also generally only
permits stockholders to act without a meeting by unanimous consent. These provisions may delay, deter or prevent takeovers and
business combinations that stockholders consider in their best interests.
Maryland takeover statutes may prevent a change of our control, which could depress our stock price.
Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting
rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter under the Maryland Control
Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the
acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting
power: one-tenth or more but less than one-third; one-third or more but less than a majority; or a majority or more of all voting power.
A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate
of an interested stockholder are prohibited for five years after the most recent date on which such stockholder became an interested
stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute,
an asset transfer or issuance or reclassification of equity securities.
Our bylaws contain a provision exempting from the control share statute any and all acquisitions by any person of our shares
of stock. Our board of directors has also adopted a resolution which provides that any business combination between us and any other
person is exempted from the provisions of the business combination statute, provided that the business combination is first approved
by the board of directors. However, our board of directors may amend or eliminate this provision in our bylaws regarding the control
share statute or amend or repeal this resolution regarding the business combination statute. If our board takes such action in the future,
the control share and business combination statutes may prevent or discourage others from trying to acquire control of us and increase
the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our Common Stock
or otherwise be in the best interest of our stockholders.
Our holding company structure with multiple lines of business, may adversely impact the market price of our Common
Stock and our ability to raise equity and debt capital.
Tiptree holds and manages multiple lines of business. Analysts, investors and lenders may have difficulty analyzing and
valuing a company with multiple lines of business, which could adversely impact the market price of our Common Stock and our
ability to raise equity and debt capital at a holding company level. Moreover, our management is required to make decisions regarding
the allocation of capital among the different lines of business, and such decisions could materially and adversely affect our business
or one or more of our lines of business.
Risks Related to Regulatory and Legal Matters
Maintenance of our 1940 Act exemption imposes limits on our operations.
We conduct our operations so that we are not required to register as an investment company under the 1940 Act. Therefore,
we must limit the types and nature of businesses in which we engage and assets that we acquire. We monitor our compliance with the
1940 Act on an ongoing basis and may be compelled to take or refrain from taking actions, to acquire additional income or loss
generating assets or to forgo opportunities that might otherwise be beneficial or advisable, including, but not limited to selling assets
that are considered to be investment securities or forgoing the sale of assets that are not investment securities, in order to ensure that
we (or a subsidiary) may continue to rely on the applicable exceptions or exemptions. These limitations on our freedom of action
could have a material adverse effect on our financial condition and results of operations.
If we fail to maintain an exemption, exception or other exclusion from registration as an investment company, we could,
among other things, be required to substantially change the manner in which we conduct our operations either to avoid being required
to register as an investment company or to register as an investment company. If we were required to register as an investment company
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under the 1940 Act, we would become subject to substantial regulation with respect to, among other things, our capital structure
(including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act),
portfolio composition, including restrictions with respect to diversification and industry concentration, and our financial condition
and results of operations may be adversely affected. If we did not register despite being required to do so, criminal and civil actions
could be brought against us, our contracts would be unenforceable unless a court were to require enforcement, and a court could
appoint a receiver to take control of us and liquidate our business.
A change in law, regulation or regulatory enforcement applicable to insurance products could adversely affect our financial
condition and results of operations.
A change in state or U.S. federal tax laws could materially affect our insurance businesses. Currently, our insurance business
does not collect sales or other related taxes on its services. Whether sales of our insurance business’s services are subject to state sales
and use taxes is uncertain, due in part to the nature of its services and the relationships through which its services are offered, as well
as changing state laws and interpretations of those laws. One or more states may seek to impose sales or use tax or other tax collection
obligations on our insurance business, whether based on sales by our insurance business or its resellers or clients, including for past
sales. A successful assertion that our insurance business should be collecting sales or other related taxes on its services could result
in substantial tax liabilities for past sales, discourage customers from purchasing its services, discourage clients from offering or
billing for its services, or otherwise cause material harm to its business, financial condition and results of operations.
With regard to our insurance business’s payment protection products, there are federal and state laws and regulations that
govern the disclosures related to lenders’ sales of those products. Our insurance business’s ability to offer and administer these products
on behalf of financial institutions is dependent upon their continued ability to sell such products. To the extent that federal or state
laws or regulations change to restrict or prohibit the sale of these products, our insurance business’s revenues would be adversely
affected. For example, the CFPB’s enforcement actions have resulted in large refunds and civil penalties against financial institutions
in connection with their marketing of payment protection and other products. Due to such regulatory actions, some lenders may reduce
their sales and marketing of payment protection and other ancillary products, which may adversely affect our insurance business’s
revenues. The full impact of the CFPB’s oversight is unpredictable and continues to evolve. With respect to the property and casualty
insurance policies our insurance business underwrites, federal legislative proposals regarding national catastrophe insurance, if adopted,
could reduce the business need for some of the related products that our insurance business provides.
Compliance with existing and new regulations affecting our business in regulated industries may increase costs and limit
our ability to pursue business opportunities.
We are subject to extensive laws and regulations administered and enforced by a number of different federal and state
governmental authorities in the industries in which we operate. Regulation of such industries may increase. In the past several years,
there has been significant legislation affecting financial services, insurance and health care, including the Dodd-Frank Act and the
Patient Protection and Affordable Care Act. In addition, we are subject to regulations governing the protection of personal confidential
information and data security including the Gramm-Leach-Bliley Act, EU General Data Protection Regulation, New York Department
Financial Services Cybersecurity Regulation and California Consumer Privacy Act. Accordingly, we cannot predict the impact that
any new laws and regulations will have on us. The costs to comply with these laws and regulations may be substantial and could have
a significant negative impact on us and limit our ability to pursue business opportunities. We can give no assurances that with changes
to laws and regulations, our businesses can continue to be conducted in each jurisdiction in the manner as we have in the past.
Our insurance subsidiaries are subject to regulation by state and, in some cases, foreign insurance authorities with respect
to statutory capital, reserve and other requirements. The laws of the various states in which our insurance businesses operate establish
insurance departments and other regulatory agencies with broad powers to preclude or temporarily suspend our insurance subsidiaries
from carrying on some or all of their activities or otherwise fine or penalize them in any jurisdiction in which they operate. Such
regulation or compliance could reduce our insurance businesses’ profitability or limit their growth by increasing the costs of compliance,
limiting or restricting the products or services they sell, or the methods by which they sell their services and products, or subjecting
their business to the possibility of regulatory actions or proceedings.
While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulatory actions taken by the
CFPB may affect the sales practices related to these products and thereby potentially affect our insurance business or the clients that
it serves. In 2017, the CFPB issued rules under its unfair, deceptive and abusive acts and practices rulemaking authority relating to
consumer installment loans, among other things. Such CFPB rules regarding consumer installment loans could adversely impact our
insurance business’s volume of insurance products and services and cost structure. Due to such regulatory actions, some lenders may
reduce their sales and marketing of payment protection and other ancillary products, which may adversely affect our insurance
business’s revenues.
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Due to the highly regulated nature of the residential mortgage industry, our mortgage subsidiaries are required to comply
with a wide array of federal, state and local laws and regulations that regulate licensing, allowable fees and loan terms, permissible
servicing and debt collection practices, limitations on forced-placed insurance, special consumer protections in connection with default
and foreclosure, and protection of confidential, nonpublic consumer information. These laws and regulations are constantly changing
and the volume of new or modified laws and regulations has increased in recent years as states and local cities and counties continue
to enact laws that either restrict or impose additional obligations in connection with certain loan origination, acquisition and servicing
activities in those cities and counties. These laws and regulations are complex and vary greatly among different states and localities,
and in some cases, these laws are in conflict with each other or with U.S. federal law. A failure by us or our servicers to comply with
applicable laws or regulations could subject our mortgage business and/or our mortgage servicers to lawsuits or governmental actions,
which could result in the loss or suspension of our licenses in the applicable jurisdictions where such violations occur and/or monetary
fines or changes in our mortgage operations. If we were to determine to change servicers, there is no assurance that we could find
servicers that satisfy our requirements or with whom we could enter into agreements on satisfactory terms. Any of these outcomes
could materially and adversely affect our mortgage business.
Our dry bulk shipping and product tanker business and the operation of our vessels are regulated under international
conventions, classification societies, national, state and local laws and regulations in force in the jurisdictions in which our vessels
operate, as well as in the country or countries of their registration, that mandate safety and environmental protection policies.
Government regulation of vessels, particularly environmental regulations, have become more stringent and may require us to incur
significant capital expenditures on our vessels.
For example, various jurisdictions have regulated management of ballast waters to prevent the introduction of non-indigenous
species that are considered invasive which requires us to make changes to the ballast water management plans we currently have in
place and to install new equipment on board our vessels. Various jurisdictions have also regulated or are considering the further
regulation of greenhouse gases from vessels and emissions of sulfur and nitrogen oxides, which may increase the cost of new vessels
and require retrofitting equipment on existing vessels. Specifically, the International Maritime Organization (“IMO”) set January 1,
2020 as the implementation date for vessels to comply with its low-sulfur fuel oil requirement, which lowers sulfur emission levels
from 3.5% to 0.5% (the “IMO 2020 Regulations”). Vessel owners and operators may comply with this regulation by (i) using 0.5%
sulfur fuels, which will be available to an as-yet unknown extent around the world by 2020 and likely at a higher cost than 3.5% sulfur
fuel; (ii) installing exhaust gas cleaning systems (or “scrubbers”); or (iii) retrofitting vessels to be powered by liquefied natural gas
rather than fuel oil.
These requirements can also affect the resale prices or useful lives of our vessels or require reductions in cargo capacity, ship
modifications or operational changes or restrictions. Failure to comply with these requirements could lead to decreased availability
of, or more costly insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or
ports, or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could
incur material liabilities, including cleanup obligations and claims for natural resource, personal injury and property damages in the
event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations.
Violations of, or liabilities under, environmental regulations can result in substantial penalties, fines and other sanctions, including,
in certain instances, seizure or detention of our vessels. In addition, we are subject to the risk that we, our affiliated entities, or our or
their respective officers, directors, shore employees, crew on board and agents may take actions determined to be in violation of such
environmental regulations and laws and our environmental policies. Any such actual or alleged environmental laws regulations and
policies violation, under negligence, willful misconduct or fault, could result in substantial fines, civil and/or criminal penalties or
curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition.
In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating
and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
Events of this nature could have a material adverse effect on our business, financial condition and results of operations.
Our businesses are subject to risks related to litigation and regulatory actions.
Over the last several years, businesses in many areas of the financial services industry have been subject to increasing amounts
of regulatory scrutiny. In addition, there has been an increase in litigation involving firms in the financial services industry and public
companies generally, some of which have involved new types of legal claims, particularly in the insurance industry. We may be
materially and adversely affected by judgments, settlements, fines, penalties, unanticipated costs or other effects of legal and
administrative proceedings now pending or that may be instituted in the future, including from investigations by regulatory bodies or
administrative agencies. An adverse outcome of any investigation by, or other inquiries from, any such bodies or agencies also could
result in non-monetary penalties or sanctions, loss of licenses or approvals, changes in personnel, increased review and scrutiny of
us by our clients, counterparties, regulatory authorities, potential litigants, the media and others, any of which could have a material
adverse effect on us.
22
Our international activities increase the compliance risks associated with economic and trade sanctions imposed by the
United States, the EU and other jurisdictions.
Our international operations and activities expose us to risks associated with trade and economic sanctions, prohibitions or
other restrictions imposed by the United States or other governments or organizations, including the United Nations, the EU and its
member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/
restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs,
and, in the event of a violation, may subject us to fines and other penalties.
We could be materially adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act
and anti-corruption laws in other applicable jurisdictions.
We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and regulations in various jurisdictions
in which we conduct business, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. We operate in countries
known to present heightened risks for corruption and our dry bulk shipping and product tankers and related operations requires us to
interact with government officials, including port officials, harbor masters, maritime regulators, customs officials and pilots.
Non-compliance with anti-corruption, anti-bribery or anti-money laundering laws could subject us to whistleblower
complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences,
remedial measures and legal expenses, all of which could materially and adversely affect our business, results of operations, financial
condition and reputation.
Failure to protect our clients’ confidential information and privacy could result in the loss of our reputation and customers,
reduction in our profitability and subject us to fines, penalties and litigation and adversely affect our results of operations and
financial condition.
We and our subsidiaries retain confidential information in our information systems, and we are subject to a variety of privacy
regulations and confidentiality obligations. For example, some of the Company’s subsidiaries are subject to the privacy regulations
of the Gramm-Leach-Bliley Act. We and certain of our subsidiaries also have contractual obligations to protect confidential information
we obtain from third parties. These obligations generally require us, in accordance with applicable laws, to protect such information
to the same extent that we protect our own confidential information. We have implemented physical, administrative and logical security
systems with the intent of maintaining the physical security of our facilities and systems and protecting our clients’ and their customers’
confidential information and personally-identifiable information against unauthorized access through our information systems or by
other electronic transmission or through misdirection, theft or loss of data. Despite such efforts, we may be subject to a breach of our
security systems that results in unauthorized access to our facilities and/or the information we are trying to protect. Anyone who is
able to circumvent our security measures and penetrate our information systems could access, view, misappropriate, alter or delete
any information in the systems, including personally identifiable customer information and proprietary business information. In
addition, most states require that customers be notified if a security breach results in the disclosure of personally-identifiable customer
information. Any compromise of the security of our or our subsidiaries’ information systems that results in inappropriate disclosure
of such information could result in, among other things, unfavorable publicity and damage to our and our subsidiaries’ reputation,
governmental inquiry and oversight, difficulty in marketing our services, loss of clients, significant civil and criminal liability, litigation
and the incurrence of significant technical, legal and other expenses, any of which may have a material adverse effect on our results
of operations and financial condition.
Cyberattacks targeting Tiptree’s process control networks or other digital infrastructure could have a material adverse
impact on the Company’s business and results of operations.
There are numerous and evolving risks to cybersecurity and privacy from cyber threat actors, including criminal hackers,
state-sponsored intrusions, industrial espionage and employee malfeasance. These cyber threat actors are becoming more sophisticated
and coordinated in their attempts to access information technology (“IT”) systems and data, including the IT systems of cloud providers
and third parties with which the Company conducts or may conduct business. Although the Company devotes significant resources
to prevent unwanted intrusions and to protect its systems and data, whether such data is housed internally or by external third parties,
the Company has experienced immaterial cyber incidents and will continue to experience cyber incidents of varying degrees in the
conduct of its business. Cyber threat actors could compromise the Company’s process control networks or other critical systems and
infrastructure, resulting in disruptions to its business operations, access to its financial reporting systems, or loss, misuse or corruption
of its critical data and proprietary information, including without limitation its business information and that of its employees,
customers, partners and other third parties. Cyber events could result in significant financial losses, legal or regulatory violations,
reputational harm, and legal liability and could ultimately have a material adverse effect on the Company’s business and results of
operations.
23
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive office is located at 299 Park Avenue, 13th Floor, New York, New York 10171. We and our subsidiaries lease
properties throughout the United States and Europe, all of which are used as administrative offices. We believe that the terms of the
leases at each of our subsidiaries are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional
space, as needed, on acceptable terms.
As of December 31, 2019, the Company owned 11 single family properties in our insurance segment consisting of REO properties
resulting from our investments in non-performing residential mortgage loans.
Item 3. Legal Proceedings
Litigation
Fortegra is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit
Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain
disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes,
as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not
awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015, the trial court issued an Order
denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied
Fortegra’s Motion for Summary Judgment as to certain disability insurance policies. In January 2018, in response to a Plaintiffs’
Motion the court vacated its November 2017 order granting Fortegra’s Motion for Summary Judgment as to the life certificates at
issue with leave to refile. No trial or additional hearings are currently scheduled.
Tiptree considers such litigation customary in the insurance industry. In management's opinion, based on information available at this
time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial
position of Tiptree. However, large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have
been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a
range of loss that is reasonably possible.
Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and
financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings,
either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position.
Item 4. Mine Safety Disclosures
Not applicable.
24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Tiptree’s Common Stock is traded on the Nasdaq Capital Market under the ticker symbol “TIPT”.
Holders
As of December 31, 2019, there were 56 Common Stockholders of record. This number does not include beneficial owners whose
shares are held by nominees in street name.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity for the three months ended December 31, 2019 was as follows:
Period
October 1, 2019 to October 31,
2019
November 1, 2019 to November
30, 2019
December 1, 2019 to December
31, 2019: Open Market
Purchases
Purchaser
Tiptree Inc.
Tiptree Inc.
Tiptree Inc.
Total
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs(1)
— $
— $
— $
— $
—
—
—
—
— $
— $
—
—
— $
20,000,000
— $
20,000,000
(1) On May 2, 2019, the Board of Directors of Tiptree (“Board”) authorized Tiptree’s Executive Committee to repurchase up to $20 million of its outstanding Common
Stock in the aggregate from time to time.
25
Item 6. Selected Financial Data
The following tables set forth our consolidated selected financial data for the periods and as of the dates indicated and are derived
from our audited Consolidated Financial Statements. The following consolidated financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Item 7 of this Form 10-K and
the consolidated financial statements and related notes included in Item 8 of this Form 10-K. All amounts pertaining to our results of
operations and financial condition are presented on a continuing operations basis. All acquisitions by Tiptree during the five years
ended December 31, 2019 are included in results of operations since their respective dates of acquisition.
Consolidated Statement of Operations Data:
(in thousands, except shares and per share amounts)
Total revenues
Total expenses
Net income (loss) attributable to consolidated CLOs (3)
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Common Stockholders
Net income (loss) per Common Share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
Weighted average number of Common Shares:
Basic
Diluted
2019
772,728
743,589
—
29,139
9,017
20,122
—
20,122
1,761
18,361
0.52
—
0.52
0.50
—
0.50
$
$
$
$
$
$
$
$
$
$
For the Years Ended December 31,
2016(1)
2017(1)
2018(1)
506,423
581,798
625,826
477,537
595,585
645,622
20,254
10,457
—
49,140
(19,796)
(3,330)
12,515
(12,562)
(5,909)
36,625
9,232
(13,887)
(4,287)
(3,998)
43,770
32,338
5,234
29,883
1,630
5,950
7,018
25,320
3,604
23,933
$
$
(0.38) $
1.07
0.69
(0.38)
1.07
0.69
$
0.22
(0.10)
0.12
0.21
(0.10)
0.11
$
$
0.88
(0.09)
0.79
0.86
(0.08)
0.78
2015(1)(2)
392,331
388,346
(6,889)
(2,904)
(753)
(2,151)
10,953
8,802
3,023
5,779
(0.01)
0.18
0.17
(0.01)
0.18
0.17
$
$
$
$
34,578,292
34,578,292
34,715,852
34,715,852
29,134,190
37,306,632
31,721,449
31,766,674
33,202,681
33,202,681
Cash dividends paid per common share
$
0.155
$
0.135
$
0.12
$
0.10
$
0.10
Consolidated Balance Sheet Data: (in thousands)
Total assets (4)
Debt, net (5)
Total stockholders’ equity
Total Tiptree Inc. stockholders’ equity
2019
$ 2,198,286
2018
$ 1,864,918
As of December 31,
2017
$ 1,989,742
2016
$ 2,890,050
$
374,454
411,415
398,062
$
354,083
399,259
387,101
$
346,081
396,774
300,077
$
554,870
390,144
293,431
2015
$ 2,494,970
$
502,255
397,694
312,840
(1) Care revenues of $6.5 million, $76.0 million, $60.7 million and $46.1 million and net income (loss) of $43.8 million, $(4.0) million, $(4.3) million and $(11.7)
million for the years ended December 31, 2018, 2017, 2016 and 2015, respectively, are included in Net income (loss) from discontinued operations, net.
(2) Philadelphia Financial Group, Inc. revenues of $40.5 million and net income of $7.0 million for the year ended December 31, 2015, and gain on sale of $15.6
million for the year ended December 31, 2015 are included in Net income (loss) from discontinued operations, net.
(3) During 2017, the Company exited all consolidated CLOs. The operations of the CLO were consolidated in the results of the Company through the redemption
date. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
(4) Total assets on December 31, 2016 and 2015 include $989.5 million and $728.8 million of assets held by consolidated CLO entities, respectively.
(5) Excludes debt of discontinued operations.
26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as
follows:
• Overview
• Results of Operations
• Non-GAAP Reconciliations
• Liquidity and Capital Resources
• Critical Accounting Policies and Estimates
• Off-Balance Sheet Arrangements
OVERVIEW
Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Our
principal operating subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider
of specialty insurance, warranty products and related administration services. We also generate earnings from a diverse group
of select investments that we refer to as Tiptree Capital. We evaluate our performance primarily by the comparison of our
shareholders’ long-term total return on capital, as measured by Adjusted EBITDA, Operating EBITDA and growth in book value
per share plus dividends.
Our 2019 and early 2020 highlights include:
Overall:
• Delivered total annual return of 8.2%, as measured by growth in book value per share plus dividends paid.
•
•
In 2019, we purchased and retired 1,472,730 shares of our Common Stock for $9.1 million.
Increased our dividends for the third consecutive year to $0.155 per share, a 14.8% increase over the prior year.
Tiptree Insurance:
• Gross written premiums for 2019 were $1,015.3 million, up 17.0% from the prior year. Net written premiums were
$537.2 million, up 15.1%, driven by growth in all product lines.
• Our insurance investments earned a total return of 5.4%, up from 0.3% from the prior year period, driven primarily
•
by improved mark-to-market on equities.
In January 2020, we acquired Smart AutoCare, a rapidly growing vehicle warranty administrator in the United States.
The transaction valued the business at $160 million of enterprise value, inclusive of $50 million of earn out consideration,
representing a multiple of 8.3x modified cash EBITDA (excluding anticipated revenue and expense synergies).
• As part of our strategy to grow our insurance operations in Europe, we acquired a majority interest in Defend in July
2019, an automotive finance and insurance administrator operating in the Czech Republic, Poland, Hungary, Slovakia,
and the UK.
Tiptree Capital:
• Operating EBITDA grew year over year, driven primarily by the inclusion of a full year of our maritime transportation
operations and improvements in specialty finance.
Increased invested capital, primarily due to additional investments in vessels.
•
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 Item 1A. “Risk Factors” in this 10-K. Generally, our businesses are positively affected by a healthy U.S. consumer,
stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely,
rising unemployment, volatile markets, rapidly rising interest rates, changing regulatory requirements and slowing business
conditions can have a material adverse effect on our results of operations or financial condition.
Our insurance business generally focuses on products which have low severity but high frequency loss experiences and are short
duration, and business has historically generated significant fee-based revenues. In general, the types of products we offer tend
to have limited aggregation risk, and thus, limited exposure to catastrophic and residual risk. We mitigate our underwriting risk
through a combination of reinsurance and retrospective commission structures with our distribution partners and/or third party
reinsurers. Our insurance results primarily depend on our pricing, underwriting, risk retention and the accuracy of reserves,
reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. While our insurance operations
have historically maintained a relatively stable combined ratio which support steady earnings, our initiatives to change our
27
business mix along with economic factors could generate different results than we have historically experienced. We believe
there are additional growth opportunities to expand our warranty and specialty programs insurance business model to other niche
products and markets.
Our insurance company investment portfolio primarily serves as a source to pay claims and secondarily as a source of income
for our operations. Our investments include fixed maturity securities, loans, credit investment funds, equity securities, real estate
and CLOs. Many of our investments are held at fair value. Changes in fair value for loans, credit investment funds, equity
securities and CLO assets and liabilities are reported quarterly as unrealized gains or losses in revenues and can be impacted by
changes in interest rates, credit risk, or market risk, including specific company or industry factors. Our equity holdings are
relatively concentrated. General equity market trends, along with company and industry specific factors, can impact the fair
value of our holdings and can result in unrealized gains and losses affecting our results. In addition, both as part of our insurance
company investments and separately in Tiptree Capital, common shares of Invesque represent a significant asset on our
consolidated balance sheet. Any change in the fair value of Invesque’s common stock or Invesque’s dividend policy could have
a significant impact on our financial condition and results of operations.
The maritime transportation industry is highly competitive and fragmented. Demand for shipping capacity is a function of global
economic conditions and the related demand for commodities, production and consumption patterns, as well as events, which
interrupt production, trade routes, and consumption. The shipping industry is cyclical with high volatility in charter hire rates
and profitability. General global economic conditions, along with company and industry specific factors, can impact the fair
value of our vessels and their operating results.
Our business can also be impacted in various ways by changes in interest rates, which can result in fluctuations in fair value of
our investments, revenues associated with floating rate loans, volume and revenues in our mortgage business and interest expense
associated with floating rate debt used to fund many of our operations.
A discussion of our performance for the year ended December 31, 2019 compared to the year ended December 31, 2018 appears
below. A discussion of our performance for the year ended December 31, 2018 compared to the year ended December 31, 2017
is set forth in Part II, Item 7 of our Form 10-K for the year ended December 31, 2018 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 year ended December 31, 2019 and 2018. In addition
to GAAP results, management uses the Non-GAAP measures Operating EBITDA, Adjusted EBITDA and book value per share
as measurements of operating performance. Management believes these measures provide supplemental information useful to
investors as they are frequently used by the financial community to analyze financial performance, debt service and comparison
among companies. Management uses Operating EBITDA as part of its capital allocation process and to assess comparative
returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive
officers. The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted (i) to add back corporate
interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) for the effect of purchase
accounting, (iii) for non-cash fair value adjustments, and (iv) for any significant non-recurring expenses. Operating EBITDA
represents Adjusted EBITDA plus stock based compensation expense, less realized and unrealized gains and losses and less
third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance
or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. See “Non-GAAP
Reconciliations” for a reconciliation of these measures to their GAAP equivalents.
Selected Key Metrics
($ in millions, except per share information)
GAAP:
Total revenues
Net income (loss) attributable to Common Stockholders
Diluted earnings per share
Cash dividends paid per common share
Non-GAAP: (1)
Operating EBITDA
Adjusted EBITDA
Book value per share (2)
28
Year Ended December 31,
2019
2018
$
$
$
$
$
$
$
772.7
18.4
0.50
0.155
63.6
63.0
11.52
$
$
$
$
$
$
$
625.8
23.9
0.69
0.135
54.9
28.8
10.79
(1) For information relating to Operating and Adjusted EBITDA and book value per share, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) For periods prior to April 10, 2018, book value per share assumed full exchange of the limited partnership units of TFP for Common Stock.
Revenues
For the year ended December 31, 2019, revenues were $772.7 million, which increased $146.9 million, or 23.5%. The increase
was primarily driven by growth in earned premiums, lower unrealized losses on Invesque, improvements in specialty finance
results, the inclusion of a full year of revenue from shipping operations and the gain on sale of our CLO asset management
business. Earned premiums were $499.1 million for the year ended December 31, 2019, up $71.3 million, or 16.7%, driven by
growth in net written premiums. The combination of unearned premiums and deferred revenues on the balance sheet grew by
$174.4 million, or 25.8%, from December 31, 2018 to December 31, 2019 as a result of increased written premiums, primarily
in credit protection and warranty programs.
Net Income (Loss) Attributable to Common Stockholders
For the year ended December 31, 2019, net income available to Common Stockholders was $18.4 million, a decrease of $5.5
million. The decrease was primarily driven by income from discontinued operations of $43.8 million in 2018, which included
the gain on sale of Care. This non-recurring gain was offset by improved insurance operating performance, the realized gain on
the sale of our CLO management business, and increased realized and unrealized gains on investments in 2019.
The table below highlights key drivers impacting our consolidated results on a pre-tax basis. Many of our investments are carried
at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these
investments to be relatively volatile between periods. Our fixed income securities are primarily marked to market through
accumulated other comprehensive income (AOCI) in stockholders’ equity and do not impact net realized and unrealized gains
and losses until they are sold. On February 1, 2018, we sold our senior living operations to Invesque in exchange for a net of
16.6 million shares of Invesque common stock which resulted in a pre-tax gain on sale of $56.9 million in 2018.
($ in millions)
Year Ended December 31,
2019
2018
Net realized and unrealized gains (losses)(1)
Net realized and unrealized gains (losses) - Invesque
Discontinued operations (Care)(2)
(1) Excludes Invesque, Mortgage realized and unrealized gains and losses and NPLs. The year ended December 31, 2019 includes a $7.6 million gain on sale of our CLO business.
(2) Represents Care for the year ended December 31, 2018 including a $56.9 million pre-tax gain on sale.
9.8
$
(1.2) $
(14.0)
(20.7)
— $
57.5
$
$
$
Operating and Adjusted EBITDA - Non-GAAP
Operating EBITDA for the year ended December 31, 2019 was $63.6 million, an increase of $8.7 million, or 15.8%. For the
year ended December 31, 2019, the key drivers of the increase were driven by improved performance in Tiptree Capital.
Adjusted EBITDA for the year ended December 31, 2019 was $63.0 million, an increase of $34.2 million. The key drivers of
the increase in the year ended December 31, 2019 were the same factors that drove improved performance in Operating EBITDA
plus lower unrealized losses on investments in the insurance portfolio and on Invesque and the gain on sale of our CLO
management business. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.
Book Value per share - Non-GAAP
Total stockholders’ equity was $411.5 million as of December 31, 2019 compared to $399.3 million as of December 31, 2018.
The increase was primarily driven by net income, offset by share repurchases and dividends paid. Over the past twelve months,
Tiptree returned $14.4 million to shareholders through share repurchases and dividends paid. Book value per share for the year
ended December 31, 2019 was $11.52, an increase from book value per share of $10.79 as of December 31, 2018. The key
drivers of the period-over-period impact were earnings per share and the purchase of 1.5 million shares at an average 40%
discount to book value. Those increases were offset by dividends paid of $0.155 per share and officer compensation share
issuances.
Results by Segment
We classify our business into one reportable segment, Tiptree Insurance, with the remainder of our non-insurance operations
aggregated into Tiptree Capital. Corporate activities include holding company interest expense, employee compensation and
29
benefits, and other expenses, including, but not limited to, public company expenses. The following table presents the components
of total pre-tax income including continuing and discontinued operations.
Pre-tax Income
($ in millions)
Tiptree Insurance
Tiptree Capital
Corporate
Pre-tax income (loss) from continuing operations
Pre-tax income (loss) from discontinued operations (1)
(1) Represents Care for the year ended December 31, 2018, which includes $56.9 million pre-tax gain on sale.
Invested Capital, Total Capital and Operating EBITDA - Non-GAAP (1)
$
$
$
Year Ended December 31,
2019
2018
$
41.0
21.0
(32.9)
29.1
$
— $
18.6
(7.8)
(30.6)
(19.8)
57.5
Management evaluates the return on Invested Capital and Total Capital, which are non-GAAP financial measures, when making
capital decisions. Invested Capital represents the total equity investment, including any re-investment of earnings, and acquisition
costs, net of tax. Total Capital represents Invested Capital plus Corporate Debt. Management believes the use of these financial
measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze
how a company has allocated capital over-time and provide a basis for determining the return on capital to shareholders.
Management uses both of these measures when making capital decisions, including reinvesting cash, and evaluating the relative
performance of its businesses and investments. The following tables present the components of Invested Capital, Total Capital,
Operating EBITDA and Adjusted EBITDA.
($ in millions)
Tiptree Insurance
Tiptree Capital
Corporate
Total Tiptree
Operating and Adjusted EBITDA
($ in millions)
Tiptree Insurance
Tiptree Capital (2)
Corporate
Operating EBITDA
Stock based compensation expense
Vessel depreciation, net of capital expenditures
Realized and unrealized gains (losses) (3)
Third party non-controlling interests (4)
Adjusted EBITDA
As of December 31,
Invested Capital
Total Capital
2019
2018
2019
2018
$
$
317.9
199.1
(65.5)
451.5
$
$
296.3
182.0
(43.9)
434.4
$
$
503.0
199.1
2.7
704.8
$
$
456.4
182.0
28.2
666.6
Year Ended December 31,
2019
2018
$
$
$
63.3
22.8
(22.5)
63.6
(6.4)
(2.9)
8.6
0.1
63.0
$
$
$
64.5
13.7
(23.3)
54.9
(6.7)
(0.9)
(18.5)
—
28.8
(1) For further information relating to Invested Capital, Total Capital, Operating EBITDA and Adjusted EBITDA, including a reconciliation to GAAP total stockholders’ equity
(2)
and pre-tax income, see “—Non-GAAP Reconciliations.”
Includes discontinued operations related to Care for the 2018 period. As of February 1, 2018, invested capital from Care discontinued operations is represented by our Invesque
common shares. For more information, see “Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.”
(3) Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs.
(4) Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.
Tiptree Insurance
Our principal operating subsidiary, Tiptree Insurance, is a provider of specialty insurance products and related services, including
credit protection insurance, warranty products, and insurance programs which underwrite niche personal and commercial lines
of insurance. We also offer fee-based administration and fronting services for our self-insured clients who own captive producer
owned reinsurance companies (PORCs). We generate income from insurance underwriting operations and our investment
portfolio. Insurance underwriting revenues are primarily generated from net earned premiums, service and administrative fees
30
and ceding commissions. We measure insurance underwriting operations performance by underwriting margin, combined ratio
and Operating EBITDA. The investment portfolio income consists of investment income and gains and losses, and is measured
by net portfolio income.
The following tables present the insurance segment results for the year ended December 31, 2019 and 2018.
Operating Results
($ in millions)
Gross written premiums
Net written premiums
Revenues:
Net earned premiums
Service and administrative fees
Ceding commissions
Net investment income
Net realized and unrealized gains (losses)
Other income
Total revenues
Expenses:
Policy and contract benefits
Commission expense
Employee compensation and benefits
Interest expense
Depreciation and amortization expense
Other expenses
Total expenses
Pre-tax income (loss)
Results
Year Ended December 31,
2019
2018
$
$
$
$
$
1,015.3
537.2
499.1
106.2
9.6
14.0
6.9
4.6
640.4
170.7
303.1
50.0
14.8
9.1
51.7
599.4
41.0
$
$
$
$
$
868.1
466.8
427.8
102.3
9.7
19.2
(11.7)
2.6
549.9
152.1
262.5
45.8
18.2
10.8
41.9
531.3
18.6
Our insurance operations are currently expanding product lines in an effort to increase written premiums, and commensurately
grow the insurance portfolio. As part of this process, the business is investing to grow warranty and specialty programs, while
maintaining a leading position in our credit protection markets. That, combined with the earnings performance of the investment
portfolio, are key drivers in comparing 2019 versus 2018 results. The growth in written premiums, combined with higher retention
in select products, has resulted in an increase of unearned premiums and deferred revenue on the balance sheet of $174.4 million,
or 25.8%, from $675.2 million as of December 31, 2018 to $849.6 million as of December 31, 2019.
Pre-tax income was $41.0 million for the year ended December 31, 2019, an increase of $22.4 million, or 120.4%. The primary
drivers of the increase were growth in net earned premiums, net realized and unrealized gains of $6.9 million in the 2019 period
versus $11.7 million of losses in the 2018 period, primarily related to equities and loans held at fair value in the portfolio.
Insurance underwriting results improved, driven primarily by increased underwriting margin of $17.9 million, or 14.0%. Interest
expense decreased by $3.4 million, or 18.7%, primarily associated with a reduction of asset based debt. Other expenses increased
$9.8 million, primarily associated with higher premium taxes due to the growth in written premiums and debt extinguishment
expenses on asset based debt.
Revenues
Revenues are generated by the sale of the following products: credit protection, warranty, specialty, services and other. Credit
protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and
dismemberment. Warranty products include vehicle service contracts, furniture and appliance service contracts and mobile device
protection. Specialty programs are primarily personal and commercial lines and other property-casualty products.
For the year ended December 31, 2019, total revenues were $640.4 million, up $90.5 million, or 16.5%, primarily driven by an
increase in earned premiums of $71.3 million, or 16.7%, and increases in service and administrative fees of $3.9 million, or
3.8%. The increase in earned premiums was driven by growth in credit and warranty programs. For the year ended December
31, 2019, revenues on the investment portfolio contributed $22.0 million, compared to $8.0 million in the 2018 period, an
31
increase of $14.0 million, driven by net realized and unrealized gains in 2019 versus losses in the prior year period. See “—
Tiptree Insurance Investment Portfolio” for a further discussion of the investment results.
Expenses
Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December
31, 2019, total expenses were $599.4 million, up $68.1 million, or 12.8%, primary driven by increases in policy and contract
benefits and commission expense as written premiums and insurance revenues increased over the 2018 period.
There are two types of expenses for claims under insurance and warranty service contracts included in policy and contract
benefits which are member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the
costs of services and replacement devices incurred in warranty protection and motor club service contracts. Net losses and loss
adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the
costs of administering claims for credit life and other insurance lines. Incurred claims are impacted by loss frequency, which is
a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims.
Loss occurrences in our insurance products are characterized by low severity and high frequency. Factors affecting loss frequency
and loss severity include the volume of underwritten contracts, changes in claims reporting patterns, claims settlement patterns,
judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
For the year ended December 31, 2019, policy and contract benefits were $170.7 million, up $18.6 million, or 12.2%, primarily
as a result of growth in written premiums.
Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to distributors
and retailers selling our products, including credit insurance policies, warranty and mobile device protection service contracts,
and motor club memberships. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted
by market conditions and retention levels.
Total commission expense for the year ended December 31, 2019 was $303.1 million, up $40.6 million, or 15.5%, primarily
due to commission expense associated with the growth in written premiums.
Operating expenses include employee compensation and benefits, interest expense, depreciation and amortization expense and
other expenses. For the year ended December 31, 2019, employee compensation and benefits were $50.0 million, up $4.2 million,
or 9.2%, from increased headcount and incentive-based compensation. Interest expense of $14.8 million in 2019 decreased by
$3.4 million, or 18.7%, primarily from reduced asset based debt. Other expenses for the year ended December 31, 2019 were
$51.7 million, up $9.8 million, or 23.4%, primarily from higher premium taxes due to growth in written premiums and debt
extinguishment expenses associated with the asset based debt. Depreciation and amortization expense was lower period-over-
period as a result of the decline in VOBA purchase accounting impact from the amortization of the fair value attributed to the
insurance policies and contracts acquired.
Key Operating Metrics and Non-GAAP Operating Results
Gross & Net Written Premiums
Gross written premiums represents total premiums from insurance policies and warranty service contracts written during a
reporting period. Net written premiums are gross written premiums less that portion of premiums ceded to third party reinsurers
or PORCs. The amount ceded is based on the individual reinsurance agreements. Net earned premiums are the earned portion
of our net written premiums. At the end of each reporting period, premiums written that are not earned are classified as unearned
premiums, which are earned in subsequent periods over the remaining term of the policy.
Written Premium Metrics
($ in millions)
Insurance Products:
Credit protection
Warranty
Specialty
Total
Year Ended December 31,
Gross Written Premiums
2019
2018
Net Written Premiums
2018
2019
644.1
233.0
138.2
1,015.3
$
$
557.9
123.8
186.4
868.1
$
$
356.2
123.9
57.1
537.2
$
$
354.8
61.0
51.0
466.8
$
$
32
Total gross written premiums for the year ended December 31, 2019 were $1,015.3 million, which represented an increase of
$147.2 million, or 17.0%. The increase was driven by growth in credit and warranty programs. The amount of business retained
was 52.9%, down from 53.8% in the prior year period. Total net premiums written for the year ended December 31, 2019 were
$537.2 million, up $70.4 million, or 15.1%, driven by growth in all products. We believe our warranty service contracts and
light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic
expansion.
Product Underwriting Margin - Non-GAAP
The following table presents product specific revenue and expenses within the Tiptree insurance segment. We generally manage
our exposure to the underwriting risk we assume using both reinsurance (e.g., quota share and excess of loss) and retrospective
commission agreements with our partners (e.g., commissions paid are adjusted based on the actual underlying losses incurred),
which mitigate our risk. Period-over-period comparisons of revenues and expenses are often impacted by the PORCs and
distribution partners choice as to whether to retain risk, specifically service and administration expenses and ceding commissions,
both components of revenue, and policy and contract benefits and commissions paid to our partners and reinsurers. Generally,
when losses are incurred, the risk which is retained by our partners and reinsurers is reflected in a reduction in commissions
paid. In order to better explain to investors the net financial impact of the risk retained by the Company of the insurance contracts
written and the impact on profitability, we use the Non-GAAP metric - Underwriting Margin.
Underwriting Revenues and Underwriting Margin - Non-GAAP(1)
($ in millions)
Insurance products:
Credit protection
Warranty
Specialty
Services and other
Total
Year Ended December 31,
Underwriting Revenues
2018
2019
Underwriting Margin
2018
2019
$
$
437.4
120.7
51.0
10.4
619.5
$
$
384.4
89.6
59.7
8.7
542.4
$
$
87.7
37.9
9.7
10.4
145.7
$
$
77.0
28.6
13.1
9.1
127.8
(1) For further information relating to the Company’s underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
Underwriting margin for the year ended December 31, 2019 was $145.7 million, up $17.9 million, or 14.0%. Credit protection
underwriting margin was $87.7 million, an increase of $10.7 million, or 13.9%. Credit protection products continue to provide
opportunities for steady growth through a combination of expanded product offerings and new clients. Underwriting margin for
warranty products was $37.9 million, up $9.3 million, or 32.5%, driven primarily by growth in auto, furniture and appliances
warranty service contracts. Specialty underwriting margin for the year ended December 31, 2019 was $9.7 million, down $3.4
million, or 26.0%, due to the run-off of certain discontinued non-standard auto programs. Services and other contributed $10.4
million in year ended December 31, 2019, which was up $1.3 million, or 14.3%.
Invested Capital, Total Capital, Operating EBITDA and Insurance Operating Ratios
We use the combined ratio as an operating metric to evaluate our insurance underwriting performance, both overall and relative
to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of
ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and
administrative fees, and other income (excluding returns on the investment portfolio). Investors use this ratio to evaluate the
ability of insureds to profitably underwrite the risks they assume over time and manage operating costs. A combined ratio less
than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. The below
table outlines the insurance operating ratios, capital invested and the drivers of Operating EBITDA split between underwriting
and investments, as management evaluates the return on the investment portfolio separately from the returns from underwriting
activities.
33
Invested Capital, Total Capital, Operating EBITDA and Operating Ratios - Non-GAAP(1)
($ in millions)
Invested Capital(1)
Total Capital(1)
Operating EBITDA drivers:
Underwriting
Investments
Tiptree Insurance Operating EBITDA(1)
Insurance operating ratios:
Combined ratio
As of December 31,
2018
2019
317.9
503.0
$
$
296.3
456.4
Year Ended December 31,
2019
2018
48.4
14.9
63.3
$
$
45.4
19.1
64.5
$
$
$
$
92.6%
92.5%
(1) For further information relating to the Company’s Operating EBITDA, Invested and Total Capital, and combined ratio, including a reconciliation to GAAP financials, see “—
Non-GAAP Reconciliations.”
The combined ratio was 92.6% for the year ended December 31, 2019, compared to 92.5% for the prior year period. The ratio
was stable period-over-period, driven by continued growth in revenues and consistent margins across our product offerings. See
“—Insurance Investment Portfolio” for a further discussion of the investment results and “—Non-GAAP Reconciliations” for
a reconciliation to GAAP pre-tax income.
Insurance Investment Portfolio
Our insurance investment portfolio is subject to different regulatory considerations, including with respect to types of assets,
concentration limits, affiliate transactions and the use of leverage. Our investment strategy is designed to achieve attractive risk-
adjusted returns over the entire investment horizon across select asset classes, sectors and geographies while maintaining adequate
liquidity to meet our claims payment obligations. As such, volatility from realized and unrealized gains and losses may impact
period-over-period performance. Unrealized gains and losses on equity securities and loans held at fair value impact current
period net income, while unrealized gains and losses on available for sale (AFS) securities impact AOCI.
In managing our investment portfolio, we analyze net investments and net portfolio income, which are non-GAAP measures.
Our presentation of net investments equals total investments plus cash and cash equivalents minus asset based financing related
to certain investments. Our presentation of net portfolio income equals net investment income plus realized and unrealized gains
and losses, including unrealized gains and losses on securities which are taken to AOCI, and minus interest expense associated
with asset based financing of investments. Net investments and net portfolio income are used to calculate total return, which is
one of the measures management uses to analyze the profitability of our investment portfolio. Management believes this
information on a cumulative basis is useful since it allows investors to evaluate the performance of our investment portfolio
based on the capital at risk and on a non-consolidated basis. Our calculation of net investments and net portfolio income may
differ from similarly titled non-GAAP financial measures used by other companies. Net investments and net portfolio income
are not measures of financial performance or liquidity under GAAP and should not be considered a substitute for total investments
or net investment income. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP total investments and investment
income.
34
Tiptree Insurance Investment Portfolio - Non-GAAP
($ in millions)
Cash and cash equivalents (1)
Available for sale securities, at fair value
Equity securities
Loans, at fair value (2)
Real estate, net
Other investments
Net investments
As of December 31,
2018
2019
$
$
89.2
335.2
62.8
10.2
2.2
40.3
539.9
$
$
53.3
283.6
29.4
78.5
10.0
8.5
463.3
(1) Cash and cash equivalents, plus restricted cash, net of due from/due to brokers on consolidated loan funds, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP
financials.
(2) Loans, at fair value, net of asset based debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
Tiptree Insurance Net Investment Portfolio Income - Non-GAAP
($ in millions)
Net investment income
Other income
Realized gains (losses)
Unrealized gains (losses)
Unrealized gains (losses) on available for sale securities
Interest expense
Net portfolio income (loss)
Total Return % (1)
Year Ended December 31,
2019
2018
$
$
$
$
14.0
1.1
4.7
2.2
5.0
(0.6)
26.4
5.4%
19.2
0.5
5.6
(17.3)
(2.1)
(4.7)
1.2
0.3%
(1) Total Return % represents the ratio of annualized net investment income, realized and unrealized gains (losses) (including realized and unrealized gains (losses) on available for
sale securities included in AOCI), less investment portfolio interest expense to the average of the prior five quarters total investments less investment portfolio debt plus cash.
Net investments of $539.9 million have grown 16.5% from December 31, 2018 through a combination of organic growth in
written premiums and increased retention.
Our net investment income includes interest and dividends, net of investment expenses, on our invested assets. Our loans, at
fair value, are generally floating rate and therefore earn LIBOR plus a spread. Generally, our interest income on those loans will
increase in a rising interest rate environment, or decrease in a declining rate environment, subject to any LIBOR floors. Our
held-to-maturity investments generally carry fixed coupons, which can impact our returns on investment. We report net realized
gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our
investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our
investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a
result of other-than-temporary impairment. We report net unrealized gains and losses on securities classified as AFS separately
within AOCI on our balance sheet. For loans, at fair value, and equity securities, we report unrealized gains and losses within
net realized gains and losses on the consolidated statement of operations.
For the year ended December 31, 2019, the net investment portfolio income was $26.4 million, up $25.2 million. Net investment
income was $14.0 million, down $5.2 million, or 27.1% from 2018, driven primarily by our efforts to reduce exposure to levered
credit through the sale of loans held at fair value, combined with an overall decline in LIBOR rates. For the year ended December
31, 2019, fair market value changes on equities resulted in unrealized and realized gains of $7.8 million, compared to losses of
$9.4 million in the 2018 period. The total return for the year improved from 0.3% in 2018 to 5.4% in 2019. The improvement
was a result of lower asset based interest expense and unrealized gains compared to unrealized losses in the prior year.
Tiptree Capital
Tiptree Capital consists of our non-insurance operating businesses and investments. As of December 31, 2019, Tiptree Capital
includes our Invesque shares, maritime transportation operations, and mortgage operations. We manage Tiptree Capital on a
total return basis, balancing current cash flow and long-term value appreciation.
35
The following table summarizes total revenues, pre-tax income from continuing and discontinued operations from Tiptree Capital.
Operating Results
($ in millions)
Total revenues
Pre-tax income (loss) from continuing operations
Pre-tax income (loss) from discontinued operations
Drivers of pre-tax income from continuing and discontinued operations
($ in millions)
Asset management fees and credit investments
Maritime transportation
Specialty finance and other
Senior Living:
Invesque(1)
Care - discontinued operations(2)
Year Ended December 31,
2019
2018
132.3
21.0
$
$
— $
76.0
(7.8)
57.5
Year Ended December 31,
2019
2018
7.7
1.8
2.4
$
$
$
9.1
$
— $
1.5
(1.7)
0.3
(7.9)
57.5
$
$
$
$
$
$
$
$
(1) Within Tiptree Capital, includes $10.1 million of dividends and $1.0 million of unrealized losses for the year ended December 31, 2019, and $9.2 million of dividends and
$17.1 million of unrealized losses for the year ended December 31, 2018.
(2) Discontinued operations related to Care for the year ended December 31, 2018 includes $56.9 million pre-tax gain on sale of Care.
Results from Continuing Operations
Tiptree Capital earns revenues from the following: net interest income; mortgage gains and origination fees; asset management
fees from CLOs under management (prior to the sale of our Telos asset management business which occurred on April 26, 2019);
distributions and realized and unrealized gains on the Company’s investment holdings (primarily Invesque); and charter revenue
from vessels within our maritime transportation operations.
Revenues for the year ended December 31, 2019 were $132.3 million, an increase of $56.3 million, or 74.1%. Pre-tax income
from continuing operations for the year ended December 31, 2019 was $21.0 million, compared to a loss of $7.8 million in the
2018 period. The primary driver of improvement in pre-tax income was the gain on sale of our Telos asset management business
and lower unrealized losses on Invesque. For the year ended December 31, 2019, we received $10.1 million of dividends from
Invesque and incurred $1.0 million of unrealized losses compared to $9.2 million of dividends and $17.1 million of unrealized
losses in the 2018 period. Pre-tax income from our maritime transportation operations improved by $3.5 million primarily driven
by a full year of operations, an overall increase in charter rates, and non-recurring start-up expenses impacting the 2018 period.
Results from Discontinued Operations
Discontinued operations includes the results from Care, previously reported in the Senior Living segment. In the year ended
December 31, 2018, pre-tax income was $57.5 million, which included a $56.9 million gain on sale of Care.
Tiptree Capital - Invested Capital and Operating EBITDA - Non-GAAP(1)
($ in millions)
Senior living (Invesque) (2)
Maritime transportation
Specialty finance and other
Total
Invested Capital(1)
As of December 31,
2018
2019
Operating EBITDA(1)
Year Ended December 31,
2019
2018
$
$
94.1
74.3
30.7
199.1
$
$
105.3
48.7
28.0
182.0
$
$
10.1
4.6
8.1
22.8
$
$
9.9
(0.8)
4.6
13.7
(1) For information relating to Invested Capital and Operating EBITDA, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) Includes discontinued operations related to Care in 2018. For more information, see “Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.”
Invested Capital
Invested Capital increased from $182.0 million as of December 31, 2018 to $199.1 million as of December 31, 2019. On February
36
1, 2018, we completed the sale of Care to Invesque. We received consideration of 16.6 million shares of Invesque, of which
13.7 million shares are held as equity securities in Tiptree Capital, and 2.9 million shares are held in the insurance investment
portfolio. In 2018, we invested approximately $50 million into three unlevered vessels which are reported in other investments.
In the third and fourth quarter of 2019, we purchased two additional vessels for $38.8 million, which we levered with an $18.0
million asset based borrowing.
Operating EBITDA
Operating EBITDA increased $9.1 million, or 66.4%, to $22.8 million for the year ended December 31, 2019. The key drivers
of Operating EBITDA were the same factors which impacted pre-tax income. See “— Non-GAAP Reconciliations” for a
reconciliation to GAAP net income.
Corporate
($ in millions)
Employee compensation and benefits
Employee incentive compensation expense
Interest expense
Depreciation and amortization expense
Other expenses
Total expenses
Results
Year Ended December 31,
2019
2018
$
$
6.6
9.0
6.3
0.7
10.3
32.9
$
$
7.0
7.5
5.0
0.2
10.9
30.6
Corporate expenses include expenses of the holding company for interest, 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, increased $1.1 million for the year ended
December 31, 2019, driven primarily by employee incentive compensation. Interest expense for the year ended December 31,
2019 was $6.3 million, an increase of $1.3 million, driven by a higher average outstanding balance during 2019. As of
December 31, 2019, the outstanding borrowing was $68.2 million, compared to $72.1 million at December 31, 2018. Other
expenses were $10.3 million for the 2019 period, down $0.6 million or 5.5%. The decrease was primarily driven by decreased
professional fees offset by increased rent expense and expenses associated with the relocation of our corporate offices.
Provision for Income Taxes
Provision for income taxes - Total Operations
The total income tax expense of $9.0 million for the year ended December 31, 2019 and total income tax expense of $7.8 million
for the year ended December 31, 2018 are reflected as components of net income (loss). For the year ended December 31, 2019,
the Company’s effective tax rate was equal to 31.0%. The effective rate for the year ended December 31, 2019 is higher than
the U.S. federal statutory income tax rate of 21%, primarily from the impact of the non-recurring return-to-provision, as well
as ongoing state and foreign taxes. For the year ended December 31, 2018, the Company’s effective tax rate was equal to 20.6%.
The effective rate for the year ended December 31, 2018 is lower than the statutory rate of 21.0% primarily due to the dividends
received deduction and other discrete items.
Provision for income taxes - Continuing Operations
The Company had a tax expense from continuing operations of $9.0 million for the year ended December 31, 2019 as compared
to a tax benefit from continuing operations of $5.9 million for the year ended December 31, 2018. The effective tax rate on
income from continuing operations for the year ended December 31, 2019 was approximately 31.0% compared to 29.9% for
the year ended December 31, 2018. Differences from the U.S. federal statutory income tax rate for the year ended December
31, 2019 are due to the impact of the non-recurring return-to-provision, as well as ongoing state and foreign taxes, and for the
year ended December 31, 2018 are due to the dividends received deduction and other discrete items.
37
Balance Sheet Information - as of December 31, 2019 compared to the year ended December 31, 2018
Tiptree’s total assets were $2,198.3 million as of December 31, 2019, compared to $1,864.9 million as of December 31, 2018.
The $333.4 million increase in assets is primarily attributable to the growth in the insurance company.
Total stockholders’ equity was $411.5 million as of December 31, 2019, compared to $399.3 million as of December 31, 2018,
primarily driven by net income, which was partially offset by stock repurchases and dividends. As of December 31, 2019, there
were 34,562,553 shares of Common Stock outstanding, as compared to 35,870,348 as of December 31, 2018.
The following table is a summary of certain balance sheet information:
($ in millions)
Total assets
Corporate debt
Asset based debt
Tiptree Inc. stockholders’ equity
Non-controlling interests - Other
Total stockholders’ equity
NON-GAAP RECONCILIATIONS
Tiptree
Insurance
1,721.7
185.0
21.6
264.6
12.1
276.7
$
$
$
$
$
$
$
$
As of December 31, 2019
Tiptree
Capital
Corporate
451.2
$
— $
108.7
199.1
1.3
200.4
$
$
$
$
25.4
68.2
—
(65.6) $
—
(65.6) $
Total
2,198.3
253.2
130.3
398.1
13.4
411.5
Adjusted EBITDA and Operating EBITDA - Non-GAAP
The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted to add (i) corporate interest expense,
consolidated income taxes and consolidated depreciation and amortization expense, (ii) adjust for the effect of purchase
accounting, (iii) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses. Operating EBITDA
represents Adjusted EBITDA plus stock based compensation expense and vessel depreciation expense, less realized and
unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not
measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute
for GAAP net income.
($ in millions)
Net income (loss) attributable to Common Stockholders
Add: net (loss) income attributable to noncontrolling interests
Less: net income from discontinued operations
Income (loss) from continuing operations
Corporate debt related interest expense(1)
Consolidated income tax expense (benefit)
Depreciation and amortization expense(2)
Non-cash fair value adjustments(3)
Non-recurring expenses(4)
Adjusted EBITDA from continuing operations
Add: Stock based compensation expense
Add: Vessel depreciation, net of capital expenditures
Less: Realized and unrealized gains (losses)(5)
Less: Third party non-controlling interests(6)
Operating EBITDA from continuing operations
Income (loss) from discontinued operations
Consolidated income tax expense (benefit)
Non-cash fair value adjustments (3)
Adjusted EBITDA from discontinued operations
Less: Realized and unrealized gains (losses) (5)
Operating EBITDA from discontinued operations
Total Adjusted EBITDA
38
Year Ended December 31,
2019
2018
18.4
1.7
—
20.1
19.7
9.0
13.1
(3.1)
4.2
63.0
6.4
2.9
8.6
0.1
63.6
$
$
$
$
— $
—
—
— $
—
— $
$
63.0
23.9
6.0
43.8
(13.9)
18.2
(5.9)
11.6
(0.4)
2.4
12.0
6.7
0.9
(34.7)
—
54.3
43.8
13.7
(40.7)
16.8
16.2
0.6
28.8
$
$
$
$
$
$
$
$
($ in millions)
Total Operating EBITDA
_______________________________
Year Ended December 31,
2019
2018
$
63.6
$
54.9
(1)
(2)
(3)
(4)
(5)
(6)
Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest
expense associated with asset-specific debt in Tiptree Insurance and Tiptree Capital is not added-back for Adjusted EBITDA and Operating EBITDA.
Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. Following the purchase
accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues
were less favorably stated. Thus, the purchase accounting effect related to our insurance companies increased EBITDA above what the historical basis of accounting
would have generated.
For our insurance operations, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA. For
Care (Discontinued Operations), the reduction in EBITDA is related to accumulated depreciation and amortization, and certain operating expenses, which were
previously included in Adjusted EBITDA in prior periods.
Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs. In 2018, includes payments pursuant to a separation
agreement, dated November 10, 2015.
Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs, as those are recurring in nature and align with those business models.
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.
Adjusted EBITDA and Operating EBITDA - Non-GAAP
The tables below present Adjusted EBITDA and Operating EBITDA by business component.
($ in millions)
Pre-tax income/(loss) from continuing operations
Adjustments:
Corporate debt related interest expense(2)
Depreciation and amortization expense(3)
Non-cash fair value adjustments(4)
Non-recurring expenses(5)
Adjusted EBITDA
Add: Stock based compensation expense
Add: Vessel depreciation, net of capital expenditures
Less: Realized and unrealized gains (losses)(6)
Less: Third party non-controlling interests(7)
Operating EBITDA
($ in millions)
Pre-tax income/(loss) from continuing operations
Pre-tax income/(loss) from discontinued operations(1)
Adjustments:
Corporate debt related interest expense(2)
Depreciation and amortization expense(3)
Non-cash fair value adjustments(4)
Non-recurring expenses(5)
Adjusted EBITDA
Add: Stock based compensation expense
Add: Vessel depreciation, net of capital expenditures
Less: Realized and unrealized gains (losses)(6)
Less: Third party non-controlling interests(7)
Operating EBITDA
Year Ended December 31, 2019
Tiptree
Insurance
Tiptree
Capital
Corporate
Expenses
Total
41.0
$
21.0
$
(32.9) $
29.1
13.4
8.6
—
3.7
66.7
3.1
—
6.5
—
63.3
$
$
—
3.8
(3.1)
0.2
21.9
0.2
2.9
2.1
0.1
22.8
$
$
6.3
0.7
—
0.3
(25.6) $
3.1
—
—
—
(22.5) $
19.7
13.1
(3.1)
4.2
63.0
6.4
2.9
8.6
0.1
63.6
Year Ended December 31, 2018
Tiptree
Insurance
Tiptree
Capital
Corporate
Expenses
Total
$
18.6
—
(7.8) $
57.5
13.2
9.8
—
3.1
44.7
3.8
—
(16.0)
—
64.5
$
$
—
1.6
(41.1)
—
10.2
0.1
0.9
(2.5)
—
13.7
$
$
(30.6) $
—
5.0
0.2
—
(0.7)
(26.1) $
2.8
—
—
—
(23.3) $
(19.8)
57.5
18.2
11.6
(41.1)
2.4
28.8
6.7
0.9
(18.5)
—
54.9
$
$
$
$
$
$
_______________________________
The footnotes below correspond to the tables above, under “—Adjusted EBITDA and Operating EBITDA - Non-GAAP”
39
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes discontinued operations related to Care. For more information, see Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest
expense associated with asset-specific debt in Tiptree Insurance and Tiptree Capital is not added-back for Adjusted EBITDA and Operating EBITDA.
Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. Following the purchase
accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues
were less favorably stated. Thus, the purchase accounting effect related to our insurance companies increased EBITDA above what the historical basis of accounting
would have generated.
For our insurance operations, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA. For
Care (Discontinued Operations), the reduction in EBITDA is related to accumulated depreciation and amortization, and certain operating expenses, which were
previously included in Adjusted EBITDA in prior periods.
Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs. In 2018, includes payments pursuant to a separation
agreement, dated November 10, 2015.
Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs, as those are recurring in nature and align with those business models.
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.
Book Value per share - Non-GAAP
Management believes the use of this financial measure provides supplemental information useful to investors as book value is
frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides
a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares.
($ in millions, except per share information)
Total stockholders’ equity
Less non-controlling interests - other
Total stockholders’ equity, net of non-controlling interests - other
Total Common Shares outstanding
Book value per share
Invested & Total Capital - Non-GAAP
As of December 31,
2018
2019
$
$
$
$
$
411.5
13.4
398.1
34.6
11.52
$
399.3
12.2
387.1
35.9
10.79
Invested Capital represents its total cash investment, including any re-investment of earnings, and acquisition costs, net of tax.
Total Capital represents Invested Capital plus corporate debt.
($ in millions)
Total stockholders’ equity
Less non-controlling interest - other
Total stockholders’ equity, net of non-controlling interests - other
Plus Tiptree Insurance accumulated depreciation and amortization, net of tax
Plus acquisition costs
Invested Capital
Plus corporate debt
Total Capital
Tiptree Insurance - Underwriting Margin - Non-GAAP
As of December 31,
2018
2019
$
$
$
$
411.5
13.4
398.1
49.3
4.2
451.6
253.2
704.8
$
$
$
$
399.3
12.2
387.1
43.2
4.2
434.5
232.1
666.6
Underwriting margin is a measure of the underwriting profitability of our insurance operations. It represents net earned premiums,
service and administrative fees, ceding commissions and other income less policy and contract benefits and commission expense.
We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative
to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of
ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and
administrative fees, and other income.
40
The following table provides a reconciliation between underwriting margin and pre-tax income for the following periods:
($ in millions)
Revenues:
Net earned premiums
Service and administrative fees
Ceding commissions
Other income
Underwriting revenues - Non-GAAP
Less underwriting expenses:
Policy and contract benefits
Commission expense
Underwriting margin - Non-GAAP
Less operating expenses:
Employee compensation and benefits
Other expenses (excluding debt extinguishment expenses)
Combined Ratio
Plus investment revenues:
Net investment income
Net realized and unrealized gains
Less other expenses:
Interest expense
Debt extinguishment expenses
Depreciation and amortization expense
Pre-tax income (loss)
Tiptree Insurance Investment Portfolio - Non-GAAP
Year Ended December 31,
2019
2018
$
$
$
$
499.1
106.2
9.6
4.6
619.5
170.7
303.1
145.7
50.0
50.5
92.6%
14.0
6.9
14.8
1.2
9.1
41.0
$
$
$
$
427.8
102.3
9.7
2.6
542.4
152.1
262.5
127.8
45.8
41.5
92.5%
19.2
(11.7)
18.2
0.4
10.8
18.6
The following table provides a reconciliation between total investments and net investments for the following periods:
($ in millions)
Total Investments
Investment portfolio debt (1)
Cash and cash equivalents
Restricted cash (2)
Receivable due from brokers (3)
Liability due to brokers (3)
Net investments - Non-GAAP
As of December 31,
2018
2019
$
$
450.7
(25.0)
115.3
—
—
(1.1)
539.9
$
$
490.0
(80.0)
50.6
2.9
0.3
(0.5)
463.3
(1) Consists of asset based financing on loans, including certain credit investments, and working capital facilities. See Note (10) Debt, net in the notes to the consolidated financial
statements for further details.
(2) Restricted cash available to invest within certain credit investment funds which are consolidated under GAAP.
(3) Receivable due from and Liability due to brokers for unsettled trades within certain credit investment funds which are consolidated under GAAP.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are unrestricted cash, cash equivalents and other liquid investments and distributions from
operating subsidiaries, including income from our investment portfolio and sales of assets and investments. We intend to use
our cash resources to continue to fund our operations and grow our businesses. We may seek additional sources of cash to fund
acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent,
subsidiary or asset level. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress
credit facility, compensation, professional fees, office rent and insurance costs.
Our subsidiaries’ ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous
business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions,
availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans,
financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or
improve current ratings. We expect our cash and cash equivalents and distributions from operating subsidiaries and our
subsidiaries’ access to financing to be adequate to fund our operations for at least the next 12 months.
41
As of December 31, 2019, cash and cash equivalents, excluding restricted cash, were $133.1 million, compared to $86.0 million
at December 31, 2018, an increase of $47.1 million.
Our mortgage business relies on short term uncommitted sources of financing as a part of their normal course of operations. To
date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing,
then we may need to draw on other sources of liquidity to fund our mortgage business. See Note (10) Debt, net in the notes to
consolidated financial statements, for additional information regarding our mortgage warehouse borrowings.
For purposes of determining enterprise value and Adjusted EBITDA, we consider corporate credit agreements and preferred
trust securities, which we refer to as corporate debt, as corporate financing and associated interest expense is added back. The
below table outlines this amount by debt outstanding and interest expense at the insurance company and corporate level.
Corporate Debt
($ in millions)
Tiptree insurance
Corporate
Total
Corporate Debt Outstanding
as of December 31,
Interest Expense for the
Year Ended December 31,
2019
2018
2019
2018
$
$
185.0
68.2
253.2
$
$
160.0
72.1
232.1
$
$
13.4
6.3
19.7
$
$
13.1
5.0
18.1
On February 21, 2020, we refinanced our existing credit facility with Fortress. See (24) Subsequent Events - New Fortress Credit
Facility for details. As of February 21, 2020, our new $125 million credit facility with Fortress carries a rate of LIBOR (with a
minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum. We are required to make quarterly principal payments of
approximately $1.56 million.
On October 16, 2017, Fortegra completed an offering of $125 million Junior Subordinated Notes due 2057. The Junior
Subordinated Notes contain customary financial covenants that require, among other items, maximum leverage and limitations
on restricted payments under certain circumstances. As a result, in certain adverse circumstances, such limitations could restrict
our ability to grow, or limit the dividends to the holding company to pay our obligations. Substantially all of the net proceeds
from the Junior Subordinated Notes were used to repay existing indebtedness. We believe these funds repositioned Fortegra’s
balance sheet, strengthened the Company’s positioning with industry rating agencies, and generated a source of long term
capital. See Note (10) Debt, net for additional information of our debt and that of our subsidiaries.
Consolidated Comparison of Cash Flows
($ in millions)
Total cash provided by (used in):
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Year Ended December 31,
2019
2018
$
$
23.7
(8.3)
36.9
52.3
$
$
57.7
(109.1)
(2.0)
(53.4)
Cash provided by operating activities was $23.7 million for the year ended December 31, 2019 compared to $57.7 million of
cash provided by operating activities in the prior year period. In 2019, the primary sources of cash from operating activities
included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums, reinsurance payables,
and deferred revenues, offset by increases in notes and accounts receivable and reinsurance receivables related to growth in our
insurance operations. In the 2018 period, the primary sources of cash from operating activities included consolidated net income
(excluding unrealized gains and losses), increases in unearned premiums, reinsurance payables, deferred revenues and policy
liabilities in our insurance segment and mortgage sales outpacing originations in our mortgage loan origination business, offset
by increases in reinsurance receivables, deferred acquisition costs and notes and account receivable in our insurance segment.
Cash used in investing activities was $8.3 million for the year ended December 31, 2019 compared to $109.1 million of cash
used in investing activities for the prior year period. The primary use of cash from investing activities was the issuance of notes
receivables outpacing proceeds from the same. This was offset by proceeds associated with a contingent earn-out from our sale
of Care, proceeds from the sale of our Telos business, and sales and maturities of investments in excess of purchases in our
insurance investment portfolio. In the 2018 period, the primary uses of cash were purchases of investments exceeding proceeds
from sales and maturities of investments in our insurance investment portfolio, and investments in vessels within Tiptree Capital,
42
offset by proceeds from the sale of Care and proceeds from the prepayment of a seller note in connection with the sale of our
commercial lending business.
Cash provided by financing activities was $36.9 million for the year ended December 31, 2019 compared to cash used in financing
activities of $2.0 million in the prior year period. In 2019, our new borrowings from various debt arrangements exceeded our
principal paydowns primarily due to increased borrowings on our mortgage warehouse facilities due to increased volume in our
mortgage business, increased borrowing on our secured corporate credit agreement in our insurance business to support growth,
and a vessel backed term loan, offset by the repayment of asset based borrowings in our credit loan fund, held within our insurance
investment portfolio. Net cash provided by increased borrowings under our debt facilities was offset by the repurchase of $9.1
million of the Company’s Common Stock and the payment of $5.5 million in dividends. In the 2018 period, the uses of cash
from financing activities were share repurchases of $14.1 million and dividends paid of $4.8 million, offset by net new borrowings
under our debt facilities, including borrowings from our secured corporate credit agreement and net new borrowings on residential
mortgage warehouse borrowings, partially offset by principal paydowns on asset based revolving financing in our insurance
portfolio.
Contractual Obligations
The table below summarizes consolidated contractual obligations by period for payments that are due as of December 31, 2019:
($ in millions)
Corporate debt
Asset based debt
Total debt (1)
Operating lease obligations (2)
Total
Less than 1
year
$
$
$
93.2
90.7
183.9
7.2
191.1
$
$
$
1-3 years
3-5 years
— $
— $
21.6
21.6
12.5
34.1
$
$
18.0
18.0
9.6
27.6
$
$
More than 5
years
Total
160.0
—
160.0
11.7
171.7
$
$
$
253.2
130.3
383.5
41.0
424.5
(1) See Note (10) Debt, net, in the accompanying consolidated financial statements for additional information.
(2) Minimum rental obligation for office leases. The total rent expense for the year ended December 31, 2019, 2018 and 2017 was $8.6 million, $7.5 million and $6.8 million,
respectively.
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 generally accepted accounting principles (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. Further information can be found in the notes to the Consolidated Financial
Statements related to the following: valuation of assets where quoted market prices are not available can be found under “Fair
Value Measurement” in Note (2) Summary of Significant Accounting Policies; policies related to goodwill and intangible assets
can be found in Note (2) Summary of Significant Accounting Policies, “Goodwill and Identifiable Intangible Assets, Net”; and
additional information on income taxes can be found under Note (19) Income Taxes.
Fair Value Option
In addition to the financial instruments the Company is required to measure at fair value, the Company has elected to make an
irrevocable election to utilize fair value as the initial and subsequent measurement attribute for certain eligible financial assets
and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized
and unrealized gains (losses) within the consolidated statements of operations. The decision to elect the fair value option is
determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected.
Impairment
Vessels, net
Vessels are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of a
particular vessel may not be fully recoverable. Potential impairment indicators are primarily based upon a comparison of the
43
market value of a vessel to its carrying value. Market values are based upon quoted prices from industry-recognized sources.
The Company evaluates market quotes of vessels for reasonableness by comparison to available market transactions or internal
valuation models. An impairment charge would be recognized if the estimated undiscounted future net cash flows expected to
result from the operation and subsequent disposal of the vessel are less than the vessel’s carrying amount.
Goodwill and Intangible Assets, net
Goodwill (and indefinite-lived intangible assets) are subject to tests for impairment annually or if events or circumstances indicate
it is more likely than not they may be impaired. Other intangible assets are subject to impairment if events or circumstances
indicate a possible inability to realize the carrying amount. Indefinite-lived intangible assets are evaluated for impairment at
least annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other
amortizing intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such
evaluation of other intangible assets is initially based on undiscounted cash flow projections.
Other-Than-Temporary-Impairments
The Company regularly reviews AFS securities, held-to-maturity and cost investments with unrealized losses in order to evaluate
whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI)
is recognized in earnings in the consolidated statements of operations for debt securities that the Company has an intent to sell
or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis. For those
securities that the Company does not intend to sell nor expect to be required to sell, credit-related impairment is recognized in
earnings, with the non-credit-related impairment recorded in AOCI. An unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis. Unrealized losses for AFS securities that are determined to be temporary
in nature are recorded, net of tax, in AOCI.
Management’s estimate of OTTI includes, among other things: (i) the duration of time and the relative magnitude to which fair
value of the security has been below amortized cost; (ii) the financial condition and near term prospects of the issuer of the
investment; (iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer
of the investment; (iv) whether it is more likely than not that the Company will sell a security before recovery of its amortized
cost basis; (v) whether a debt security exhibits cash flow deterioration; and (vi) whether the security’s decline is attributable to
specific conditions, such as conditions in an industry or in a geographic location.
Reserves
Insurance Reserves
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial
methods. Credit life and 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.
44
Deferred Acquisition Costs
The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s
insurance segment.
Insurance Policy Related
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.
The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers
investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable
insurance related deferred acquisition costs were recognized during the years ended December 31, 2019, 2018 and 2017,
respectively.
Non-insurance Policy Related
Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that
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 deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result
of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended
December 31, 2019, 2018 and 2017, respectively.
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.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software
development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed
and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may
occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years
ended December 31, 2019, 2018 and 2017, respectively, the Company did not incur a loss with respect to a specific significant
service fee contract.
Administrative Fees. 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 programs, motor club programs, and warranty programs.
Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance
policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's,
pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available
information, and periodically reviews the selections as additional information becomes available.
45
Ceding Commissions
Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part,
underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments
to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. The
adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's
benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
Stock Based Compensation
The Company measures compensation cost for equity-based awards at fair value and recognizes compensation over the service
period for awards expected to vest. The fair value of restricted stock units and restricted stock awards are based on the number
of shares granted and the quoted price of our Common Stock at the time of grant. In addition, the estimation of equity-based
awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical
experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.
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, 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.
Significant Accounting Policies Related to Dispositions, Assets Held for Sale and Discontinued Operations
Revenue Recognition
Rental Revenue (Care)
Rental revenue from residents in managed properties are recognized monthly as services are provided, as lease periods for
residents are short-term in nature. The Company recognizes rental revenue from triple net lease properties on a straight-line
basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time
pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher
than those in the primary term are excluded from the calculation of straight-line rent if the renewals are not reasonably assured.
The Company commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes
lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations
under the lease.
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.
46
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we enter into various off-balance sheet arrangements including entering into derivative financial
instruments and hedging transactions, operating leases and sponsoring and owning interests in consolidated and non-consolidated
variable interest entities.
Further disclosure on our off-balance sheet arrangements as of December 31, 2019 is presented in the “Notes to Consolidated
Financial Statements” in “Part II. Item 8. Financial Statements and Supplementary Data” of this filing as follows:
• Note (9) Derivative Financial Instruments and Hedging
• Note (20) Commitments and Contingencies
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk related to borrowings in various businesses. These risks result primarily from changes in
LIBOR rates and the spread over LIBOR rates related to the credit risks of our businesses.
For fixed rate debt, interest rate fluctuations generally affect the fair value of our liabilities, but do not impact our earnings.
Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until such obligations mature
or until we elect to prepay and refinance such obligations. If interest rates have risen at the time our fixed rate debt matures or
is refinanced, our future earnings could be adversely affected by additional borrowing costs. Conversely, lower interest rates at
the time of maturity or refinancing may lower our overall interest expense. As of December 31, 2019, the Company had $125
million of general purpose fixed rate debt outstanding maturing in 2057.
For general purpose floating rate debt, interest rate fluctuations primarily affect interest expense and cash flows. If market interest
rates rise, our earnings could be adversely affected by an increase in interest expense. In contrast, lower interest rates may reduce
our interest expense and improve our earnings, except to the extent that our borrowings are subject to interest rate floors. The
floating interest rate risk of asset based financing is generally offset as the financing and the purchased financial asset are
generally subject to the same interest rate risk. For floating rate risk of other asset based financing such as borrowings to finance
acquisitions of real estate, we generally hedge our exposure to the variability of the benchmark index with an interest rate swap.
As of December 31, 2019, we had $68.2 million of general purpose floating rate debt with a weighted average rate of 7.2%. A
100 basis point change in interest rates would increase interest expense by $0.5 million and decrease interest rate expense by
$0.2 million (including the effect of applicable floors) on an annualized basis. As of December 31, 2018, we had $72.1 million
of general purpose floating rate debt with a weighted average rate of 7.9%. A 100 basis point change in interest rates would
increase interest expense by $0.7 million and decrease interest rate expense by $0.7 million (including the effect of applicable
floors) on an annualized basis.
We also invest in bonds, loans or other interest bearing instruments. The fair values of such investments fluctuate in response
to changes in market interest rates. Increases and decreases in interest rates generally translate into decreases and increases in
fair values of these instruments. Some of these investments bear a floating rate of interest which subjects the Company to cash
flow risk based upon changes in the underlying interest rate index. As noted above in the discussion of risks related to floating
rate borrowings, the Company mitigates a significant amount of our floating rate risk by matching the funding of such investments
with borrowings based upon the same interest rate index. Additionally, fair values of interest rate sensitive instruments may be
affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions.
As of December 31, 2019, we had $360 million invested in interest bearing instruments, which represents 49% of the total
investments portfolio. The estimated effects of a hypothetical increase in interest rates of 100 bps would result in a decrease to
the fair value of the portfolio by $7.9 million. As of December 31, 2018, we had $420 million invested in interest bearing
instruments, which represents 60% of the total investments portfolio. The estimated effects of a hypothetical increase in interest
rates of 100 bps would result in a decrease to the fair value of the portfolio by $7.1 million.
47
Credit Risk
In 2019, we reduced exposure to levered credit through the sale of corporate loans, and exited almost all of our investments in
non-performing loans. We are exposed to credit risk related to the following loan investments held within the insurance business:
($ in millions)
Investments in Loans
Corporate loans
Non-performing loans
Total
As of December 31,
2018
2019
$
$
9.8
0.4
10.2
$
$
130.9
27.6
158.5
Our insurance business also has exposure to credit risk in the form of fixed income securities which are primarily invested in
high-grade government, municipal and corporate debt securities. We are exposed to credit risk related to the following debt
investments held within the insurance business:
($ in millions)
Investments in debt securities (1)
Corporate securities
Asset backed securities
Obligations of foreign governments
Other investments
Total
As of December 31,
2018
2019
$
$
51.2
44.0
1.1
40.3
136.6
$
$
95.7
40.7
6.8
8.5
151.7
(1) The Company also holds interests in U.S. Treasury securities and obligations of U.S. government authorities and agencies, and state and political
subdivisions of $237.9 million and $139.2 million as of December 31, 2019 and 2018, respectively.
Credit risk related to other credit related investments within the portfolio is the exposure to the adverse changes in the
creditworthiness of individual investment holdings, issuers, groups of issuers, industries, and countries. A widening of
credit spreads by 100 bps for debt securities (excluding other investments) would result in a decrease of $5.3 million to
the fair value of the portfolio as of December 31, 2019. As of December 31, 2019 and 2018, 69% and 93%, respectively,
of the debt securities had investment grade ratings.
In addition, our mortgage business also underwrites mortgage loans for the purpose of selling them into the secondary
market. Due to the relatively short holding period, the credit risk associated with mortgage loans held for sale is not
expected to be significant.
See Note (5) Investments to the consolidated financial statements for more information regarding our investments in loans
by type.
Market Risk
We are primarily exposed to market risk related to the following investments:
($ in millions)
As of December 31, 2019
Tiptree
Capital
Tiptree
Insurance
Total
As of December 31, 2018
Tiptree
Capital
Tiptree
Insurance
Total
Invesque
Fixed income exchange traded fund
Other equity securities
Total equity securities
$
$
19.4
25.0
18.4
62.8
$
$
92.6
—
—
92.6
$
$
112.0
25.0
18.4
155.4
$
$
19.6
—
9.8
29.4
$
$
93.6
—
—
93.6
$
$
113.2
—
9.8
123.0
A 10% increase or decrease in the fair value of such investments would result in $15.5 million and $12.3 million of unrealized
gains and losses as of December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, we owned 16.6 million shares of common stock, or approximately 31%, of Invesque, a real
estate investment company that specializes in health care real estate and senior living property investment throughout North
America. The value of our Invesque shares is reported at fair market value on a quarterly basis and fluctuates. Invesque has
historically paid monthly dividends but there can be no assurance that Invesque will continue to pay dividends in the same
frequency or amount. A loss in the fair market value of our Invesque shares or a reduction or discontinuation in the dividends
48
paid on our Invesque shares could have a material adverse effect on our financial condition and results of operations. The
Company’s investment in Invesque was subject to certain contractual and functional sale restrictions. As of December 31, 2018,
the fair value of the Invesque shares was based on the market price adjusted for the impact of these restrictions. As of December
31, 2019, these restrictions are no longer applicable.
See “Risk Factors — Risks Related to our Business - Our investment in Invesque shares is subject to market volatility and the
risk that Invesque changes its dividend policy”.
Counterparty Risk
We are subject to counterparty risk to the extent that we engage in derivative activities for hedging or other purposes. As of
December 31, 2019 and 2018, the total fair value of derivative assets subject to counterparty risk, including the effect of any
legal right of offset, totaled $7.5 million and $3.5 million, respectively. We generally manage our counterparty risk to derivative
counterparties by entering into contracts with counterparties of high credit quality.
Reinsurance receivables were $539.8 million and $420.4 million as of December 31, 2019 and 2018, respectively. Of those
amounts, $334 million and $270 million relates to contracts where we hold collateral or receive letters of credit in excess of the
receivables balance. The remainder is held with high quality reinsurers, substantially all of which have a rating of A or better
by A.M. Best. As of December 31, 2019, 5 counterparties constituted more than 10% of the uncollateralized reinsurance receivable
exposure, ranging from 10% to 20%, with ratings ranging from A- to A+.
We were also exposed to counterparty risk of approximately $105.4 million and $84.5 million as of December 31, 2019 and
2018, respectively, related to our retrospective commission arrangements; associated risks are offset by the Company’s contractual
ability to withhold future commissions against the retrospective balances. In addition, we are exposed to counterparty risk of
approximately $42.2 million and $13.1 million as of December 31, 2019 and 2018, respectively, related to our premium financing
business. The risk associated with such arrangements is mitigated by the fact that we have the contractual ability to cancel the
insurance policy and have premiums refunded to us by the insurer in the event of a counterparty default.
49
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
F- 2
F- 4
F- 5
F- 6
F- 7
F- 9
F- 11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Tiptree Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tiptree Inc. and subsidiaries (the "Company") as of
December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related
notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 11, 2020, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
March 11, 2020
We have served as the Company's auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Tiptree Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Tiptree Inc. and subsidiaries (the “Company”) as of December
31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our
report dated March 11, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, New York
March 11, 2020
TIPTREE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
Assets:
Investments:
Available for sale securities, at fair value
Loans, at fair value
Equity securities
Other investments
Total investments
Cash and cash equivalents
Restricted cash
Notes and accounts receivable, net
Reinsurance receivables
Deferred acquisition costs
Goodwill
Intangible assets, net
Other assets
Assets held for sale
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Debt, net
Unearned premiums
Policy liabilities and unpaid claims
Deferred revenue
Reinsurance payable
Other liabilities and accrued expenses
Liabilities held for sale
Total liabilities
Stockholders’ Equity:
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
Common Stock: $0.001 par value, 200,000,000 shares authorized, 34,562,553 and 35,870,348 shares
issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Total Tiptree Inc. stockholders’ equity
Non-controlling interests - Other
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
F- 4
As of December 31,
2019
2018
335,192
108,894
155,378
137,472
736,936
133,117
11,473
286,968
539,833
166,493
99,147
47,974
68,510
107,835
2,198,286
374,454
754,993
144,384
94,601
143,869
172,140
102,430
1,786,871
$
$
$
$
283,563
215,383
122,979
75,002
696,927
86,003
10,521
223,105
420,351
170,063
91,562
52,121
46,034
68,231
1,864,918
354,083
599,444
131,611
75,754
117,597
124,190
62,980
1,465,659
— $
—
35
326,140
1,698
70,189
398,062
13,353
411,415
2,198,286
$
36
331,892
(2,058)
57,231
387,101
12,158
399,259
1,864,918
$
$
$
$
$
$
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
Year Ended December 31,
2018
2017
2019
499,108
106,239
9,608
14,017
83,868
59,888
772,728
170,681
303,057
129,479
27,059
13,569
99,744
743,589
—
—
—
—
29,139
9,017
20,122
—
—
—
—
20,122
—
1,761
18,361
0.52
—
0.52
0.50
—
0.50
$
$
$
$
$
427,837
102,315
9,651
19,179
28,782
38,062
625,826
152,095
262,460
113,557
27,013
12,596
77,901
645,622
—
—
—
—
(19,796)
(5,909)
(13,887)
624
56,860
13,714
43,770
29,883
5,500
450
23,933
$
$
(0.38) $
1.07
0.69
$
(0.38)
1.07
0.69
$
371,700
95,160
8,770
16,286
47,607
42,275
581,798
123,959
241,835
115,949
25,562
13,841
74,439
595,585
24,903
14,446
10,457
10,457
(3,330)
(12,562)
9,232
(6,222)
—
(2,224)
(3,998)
5,234
748
882
3,604
0.22
(0.10)
0.12
0.21
(0.10)
0.11
34,578,292
34,578,292
34,715,852
34,715,852
29,134,190
37,306,632
0.16
$
0.14
$
0.12
$
$
$
$
$
$
Revenues:
Earned premiums, net
Service and administrative fees
Ceding commissions
Net investment income
Net realized and unrealized gains (losses)
Other revenue
Total revenues
Expenses:
Policy and contract benefits
Commission expense
Employee compensation and benefits
Interest expense
Depreciation and amortization
Other expenses
Total expenses
Other income:
Results of consolidated CLOs:
Income attributable to consolidated CLOs
Expenses attributable to consolidated CLOs
Net income (loss) attributable to consolidated CLOs
Total other income
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from continuing operations
Discontinued operations:
Income (loss) before taxes from discontinued operations
Gain on sale of discontinued operations
Less: Provision (benefit) for income taxes
Net income (loss) from discontinued operations
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests - TFP
Less: net income (loss) attributable to non-controlling interests - Other
Net income (loss) attributable to Common Stockholders
Net income (loss) per Common Share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
Weighted average number of Common Shares:
Basic
Diluted
Dividends declared per Common Share
See accompanying notes to consolidated financial statements.
F- 5
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31,
2019
2018
2017
$
20,122
$
29,883
$
5,234
6,320
(1,409)
(1,312)
280
3,879
—
—
—
—
—
3,879
24,001
—
1,785
22,216
$
(2,919)
662
819
(171)
(1,609)
1,111
(276)
(3,845)
936
(2,074)
(3,683)
26,200
5,278
13
20,909
$
806
(284)
(435)
153
240
282
(92)
184
(59)
315
555
5,789
842
932
4,015
Net income (loss) before non-controlling interests
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during the period
Related tax (expense) benefit
Reclassification of (gains) losses included in net income
Related tax expense (benefit)
Unrealized gains (losses) on available for sale securities, net of tax
Interest rate swaps (cash flow hedges):
Unrealized gains (losses) on interest rate swaps
Related tax (expense) benefit
Reclassification of (gains) losses included in net income (1)
Related tax expense (benefit)
Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to non-controlling interests - TFP
Less: Comprehensive income (loss) attributable to non-controlling interests - Other
Comprehensive income (loss) attributable to Common Stockholders
$
(1)
Deconsolidated as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
See accompanying notes to consolidated financial statements.
F- 6
Number of Shares
Par Value
Common
Stock
Class B
Common
Stock
TIPTREE INC. AND SUBSIDIARIES
Statements of Changes in Stockholders’ Equity
(in thousands, except shares)
Additional
paid in
capital
Accumulated
other
comprehensive
income (loss)
Shares held by subsidiaries
Retained
earnings
Common
Stock
Common
Stock
Amount
Class B
Shares
Class B
Amount
Total
stockholders’
equity to
Tiptree Inc.
Non-
controlling
interests -
TFP
Non-
controlling
interests -
Other
Total
stockholders'
equity
$ 297,391
$
555
$ 37,974
(6,596,000) $(42,524)
(8,049,029) $
(8) $
293,431
$ 76,077
$ 20,636
$
390,144
Class
B
$
8
—
—
—
—
—
—
—
—
—
—
—
8
—
—
$
Balance at December 31, 2016
34,983,616
8,049,029
$
Amortization of share-based
incentive compensation
Vesting of share-based incentive
compensation
Shares issued to settle contingent
consideration
Issuance of common stock for cash
upon exercise of stock options
Shares acquired by subsidiaries
Non-controlling interest
contributions
Non-controlling interest
distributions
Net changes in non-controlling
interest
Dividends declared
Other comprehensive income, net
of tax
Net income
Balance at December 31, 2017
Amortization of share-based
incentive compensation
Vesting of share-based incentive
compensation
Shares purchased under stock
purchase plan
Reorganization merger (1)
Cancellation of treasury shares
Non-controlling interest
contributions
Non-controlling interest
distributions
Net changes in non-controlling
interest
Dividends declared
Other comprehensive income, net
of tax
Net income
Balance at December 31, 2018
—
19,388
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
35,003,004
8,049,029
$
—
31,527
(2,177,235)
—
—
—
(5,035,977)
—
—
—
—
—
—
—
—
—
—
—
—
—
35,870,348
— $
35
—
—
—
—
—
—
—
—
—
—
—
35
—
—
—
—
—
—
—
—
36
2,139
(588)
(76)
(1,371)
—
—
—
(1,913)
—
—
—
—
—
—
—
—
—
—
—
—
411
—
—
—
—
—
131,483
—
854
756,046
4,914
— 1,510,920
9,471
— (1,000,000)
(7,300)
—
—
—
(3,499)
—
3,604
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 295,582
$
966
$ 38,079
(5,197,551) $(34,585)
(8,049,029) $
8,049,029
(8,049,029)
8
(8)
82,523
(341)
— 8,049,029
(5) —
(33,530)
— 5,035,977
33,535
2,465
(907)
(2) —
(14,109)
—
—
—
—
—
—
—
—
(132)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,781)
(2,683)
—
— 23,933
—
—
161,574
1,050
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8) $
—
—
—
8
—
—
—
—
—
—
—
2,139
266
4,838
8,100
(7,300)
—
—
(1,913)
(3,499)
411
3,604
—
—
—
—
—
—
3,346
5,485
—
—
—
—
266
4,838
8,100
(7,300)
2,464
2,464
(966)
(2,002)
(2,968)
1,541
—
94
748
(6,173)
—
50
882
(6,545)
(3,499)
555
5,234
300,077
$ 77,494
$ 19,203
$
396,774
2,465
143
(14,111)
82,190
—
—
—
(132)
(4,781)
(2,683)
23,933
—
—
—
(82,190)
—
3,889
6,354
—
—
—
—
143
(14,111)
—
—
—
3,150
3,150
(241)
—
(241)
—
—
(14,097)
—
(563)
5,500
(437)
450
(14,229)
(4,781)
(3,683)
29,883
$ — $ 331,892
$
(2,058) $ 57,231
— $
— $ — $
387,101
$
— $ 12,158
$
399,259
(1)
Includes the exchange of 424,399 units of TFP for 1,187,468 shares of Common Stock.
See accompanying notes to consolidated financial statements.
F- 7
TIPTREE INC. AND SUBSIDIARIES
Statements of Changes in Stockholders’ Equity
(in thousands, except shares)
Common Stock
Number of
shares
Par
value
Additional
paid in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
stockholders’
equity to
Tiptree Inc.
Non-
controlling
interests -
Other
Total
stockholders'
equity
$ 331,892
$
(2,058) $57,231
$
387,101
$ 12,158
$ 399,259
35,870,348
$
—
—
164,935
36
—
—
—
(1,472,730)
(1)
(9,084)
—
—
—
—
—
—
—
—
—
—
—
—
35
—
3,145
187
—
—
—
—
—
—
(99)
—
—
—
—
—
—
99
—
—
—
—
—
—
—
—
—
3,145
2,917
6,062
187
(2,483)
(2,296)
(9,085)
—
—
—
—
61
(9,085)
61
(3,585)
(3,585)
2,500
—
24
1,761
2,500
(5,502)
3,879
20,122
— (5,502)
(5,502)
3,855
—
— 18,361
3,855
18,361
Balance at December 31, 2018
Adoption of accounting standard(1)
Amortization of share-based
incentive compensation
Vesting of share-based incentive
compensation (2)
Shares purchased under stock
purchase plan
Non-controlling interest
contributions
Non-controlling interest
distributions (2)
Net change in non-controlling
interest
Dividends declared
Other comprehensive income, net
of tax
Net income
Balance at December 31, 2019
34,562,553
$
$ 326,140
$
1,698
$70,189
$
398,062
$ 13,353
$ 411,415
(1)
(2)
Amounts reclassified due to adoption of ASU 2018-02. See Note (2) Summary of Significant Accounting Policies.
Includes subsidiary RSU exchanges. See Note (18) Stock Based Compensation.
See accompanying notes to consolidated financial statements.
F- 8
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
2018
2017
2019
Operating Activities:
Net income (loss) attributable to Common Stockholders
Net income (loss) attributable to non-controlling interests - TFP
Net income (loss) attributable to non-controlling interests - Other
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating activities
$
$
18,361
—
1,761
20,122
$
23,933
5,500
450
29,883
Net realized and unrealized (gains) losses
Net (gain) on sale of businesses
Realized (gain) on cash flow hedge
Change in fair value of contingent consideration
Non-cash compensation expense
Amortization/accretion of premiums and discounts
Depreciation and amortization expense
Non-cash lease expense
Bad debt expense
Amortization of deferred financing costs
Loss on extinguishment of debt
Deferred tax expense (benefit)
Changes in operating assets and liabilities:
Mortgage loans originated for sale
Proceeds from the sale of mortgage loans originated for sale
(Increase) decrease in notes and accounts receivable
(Increase) decrease in reinsurance receivables
(Increase) decrease in deferred acquisition costs
(Increase) decrease in other assets
Increase (decrease) in unearned premiums
Increase (decrease) in policy liabilities and unpaid claims
Increase (decrease) in deferred revenue
Increase (decrease) in reinsurance payable
Increase (decrease) in other liabilities and accrued expenses
Operating activities from consolidated CLOs
Net cash provided by (used in) operating activities
Investing Activities:
Purchases of investments
Proceeds from sales and maturities of investments
(Increase) decrease in loans owned, at amortized cost, net
Proceeds from the sale of real estate
Purchases of property, plant and equipment
Proceeds from the sale of businesses
Proceeds from notes receivable
Issuance of notes receivable
Business and asset acquisitions, net of cash and deposits
Investing activities from consolidated CLOs
Net cash provided by (used in) investing activities
Financing Activities:
Dividends paid
Non-controlling interest contributions
Non-controlling interest distributions
Payment of debt issuance costs
Proceeds from borrowings and mortgage notes payable
Principal paydowns of borrowings and mortgage notes payable
Proceeds from the exercise of options for Common Stock
Repurchases of Common Stock
Financing activities from consolidated CLOs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash – beginning of period
Cash, cash equivalents and restricted cash – beginning of period - held for sale
Cash, cash equivalents and restricted cash – end of period (1)
Less: Reclassification of cash to assets held for sale
Cash, cash equivalents and restricted cash – end of period
$
F- 9
(83,868)
(7,598)
—
—
6,363
1,161
13,569
7,568
140
714
1,241
6,815
(2,048,228)
2,043,097
(33,085)
(119,482)
3,570
269
155,549
12,773
16,397
26,272
383
—
23,742
(389,206)
394,331
—
11,857
(8,519)
18,329
36,690
(67,176)
(4,633)
—
(8,327)
(5,502)
61
(3,585)
(586)
2,237,329
(2,181,704)
—
(9,085)
—
36,928
52,343
96,524
2,860
151,727
7,137
144,590
$
(28,782)
(56,860)
—
—
6,657
1,029
12,596
—
243
934
428
4,011
(1,533,365)
1,590,546
(35,256)
(67,384)
(22,901)
(12,400)
95,998
19,608
19,009
27,043
6,687
—
57,724
(327,617)
190,942
—
17,705
(3,749)
15,709
29,234
(31,331)
—
—
(109,107)
(4,781)
3,150
(241)
(1,143)
1,632,469
(1,617,346)
—
(14,111)
—
(2,003)
(53,386)
142,237
10,533
99,384
2,860
96,524
$
3,604
748
882
5,234
(47,607)
(1,944)
(877)
3,192
6,826
1,316
29,992
—
1,019
2,770
1,163
(11,249)
(1,592,726)
1,658,646
(48,085)
(53,256)
(20,554)
(4,849)
87,880
5,729
4,082
19,966
3,205
(2,954)
46,919
(221,096)
296,855
(37,166)
14,035
(1,747)
14,089
50,175
(41,861)
(85,826)
225,317
212,775
(3,499)
2,464
(2,224)
(9,588)
1,857,571
(1,816,537)
8,100
(7,300)
(223,393)
(194,406)
65,288
74,258
13,224
152,770
10,533
142,237
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest expense
Cash (received) paid during the period for income taxes
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Right-of-use asset obtained in exchange for lease liability
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
Acquisition of non-controlling interest
Equity securities acquired through the sale of a subsidiary and asset sales
Cancellation of treasury shares
Assets of consolidated CLOs deconsolidated due to sale and redemption
Liabilities of consolidated CLOs deconsolidated due to sale and redemption
Real estate acquired through asset acquisition
Seller provided financing related to the sale of subsidiary
Intangible assets related to in-place leases acquired through asset acquisition
Settlement of contingent consideration payable with Common Stock
Debt assumed through acquisitions
Reconciliation of cash, cash equivalents and restricted cash shown in the statement of cash flows
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
Includes cash in assets held for sale
(1)
Year ended December 31,
2018
2017
2019
26,224
3,301
$
$
25,976
$
(5,088) $
34,113
5,049
33,558
2,596
2,500
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
7,367
82,190
135,675
33,535
— $
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
—
15,033
—
—
—
765,603
729,597
8,178
11,000
2,049
4,838
7,586
As of December 31,
2018
2019
133,117
11,473
144,590
$
$
86,003
10,521
96,524
$
$
2017
110,667
31,570
142,237
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F- 10
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(1) Organization
Tiptree Inc. (together with its consolidated subsidiaries, collectively, Tiptree, the Company, or we) is a Maryland Corporation
that was incorporated on March 19, 2007. Tiptree’s Common Stock trades on the Nasdaq Capital Market under the symbol
“TIPT”. Tiptree is a holding company that combines specialty insurance operations with investment management capabilities.
We allocate our capital across our insurance operations and other investments. We classify our business into one reportable
segment: Tiptree Insurance. We refer to our non-insurance operations, assets and other investments, which is comprised of our
non-reportable segments and other business activities, as Tiptree Capital.
In this report, “Common Stock” means Class A common stock $0.001 par value for periods prior to June 7, 2018 and thereafter
the common stock $0.001 par value.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of Tiptree have been prepared in accordance with generally accepted
accounting principles in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries.
The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company.
Tiptree consolidates those entities in which it has an investment 50% or more of voting rights or has control over significant
operating, financial and investing decisions of the entity as well as variable interest entities (VIEs) in which Tiptree is determined
to be the primary beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated
financial support from other parties.
A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct
the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or
the right to receive benefits from the VIE that could potentially be significant to the VIE. Tiptree’s consolidated VIEs are entities
which Tiptree is considered the primary beneficiary through its controlling financial interests.
Non-controlling interests on the consolidated balance sheets represent the ownership interests in certain consolidated subsidiaries
held by entities or persons other than Tiptree. Accounts and transactions between consolidated entities have been eliminated.
As a result of changes in presentation, certain prior year amounts have been reclassified to conform to the current presentation.
These reclassifications had no effect on the reported results of operations.
As a result of the adoption of ASU 2016-02, Leases (Topic 842), the Company’s operating leases are now recognized on the
consolidated balance sheets as of January 1, 2019. See Note (14) Other Assets and Other Liabilities and Accrued Expenses for
additional information.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying
notes. Management makes estimates and assumptions that include, but are not limited to, the determination of the following
significant items:
Fair value of financial assets and liabilities, including, but not limited to, securities, loans and derivatives
•
• Value of acquired assets and liabilities;
• Carrying value of goodwill and other intangibles, including estimated amortization period and useful lives;
• Vessel valuations, residual value of vessels and the useful lives of vessels;
• Reserves for unpaid losses and loss adjustment expenses, estimated future claims and losses, potential litigation and
other claims;
• Deferred acquisition costs and value of business acquired (VOBA);
• Valuation of contingent share issuances for compensation and purchase consideration, including estimates of number
F- 11
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
of shares and vesting schedules;
• Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service and
administration fees, and loan origination fees; and
• Other matters that affect the reported amounts and disclosure of contingencies in the consolidated financial statements
Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially
from management’s estimates.
Business Combination Accounting
The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method
requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value
as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of
purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives
and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future
amortization and possible impairment charges. Contingent consideration, if any, is measured at fair value on the date of acquisition.
The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other
expense in the consolidated statements of operations. Acquisition and transaction costs are expensed as incurred.
In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-
controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a
preliminary estimate of fair value, which may be adjusted during the measurement period, primarily due to the results of valuation
studies applicable to the business combination.
Acquisitions that do not meet the criteria for the acquisition method of accounting are accounted for as acquisitions of assets.
On July 1, 2019, a subsidiary in our insurance business acquired a majority interest in Ingenasys, Ltd., the parent holding company
of Defend Insurance Group (Defend), for total net cash consideration of approximately $4.6 million. Defend is an automotive
finance and insurance provider and insurance administrator operating in the Czech Republic, Poland, Hungary, Slovakia, and
the UK. Identifiable assets acquired were primarily made up of goodwill and intangible assets. See Note (8) Goodwill and
Intangible Assets, net.
Dispositions, Assets Held for Sale and Discontinued Operations
The results of operations of a business that has either been disposed of or are classified as held for sale are reported in discontinued
operations if the disposal of the business represents a strategic shift that has (or will have) a major effect on an entity’s operations
and financial results. The Company carries assets and liabilities held for sale at the lower of carrying value on the date the asset
is initially classified as held for sale or fair value less costs to sell. At the time of reclassification to held for sale, the Company
ceases the recording of depreciation and amortization on assets transferred.
Accounting policies specific to our dispositions, assets held for sale and discontinued operations are described in more detail in
(3) Dispositions, Assets Held for Sale and Discontinued Operations.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. The three levels, from highest to lowest, are defined as follows:
• Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date.
• Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or
indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments
in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial
F- 12
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
assets and liabilities carried at Level 2 are valued based on one or more of the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in nonactive markets;
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability;
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through
correlation or other means for substantially the full term of the asset or liability.
• Level 3 – Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data
and assumptions that are used in pricing the asset or liability.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of
factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active
exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs
that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the
degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3
of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement
in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Tiptree’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the
consideration of factors specific to the investment. From time to time, Tiptree’s assets and liabilities will transfer between one
level to another level. It is Tiptree’s policy to recognize transfers between different levels at the end of each reporting period.
Tiptree utilizes both observable and unobservable inputs in its valuation methodologies. Observable inputs include benchmark
yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition,
specific issuer information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be
market participants. Unobservable inputs may include expected cash flow streams, default rates, supply and demand
considerations and market volatility.
Fair Value Option
In addition to the financial instruments the Company is required to measure at fair value, the Company has elected to make an
irrevocable election to utilize fair value as the initial and subsequent measurement attribute for certain eligible financial assets
and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized
and unrealized gains (losses) within the consolidated statements of operations. The decision to elect the fair value option is
determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected.
Derivative Financial Instruments and Hedging
From time to time, derivative instruments are used in the overall strategy to manage exposure to market risks primarily related
to fluctuations in interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments
are measured at fair value on a recurring basis and are included in other investments or other liabilities and accrued expenses
in the consolidated balance sheets.
Derivative Instruments Designated as Cash Flow Hedging Instruments
The Company uses cash flow hedges to reduce the exposure to variability of cash flows from floating rate borrowings. If a
derivative instrument meets certain cash flow hedge accounting criteria, it is recorded on the consolidated balance sheet at its
fair value, as either an asset or a liability, with offsetting changes in fair value recognized in AOCI. The effective portion of the
changes in fair value of derivatives are reported in AOCI and amounts previously recorded in AOCI are recognized in earnings
in the period in which the hedged transaction affects earnings. Any ineffective portions of the change in fair value of the derivative
are recognized in current earnings.
Stock Based Compensation
The Company accounts for equity based compensation issued to employees, directors, and affiliates of the Company using the
current fair value based methodology.
F- 13
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The Company initially measures the cost of restricted stock unit (RSUs) and restricted stock awards at fair value on the date of
grant and subsequently recognizes the cost of such awards over the vesting period using the straight-line method. The
compensation costs are charged to expense over the vesting period with a corresponding credit to additional paid-in capital.
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of
grant. Compensation cost is recognized over the required service period, generally defined as the vesting period.
Grants of subsidiary RSUs exchangeable into Common Stock of the Company were initially accounted for as liabilities based
upon their expected settlement method. Changes in fair value of the awards were recognized in earnings for the relative amount
of cumulative compensation cost. The Company used the straight-line method to recognize compensation expense for the time
vesting RSUs over the requisite service periods, beginning on the grant date. In June 2017, when sufficient shares were made
available, we accounted for these RSUs under the fair value method and ceased marking the shares to market. The Company
uses the graded-vesting method to recognize compensation expense for the performance vesting RSUs. Changes in fair value
of shares underlying liability awards are recognized in earnings to the extent of the accumulated amortization. Compensation
expense will be recognized to the extent that it is probable that the performance condition will be achieved. The Company
reassesses the probability of satisfaction of the performance condition for the performance vesting RSUs for each reporting
period.
Income Taxes
Deferred tax assets and liabilities are determined using the asset and liability method. Under this method, deferred tax assets
and liabilities are established for future tax consequences of temporary differences between the financial statement carrying
amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary differences are expected to reverse. A valuation
allowance is established when necessary to reduce a deferred tax asset to the amount expected to be realized. Several of the
Company’s subsidiaries file state tax returns on a standalone basis. Two of our subsidiaries file federal and state tax returns on
a stand alone basis, one of which is held for sale. These U.S. federal and state income tax returns, when filed, will be subject to
examination by the Internal Revenue Service and state departments of revenue. See Note (19) Income Taxes.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether
the tax positions are “more likely than not” of being sustained by the applicable tax authority. The Company’s tax benefit or tax
expense is adjusted accordingly for tax positions not deemed to meet the more likely than not threshold. The Company’s policy
is to account for interest as a component of interest expense and penalties as a component of other expenses.
Earnings Per Share
The Company presents both basic and diluted earnings per Common Share in its consolidated financial statements and footnotes
thereto. Basic earnings per Common Share (Basic EPS) excludes dilution and is computed by dividing net income or loss
available to common stockholders by the weighted average number of common shares outstanding, including vested restricted
share units, for the period. Diluted earnings per Common Share (Diluted EPS) reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted into common shares where such exercise or
conversion would result in a lower earnings per share amount.
The Company calculates EPS using the two-class method, which is an earnings allocation formula that determines EPS for
common shares and participating securities. Unvested RSUs contain non-forfeitable rights to distributions or distribution
equivalents (whether paid or unpaid) and are participating securities that are included in the computation of EPS using the two-
class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and participating securities
based on their respective rights to receive distributions. The participating securities do not have a contractual obligation to absorb
losses and are only allocated in periods where there is income from continuing operations.
See Note (21) Earnings Per Share, for EPS computations.
Investments
The Company records all investment transactions on a trade date basis. Realized gains (losses) are determined using the specific-
identification method. The Company classifies its investments in debt securities as available for sale or held-to-maturity based
F- 14
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
on the Company’s intent and ability to hold the debt security to maturity. The Company did not have any held-to-maturity
securities at December 31, 2019 and 2018.
Available for Sale Securities, at Fair Value (AFS)
AFS are securities that are not classified as trading or held-to-maturity and are intended to be held for indefinite periods of time.
AFS securities include those debt securities that management may sell as part of its asset/liability management strategy or in
response to changes in interest rates, resultant prepayment risk or other factors. AFS securities are held at fair value on the
consolidated balance sheet with changes in fair value, net of related tax effects, recorded in the AOCI component of stockholders’
equity in the period of change. Upon the disposition of an AFS security, the Company reclassifies the gain or loss on the security
from AOCI to net realized and unrealized gains (losses) on the consolidated statements of operations.
The Company regularly reviews AFS securities, held-to-maturity and cost investments with unrealized losses in order to evaluate
whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI)
is recognized in earnings in the consolidated statements of operations for debt securities that the Company has an intent to sell
or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis. For those
securities that the Company does not intend to sell nor expect to be required to sell, credit-related impairment is recognized in
earnings, with the non-credit-related impairment recorded in AOCI. An unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis. Unrealized losses for AFS securities that are determined to be temporary
in nature are recorded, net of tax, in AOCI.
Management’s estimate of OTTI includes, among other things: (i) the duration of time and the relative magnitude to which fair
value of the security has been below amortized cost; (ii) the financial condition and near term prospects of the issuer of the
investment; (iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer
of the investment; (iv) whether it is more likely than not that the Company will sell a security before recovery of its amortized
cost basis; (v) whether a debt security exhibits cash flow deterioration; and (vi) whether the security’s decline is attributable to
specific conditions, such as conditions in an industry or in a geographic location.
Loans, at Fair Value
Loans, at fair value is substantially comprised of (i) non-performing residential loans (NPLs), (ii) middle market leveraged loans
held by the Company and (iii) loans originated by the Company’s mortgage finance business. Changes in their fair value are
reported within net realized and unrealized gains (losses) in our consolidated statements of operations.
Corporate Loans
Corporate loans are comprised of a diversified portfolio of middle market leveraged loans which are carried at fair value. In
general, the fair value of leveraged loans are obtained from an independent pricing service which provides coverage of secondary
market participants. The values represent a composite of mark-to-market bid/offer prices. In certain circumstances, the Company
will make its own determination of fair value of leveraged loans based on internal models and other unobservable inputs.
Mortgage Loans Held for Sale
Mortgage loans held for sale represent loans originated and held until sold to secondary market investors. Such loans are typically
warehoused for a period after origination or purchase before sale into the secondary market. Loans are sold either servicing
released, or in select instances, servicing maintained into the secondary loan market. The Company has elected to measure all
mortgage loans held for sale at fair value. These loans are considered sold when the Company surrenders control to the purchaser.
The gains or losses on sales of such loans, net of any accrual for standard representations and warranties, are reported in operating
results as a component of net realized and unrealized gains (losses) in the consolidated statement of operations in the period
when the sale occurs.
Non-Performing Loans (NPLs)
The Company has purchased portfolios of NPLs which consist of residential mortgage loans. Such loans are carried at fair value,
which is measured on an individual loan basis. We seek to either (i) convert such loans into real estate owned property (REO)
through foreclosure or another resolution process that can then be sold, or (ii) modify and resell them at higher prices if
circumstances warrant.
F- 15
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The Company has elected the fair value option for NPLs as we have concluded that fair value timely reflects the results of our
investment performance. As substantially all of our loans were non-performing when acquired, we generally look to the estimated
fair value of the underlying property collateral to assess the recoverability of our investments. We primarily utilize the local
broker price opinion (BPO) but also consider any other comparable home sales or other market data, as considered necessary,
in estimating a property’s fair value. For further discussion on the observable and unobservable inputs to the model and
determination of fair value of NPLs, see Note (11) Fair Value of Financial Instruments.
Certain NPLs are loans that are delinquent on obligated payments of principal and interest. Certain other NPLs are making some
payments, generally as a result of a modification or a workout plan.
The fair value of NPLs are determined using a discounted cash flow model. As such, both the changes in fair value and the net
periodic cash flows related to NPLs are recorded in net realized and unrealized gains (losses) in the consolidated statement of
operations.
Equity Securities
Equity securities are investments consisting of equity securities that are purchased principally for the purpose of selling them
in the near term. Changes in fair value are recorded in net realized and unrealized gains (losses) on investments on the consolidated
statements of operations in the period of change.
Other Investments
Foreclosed Residential Real Estate Property (REO)
NPLs are reclassified to REO once the Company has obtained legal title to the property upon completion of a foreclosure sale
or the borrower has conveyed all interest in the property to satisfy that loan through completion of a deed in lieu of foreclosure.
Because the Company elected the fair value option for NPLs, upon recognition as REO, the property fair value is estimated
using market values and, if the property meets held-for-sale criteria, it is initially recorded at fair value less costs to sell as its
new cost basis. Subsequently, the property is carried at (i) the fair value of the asset minus the estimated costs to sell the asset
or (ii) the initial REO value, whichever is lower. Adjustments to the carrying value of REOs are recorded in net realized and
unrealized gains (losses).
Vessels, net
Investments in vessels, net are carried at cost (inclusive of capitalized acquisition costs, where applicable) less accumulated
depreciation. Subsequent expenditures are also capitalized when they appreciably extend the life, increase the earning capacity
or improve the efficiency or safety of the vessels; otherwise, these amounts are expensed as incurred. Vessels acquired are
recognized at their fair value as of the date of the acquisition.
Depreciation is computed using the straight-line method over the vessel’s estimated remaining useful life, after considering the
estimated salvage value. A vessel’s salvage value is equal to the product of its lightweight tonnage and estimated scrap rate.
Vessels are depreciated from the date of their acquisition through their remaining estimated useful life.
Vessels are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of a
particular vessel may not be fully recoverable. Potential impairment indicators are primarily based upon a comparison of the
market value of a vessel to its carrying value. Market values are based upon quoted prices from industry-recognized sources.
The Company evaluates market quotes of vessels for reasonableness by comparison to available market transactions or internal
valuation models. An impairment charge would be recognized if the estimated undiscounted future net cash flows expected to
result from the operation and subsequent disposal of the vessel are less than the vessel’s carrying amount.
The Company’s estimate of future revenue is based upon time charter equivalent (TCE) rates using current market rates. The
Company uses average historical rates for periods beyond those for which rates are available. Estimated cash flows are net of
brokerage and address commissions, vessel operating expenses, and estimated costs of drydocking and include an inflation
factor, as appropriate. The projected undiscounted future cash flows are comprised of the net of these inflows and outflows, plus
an estimated salvage value.
F- 16
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
As of December 31, 2019, the undiscounted future cash flows were higher than the carrying amount of each of the vessels in
the Company’s fleet and, as such, no loss on impairment was recognized.
Cash and Cash Equivalents
The Company considers all highly liquid investments of sufficient credit quality purchased with an initial maturity of three months
or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand, cash held in banks and
investments in money market funds.
Restricted Cash
The Company’s restricted cash primarily consists of cash for unremitted premiums received from agents and insurers, fiduciary
cash for reinsurers and pledged assets for the protection of policy holders in various state jurisdictions. Restricted cash also
includes cash posted as collateral under credit facilities to maintain borrowing base sufficiency, borrower escrow funds for taxes,
insurance, rate-lock fees and servicing related escrow funds and collateral on warehouse borrowings.
Notes and Accounts Receivable, Net
Notes Receivable, Net
The Company’s notes receivable, net includes receivables related to the insurance business for its premium financing programs.
The Company accrues interest income on its notes receivable based on the contractual terms of the respective note. The Company
monitors all notes receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be
collected. In addition to allowances for bad debt for specific notes receivable, a general provision for bad debt is estimated for
the Company’s notes receivable based on history. Account balances are generally charged against the allowance when the
Company believes it is probable that the note receivable will not be recovered, and has exhausted its contractual and legal
remedies.
Generally, receivables overdue more than 120 days are written off when the Company determines it has exhausted reasonable
collection efforts and remedies, see Note (6) Notes and Accounts Receivable, net.
Accounts and Premiums Receivable, Net
Accounts and premiums receivable, net are primarily trade receivables from the insurance business that are carried at their
approximate fair value. Accounts and premiums receivable from the Company’s insurance business consist primarily of advance
commissions and agents' balances in course of collection and billed but not collected policy premiums, presented net of the
allowance for doubtful accounts. For policy premiums that have been billed but not collected, the Company records a receivable
on its consolidated balance sheet for the full amount of the premium billed, with a corresponding liability, net of its commission,
to insurance carriers. The Company earns interest on the premium cash during the period of time between receipt of the funds
and payment of these funds to insurance carriers. The Company maintains an allowance for doubtful accounts based on an
estimate of uncollectible accounts.
Retrospective commissions receivable, Trust receivables and Other receivables
Retrospective commissions receivable, trust receivables and other receivables are primarily trade receivables from the insurance
business that are carried net of allowance at their approximate fair value.
Reinsurance Receivables
Through the insurance business, the Company has various reinsurance agreements in place whereby the amount of risk in excess
of its retention goals is reinsured by unrelated domestic and foreign insurance companies. The Company is required to pay losses
even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Reinsurance receivables include
amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based upon
estimates and are reported on the consolidated balance sheets separately as assets, as reinsurance does not relieve the Company
of its legal liability to policyholders. Management continually monitors the financial condition and agency ratings of the
Company’s reinsurers and believes that the reinsurance receivables accrued are collectible. Balances recoverable from reinsurers
F- 17
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
and amounts ceded to reinsurers relating to the unexpired portion of reinsured policies are presented as assets. Experience refunds
from reinsurers are recognized based on the underwriting experience of the underlying contracts.
Deferred Acquisition Costs
The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s
insurance business. Amortization of deferred acquisition costs was $287,834, $246,330 and $221,362 for the years ended
December 31, 2019, 2018 and 2017, respectively.
Insurance Policy Related
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.
The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers
investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable
insurance related deferred acquisition costs were recognized during the years ended December 31, 2019, 2018 and 2017.
Non-insurance Policy Related
Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees that
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 deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result
of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended
December 31, 2019, 2018 and 2017.
Goodwill and Intangible Assets, net
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. Other intangible assets are amortized over
their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the
carrying amount. The Company carries intangible assets, which represent customer and agent relationships, trade names,
insurance licenses (certificates of authority granted by individual state departments of insurance), the value of in-force insurance
policies acquired, software acquired or internally developed, and leases in-place. Management has deemed the insurance licenses
to have an indefinite useful life. Costs incurred to renew or maintain insurance licenses are recorded as operating costs in the
period in which they arise. See Note (8) Goodwill and Intangible Assets, net.
Other Assets
Other assets primarily consist of right of use assets, prepaid expenses, and furniture, fixtures and equipment, net. See Note (14)
Other Assets and Other Liabilities and Accrued Expenses.
Debt, net
Debt is carried on the consolidated balance sheets at an amount equal to the unpaid principal balance, net of any remaining
unamortized discount or premium and direct and any incremental costs attributable to issuance. Discounts, premiums and direct
and incremental costs are amortized as a component of interest expense in the consolidated statements of operations over the
life of the debt.
Unearned Premiums
Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial methods as
appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A
F- 18
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs and policy
maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2019
and December 31, 2018, no deficiency reserves were recorded.
Policy Liabilities and Unpaid Claims
Policyholder account balances relate to investment-type individual annuity contracts in the accumulation phase. Policyholder
account balances are carried at accumulated account values, which consist of deposits received, plus interest credited, less
withdrawals and assessments. Minimum guaranteed interest credited to these contracts ranges from 3.0% to 4.0%.
The Company’s claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. The
Company’s actuaries apply a variety of generally accepted actuarial methods to the historical loss development patterns, to derive
cumulative development factors. These cumulative development factors are applied to reported losses for each accident quarter
to compute ultimate losses. The indicated required reserve is the difference between the ultimate losses and the reported losses.
The actuarial methods used include but are not limited to the chain ladder method, the Bornhuetter-Ferguson method, and the
expected loss ratio method. The actuarial analyses are performed on a basis gross of ceded reinsurance, and the resulting factors
and estimates are then used in calculating the net loss reserves which take into account the impact of reinsurance. The Company
has not made any changes to its methodologies for determining claim reserves in the periods presented.
Credit life and accidental death and dismemberment (AD&D) unpaid claims reserves include claims in the course of settlement
and incurred but not reported (IBNR). Credit disability unpaid claims reserves also include continuing claim reserves for open
disability claims. For all other product lines, unpaid claims reserves include case reserves for reported claims and bulk reserves
for IBNR claims. 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, reported incurred losses, target loss ratios, and in-
force amounts or a combination of these factors.
Anticipated future loss development patterns form a key assumption underlying these analyses. Generally, unpaid claims reserves,
and associated incurred losses, are impacted by loss frequency, which is the 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 may
include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions,
morbidity patterns and the attitudes of claimants towards settlements.
The unpaid claims reserves represent the Company's best estimates at a given time, based on the projections and analyses
discussed above. 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.
In accordance with applicable statutory insurance company regulations, the Company’s recorded unpaid claims reserves are
evaluated by appointed independent third party actuaries, who perform this function in compliance with the Standards of Practice
and Codes of Conduct of the American Academy of Actuaries. The independent actuaries perform their actuarial analyses annually
and prepare opinions, statements, and reports documenting their determinations. For December 31, 2019 and 2018, our appointed
independent third party actuaries found the Company’s reserves to be adequate.
Deferred Revenue
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships,
mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods
using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would
be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred
revenues and anticipated investment income. As of December 31, 2019 and 2018, respectively, no deficiency reserves were
recorded.
Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses primarily consist of lease liabilities, accounts payable and accrued expenses, deferred tax
F- 19
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
liabilities, net, commissions payable and accrued interest payable. See Note (14) Other Assets and Other Liabilities and Accrued
Expenses.
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 producer owned reinsurance companies (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.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software
development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is
performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any
losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.
During the years ended December 31, 2019, 2018 and 2017, respectively, the Company did not incur a loss with respect to
a specific significant service fee contract.
Administrative Fees. 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 programs, motor club programs, and warranty
programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying
insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified
Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based
on available information, and periodically reviews the selections as additional information becomes available.
Ceding Commissions
Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part,
underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments
to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. The
adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's
benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
Vessel Related Revenue
The Company generates its revenues from charterers for the charter hire of its vessels. Vessels are chartered under time or voyage
charters, where a contract is entered into for the use of a vessel for a specific voyage or a specific period of time and at a specified
daily charter rate. Charter revenues are recognized as earned on a straight-line basis over the term of the charter as service is
provided.
Revenue is recognized when a charter agreement exists, the vessel is made available to the charterer and collection of the related
revenue is reasonably assured. Unearned revenue includes revenue received prior to the balance sheet date relating to services
to be rendered after the balance sheet date. Vessel related revenue is recorded in other investment income as a part of other
revenue.
F- 20
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Policy and Contract Benefits
Member Benefit Claims
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.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses represent losses and related claim adjudication and processing costs on insurance
contract claims, net of amounts ceded. Net losses include actual claims paid and the change in unpaid claim reserves.
Commissions Payable and Expense
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device
protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related
revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market
conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability
of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives
a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated
with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company
analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with
each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer
or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of
the retrospective commission calculation is negative. Commissions payable are included in other liabilities and accrued expenses.
Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In the first quarter of 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and
applicable amendments, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing and ASU 2016-12, Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients. These standards establish a comprehensive new revenue recognition
model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity
expects to receive in exchange for those goods or services.
A substantial majority of the Company’s non-investment related revenues are comprised of revenues from insurance contracts
that are accounted for under Financial Services-Insurance (Topic 944) or certain financial services products (e.g. gains upon the
origination of mortgages) that are not within the scope of the new standard. The Company’s remaining revenues that are within
the scope of Topic 606 are primarily comprised of revenues from contracts with customers for monthly membership dues for
motor clubs, monthly administration fees for services provided for premiums, claims and reinsurance processing revenues,
vehicle service contracts and warranty coverage revenues for household goods and appliances (collectively, remaining contracts).
Vessel related revenue is also under the scope of this standard. The Company has chosen the modified-retrospective method of
adopting Topic 606, and has assessed these contracts and concluded that changes in accounting and revenue recognition upon
adoption of Topic 606 was not material to the Company’s financial position as of January 1, 2018, and did not have a material
impact on the Company’s consolidated financial statements. No cumulative effect adjustment was made due to the adoption of
this standard. See Note (13) Revenue From Contracts with Customers for disclosures required under ASU 2014-09 and others
related to Topic 606.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the recognition, measurement,
presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity
investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial
F- 21
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
instruments. Among its provisions for public business entities, ASU 2016-01 eliminates the requirement to disclose the method(s)
and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, requires the use
of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires the separate
presentation in other comprehensive income of the change in fair value of a liability due to instrument-specific credit risk for a
liability for which the reporting entity has elected the fair value option, requires separate presentation of financial assets and
financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) and clarifies
guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses
on available for sale debt securities. ASU 2016-01 was effective for the Company as of January 1, 2018. The adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations
on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that
has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging
relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 was effective for the Company
for the annual and interim periods beginning after December 15, 2016. The adoption of this standard did not have a material
impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update
eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised
2004), Share-Based Payment. The standard was effective for the Company for the annual and interim periods beginning after
December 15, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies
(COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The
standard was effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods
within those annual periods. Early adoption was permitted, including the adoption in an interim period. The amendments in this
Update should be applied using a retrospective transition method to each period presented. The adoption of this standard did
not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force),
which addresses classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18
requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents.
The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the
restrictions. ASU 2016-18 was effective for public business entities for annual and interim periods in fiscal years beginning after
December 15, 2017. The adoption of ASU 2016-18 resulted in reclassification of restricted cash balances into cash, cash
equivalents and restricted cash on the consolidated statements of cash flows in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business,
which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects
many areas of accounting including the treatment of acquisitions, disposals, goodwill, and consolidation. There are no disclosures
required for a change in accounting principle at transition. Early adoption was permitted for transactions (i.e., acquisitions or
dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in
financial statements that have been issued or made available for issuance. The Company elected to early adopt this standard,
effective for transactions on or after October 1, 2016. The adoption of this standard did not have a material impact on the
Company’s consolidated financial statements.
F- 22
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets. The new guidance was effective for fiscal years beginning after December 15, 2017 and interim periods within those
years. Early adoption was permitted for interim or annual reporting periods beginning after December 15, 2016. The guidance
may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of
adoption. The new guidance clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance
nonfinancial asset” and defines the term, “in-substance nonfinancial asset.” The ASU also added guidance for partial sales of
nonfinancial assets. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting, which provided clarity as to what changes to the terms or conditions of share-based payment awards require an
entity to apply modification accounting in Topic 718. ASU 2017-09 was effective for the Company for interim and annual periods
beginning after December 15, 2017, with early adoption permitted, and was applied prospectively to changes in terms or conditions
of awards occurring on or after the adoption date. The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features;
II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this Update addressed the
complexity of accounting for certain financial instruments with down round features. Down round features are features of certain
equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future
equity offerings. Previous accounting guidance created cost and complexity for entities that issue financial instruments (such
as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument
or conversion option. Part II of this Update addressed the difficulty of navigating Topic 480, Distinguishing Liabilities from
Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending
content was the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments
of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this
Update did not have an accounting effect. The Company elected to early adopt this standard as of December 31, 2017. The
adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard
requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether
or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is
recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their
classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases
today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing
guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard,
Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company adopted the
standard in the first quarter of 2019 under the modified retrospective approach without restating prior comparative periods. The
adoption of the updated guidance resulted in the Company recognizing a right of use asset of $32,052 as part of other assets and
a lease liability of $33,558 as part of other liabilities and accrued expenses in the consolidated balance sheets, as well as de-
recognizing the liability for deferred rent that was required under the previous guidance for its operating lease agreements at
January 1, 2019. We have elected the practical expedient to not separate lease components and non-lease components, and leases
with an initial term of 12 months or less are not recorded on the balance sheet. The cumulative effect adjustment to the opening
balance of retained earnings was zero.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. The new guidance is effective for fiscal years beginning after December 15,
2018 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after
December 15, 2017. The guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of adoption. The guidance shortens the amortization period for
certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The adoption
of this standard did not have a material impact on the Company’s consolidated financial statements.
F- 23
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities, which amends the guidance on hedge accounting. The amendment will make more financial and
nonfinancial hedging strategies eligible for hedge accounting and amend the presentation and disclosure requirements. It is
intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge
accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 can be adopted immediately
in any interim or annual period. The mandatory effective date for calendar year-end public companies is January 1, 2019. The
adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which permits companies to
reclassify stranded tax effects caused by Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act),
from AOCI to retained earnings. Deferred tax assets (DTA) on unrealized gains and losses related to available for sale (AFS)
securities that were revalued as of December 31, 2017 created stranded tax effects in AOCI due to the enactment of the Tax Act,
due to the nature of existing GAAP requiring recognition of tax rate change effects on the DTA revaluation related to AFS
securities as an adjustment to the provision for income taxes. Specifically, ASU 2018-02 permits a reclassification from AOCI
to retained earnings for stranded tax effects resulting from the Tax Act. Additionally, the ASU requires new disclosures by all
companies, whether they opt to do the reclassification or not. The amendments in ASU 2018-02 are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The
Company adopted the standard effective January 1, 2019, and reclassified the stranded tax effects caused by the Tax Act from
AOCI to retained earnings. The standard is applied in the period of adoption, and the impact to the Company’s consolidated
financial statements in the period of adoption is not material. The Company’s accounting policy for the release of stranded tax
effects in AOCI is the aggregate portfolio approach.
Recently Issued Accounting Pronouncements, Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and AFS
debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current
GAAP and, instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses
is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected
to be collected. For AFS debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic
326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding
financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in
ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years, with early adoption permitted as of the fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The amendments will affect loans, debt securities, trade receivables, net investments in leases, off balance
sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual
right to receive cash. The Company does not believe the adoption of this standard will have a material impact on the Company’s
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 does not change
the qualitative assessment; however, it removes “the requirements for any reporting unit with a zero or negative carrying amount
to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead,
all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Therefore, as the
FASB notes in the ASU’s Basis for Conclusions, the goodwill of reporting units with zero or negative carrying values will not
be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be
required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated
to those reporting units. The amendments in ASU 2017-04 are effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect on its consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements
for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. The
modifications include the removal of certain requirements, modifications to existing requirements and additional requirements.
The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after
F- 24
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect on its consolidated financial
statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,
which simplifies the application of Topic 740 while maintaining or improving the usefulness of the information provided to
users of financial statements. The modifications include the removal of certain exceptions and simplification to existing
requirements. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect on its
consolidated financial statements.
(3) Dispositions, Assets Held for Sale and Discontinued Operations
Dispositions
On April 26, 2019, the Company completed the sale of the management contracts and related assets for the CLOs managed by
Telos Asset Management, LLC (Telos). The pre-tax gain on sale for the year ended December 31, 2019 was $7.6 million, which
is included in other revenue. See Note (15) Other Revenue, Other Expenses and Other Income. The sale did not meet the
requirements to be classified as a discontinued operation.
The sale agreement also contains a provision which provides for contingent consideration if the Telos business achieves specific
performance metrics. This contingent consideration represents a gain contingency, and the Company will not recognize any
additional gain unless such consideration is realized.
On February 1, 2018, the Company completed the sale of Care, as well as two senior living properties held in our insurance
business, to Invesque Inc. (Invesque). The pre-tax comprehensive income on the sale was approximately $54.9 million, which
consists of $56.9 million gain on sale of a subsidiary, $1.8 million of realized gain on the sale of the insurance properties, offset
by the reclassification of the interest rate swap from AOCI of $3.8 million. The gain on sale of a subsidiary includes $10.7
million of earnout consideration recognized in December 2018 as a result of a portfolio disposition by Invesque.
Total consideration received for the sale of Care was $150.7 million, including approximately 16.6 million shares of Invesque,
resulting in an ownership of approximately 34% of the acquiring company at the time of sale. The Company has elected to apply
the fair value option to the investment in Invesque. As such, these shares are held at fair value within equity securities.
When the Company entered into a purchase agreement on November 16, 2017 to sell Care, the Company concluded that the
sale met the requirements to be classified as a discontinued operation. As a result, the Company reclassified the income and
expenses attributable to Care to net income (loss) from discontinued operations through the completion of the sale.
The Company has entered into a definitive agreement to sell Luxury, which is pending regulatory approval, and is classified as
held for sale at December 31, 2019 and December 31, 2018. The agreement did not meet the requirements to be classified as a
discontinued operation.
On January 18, 2017 and November 7, 2017, the Company sold its ownership in the subordinated notes in two CLOs (collectively,
the Disposed CLOs). On August 10, 2017, the Company’s ownership in the subordinated notes of an additional CLO was
redeemed for cash as part of the complete liquidation of the CLO. The operations of the Disposed CLOs and redeemed CLO
were consolidated in the results of the Company through the redemption date.
The Company sold its interest in its commercial lending business on October 1, 2017. Consideration consisted of $2,500 in cash
and $11,000 of seller provided financing at the time of sale. The financing had an interest rate of 10% and was settled in cash
in December 2018. The operations of this business were consolidated in the results of the Company through the sale date.
As of December 31, 2019 and December 31, 2018, the Company did not record any impairments with respect to assets held for
sale.
F- 25
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Assets Held for Sale
The following table presents detail of Luxury’s assets and liabilities held for sale in the consolidated balance sheets for the
following periods:
Assets
Investments:
Loans, at fair value
Other investments
Total investments
Cash and cash equivalents
Notes and accounts receivable, net
Other assets (1)
Assets held for sale
Liabilities
Debt, net
Other liabilities and accrued expenses (2)
Liabilities held for sale
As of December 31,
2018
2019
$
$
$
$
98,272
1,019
99,291
7,137
238
1,169
107,835
97,822
4,608
102,430
$
$
$
$
63,340
798
64,138
2,860
230
1,003
68,231
61,381
1,599
62,980
(1)
(2)
Includes $318 and $0 of a right of use asset as of December 31, 2019 and December 31, 2018, respectively.
Includes $341 and $0 of a lease liability as of December 31, 2019 and December 31, 2018, respectively.
Luxury has a total borrowing capacity at December 31, 2019 of $154,500. As of December 31, 2019 and 2018, a total of $97,822
and $61,381, respectively, was outstanding under such financing agreements.
Discontinued Operations
The following table presents detail of Care’s revenues and expenses of discontinued operations in the consolidated statements
of operations for the following periods:
Revenues:
Rental and related revenue
Other revenue
Total revenues
Expenses:
Employee compensation and benefits
Interest expense
Depreciation and amortization
Other expenses
Total expenses
Net income (loss) before taxes from discontinued operations
Gain on sale of discontinued operations
Less: provision (benefit) for income taxes
Net income (loss) from discontinued operations
Year Ended December 31,
2018
2017
2019
$
$
— $
—
—
—
—
—
—
—
—
—
—
— $
$
6,476
149
6,625
2,788
1,252
—
1,961
6,001
624
56,860
13,714
43,770
$
74,386
1,583
75,969
30,215
13,068
15,645
23,263
82,191
(6,222)
—
(2,224)
(3,998)
F- 26
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents a summary of cash flows related to discontinued operations included in the consolidated statements
of cash flows for the following periods:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net cash flows provided by discontinued operations
Year Ended December 31,
2018
2017
2019
$
$
— $
—
—
— $
(2,095) $
(592)
(123)
(2,810) $
16,805
(74,325)
50,569
(6,951)
Significant Accounting Policies Related to Dispositions and Discontinued Operations
Except as noted below, Care, Luxury and our commercial lending business adhered to the Significant Accounting Policies as
described in Note (2) Summary of Significant Accounting Policies.
Investments
Loans, at Amortized Cost, Net
Interest income related to loans at amortized cost was generally recognized using the effective interest method or on a basis
approximating a level rate of return over the term of the loan. Nonaccrual loans were those on which the accrual of interest was
suspended. Loans were placed on nonaccrual status and considered nonperforming when full payment of principal and interest
was in doubt, or when principal or interest was 90 days or more past due and collateral, if any, was insufficient to cover principal
and interest. Interest accrued but not collected at the date a loan was placed on nonaccrual status was reversed against interest
income. In addition, the amortization of net deferred loan fees was suspended. Interest income on nonaccrual loans was recognized
only to the extent it was received in cash. However, when there was doubt regarding the ultimate collectability of loan principal,
cash receipts on such nonaccrual loans were applied to reduce the carrying value of such loans. Nonaccrual loans were returned
to accrual status when repayment was reasonably assured and there had been demonstrated performance under the terms of the
loan or, if applicable, the restructured terms of such loan.
The Company deferred nonrefundable loan origination and commitment fees collected on originated loans and amortized the
net amount as an adjustment of the interest income over the contractual life of the loan. If a loan was prepaid, the net deferred
amount was recognized in loan fee income within the consolidated statements of operations in the period. Loan fee income
included prepayment fees and late charges collected.
Revenue Recognition
Rental and Related Revenue
Rental revenue from residents in properties owned by Care but managed by a management company pursuant to a management
agreement (Managed Properties) were recognized monthly as services were provided, as lease periods for residents were short-
term in nature. The Company recognized rental revenue from triple net leases on a straight-line basis over the non-cancelable
term of the lease unless another systematic and rational basis was more representative of the time pattern in which the use benefit
was derived from the leased property. Renewal options in leases with rental terms that were higher than those in the primary
term were excluded from the calculation of straight-line rent if the renewals were not reasonably assured. The Company
commenced rental revenue recognition when the tenant took control of the leased space. The Company recognized lease
termination payments as a component of rental revenue in the period received, provided that there were no further obligations
under the lease. Revenue related to rental revenue was primarily attributable to services provided to the occupants of our senior
living properties.
Management Fee Income
The Company earned management and incentive fees from the CLOs it managed. These management fees were paid periodically
in accordance with the terms of the individual management agreements for as long as the Company managed the funds.
Management fees typically consisted of fees based on the amount of assets held in the CLOs. Management fees were recognized
as revenue when earned. The Company did not recognize incentive fees until all contractual contingencies were removed.
F- 27
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Management fee income is recorded in other revenue.
(4) Operating Segment Data
Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Tiptree’s
principal operating subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider
of specialty insurance, warranty products and related administration services. We classify our business into one reportable
segment – Tiptree Insurance, formally referred to as Specialty Insurance. This change for the year ended December 31, 2019
did not change any previously reported balances. We refer to our non-insurance operations, assets and other investments, which
is comprised of our non-reportable operating segments and other business activities, as Tiptree Capital. Corporate activities
include holding company interest expense, employee compensation and benefits, and other expenses.
Our reportable segment’s income or loss is reported before income taxes, discontinued operations and non-controlling interests.
Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.
Intercompany transactions are eliminated.
Descriptions of our reportable segment and of Tiptree Capital are as follows:
Tiptree Insurance operations are conducted through Tiptree Insurance, which includes Fortegra Financial Corporation (Fortegra),
an insurance holding company incorporated in 1981, and Tiptree Warranty. Fortegra underwrites and administers specialty
insurance programs and products, and is a leading provider of credit and asset protection products and administration services.
Fortegra’s programs are provided across a diverse range of products and services including credit protection insurance, warranty
and service contract products, premium finance, and niche personal and commercial lines of insurance. On January 3, 2020,
Tiptree Warranty acquired Smart AutoCare, a rapidly growing vehicle warranty solutions provider in the United States.
Tiptree Capital includes our asset management, mortgage and shipping operations, and other investments (including our Invesque
shares).
The tables below present the components of revenue, expense, pre-tax income (loss), and assets for our reportable segment as
well as Tiptree Capital for the following periods:
Year Ended December 31, 2019
Tiptree
Capital
Tiptree
Insurance
Total
Total revenue
Total expense
Corporate expense
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Common Stockholders
Total revenue
Total expense
Corporate expense
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from discontinued operations
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Common Stockholders
F- 28
$
$
$
$
640,433
(599,433)
—
41,000
$
$
132,295
(111,309)
—
20,986
$
$
$
$
772,728
(710,742)
(32,847)
29,139
9,017
20,122
1,761
18,361
Year Ended December 31, 2018
Tiptree
Capital
Tiptree
Insurance
Total
549,872
(531,312)
—
18,560
$
$
$
75,954
(83,759)
—
(7,805) $
$
$
625,826
(615,071)
(30,551)
(19,796)
(5,909)
43,770
29,883
5,950
23,933
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Year Ended December 31, 2017
Tiptree
Capital
Tiptree
Insurance
Total
Total revenue
Total expense
Net income attributable to consolidated CLOs
Corporate expense
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from discontinued operations
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Common Stockholders
The following table presents sources of revenue from Tiptree Capital:
Net realized and unrealized gains (losses) (1)
Other investment income (2)
Gain on sale of businesses (3)
Management fee income
Other
Total revenue
$
$
$
$
478,965
(473,561)
—
—
5,404
$
$
102,833
(92,954)
10,457
—
20,336
$
$
$
$
581,798
(566,515)
10,457
(29,070)
(3,330)
(12,562)
(3,998)
5,234
1,630
3,604
Year Ended December 31,
2019
2018
2017
76,973
45,985
7,598
1,267
472
132,295
$
$
40,446
25,541
—
6,694
3,273
75,954
$
$
64,110
26,261
1,994
8,314
2,154
102,833
(1)
(2)
(3)
See Note (5) Investments for the components of Net realized and unrealized gains (losses) related to Tiptree Capital.
See Note (5) Investments for the components of Other investment income.
Related to the sale of Telos and our commercial lending business for the year ended December 31, 2019 and 2017, respectively. See Note (3) Dispositions, Assets Held for Sale
and Discontinued Operations.
The following table presents the reportable segment and Tiptree Capital assets for the following periods:
As of December 31, 2019
As of December 31, 2018
Tiptree
Insurance
$ 1,721,669
Tiptree
Capital
$ 451,249
Corporate
25,368
$
Total
$ 2,198,286
Tiptree
Insurance
$ 1,514,084
Tiptree
Capital
$ 318,420
Corporate
32,414
$
Total
$ 1,864,918
Total assets
(5) Investments
The following table presents the Company's investments related to insurance operations (Tiptree Insurance) and investments
from other Tiptree investing activities (Tiptree Capital), measured at fair value as of the following periods:
As of December 31, 2019
As of December 31, 2018
Tiptree
Insurance
Tiptree
Capital
Total
Tiptree
Insurance
Tiptree
Capital
Available for sale securities, at fair value $
Loans, at fair value
Equity securities
Other investments
Total investments
$
335,192
10,174
62,816
42,452
450,634
$
$
— $
98,720
92,562
95,020
286,302
$
335,192
108,894
155,378
137,472
736,936
$
$
283,563
158,466
29,425
18,526
489,980
$
$
— $
56,917
93,554
56,476
206,947
$
Total
283,563
215,383
122,979
75,002
696,927
F- 29
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Available for Sale Securities, at fair value
All of the Company’s investments in AFS securities as of December 31, 2019 and December 31, 2018 are held by subsidiaries
in the insurance business. The following tables present the Company's investments in AFS securities:
U.S. Treasury securities and obligations of U.S. government authorities
and agencies
Obligations of state and political subdivisions
Corporate securities
Asset backed securities
Certificates of deposit
Obligations of foreign governments
Total
U.S. Treasury securities and obligations of U.S. government authorities
and agencies
Obligations of state and political subdivisions
Corporate securities
Asset backed securities
Certificates of deposit
Obligations of foreign governments
Total
As of December 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
Amortized
cost
Fair value
$
$
$
$
189,596
45,249
50,514
45,634
896
1,099
332,988
Amortized
cost
71,945
67,624
96,888
41,912
1,241
6,750
286,360
$
$
$
$
2,138
1,104
719
89
—
20
4,070
$
$
(144) $
(15)
(2)
(1,705)
—
—
(1,866) $
191,590
46,338
51,231
44,018
896
1,119
335,192
As of December 31, 2018
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
266
280
78
14
—
12
650
$
$
(463) $
(458)
(1,241)
(1,274)
—
(11)
(3,447) $
71,748
67,446
95,725
40,652
1,241
6,751
283,563
The amortized cost and fair values of AFS securities, by contractual maturity date, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Asset backed securities
Total
As of
December 31, 2019
December 31, 2018
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
9,584
130,223
19,508
128,039
45,634
332,988
$
$
9,602
131,952
20,125
129,495
44,018
335,192
$
$
30,920
167,201
32,805
13,522
41,912
286,360
$
$
30,836
166,366
32,185
13,524
40,652
283,563
F- 30
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following tables present the gross unrealized losses on AFS securities by length of time that individual AFS securities have
been in a continuous unrealized loss position:
As of December 31, 2019
Less Than or Equal to One Year
Gross
unrealized
losses
# of
Securities
Fair value
More Than One Year
Gross
unrealized
losses
# of
Securities
Fair value
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
Obligations of state and political subdivisions
Corporate securities
Asset backed securities
Total
$
$
31,416
3,774
2,820
3,878
41,888
$
$
(132)
(15)
(2)
(11)
(160)
75
20
12
17
124
$
$
3,888
—
742
19,480
24,110
$
$
(12)
—
—
(1,694)
(1,706)
38
—
7
11
56
As of December 31, 2018
Less Than or Equal to One Year
Gross
unrealized
losses
# of
Securities
Fair value
More Than One Year
Gross
unrealized
losses
# of
Securities
Fair value
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
Obligations of state and political subdivisions
Corporate securities
Asset backed securities
Obligations of foreign governments
Total
$
$
14,844
15,830
47,976
37,613
2,313
118,576
$
$
(70)
(30)
(393)
(1,262)
(6)
(1,761)
51
41
352
35
15
494
$
$
19,495
21,594
28,517
614
1,301
71,521
$
$
(393)
(428)
(848)
(12)
(5)
(1,686)
128
115
404
5
8
660
Management believes that it is more likely than not that the Company will be able to hold the fixed maturity AFS securities that
were in an unrealized loss position as of December 31, 2019 until full recovery of their amortized cost basis. The unrealized
losses were attributable to changes in interest rates and not credit-related issues. As of December 31, 2019 and December 31,
2018, based on the Company's review, none of the AFS securities were deemed to be other-than-temporarily impaired based on
the Company's analysis of the securities and its intent to hold the securities until recovery.
Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in
custody accounts or insurance department safekeeping accounts. The Company cannot remove or replace investments in
regulatory deposit accounts without prior approval of the contractual party or regulatory authority, as applicable. The following
table presents the Company's restricted investments included in the Company's AFS securities:
Fair value of restricted investments for special deposits required by state insurance departments
Fair value of restricted investments in trust pursuant to reinsurance agreements
Total fair value of restricted investments
The following table presents additional information on the Company’s AFS securities:
Purchases of AFS securities
Proceeds from maturities, calls and prepayments of AFS securities
Gains (losses) realized on maturities, calls and prepayments of AFS securities
Gross proceeds from sales of AFS securities
Gains (losses) realized on sales of AFS securities
$
$
$
$
$
F- 31
As of December 31,
2018
2019
$
$
6,275
33,478
39,753
$
$
9,398
24,931
34,329
Year Ended December 31,
2018
192,288
2019
253,415
$
$
2017
117,735
36,459
$
30,089
$
32,157
— $
(30) $
5
170,495
1,312
$
$
56,191
$
48,252
(789) $
430
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Loans, at fair value
The following tables present the Company’s investments in loans measured at fair value and the Company’s investments in loans
measured at fair value pledged as collateral:
As of December 31, 2019
As of December 31, 2018
Unpaid
principal
balance
(UPB)
Fair
value
exceeds /
(below)
UPB
Fair
value
Pledged
as
Collateral
Fair
value
Unpaid
principal
balance
(UPB)
Fair
value
exceeds /
(below)
UPB
Pledged
as
Collateral
Tiptree Insurance:
Corporate loans (1)
Non-performing loans (2)
Tiptree Capital:
Mortgage loans held for sale (3)
Total loans, at fair value
$
9,787
$ 12,006
$
(2,219) $
— $ 130,910
$ 136,475
$
(5,565) $ 120,202
387
409
(22)
—
27,556
33,887
(6,331)
—
98,720
95,680
3,040
98,086
56,917
54,679
2,238
56,441
$ 108,894
$ 108,095
$
799
$
98,086
$ 215,383
$ 225,041
$
(9,658) $ 176,643
(1)
(2)
(3)
The UPB of these loans approximates cost basis.
The cost basis of NPLs was approximately $282 and $21,555 at December 31, 2019 and December 31, 2018, respectively.
As of December 31, 2019, there was one mortgage loan held for sale with a fair value of $198 that was 90 days or more past due. As of December 31, 2018, there were no
mortgage loans held for sale 90 days or more past due.
Equity securities
Equity securities represents the carrying amount of the Company's basis in equity investments. Included within the equity
securities balance are 16.6 million shares of Invesque for which the Company has elected to apply the fair value option. The
following table presents the Company’s equity securities related to insurance operations and other Tiptree investing activity as
of the following periods:
As of December 31, 2019
As of December 31, 2018
Tiptree
Insurance
Tiptree
Capital
Total
Tiptree
Insurance
Tiptree
Capital
Invesque
Fixed income exchange traded fund
Other equity securities
Total equity securities
$
$
19,376
25,039
18,401
62,816
$
$
92,562
—
—
92,562
$
$
111,938
25,039
18,401
155,378
$
$
19,584
—
9,841
29,425
$
$
93,554
—
—
93,554
$
$
Total
113,138
—
9,841
122,979
Other Investments
The following table contains information regarding the Company’s other investments as of the following periods:
As of December 31, 2019
As of December 31, 2018
Tiptree
Insurance
Tiptree
Capital
Total
Tiptree
Insurance
Tiptree
Capital
Total
Vessels, net (1)
Corporate bonds, at fair value
Real estate
Other
Total other investments
$
$
— $
20,705
2,188
19,559
42,452
$
85,991
—
—
9,029
95,020
$
$
85,991
20,705
2,188
28,588
137,472
$
$
— $
—
10,019
8,507
18,526
$
50,125
—
—
6,351
56,476
$
$
50,125
—
10,019
14,858
75,002
(1)
Net of accumulated depreciation of $3,817 and $898, respectively.
F- 32
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Net Investment Income - Tiptree Insurance
Net investment income represents investment income and expense from investments related to insurance operations as disclosed
within net investment income on the consolidated statements of operations. The following tables present the components of net
investment income by source of income:
Interest:
AFS securities, at fair value
Loans, at fair value
Other investments
Dividends from equity securities
Other
Subtotal
Less: investment expenses
Net investment income
Other Investment Income - Tiptree Capital
Year Ended December 31,
2019
2018
2017
$
$
8,404
3,284
1,218
2,813
—
15,719
1,702
14,017
$
$
6,560
10,809
1,350
2,092
97
20,908
1,729
19,179
$
$
3,490
11,073
566
2,043
800
17,972
1,686
16,286
Other investment income represents other income from other Tiptree non-insurance activities as disclosed within other revenue
on the consolidated statements of operations, see Note (15) Other Revenue, Other Expenses and Other Income. The following
tables present the components of other investment income by type:
Interest income:
Loans, at fair value
Loans at amortized cost, net
Other
Dividends from equity securities
Loan fee income:
Loans, at fair value
Loans at amortized cost, net
Vessel related revenue
Other investment income
Year Ended December 31,
2019
2018
2017
$
$
6,206
—
269
10,132
12,631
—
16,747
45,985
$
$
4,343
—
175
9,224
7,827
—
3,972
25,541
$
$
3,555
8,368
184
—
10,596
3,558
—
26,261
F- 33
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Net realized and unrealized gains (losses)
The following table presents the components of net realized and unrealized gains (losses) recorded on the consolidated statements
of operations. Net unrealized gains (losses) on AFS securities are included within other comprehensive income, and as such,
are not included in this table. Net realized and unrealized gains (losses) on non-investment financial assets and liabilities are
included below:
Year Ended December 31,
2018
2017
2019
Net realized gains (losses)
Tiptree Insurance:
Reclass of unrealized gains (losses) on AFS securities from OCI
Net realized gains (losses) on loans
Net realized gains (losses) on equity securities
Other
$
$
1,312
2,100
947
318
(819) $
2,071
2,721
1,627
Tiptree Capital:
Net realized gains (losses) on loans
Other
Total net realized gains (losses)
Net unrealized gains (losses)
Tiptree Insurance:
Net change in unrealized gains (losses) on loans
Net unrealized gains (losses) on equity securities held at period end
Reclass of unrealized (gains) losses from prior periods for equity securities sold
Other
Tiptree Capital:
Net change in unrealized gains (losses) on loans
Net unrealized gains (losses) on equity securities held at period end
Other
Total net unrealized gains (losses)
Total net realized and unrealized gains (losses)
$
(6) Notes and Accounts Receivable, net
The following table presents the total notes and accounts receivable, net:
Notes receivable, net - premium financing program
Accounts and premiums receivable, net
Retrospective commissions receivable
Trust receivables
Other receivables
Total notes and accounts receivable, net
76,020
(260)
80,437
(3,899)
7,621
(807)
(697)
1,823
(992)
382
3,431
83,868
$
$
$
435
5,380
—
—
64,296
(5,686)
64,425
1,435
(23,753)
—
—
286
—
5,214
(16,818)
47,607
61,147
(2,084)
64,663
(4,730)
(9,815)
(2,291)
(428)
194
(17,134)
(1,677)
(35,881)
28,782
$
As of December 31,
2018
2019
42,192
50,712
105,387
63,925
24,752
286,968
$
$
13,057
50,880
84,488
53,424
21,256
223,105
The following table presents the total valuation allowance and bad debt expense for the following periods:
Notes receivable, net - premium financing program (1) $
Accounts and premiums receivable, net
$
95
109
$
$
97
217
$
$
175
36
$
$
195
39
$
$
374
48
Valuation allowance
As of December 31,
2018
2019
Bad debt expense
Year Ended December 31,
2018
2017
2019
(1)
As of December 31, 2019 and December 31, 2018, there were $93 and $368 in balances classified as 90 days plus past due, respectively.
F- 34
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(7) Reinsurance Receivables
The following table presents the effect of reinsurance on premiums written and earned by our insurance business for the following
periods:
Direct
amount
Ceded to
other
companies
Assumed
from other
companies
Net amount
Percentage of
amount -
assumed to net
For the Year Ended December 31, 2019
Premiums written:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums written
Premiums earned:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums earned
For the Year Ended December 31, 2018
Premiums written:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums written
Premiums earned:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums earned
For the Year ended December 31, 2017
Premiums written:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums written
Premiums earned:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums earned
$
$
$
$
$
$
75,060
133,514
709,515
918,089
68,282
123,182
597,852
789,316
69,516
126,951
616,135
812,602
64,346
118,482
552,792
735,620
63,196
119,227
553,111
735,534
61,780
111,124
486,913
659,817
$
$
$
$
$
$
40,555
87,447
350,093
478,095
35,929
82,660
242,180
360,769
38,239
85,136
277,856
401,231
32,865
80,258
231,093
344,216
32,358
79,278
238,614
350,250
30,567
76,549
201,576
308,692
$
$
$
$
$
$
1,692
3,201
92,246
97,139
1,607
3,165
65,789
70,561
1,874
3,229
50,346
55,449
1,766
3,262
31,405
36,433
2,011
3,247
27,480
32,738
1,942
3,198
15,435
20,575
$
$
$
$
$
$
36,197
49,268
451,668
537,133
33,960
43,687
421,461
499,108
33,151
45,044
388,625
466,820
33,247
41,486
353,104
427,837
32,849
43,196
341,977
418,022
33,155
37,773
300,772
371,700
4.7%
6.5%
20.4%
18.1%
4.7%
7.2%
15.6%
14.1%
5.7%
7.2%
13.0%
11.9%
5.3%
7.9%
8.9%
8.5%
6.1%
7.5%
8.0%
7.8%
5.9%
8.5%
5.1%
5.5%
F- 35
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and
loss adjustment expenses (LAE) incurred:
For the Year Ended December 31, 2019
Losses and LAE Incurred
Life insurance
Accident and health insurance
Property and liability insurance
Total losses and LAE incurred
For the Year Ended December 31, 2018
Losses and LAE Incurred
Life insurance
Accident and health insurance
Property and liability insurance
Total losses and LAE incurred
For the Year ended December 31, 2017
Losses and LAE Incurred
Life insurance
Accident and health insurance
Property and liability insurance
Total losses and LAE incurred
Direct
amount
Ceded to
other
companies
Assumed
from other
companies
Net
amount
Percentage
of amount -
assumed to
net
$
$ 38,306
18,832
225,200
282,338
$
22,607
15,022
147,290
184,919
443
362
52,785
53,590
$ 16,142
4,172
130,695
151,009
2.7%
8.7%
40.4%
35.5%
Member benefit claims (1)
Total policy and contract benefits
19,672
$ 170,681
$
$ 36,488
18,986
227,512
282,986
$
21,037
15,666
141,184
177,887
886
686
28,181
29,753
$ 16,337
4,006
114,509
134,852
5.4%
17.1%
24.6%
22.1%
Member benefit claims (1)
Total policy and contract benefits
17,243
$ 152,095
$
$ 33,068
17,512
198,484
249,064
$
18,388
14,421
118,262
151,071
879
752
8,915
10,546
$ 15,559
3,843
89,137
108,539
5.6%
19.6%
10.0%
9.7%
Member benefit claims (1)
Total policy and contract benefits
15,420
$ 123,959
(1) Member benefit claims are not covered by reinsurance.
The following table presents the components of the reinsurance receivables:
Prepaid reinsurance premiums:
Life (1)
Accident and health (1)
Property
Total
Ceded claim reserves:
Life
Accident and health
Property
Total ceded claim reserves recoverable
Other reinsurance settlements recoverable
Reinsurance receivables (2)
As of December 31,
2018
2019
72,675
66,393
286,411
425,479
3,350
11,065
74,384
88,799
25,555
539,833
$
$
69,436
61,606
178,498
309,540
3,424
11,039
75,748
90,211
20,600
420,351
$
$
(1)
(2)
Including policyholder account balances ceded.
Includes a non-cash transaction, as part of a reinsurance contract that resulted in an increase of $57,815 in reinsurance receivables, offset by a decrease of $40,295 in deferred
acquisition costs and increases of $15,491 in reinsurance payables and $2,029 in deferred revenue.
F- 36
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest
receivable balances from non-affiliated reinsurers:
Total of the three largest receivable balances from non-affiliated reinsurers
As of
December 31,
2019
$
173,183
As of December 31, 2019, the non-affiliated reinsurers from whom our insurance business has the largest receivable balances
were: MFI Insurance Company, LTD (A. M. Best Rating: Not rated), Freedom Insurance Company, LTD (A. M. Best Rating:
Not rated) and London Life International Reinsurance Corporation (A. M. Best Rating: Not rated). The related receivables of
these reinsurers are collateralized by assets on hand, assets held in trust accounts and letters of credit. As of December 31, 2019,
the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the
collateralization. On January 3, 2020, Tiptree acquired Freedom Insurance Company, LTD as part of our acquisition of Smart
AutoCare. See Note (24) Subsequent Events.
(8) Goodwill and Intangible Assets, net
The following table presents identifiable finite and indefinite-lived intangible assets, accumulated amortization, and goodwill
by operating segment and/or reporting unit, as appropriate:
As of December 31, 2019
As of December 31, 2018
Customer relationships
Accumulated amortization
Trade names
Accumulated amortization
Software licensing
Accumulated amortization
Insurance policies and contracts acquired
Accumulated amortization
Insurance licensing agreements(2)
Intangible assets, net
Goodwill
Total goodwill and intangible assets, net
Tiptree
Insurance Other (1)
$
$
Tiptree
Insurance Other (1)
$
$
53,500
(24,318)
6,750
(3,273)
8,500
(8,500)
36,500
(36,115)
14,261
47,305
97,439
$ 144,744
Total
— $
—
800
(360)
640
(411)
—
—
—
669
1,708
2,377
53,500
(24,318)
7,550
(3,633)
9,140
(8,911)
36,500
(36,115)
14,261
47,974
99,147
$ 147,121
50,500
(18,913)
6,500
(2,727)
8,500
(6,942)
36,500
(35,898)
13,761
51,281
89,854
$ 141,135
$
$
Total
— $
—
800
(280)
640
(320)
—
—
—
840
1,708
2,548
50,500
(18,913)
7,300
(3,007)
9,140
(7,262)
36,500
(35,898)
13,761
52,121
91,562
$ 143,683
(1)
(2)
Other is primarily comprised of mortgage operations.
Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
Goodwill
The following table presents the activity in goodwill, by operating segment and/or reporting unit, as appropriate, and includes
the adjustments made to the balance of goodwill to reflect the effect of the final valuation adjustments made for acquisitions,
as well as the reduction to any goodwill attributable to discontinued operations or impairment related charges:
Balance at December 31, 2017
Balance at December 31, 2018
Goodwill acquired (1)
Balance at December 31, 2019
Accumulated impairments
Tiptree
Insurance
Other
Total
$
$
$
$
89,854
89,854
7,585
97,439
$
$
$
1,708
1,708
—
1,708
— $
699
$
$
$
$
91,562
91,562
7,585
99,147
699
(1)
Relates to an acquisition in our insurance business as of July 1, 2019 based on the initial valuation, and may be adjusted during the measurement period as permitted under ASC
805. See Note (2) Summary of Significant Accounting Policies.
The Company conducts annual impairment tests of its goodwill as of October 1. The Company’s impairment testing for each
F- 37
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
period did not indicate any goodwill impairment, as each of the Company’s reporting units with goodwill had a fair value that
was substantially in excess of its carrying value. For the years ended December 31, 2019, 2018 and 2017, respectively, no
impairment was recorded on the Company’s goodwill or intangibles.
Intangible Assets, net
The following table presents the activity, by operating segment and/or reporting unit, as appropriate, in finite and indefinite-
lived other intangible assets and includes the adjustments made to the balance to reflect the effect of any final valuation adjustments
made for acquisitions, as well as any reduction attributable to discontinued operations or impairment-related charges:
Balance at December 31, 2017
Intangible assets divested
Less: amortization expense
Balance at December 31, 2018
Intangible assets acquired (1)
Less: amortization expense
Balance at December 31, 2019
Tiptree
Insurance
Other
Total
$
$
$
63,005
(2,167)
(9,557)
51,281
3,750
(7,726)
47,305
$
$
$
1,012
—
(172)
840
—
(171)
669
$
$
$
64,017
(2,167)
(9,729)
52,121
3,750
(7,897)
47,974
(1)
Relates to an acquisition in our insurance business as of July 1, 2019 based on the initial valuation, and may be adjusted during the measurement period as permitted under ASC
805. See Note (2) Summary of Significant Accounting Policies.
The following table presents the amortization expense on finite-lived intangible assets for the following periods:
Amortization expense on intangible assets
Year Ended December 31,
2018
2017
2019
$
7,897
$
9,729
$
11,409
The following table presents the amortization expense on finite-lived intangible assets for the next five years by operating
segment and/or reporting unit, as appropriate:
2020
2021
2022
2023
2024
2025 and thereafter
Total
As of December 31, 2019
Tiptree
Insurance
Other
Total
$
$
5,150
4,333
3,649
3,212
2,664
14,036
33,044
$
$
171
171
127
80
80
40
669
$
$
5,321
4,504
3,776
3,292
2,744
14,076
33,713
(9) Derivative Financial Instruments and Hedging
The Company utilizes derivative financial instruments as part of its overall investment and hedging activities. Derivative contracts
are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are
primarily classified by underlying credit risk and interest rate risk. In addition, the Company is also subject to additional
counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are reported in
other investments. Derivative liabilities are reported within other liabilities and accrued expenses.
Derivatives, at fair value
Interest Rate Lock Commitments
The Company enters into interest rate lock commitments (IRLCs) with customers in connection with its mortgage banking
activities to fund residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination
of mortgage loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting
F- 38
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
guidance. As such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain
when the Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan
commitment will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from
the fair value of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk
that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To
manage this risk, the Company utilizes forward delivery contracts and to be announced (TBA) mortgage backed securities to
economically hedge the risk of potential changes in the value of the loans that would result from the commitments.
Forward Delivery Contracts and TBA Mortgage Backed Securities
The Company enters into forward delivery contracts with loan aggregators and other investors as one of the tools to manage the
interest rate risk associated with IRLCs and loans held for sale. In addition, the Company enters into TBA mortgage backed
securities which facilitate hedging and funding by allowing the Company to prearrange prices for mortgages that are in the
process of originating. The Company utilizes these hedging instruments for Agency (Fannie Mae and Freddie Mac) and FHA/
VA (Ginnie Mae) eligible IRLCs.
The following table presents the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying
risk:
As of December 31, 2019
As of December 31, 2018
Notional
values
Asset
derivatives
Liability
derivatives
Notional
values
Asset
derivatives
Liability
derivatives
Interest rate lock commitments
Forward delivery contracts
TBA mortgage backed securities
Other
Total
$
$
279,048
87,773
235,000
10,360
612,181
$
$
7,336
36
118
—
7,490
$
$
— $
—
428
3,330
3,758
$
122,477
41,383
129,000
—
292,860
$
$
3,460
5
39
—
3,504
$
$
—
52
824
—
876
Derivatives Designated as Cash Flow Hedging Instruments
The following table presents the pre-tax impact of the cash flow hedging derivative instruments on the consolidated financial
statements for the following periods:
Year Ended December 31,
2018
2017
2019
Gains (losses) recognized in AOCI on the derivative-effective portion
(Gains) losses reclassified from AOCI into income-effective portion
$
$
— $
1,111
$
— $
(3,845) $
282
184
F- 39
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(10) Debt, net
The following table presents the balance of the Company’s debt obligations, net of discounts and deferred financing costs.
Debt Type
Corporate debt
Secured corporate credit agreements
Junior subordinated notes
Preferred trust securities
Total corporate debt
Asset based debt (1)
Asset based revolving financing (2)
Residential mortgage warehouse
borrowings (3)
Vessel backed term loan
Total asset based debt
Total debt, face value
Unamortized discount, net
Unamortized deferred financing costs
Total debt, net
Stated maturity
date
Stated interest
rate or range of
rates
Maximum
borrowing
capacity as of
As of December 31,
December 31,
2019
December 31,
2019
December 31,
2018
April 2020 -
September 2020
October 2057
June 2037
LIBOR + 1.20%
to 5.50%
8.50%
LIBOR + 4.10%
$
$
143,210
125,000
35,000
$
93,210
125,000
35,000
253,210
72,090
125,000
35,000
232,090
April 2021
May 2020 -
August 2020
November 2024
LIBOR + 2.40%
LIBOR + 2.00%
to 2.50%
LIBOR + 4.75%
40,000
21,576
86,092
111,000
18,000
90,673
18,000
130,249
383,459
(198)
(8,807)
374,454
$
46,091
—
132,183
364,273
(504)
(9,686)
354,083
$
(1)
(2)
(3)
Asset based debt is generally recourse only to specific assets and related cash flows.
The weighted average coupon rate for asset based revolving financing was 4.16% and 4.30% at December 31, 2019 and December 31, 2018, respectively.
The weighted average coupon rate for residential mortgage warehouse borrowings was 3.83% and 4.66% at December 31, 2019 and December 31, 2018, respectively.
The following table presents the amount of interest expense the Company incurred on its debt for the following periods:
Interest expense - corporate debt
Interest expense - asset based debt
Interest expense on debt
Year Ended December 31,
2018
2017
2019
$
$
19,682
7,377
27,059
$
$
18,162
8,851
27,013
$
$
12,838
12,759
25,597
The following table presents the future maturities of the unpaid principal balance on the Company’s debt for the following
period:
2020
2021
2022
2023
2024
2025 and thereafter
Total
As of
December 31,
2019
$
$
183,883
21,576
—
—
18,000
160,000
383,459
The following narrative is a summary of certain terms of our debt agreements for the period ended December 31, 2019:
Corporate Debt
Secured Corporate Credit Agreements
On May 4, 2018, the Company entered into a Fifth Amendment to the Credit Agreement with Fortress providing for an additional
$47,000 borrowing for a total principal amount outstanding of $75,000 as of the borrowing date. The Fifth Amendment extends
F- 40
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
the maturity date of all term loans under the Credit Agreement from September 18, 2018 to September 18, 2020. The amended
facility also has a new interest rate at a variable rate equal to one-month LIBOR with a LIBOR floor of 1.25%, plus a margin
of 5.50% per annum. As of December 31, 2019 and December 31, 2018, a total of $68,210 and $72,090, respectively, was
outstanding under the Operating Company credit agreement.
On December 21, 2017, a subsidiary in our insurance business entered into a $30,000 revolving line of credit which bears interest
at a rate equal to LIBOR rate plus 1.00% and has a $30,000 accordion feature. The facility is secured by substantially all the
assets of the subsidiary and had an original maturity date of December 20, 2018, which was renewed with a new maturity date
of April 28, 2019. During April 2019, the maturity date of this borrowing was extended to April 2020 with a new rate of LIBOR
plus 1.20%. On December 31, 2019, the borrowing was amended to increase the revolving credit exposure to $75,000 with a
sublimit of $30,000 of revolving loans and requiring that any revolving loans in excess of $30,000 be cash collateralized. As of
December 31, 2019 and December 31, 2018, a total of $25,000 and $0, respectively, was outstanding under this facility.
Junior Subordinated Notes
On October 16, 2017, a subsidiary in our insurance business issued $125,000 of 8.50% Fixed Rate Resetting Junior Subordinated
Notes due October 2057. Substantially all of the net proceeds were used to repay the existing secured credit agreement, which
was terminated thereafter. The notes are unsecured obligations of the subsidiary and rank in right of payment and upon liquidation,
junior to all of the subsidiary’s current and future senior indebtedness. The notes are not obligations of or guaranteed by any
subsidiaries of the subsidiary, or any other Tiptree entities. So long as no event of default has occurred and is continuing, all or
part of the interest payments on the notes can be deferred on one or more occasions for up to five consecutive years per deferral
period. This credit agreement contains customary financial covenants that require, among other items, maximum leverage and
limitations on restricted payments under certain circumstances.
Preferred Trust Securities
A subsidiary in our insurance business has $35,000 of preferred trust securities due June 15, 2037. Interest is payable quarterly
at an interest rate of LIBOR plus 4.10%. The Company may redeem the preferred trust securities, in whole or in part, at a price
equal to the full outstanding principal amount of such preferred trust securities outstanding plus accrued and unpaid interest.
Asset Based Debt
Asset Backed Revolving Financing
As of December 31, 2019 and December 31, 2018, a total of $9,840 and $4,749, respectively, was outstanding under the borrowing
related to our premium finance business in our insurance business. During April 2019, the maturity date of this borrowing was
extended to April 2021 with a new rate of LIBOR plus 2.40%. On December 30, 2019, the maximum borrowing capacity of
this borrowing was reduced from $25,000 to $13,000.
On August 5, 2019, a subsidiary in our insurance business entered into a $15,000 revolving line of credit agreement related to
our warranty service contract finance business. The borrowing has a maturity date of April 28, 2021 and a rate of LIBOR plus
2.40%. On December 30, 2019, the maximum borrowing capacity of this borrowing was increased from $15,000 to $27,000.
As of December 31, 2019, a total of $11,736 was outstanding under the borrowing.
The $81,343 balance as of December 31, 2018 of the corporate loan financing agreement in our insurance business was paid
off and the borrowing was extinguished in March 2019.
Residential Mortgage Warehouse Borrowings
The Company, through a subsidiary in its mortgage business has three warehouse borrowings with a total borrowing capacity
at December 31, 2019 of $111,000. Such warehouse facilities are recourse to the assets of the subsidiary and are secured by
liens on cash escrow and the loans held for sale in the warehouse. These credit agreements contain customary financial covenants
that require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios, and
minimum liquid assets. As of December 31, 2019 and December 31, 2018, a total of $90,673 and $46,091, respectively, was
outstanding under such financing agreements.
F- 41
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Vessel Backed Term Loan
On November 28, 2019, subsidiaries in our shipping business entered into a $18,000 term loan facility. Amounts borrowed under
the facility are not allowed to be reborrowed. The borrowing has a maturity date of November 28, 2024 and a rate of LIBOR
plus 4.75%, with quarterly principal payments of $550. This facility is secured by liens on two of our vessels as well as the
assets of the borrowing entities and their parent guarantor. This credit agreement contains customary financial covenants that
require, among other items, minimum liquidity, positive working capital, minimum required security coverage ratio of 150%,
and the existence of a maintenance reserve account funded on a quarterly basis prior to anticipated scheduled drydocking costs.
As of December 31, 2019, a total of $18,000 was outstanding under the borrowing.
As of December 31, 2019, the Company is in compliance with the representations and covenants for outstanding borrowings or
has obtained waivers for any events of non-compliance.
(11) Fair Value of Financial Instruments
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to
measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing
an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the
secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs
used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the
level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest
level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy
discussed in Note (2) Summary of Significant Accounting Policies which prioritizes the inputs used to measure fair value into
three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to
the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest
for instruments categorized within Level 3 of the fair value hierarchy.
The Company’s fair value measurement is based primarily on a market approach, which utilizes prices and other relevant
information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the
market approach include third party pricing services, independent broker quotations and pricing matrices. Management analyzes
the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within
the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in
fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to
resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. In addition,
the Company utilizes an income approach to measure the fair value of NPLs, as discussed below.
The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs may include:
benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.
In addition, specific issuer information and other market data is used. Broker quotes are obtained from sources recognized to
be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand
considerations and market volatility.
Available for Sale Securities, at fair value
Available for sale securities fair values are based on prices provided by an independent pricing service and a third party investment
manager. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service
and the third party investment manager by analyzing the investment manager-provided pricing report.
The following details the methods and assumptions used to estimate the fair value of each class of AFS securities and the
applicable level each security falls within the fair value hierarchy:
U.S Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Obligations of State and Political
Subdivisions, Corporate Securities, Asset Backed Securities, and Obligations of Foreign Governments: Fair values were obtained
from an independent pricing service and a third party investment manager. The prices provided by the independent pricing
service and third party investment manager are based on quoted market prices, when available, non-binding broker quotes, or
matrix pricing and fall under Level 2 or Level 3 in the fair value hierarchy.
F- 42
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Certificates of Deposit: The estimated fair value of certificates of deposit approximate carrying value and fall under Level 1 of
the fair value hierarchy.
Equity Securities
The fair values of publicly traded common and preferred stocks are obtained from market value quotations provided by an
independent pricing service and fall under Level 1 in the fair value hierarchy. The fair values of non-publicly traded common
and preferred stocks are based on prices obtained from an independent pricing service using unobservable inputs and fall under
Level 3 in the fair value hierarchy.
The Company’s investment in Invesque was subject to certain contractual and functional sale restrictions. As of December 31,
2018, the fair value of the Invesque shares was based on the market price adjusted for the impact of these restrictions, and was
classified under Level 2 in the fair value hierarchy. As of December 31, 2019, these restrictions are no longer applicable and the
shares are classified under Level 1.
Loans, at fair value
Corporate Loans: These loans are comprised of a diversified portfolio of middle market and broadly syndicated leveraged loans
and are generally classified under either Level 2 or Level 3 in the fair value hierarchy. To determine fair value, the Company
uses quoted prices which include those provided from pricing vendors, where available. We perform internal price verification
procedures to ensure that the prices and quotes provided from the independent pricing vendors are reasonable. Such verification
procedures include comparison of pricing sources and analysis of variances among pricing sources. The Company has evaluated
each loan’s respective liquidity and has additionally performed valuation benchmarking. The key characteristics which were
evaluated as part of this determination were liquidity ratings, price changes to index benchmarks, depth of quotes, credit ratings
and industry trends.
Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified under Level 2 in the fair value hierarchy
and fair value is based upon forward sales contracts with third party investors, including estimated loan costs, and reserves.
Nonperforming Loans and REO: The Company determines the purchase price for NPLs at the time of acquisition and for each
subsequent valuation by using a discounted cash flow valuation model and considering alternate loan resolution probabilities,
including modification, liquidation, or conversion to REO. The significant unobservable inputs used in the fair value measurement
of our NPLs are discount rates, loan resolution timeline, and the value of underlying properties. The fair values of NPLs which
are making payments (generally based on a modification or a workout plan) are primarily based upon secondary market transaction
prices, which are expressed as a percentage of unpaid principal balance (UPB). Observable inputs to the model include loan
amounts, payment history, and property types. Our NPLs are on nonaccrual status at the time of purchase as it is probable that
principal or interest is not fully collectible. NPLs are included in loans, at fair value and fall under Level 3 in the fair value
hierarchy.
NPLs that have become REOs were measured at fair value on a non-recurring basis at the time of transfer during the year ended
December 31, 2019 and the year ended December 31, 2018. The carrying value of REOs at December 31, 2019 and December 31,
2018 was $2,188 and $10,019, respectively. Upon conversion to REO, the fair value is estimated using a broker price opinion
(BPO). BPOs are subject to judgments of a particular broker formed by visiting a property, assessing general home values in an
area, reviewing comparable listings, and reviewing comparable completed sales. These judgments may vary among brokers and
may fluctuate over time based on housing market activities and the influx of additional comparable listings and sales. REO is
included in other investments. Subsequent to conversion, REOs are carried at lower of cost or market.
Derivative Assets and Liabilities
Derivatives are primarily comprised of IRLCs, forward delivery contracts and TBA mortgage backed securities. The fair value
of these instruments is based upon valuation pricing models, which represent the amount the Company would expect to receive
or pay at the balance sheet date to exit the position. Our mortgage origination subsidiaries issue IRLCs to their customers, which
are carried at estimated fair value on the Company’s consolidated balance sheet. The estimated fair values of these commitments
are generally calculated by reference to the value of the underlying loan associated with the IRLC net of costs to produce and
an expected fall out assumption. The fair values of these commitments generally fall under Level 3 in the fair value hierarchy.
Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors.
F- 43
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
For loans not locked with investors under a forward delivery commitment, the Company enters into hedge instruments, primarily
TBAs, to protect against movements in interest rates. The fair values of TBA mortgage backed securities and forward delivery
contracts generally fall under Level 2 in the fair value hierarchy.
Corporate Bonds
Corporate bonds are generally classified under Level 2 in the fair value hierarchy and fair value is provided by a third party
investment manager, based on quoted market prices. We perform internal price verification procedures to ensure that the prices
provided are reasonable.
The following tables present the Company’s fair value hierarchies for financial assets and liabilities, measured on a recurring
basis:
Assets:
Available for sale securities, at fair value:
U.S. Treasury securities and obligations of U.S. government
authorities and agencies
Obligations of state and political subdivisions
Obligations of foreign governments
Certificates of deposit
Asset backed securities
Corporate securities
Total available for sale securities, at fair value
Loans, at fair value:
Corporate loans
Mortgage loans held for sale
Non-performing loans
Total loans, at fair value
Equity securities
Other investments, at fair value:
Corporate bonds
Derivative assets
CLOs
Total other investments, at fair value
Total
Liabilities:
Derivative liabilities (included in other liabilities and accrued
expenses)
Total
As of December 31, 2019
Quoted
prices in
active
markets
Level 1
Other
significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Fair value
$
$
$
$
— $
—
—
896
—
—
896
$
191,590
46,338
1,119
—
42,833
51,231
333,111
— $
—
—
—
1,185
—
1,185
—
—
—
—
155,135
—
—
—
—
—
98,720
—
98,720
—
20,705
154
—
20,859
9,787
—
387
10,174
243
—
7,336
4,768
12,104
191,590
46,338
1,119
896
44,018
51,231
335,192
9,787
98,720
387
108,894
155,378
20,705
7,490
4,768
32,963
156,031
$
452,690
$
23,706
$
632,427
— $
— $
3,758
3,758
$
$
— $
— $
3,758
3,758
F- 44
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Assets:
Available for sale securities, at fair value:
U.S. Treasury securities and obligations of U.S. government
authorities and agencies
Obligations of state and political subdivisions
Obligations of foreign governments
Certificates of deposit
Asset backed securities
Corporate securities
Total available for sale securities, at fair value
Loans, at fair value:
Corporate loans
Mortgage loans held for sale
Non-performing loans
Total loans, at fair value
Equity securities
Other investments, at fair value:
Derivative assets
CLOs
Total other investments, at fair value
Total
Liabilities:
Derivative liabilities (included in other liabilities and accrued
expenses)
Total
As of December 31, 2018
Quoted
prices in
active
markets
Level 1
Other
significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Fair value
$
$
$
$
— $
—
—
1,241
—
—
1,241
—
—
—
—
$
71,748
67,446
6,751
—
39,144
95,725
280,814
22,697
56,917
—
79,614
9,323
113,138
—
—
—
44
—
44
— $
—
—
—
1,508
—
1,508
108,213
—
27,556
135,769
518
3,460
5,027
8,487
71,748
67,446
6,751
1,241
40,652
95,725
283,563
130,910
56,917
27,556
215,383
122,979
3,504
5,027
8,531
10,564
$
473,610
$
146,282
$
630,456
— $
— $
876
876
$
$
— $
— $
876
876
The following table presents additional information about assets that are measured at fair value on a recurring basis for which
the Company has utilized Level 3 inputs to determine fair value for the following periods:
Balance at January 1,
Net realized gains (losses)
Net unrealized gains (losses)
Origination of IRLC
Purchases
Sales
Issuances
Transfers into Level 3 (1)
Transfer adjustments (out of) Level 3 (1)
Conversions to real estate owned
Conversions to mortgage loans held for sale
Balance at December 31,
Changes in unrealized gains (losses) included in earnings related to assets still held at period end
Year Ended December 31,
2018 (1)
2019 (1)
$
$
$
146,282
3,733
(4,356)
77,082
153
(123,497)
111
—
—
(2,596)
(73,206)
23,706
$
$
162,666
521
(4,123)
49,067
65,661
(71,282)
373
12,748
(11,567)
(7,367)
(50,415)
146,282
(5,596) $
(2,971)
(1) All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third party pricing on assets to various liquidity, depth, bid-ask
spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.
F- 45
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following is quantitative information about Level 3 assets with significant unobservable inputs used in fair valuation.
Assets
IRLCs
NPLs
Total
Fair Value as of
December 31,
Actual or Range
(Weighted average)
2019
2018
Valuation
technique
Unobservable
input(s)
December 31,
2019
December 31,
2018
$
$
7,336
$
3,460
Internal model
387
7,723
$
27,556
31,016
Discounted
cash flow (1)
Pull through
rate
See table
below (1) (2)
50% - 95%
50% - 95%
N/A
See table
below
(1)
(2)
As of December 31, 2019, there was one NPL remaining, which is making payments. The value as of December 31, 2019 is based on the expected sale price into the secondary
market.
Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase
the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics, such as location and value of underlying
collateral, affect the loan resolution timeline. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties
in isolation would decrease the fair value.
The following table presents quantitative information about the significant unobservable inputs used to measure the fair value
of our NPLs. For NPLs that are not making payments, discount rate, loan resolution time-line, value of underlying properties,
holding costs and liquidation costs are the primary inputs used to measure fair value. For NPLs that are making payments, note
rate and secondary market transaction prices/UPB are the primary inputs used to measure fair value. As of December 31, 2019,
there was one NPL remaining, which is making payments. The value as of December 31, 2019 is based on the expected sale
price into the secondary market.
Unobservable inputs
Discount rate
Loan resolution time-line (Years)
Value of underlying properties
Holding costs
Liquidation costs
Note rate
Secondary market transaction prices/UPB
(1) Weighted based on value of underlying properties.
As of December 31, 2018
Low
16.0%
0.6
$55
5.0%
8.4%
3.0%
74.5%
Average(1)
23.6%
1.2
$383
6.9%
9.2%
4.9%
83.3%
High
30.0%
2.1
$1,780
14.7%
14.2%
6.0%
88.3%
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded
at fair value and their respective levels within the fair value hierarchy:
As of December 31, 2019
As of December 31, 2018
Level within
fair value
hierarchy
Fair value
Carrying
value
Level within
fair value
hierarchy
Fair value
Carrying
value
2
2
3
$
$
$
$
15,423
42,192
57,615
396,699
396,699
$
$
$
$
15,423
42,192
57,615
383,261
383,261
2
2
3
$
$
$
$
5,134
13,057
18,191
363,769
363,769
$
$
$
$
5,134
13,057
18,191
363,769
363,769
Assets:
Debentures (1)
Notes and accounts receivable, net
Total assets
Liabilities:
Debt, net
Total liabilities
(1)
Included in other investments.
Debentures: Since interest rates on debentures are at current market rates for similar credit risks, the carrying amount approximates
fair value. These values are net of allowance for doubtful accounts.
F- 46
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Notes and Accounts Receivable: To the extent that carrying amounts differ from fair value, fair value is determined based on
contractual cash flows discounted at market rates for similar credits. Categorized under Level 2 in the fair value hierarchy.
Debt: The carrying value, which approximates fair value of LIBOR based debt, represents the total debt balance at face value
excluding the unamortized discount. The fair value of the Junior subordinated notes is determined based on dealer quotes.
Categorized under Level 3 in the fair value hierarchy.
Additionally, the following financial assets and liabilities on the consolidated balance sheets are not carried at fair value, but
whose carrying amounts approximate their fair value:
Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair
value. Categorized under Level 1 in the fair value hierarchy.
Accounts and Premiums Receivable, net, Retrospective Commissions Receivable and Other Receivables: The carrying amounts
approximate fair value since no interest rate is charged on these short duration assets. Categorized under Level 2 in the fair value
hierarchy. See Note (6) Notes and Accounts Receivable, net.
Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts are included in other
assets and other liabilities and accrued expenses and approximate their fair value due to their short term nature. Categorized
under Level 2 in the fair value hierarchy.
F- 47
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(12) Liability for Unpaid Claims and Claim Adjustment Expenses
The following tables present undiscounted information about incurred and paid claims development as of December 31, 2019,
net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities plus expected development on reported
claims included within the net incurred claims amounts. This information is presented in the aggregate for all short duration
contracts, due to the commonality of claims characteristics. The tables reflect three years of information because historically
over 95% of incurred losses have been paid within three years of the accident period.
Roll forward of Claim Liability
The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short
duration contracts for the following periods:
Policy liabilities and unpaid claims balance as of January 1,
Less: liabilities of policy-holder accounts balances, gross
Less: non-insurance warranty benefit claim liabilities
Gross liabilities for unpaid losses and loss adjustment expenses
Less: reinsurance recoverable on unpaid losses - short duration
Less: other lines, gross
Net balance as of January 1, short duration
Incurred (short duration) related to:
Current year
Prior years
Total incurred
Paid (short duration) related to:
Current year
Prior years
Total paid
Net balance as of December 31, short duration
Plus: reinsurance recoverable on unpaid losses - short duration
Plus: other lines, gross
Gross liabilities for unpaid losses and loss adjustment expenses
Plus: liabilities of policy-holder accounts balances, gross
Plus: non-insurance warranty benefit claim liabilities
Policy liabilities and unpaid claims balance as of December 31,
Year Ended December 31,
2019
2018
$
$
$
131,611
(13,659)
(94)
117,858
(90,016)
(227)
27,615
144,925
5,169
150,094
122,348
11,480
133,828
43,881
88,599
230
132,710
11,589
85
144,384
$
112,003
(15,474)
(58)
96,471
(73,778)
(224)
22,469
129,352
2,509
131,861
105,740
20,975
126,715
27,615
90,016
227
117,858
13,659
94
131,611
The following schedule reconciles the total short duration contracts per the table above to the amount of total losses incurred as
presented in the consolidated statement of operations, excluding the amount for member benefit claims:
Short duration incurred
Other lines incurred
Unallocated loss adjustment expense
Total losses incurred
Year Ended December 31,
2018
2017
2019
$
$
150,094
184
731
151,009
$
$
131,861
124
2,867
134,852
$
$
106,653
123
1,763
108,539
For the year ended December 31, 2019, the Company’s insurance business experienced an increase in prior year case development
of $5,169, primarily from its non-standard auto business.
For the year ended December 31, 2018, the Company’s insurance business experienced an increase in prior year case development
of $2,509, primarily from its non-standard auto business.
Incurred and Paid Development
The following table presents information about incurred and paid loss development and average claim duration as of December 31,
F- 48
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
2019, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities plus expected development on
reported claims included within the net incurred claims amounts. The cumulative number of reported claims represents open
claims, claims closed with payment, and claims closed without payment. It does not include an estimated count of unreported
claims. The number of claims is measured by claim event. The Company considers a claim that does not result in a liability as
a claim closed without payment.
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2019
Accident Year
2017
2018
2019
2017
(Unaudited)
For the Years Ended December 31,
2018
(Unaudited)
2019
$
103,306 $
104,898 $
129,352
Total $
105,601
133,225
144,925
383,751
Total of IBNR
Liabilities Plus
Expected
Development of
Reported Claims
305
$
2,930
$
34,344
$
Cumulative
Number of
Reported
Claims
326
397
313
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
2017
2018
2019
2017
(Unaudited)
2018
(Unaudited)
2019
$
84,493 $
102,620 $
105,740
Total $
All outstanding liabilities before 2017, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
$
105,075
112,619
122,348
340,042
172
43,881
Duration
The following table presents supplementary information about average historical claims duration as of December 31, 2019
for short duration contracts:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
Short duration
1
81.3%
2
11.2%
3
2.3%
Reconciliation of Reserves to Balance Sheet
The following table presents a reconciliation of net outstanding liabilities for unpaid loss and loss adjustment expenses of short
duration contracts to the consolidated balance sheet value of policy liabilities and unpaid claims:
Net outstanding liabilities:
Short duration
Insurance lines other than short duration
Total liabilities for unpaid losses and loss adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid losses and loss adjustment expenses:
Short duration
Other insurance lines
Total reinsurance recoverable on unpaid losses and loss adjustment expenses
Total gross liability for unpaid losses and loss adjustment expenses
Liabilities of policy-holder accounts balances, gross
Non-insurance warranty benefit claim liabilities
Total policy liabilities and unpaid claims
F- 49
As of
December 31,
2019
$
$
43,881
30
43,911
88,599
200
88,799
132,710
11,589
85
144,384
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(13) Revenue From Contracts with Customers
Revenue from contracts with customers is primarily comprised of asset management fee income included as a part of other
revenue, vessel related revenue included as a part of other revenue, and warranty coverage, motor club and other revenues
included as a part of service and administrative fees in our insurance business. The following table presents the disaggregated
amounts of revenue from contracts with customers by product type for the following periods:
Motor club revenue
Warranty coverage revenue
Vessel related revenue
Management fee income
Other
Revenue from contracts with customers
Year Ended December 31,
2018
2017
2019
36,076
27,597
16,747
1,267
7,317
89,004
$
$
32,242
26,058
3,972
6,694
7,840
76,806
$
$
31,501
18,385
—
8,314
7,987
66,187
$
$
Service and Administrative Fees
Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and
claims handling for our customers. Management reviews the financial results under each significant contract on a monthly basis.
Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.
Administrative fee revenue includes the administration of premium associated with our producers and their producer owned
reinsurance companies (PORCs). In addition, we also earn fee revenue from debt cancellation programs, motor club programs,
and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the
underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's,
modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method
based on available information, and periodically reviews the selections as additional information becomes available.
Information on Remaining Performance Obligations
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected
duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance
obligations with an original expected duration exceeding one year was not material at December 31, 2019.
Contract Balances
The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when
revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes
the provision of the related services, we record deferred revenue until the performance obligations are satisfied.
Charter Revenue
The Company generates its revenues from charterers for the charter hire of its vessels. Vessels are chartered under time or voyage
charters, where a contract is entered into for the use of a vessel for a specific voyage or a specific period of time and at a specified
daily charter rate. Charter revenues are recognized as earned on the straight-line basis over the term of the charter as service is
provided.
Revenue is recognized when a charter agreement exists, the vessel is made available to the charterer and collection of the related
revenue is reasonably assured. Unearned revenue includes revenue received prior to the balance sheet date relating to services
to be rendered after the balance sheet date.
Management Fees
The Company earned management fee income in the form of base management fees and incentive fees from the CLOs it managed.
These base management fees were billed as the services were provided and paid periodically in accordance with the terms of
the individual management agreements for as long as the Company managed the funds. Base management fees typically consisted
of fees based on the amount of assets held in the CLOs. Base management fees were recognized as revenue when earned. The
Company did not recognize incentive fees until all contractual contingencies were removed.
F- 50
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents the activity in the significant deferred assets and liabilities related to revenue from contracts with
customers for the year ended December 31, 2019.
Deferred acquisition costs
Motor club revenue
Warranty coverage revenue
Total
Deferred revenue
Motor club revenue
Warranty coverage revenue
Total
January 1, 2019
December 31, 2019
Beginning balance
Additions
Amortizations
Ending balance
$
$
$
$
12,189
1,274
13,463
16,128
39,835
55,963
$
$
$
$
28,944
696
29,640
37,858
37,130
74,988
$
$
$
$
27,433
943
28,376
36,076
27,597
63,673
$
$
$
$
13,700
1,027
14,727
17,910
49,368
67,278
Write-offs were not material for any period presented.
(14) Other Assets and Other Liabilities and Accrued Expenses
Other Assets
The following table presents the components of other assets as reported in the consolidated balance sheets:
Right of use asset - Operating leases (1)
Furniture, fixtures and equipment, net
Prepaid expenses
Subsidiary sale receivable (2)
Other
Total other assets
As of December 31,
2018
2019
23,832
12,305
8,461
625
23,287
68,510
$
$
—
6,122
7,351
10,676
21,885
46,034
$
$
(1)
(2)
See Note (2) Summary of Significant Accounting Policies - Recent Accounting Standards and Note (20) Commitments and Contingencies for additional information.
Related to the gain contingency on sale of Care recorded in December 2018. $10,051 was received in cash in 2019. The remaining amount is expected to be paid off by 2021.
See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
The following table presents the depreciation expense related to furniture, fixtures and equipment for the following periods:
Depreciation expense related to furniture, fixtures and equipment
$
2,753
$
1,984
$
2,555
Year Ended December 31,
2018
2017
2019
Other Liabilities and Accrued Expenses
The following table presents the components of other liabilities and accrued expenses as reported in the consolidated balance
sheets:
Accounts payable and accrued expenses
Operating lease liability(1)
Deferred tax liabilities, net
Commissions payable
Other
Total other liabilities and accrued expenses
As of December 31,
2018
2019
$
$
68,829
29,491
32,306
9,179
32,335
172,140
$
$
63,755
—
25,433
11,076
23,926
124,190
(1)
See Note (2) Summary of Significant Accounting Policies - Recent Accounting Standards and Note (20) Commitments and Contingencies for additional information.
F- 51
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(15) Other Revenue, Other Expenses and Other Income
Other Revenue
The following table presents the components of other revenue as reported in the consolidated statement of operations. Other
revenue is primarily generated by Tiptree Capital’s non-insurance activities except as noted in the footnote to the table.
Other investment income (1)
Gain on sale of businesses (2)
Management fee income
Other (3)
Total other revenue
Year Ended December 31,
2018
2017
2019
$
$
45,985
7,598
1,267
5,038
59,888
$
$
25,541
—
6,694
5,827
38,062
$
$
26,261
1,994
8,314
5,706
42,275
(1)
(2)
(3)
See Note (5) Investments for the components of Other investment income.
Related to the sale of Telos and our commercial lending business, for the years ended December 31, 2019 and 2017, respectively. See Note (3) Dispositions, Assets Held for
Sale and Discontinued Operations.
Includes $4,566, $2,554 and $3,552 related to Tiptree Insurance for the year ended December 31, 2019, 2018 and 2017, respectively.
Other Expenses
The following table presents the components of other expenses as reported in the consolidated statement of operations:
Professional fees
General and administrative
Premium taxes
Mortgage origination expenses
Rent and related
Operating expenses from vessels
Loss on extinguishment of debt
Other
Total other expenses
Other Income
Year Ended December 31,
2018
2017
2019
20,820
18,563
15,205
12,200
12,642
9,781
1,241
9,292
99,744
$
$
15,216
16,218
14,026
8,857
11,114
3,777
428
8,265
77,901
$
$
16,245
14,800
11,658
8,822
10,379
—
1,163
11,372
74,439
$
$
The CLOs are considered variable interest entities (VIE) and the Company consolidates entities when it is determined to be the
primary beneficiary under current VIE accounting guidance.
The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated
statements of operations for the periods indicated:
Income:
Net realized and unrealized gains (losses)
Interest income
Total income
Expenses:
Interest expense
Other expense
Total expense
Net income (loss) attributable to consolidated CLOs
Year Ended December 31,
2018
2017 (1)
2019
$
$
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
2,364
22,539
24,903
13,386
1,060
14,446
10,457
(1)
In 2017, the Company exited all consolidated CLOs. The operations of the CLOs were consolidated in the results of the Company through the redemption date. See Note (3)
Dispositions, Assets Held for Sale and Discontinued Operations.
F- 52
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
As summarized in the table below, the application of the measurement alternative results in the consolidated net income
summarized above to be equivalent to the Company’s own economic interests in the CLOs which are eliminated upon
consolidation:
Economic interests:
Distributions received
Realized and unrealized gains on subordinated notes held by the Company, net
Total
Management fee income
Total economic interests
(16) Stockholders’ Equity
Stock Repurchases
Year Ended December 31,
2018
2017
2019
$
$
— $
—
—
—
— $
— $
—
—
—
— $
5,757
3,559
9,316
1,141
10,457
On May 2, 2019, the Board of Directors replenished the Company’s authorization to make repurchases of up to $20.0 million
of shares of the Company’s outstanding Common Stock in the aggregate, at the discretion of the Company's Executive Committee.
The shares purchased during the first quarter of 2019 were purchased under a previous authorization. The following table presents
the Company’s stock repurchase activity and remaining authorization.
Share repurchase programs
Block repurchase program
Total
Remaining repurchase authorization
Dividends
The Company declared cash dividends per share for the following periods presented below:
Year Ended December 31, 2019
Number of
shares
purchased
60,421
1,412,309
1,472,730
Average price
per share
$
$
5.86
6.18
6.17
20,000
First quarter
Second quarter
Third quarter
Fourth quarter(1)
Total cash dividends declared
(1)
See Note (24) Subsequent Events for when dividend was declared.
Reorganization Merger
Dividends per share for the
Year Ended December 31,
2018
2019
2017
$
$
0.040
0.040
0.040
0.040
0.160
$
$
0.035
0.035
0.035
0.035
0.140
$
$
0.030
0.030
0.030
0.030
0.120
On April 10, 2018, the Company completed a reorganization merger whereby TFP merged with and into the Company with the
Company continuing as the surviving company (Reorganization Merger). After the Reorganization Merger, TFP ceased to exist
and the Company owned 100% of Operating Company. As a result of the merger, the balance of Non-controlling interest - TFP
as of the merger date was allocated to Additional paid in capital and Accumulated other comprehensive income (loss), as detailed
in the consolidated statement of changes in stockholders’ equity.
In connection with the Reorganization Merger, each TFP limited partner other than Tiptree received 2.798 shares of Class A
common stock for each partnership unit, 6,861,561 Class A common shares were issued, and all outstanding Class B common
F- 53
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
stock was canceled. Outstanding warrants to acquire 652,500 shares of Class A common stock at an exercise price of $11.33
per share owned by TFP were canceled. In addition, warrants to acquire 103,994 shares of Class A common stock at an exercise
price of $11.33 were issued to partners of TFP other than Tiptree, and expired unexercised on December 31, 2018. Warrants to
acquire 805,986 TFP LP units at $21.232 per unit were canceled and Tiptree issued warrants for 2,255,149 Tiptree shares of
Class A common stock at an exercise price of $7.59 per share to holders of the canceled TFP warrants.
On April 16, 2018, the Company canceled 5,035,977 shares of Class A common stock held by a subsidiary of the Company,
which had no effect on total Tiptree Inc. stockholders’ equity.
At the 2018 Annual Meeting of Stockholders of the Company held on June 6, 2018, the Company’s stockholders approved an
amendment and restatement (the Amendment) to the Fourth Articles of Amendment and Restatement of the Company (as amended
by the Amendment, the Fifth A&R Charter) to remove all references to the Company’s Class B common stock as well as other
ministerial changes, including changing the name of our Class A common stock to Common Stock. The Amendment was filed
with the State Department of Assessments and Taxation of Maryland on June 7, 2018.
Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions
The Company’s U.S. insurance subsidiaries prepare financial statements in accordance with Statutory Accounting Principles
(SAP) prescribed or permitted by the insurance departments of their states of domicile. Prescribed SAP includes the Accounting
Practices and Procedures Manual of the National Association of Insurance Commissioners (the NAIC) as well as state laws,
regulations and administrative rules.
Statutory capital, surplus and net income
The following table presents the combined statutory capital and surplus of the Company's U.S. domiciled insurance company
subsidiaries and the required minimum statutory capital and surplus, as required by the laws of the states in which they are
domiciled for the following periods:
Combined statutory capital and surplus of the Company's insurance company subsidiaries
Required minimum statutory capital and surplus
As of December 31,
2018
2019
$
$
134,179
17,950
$
$
131,859
17,950
Under the National Association of Insurance Commissioners Risk-Based Capital Act of 1995, a company's Risk-Based Capital
(RBC) is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted surplus
falls below calculated RBC thresholds, regulatory intervention or oversight is required. The Company's U.S. domiciled insurance
company subsidiaries' RBC levels, as calculated in accordance with the NAIC’s RBC instructions, exceeded all RBC thresholds
as of December 31, 2019.
The following table presents the statutory net income of the Company’s U.S. domiciled statutory insurance companies for the
following periods:
Net income of statutory insurance companies
Year Ended December 31,
2019
2018
2017
$
8,444
$
13,986
$
9,135
The Company also has a foreign insurance subsidiary that is not subject to SAP. The statutory capital and surplus amounts and
statutory net income presented above do not include the foreign insurance subsidiary in accordance with SAP.
Statutory Dividends
The Company's U.S. domiciled insurance company subsidiaries may pay dividends to the Company, subject to statutory
restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior
approval of the insurance department of the applicable state of domicile. The Company eliminates all dividends from its
subsidiaries in the consolidated financial statements. The following table presents the dividends paid to the Company by its U.S
domiciled insurance company subsidiaries and the combined amount available for ordinary dividends of the Company's U.S.
domiciled insurance company subsidiaries for the following periods:
F- 54
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Ordinary dividends
Extraordinary dividends
Total dividends
Amount available for ordinary dividends of the Company's insurance company subsidiaries
For the Year Ended
December 31,
2019
2018
$
$
9,001
1,188
10,189
$
$
—
—
—
As of December 31,
2018
2019
4,527
13,532
At December 31, 2019, the maximum amount of dividends that our U.S. domiciled regulated insurance company subsidiaries
could pay under applicable laws and regulations without regulatory approval was approximately $4,527. The Company may
seek regulatory approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company
would receive regulatory approval if sought.
(17) Accumulated Other Comprehensive Income (Loss)
The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following
periods:
Unrealized gains (losses) on
Amount attributable to
noncontrolling interests
Available
for sale
securities
Interest rate
swaps
Total AOCI
(loss)
TFP
Other
(700) $
1,759
$
1,059
$
(128) $
(376) $
Total AOCI
(loss) to
Tiptree Inc.
555
522
(282)
240
(460) $
(2,257)
648
—
—
(1,609)
(2,069) $
4,911
(1,032)
3,879
(99)
1,711
$
$
190
125
315
2,074
835
—
(2,909)
—
(2,074)
— $
—
—
—
—
— $
712
(157)
555
1,614
(1,422)
648
$
(2,909)
—
(3,683)
(2,069) $
4,911
(1,032)
3,879
(99)
1,711
$
(94)
—
(94)
(222) $
61
—
502
(341)
222
— $
—
—
—
—
— $
(50)
—
(50)
(426) $
211
—
226
—
437
11
$
(24)
—
(24)
—
(13) $
568
(157)
411
966
(1,150)
648
(2,181)
(341)
(3,024)
(2,058)
4,887
(1,032)
3,855
(99)
1,698
Balance at December 31, 2016
Other comprehensive income (losses)
before reclassifications
Amounts reclassified from AOCI
Period change
Balance at December 31, 2017
Other comprehensive income (losses)
before reclassifications
Amounts reclassified from AOCI
Reclassification of AOCI - interest
rate swaps (1)
Reorganization merger
Period change
Balance at December 31, 2018
Other comprehensive income (losses)
before reclassifications
Amounts reclassified from AOCI
Period change
Adoption of accounting standard (2)
Balance at December 31, 2019
$
$
$
$
(1)
(2)
Relates to the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
Amounts reclassified to retained earnings due to adoption of ASU 2018-02. See Note (2) Summary of Significant Accounting Policies.
F- 55
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items
on the consolidated statement of operations for the following periods:
Components of AOCI
Unrealized gains (losses) on available for sale
securities
Related tax (expense) benefit
Net of tax
Unrealized gains (losses) on interest rate swaps
Reclassification of AOCI - interest rate swaps (1)
Related tax (expense) benefit
Net of tax
$
$
$
$
Year Ended December 31,
2018
2017
2019
Affected line item in consolidated
statement of operations
1,312
$
(819) $
435 Net realized and unrealized gains (losses)
(280)
1,032
$
171
(648) $
(153) Provision for income tax
282
— $
—
—
— $
— $
(184) Interest expense
3,845
(936)
2,909
— Gain on sale of discontinued operations
59 Provision for income tax
$
(125)
(1)
Relates to the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
(18) Stock Based Compensation
Equity Plans
2013 Omnibus Incentive Plan
The Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) was adopted on August 8, 2013. On June 6, 2017, the 7,359
remaining shares of Common Stock available for issuance under the 2013 Equity Plan was rolled into the 2017 Equity Plan and
the 2013 Equity Plan was simultaneously terminated.
2017 Omnibus Incentive Plan
The Company adopted the Tiptree 2017 Omnibus Incentive Plan (2017 Equity Plan) on June 6, 2017, which permits the grant
of stock units, stock, and stock options up to a maximum of 6,100,000 shares of Common Stock. The general purpose of the
2017 Equity Plan is to attract, motivate and retain selected employees and directors for the Company and its subsidiaries, to
provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s
stockholders. Unless otherwise extended, the 2017 Equity Plan terminates automatically on June 6, 2027. The table below
summarizes changes to the issuances under the Company’s 2017 Equity Plan for the periods indicated, excluding awards granted
under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Common Stock:
2013 Equity Plan
Available for issuance as of December 31, 2016
Awards granted
Awards rolled into 2017 Equity Plan
Available for issuance as of December 31, 2017
2017 Equity Plan
Available for issuance as of December 31, 2016
Available from 2017 Equity Plan (1) (2)
Awards granted
Available for issuance as of December 31, 2017
RSU and option awards granted
Forfeited
Available for issuance as of December 31, 2018
RSU and option awards granted
Forfeited
Subsidiary exchanged shares
Available for issuance as of December 31, 2019
(1)
(2)
Excludes awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Common Stock.
Includes remaining awards from 2013 Equity Plan.
F- 56
Number of
shares (1)
961,650
(954,291)
(7,359)
—
—
6,100,000
(82,988)
6,017,012
(558,034)
15,236
5,474,214
(702,264)
8,318
(14,405)
4,765,863
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Restricted Stock Units (RSUs)
Tiptree Corporate Incentive Plans
The Company values RSUs at their grant-date fair value as measured by Tiptree’s Common Stock price. Generally, the Tiptree
RSUs vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the first, second and third
anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period.
The following table presents changes to the issuances of RSUs under the 2017 Equity Plan for the periods indicated:
Unvested units as of December 31, 2016
Granted (1)
Vested
Unvested units as of December 31, 2017
Granted (1)
Vested
Forfeited
Unvested units as of December 31, 2018
Granted (1)
Vested
Forfeited
Unvested units as of December 31, 2019
Number of
shares
issuable
Weighted
average grant
date fair
value
299,817
466,652
(167,587)
598,882
315,371
(222,387)
(15,236)
676,630
476,449
(186,151)
(8,318)
958,610
$
$
$
$
6.27
6.60
6.43
6.48
5.95
6.39
6.04
6.27
6.25
6.44
6.10
6.23
(1)
Includes grants of 48,076, 46,572 and 39,164 shares of Common Stock to directors for the years ended December 31, 2019, 2018 and 2017, respectively.
The following tables present the detail of the granted and vested RSUs for the periods indicated:
Granted
Directors
Employees (1)
Total Granted
Year Ended
December 31,
2019
Vested
48,076 Directors
428,373 Employees
476,449
Total Vested
Taxes
Exchanged
Net Vested
Year Ended
December 31,
2019
48,076
138,075
186,151
(35,622)
14,405
164,934
(1)
Includes 307,148 shares that vest ratably over three years, 112,907 shares that cliff vest in February 2021 and the remaining shares vested immediately.
Subsidiary Incentive Plans
Certain of the Company’s subsidiaries have established incentive plans under which they are authorized to issue equity of those
subsidiaries to certain of their employees. Such awards are accounted for as equity. These awards are subject to performance-
vesting criteria based on the performance of the subsidiary (performance vesting awards) and time-vesting subject to continued
employment (time vesting awards). Following the service period, such vested awards may be exchanged at fair market value,
at the option of the holder, for Tiptree Common Stock under the 2017 Equity Plan. The service period for certain grants has been
achieved and those vested subsidiary awards are currently eligible for exchange. The Company has the option, but not the
obligation to settle the exchange right in cash.
F- 57
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents changes to the issuances of subsidiary awards under the subsidiary incentive plans for the periods
indicated:
Unvested balance as of December 31, 2016
Granted
Vested
Grant value adjustment (1)
Performance assumption adjustment
Unvested balance as of December 31, 2017
Granted
Vested
Performance assumption adjustment
Unvested balance as of December 31, 2018
Granted
Vested
Performance assumption adjustment
Unvested balance as of December 31, 2019
Grant date
fair value of
equity shares
issuable
$
$
$
$
8,089
2,669
(2,436)
(210)
680
8,792
1,113
(1,771)
576
8,710
—
(4,991)
560
4,279
(1)
Due to the approval of the 2017 Equity Plan, the Company changed the classification of the subsidiary RSU’s during the year ended December 31, 2017
from liability to equity awards because the Company expects to settle these awards in stock.
The net vested and unvested balance of subsidiary awards (assuming full vesting) translates to an aggregate of 2,529,709 shares
of Common Stock if converted as of December 31, 2019, of which 891,933 are vested and eligible for exchange as of December 31,
2019.
Stock Options - Tiptree Corporate
Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our
Common Stock on the date of grant. The option awards have a 10-year term and are subject the recipient’s continuous service,
a market requirement, and vest one third on each of the third, fourth and fifth anniversary of the grant date. The market requirement
is a book value per share target that can be met at any time before the option expires and it only needs to be met once for the
option to remain exercisable for the remainder of its term. If the service condition is met, the full amount of the compensation
expense will be recognized over the appropriate vesting period whether the market requirement is met or not. The options granted
in 2018 include a retirement provision and are amortized over the lesser of the service condition or expected retirement date.
The fair value option grants are estimated on the date of grant using a Black-Scholes-Merton option pricing formula embedded
within a Monte Carlo model used to simulate the future stock prices of the Company, which assumes that the market requirement
is achieved. Historical volatility was computed based on historical daily returns of the Company’s stock between the grant date
and July 1, 2013, the date of the business combination through which Tiptree became a public company. The valuation is done
under a risk-neutral framework using the 10-year zero-coupon risk-free interest rate derived from the Treasury Constant Maturities
yield curve on the grant date. The current quarterly dividend rates in effect as of the date of the grant are used to calculate a spot
dividend yield as of the date of grant for use in the model.
The following table presents the assumptions used to estimate the fair values of the stock options granted for the following
periods:
Year Ended December 31,
Valuation Input
2019
2018
2017
Historical volatility
Risk-free rate
Dividend yield
Expected term (years)
Assumption
27.69%
2.62%
2.21%
Average
N/A
N/A
N/A
6.5
Assumption
30.63%
2.85%
2.03%
Average
N/A
N/A
N/A
6.5
Assumption
47.20%
2.44%
1.80%
Average
N/A
N/A
N/A
6.5
F- 58
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents the Company's stock option activity for the current period:
Balance, December 31, 2016
Granted
Balance, December 31, 2017
Granted
Balance, December 31, 2018 (1)
Granted
Balance, December 31, 2019
Options
outstanding
251,237
570,627
821,864
242,663
1,064,527
225,815
1,290,342
Weighted
average
exercise price
(in dollars per
stock option)
5.69
$
6.65
6.36
5.85
6.24
6.26
6.24
$
$
$
Weighted
average grant
date value (in
dollars per
stock option)
2.62
$
2.91
2.82
1.88
2.61
1.69
2.45
$
$
$
Options
exercisable
—
—
—
—
—
—
—
Weighted average remaining contractual term at December 31, 2019
(in years)
7.5
(1)
Book value targets for grants in 2019, 2018, 2017 and 2016 are $10.79, $9.97, $10.14 and $8.96, respectively.
Stock Based Compensation Expense
The following table presents total stock based compensation expense and the related income tax benefit recognized on the
consolidated statements of operations:
Employee compensation and benefits
Director compensation
Income tax benefit
Net stock based compensation expense
Year Ended December 31,
2018
2017
2019
$
$
6,062
301
(1,374)
4,989
$
$
6,354
303
(1,438)
5,219
$
$
6,560
266
(2,410)
4,416
Additional information on total non-vested stock based compensation is as follows:
Unrecognized compensation cost related to non-vested awards
Weighted - average recognition period (in years)
As of
December 31, 2019
Stock options
694
$
2.10
Restricted
stock awards
and RSUs
$
3,511
1.62
F- 59
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
(19) Income Taxes
The Company’s provision (benefit) for income taxes is reflected as a component of income (loss) from continuing and
discontinued operations and consists of the following:
Current tax expense (benefit):
Federal
State
Foreign
Total current tax expense (benefit)
Deferred tax expense (benefit):
Federal
State
Foreign
Total deferred tax (benefit)
Total income tax expense (benefit) from continuing operations
Income tax (benefit) from discontinued operations
Total tax expense (benefit)
Year Ended December 31,
2018
2017
2019
$
$
$
991
386
825
2,202
6,502
335
(22)
6,815
9,017
—
9,017
$
$
$
(9,650) $
(1,182)
754
(10,078)
4,110
59
—
4,169
(5,909) $
13,714
7,805
$
(1,559)
246
—
(1,313)
(13,755)
2,506
—
(11,249)
(12,562)
(2,224)
(14,786)
The Company’s primary tax jurisdiction is the United States, which currently has a statutory income tax rate equal to 21%. On
December 22, 2017, the U.S. government enacted Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act
(Tax Act), which, among other things, reduced the federal income tax rate from 35% to 21% effective January 1, 2018, and
requires mandatory deemed repatriation of foreign earnings. As a result of the Tax Act, we re-measured our net deferred tax
liabilities and recognized a net tax benefit of $15,238 in 2017.
The U.S. federal rate is before the consideration of rate reconciling items. A reconciliation of the expected federal income tax
expense on income from continuing operations using the federal statutory income tax rate to the actual income tax expense and
resulting effective income tax rate is as follows for the periods indicated below:
Income (loss) before income taxes from continuing operations
Federal statutory income tax rate
Expected federal income tax expense (benefit) at the federal statutory income tax rate
Effect of change in U.S. federal tax rate effective 2018
Effect of Reliance contingent liability valuation
Effect of state income tax expense, net of federal benefit
Effect of dividends received deduction
Effect of foreign operations
Effect of permanent differences
Effect of changes in valuation allowance
Effect of return-to-accrual
Effect of other items
Tax (benefit) on income from continuing operations
Year Ended December 31,
2019
$
29,139
$
21.0%
6,119
—
—
549
(29)
440
(30)
(80)
1,524
524
9,017
$
$
$
$
2018
(19,796)
21.0%
(4,157)
—
—
(471)
(1,534)
1,053
170
55
(404)
(621)
(5,909)
$
$
$
2017
(3,330)
35.0%
(1,166)
(15,238)
1,018
219
—
—
(144)
2,314
623
(188)
(12,562)
Effective tax rate
31.0%
29.9%
377.2%
For the year ended December 31, 2019, the Company’s effective tax rate on income from continuing operations was equal to
31%. The effective tax rate for the year ended December 31, 2019 is higher than the U.S. statutory income tax rate of 21.0%
primarily due to the non-recurring return-to-provision, as well as ongoing state and foreign taxes.
F- 60
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
For the year ended December 31, 2018, the Company’s effective tax rate on losses from continuing operations was equal to
29.9%. The effective tax rate for the year ended December 31, 2018 is higher than the U.S. statutory income tax rate of 21.0%
primarily due to the dividends received deduction, offset by the effect of foreign operations.
For the year ended December 31, 2017, the Company’s effective tax rate on income from continuing operations was equal to
377.2%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended
December 31, 2017 is higher than the U.S. statutory income tax rate of 35.0% primarily due to the $15,238 discrete tax benefit
of the U.S. federal tax law change and resulting revaluation of the net deferred tax liability, partially offset by an increase in the
valuation allowance on certain deferred tax assets and the impact of the Reliance contingent liability revaluation.
The table below presents the components of the Company’s net deferred tax assets and liabilities as of the respective balance
sheet dates:
Deferred tax assets:
Net operating loss carryforwards
Unrealized losses
Accrued expenses
Unearned premiums
Deferred revenue
Other deferred tax assets
Total deferred tax assets
Less: Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Property
Unrealized gains
Other deferred tax liabilities
Deferred acquisition cost
Advanced commissions
Intangibles
Total deferred tax liabilities
Net deferred tax liability
As of December 31,
2019
2018
17,384
4,242
5,470
14,189
6,301
5,720
53,306
(4,961)
48,345
1,554
6,005
3,370
35,066
25,392
9,264
80,651
32,306
$
$
13,554
9,381
1,618
13,752
5,769
1,975
46,049
(3,092)
42,957
414
—
2,666
37,473
18,153
9,684
68,390
25,433
$
$
As of January 2016, Tiptree has established a U.S. federal consolidated income tax group and as such files on a consolidated
basis, with certain exceptions such as a Fortegra life insurance company and Luxury. Tiptree consolidated, and certain subsidiaries
on a separate basis, file returns in various state jurisdictions, and as such may have state tax obligations. Additionally, as needed
the Company will take all necessary steps to comply with any income tax withholding requirements.
F- 61
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
As of December 31, 2019, the Company had total U. S. Federal net operating loss carryforwards (NOLs) of $46.2 million arising
from continuing operations. The following table presents the U.S. Federal NOLs by tax year of expiration:
Tax Year of Expiration
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
Indefinite
Total
As of
December 31,
2019
$
$
86
124
—
167
17
—
—
—
1,893
562
39,862
1,766
1,758
46,235
In addition to the U.S. Federal NOL, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $7.4 million.
Valuation allowances have been established for net operating loss carryforwards and other deferred tax assets generated by
Luxury, and certain state NOLs of $4,961, since management has concluded it is more likely than not they will expire unutilized
based on existing positive and negative evidence. Management believes it is more likely than not the remaining NOLs and
deferred tax assets will be utilized prior to their expiration dates. As of December 31, 2018, the consolidated valuation allowance
for Tiptree was $3,092. In 2019, the Company recorded a net increase in its valuation allowances equal to $1,869, compared to
a net decrease in its valuation allowance of $1,211 in 2018.
As of December 31, 2019, the Company had no material unrecognized tax benefits or accrued interest and penalties. This is
consistent with the tax years ending December 31, 2018 and December 31, 2017 as well. Federal tax years 2016 through 2018
were open for examination as of December 31, 2019.
(20) Commitments and Contingencies
Operating Leases
All leases are office space leases and are classified as operating leases that expire through 2028. Some of our office leases include
the option to extend for up to five years or less at management’s discretion. Such extension options were not included in the
measurement of the lease liability. Below is a summary of our right of use asset and lease liability as of December 31, 2019:
Right of use asset - Operating leases
Operating lease liability
Weighted-average remaining lease term (years)
Weighted-average discount rate (1)
(1) Discount rate was determined by applying available market rates to lease obligations based upon their term.
F- 62
As of
December 31,
2019
$
$
23,832
29,491
6.2
7.1%
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
As of December 31, 2019, the approximate aggregate minimum future lease payments required for our lease liability over the
remaining lease periods are as follows:
2020
2021
2022
2023
2024
2025 and thereafter
Total minimum payments
Less: liabilities held for sale
Less: present value adjustment
Total
December 31,
2019
$
$
7,169
6,879
5,625
5,020
4,541
11,767
41,001
(341)
(11,169)
29,491
The following table presents rent expense for the Company’s office leases recorded on the consolidated statements of
operations for the following periods:
Rent expense for office leases
Litigation
Year Ended December 31,
2019
2018
2017
$
8,612
$
7,519
$
6,816
The Company is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike
Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage
under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and
certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest.
To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015,
the trial court issued an Order denying the Company’s motion to decertify the class, which was upheld on appeal. Following a
February 2017 hearing, the court denied the Company’s Motion for Summary Judgment as to certain disability insurance policies.
In January 2018, the court vacated its November 2017 order granting Company’s Motion for Summary Judgment as to the life
certificates at issue with leave to refile. No trial or additional hearings are currently scheduled.
The Company considers such litigation customary in the insurance industry. In management's opinion, based on information
available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse
to the financial position of the Company. It should be noted that large punitive damage awards, bearing little relation to actual
damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business.
At this time, the Company cannot estimate a range of loss that is reasonably possible.
The Company and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although the
Company’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company does
not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the
Company’s financial position.
(21) Earnings Per Share
The Company calculates basic net income per share of Common Stock (Common Share) based on the weighted average number
of Common Shares outstanding, which includes vested corporate restricted share units. Unvested corporate restricted share units
have a non-forfeitable right to participate in dividends declared and paid to the Company’s Common Stock on an as vested basis
and are therefore considered a participating security. The Company calculates basic earnings per share using the “two-class”
method under which the income available to Common Stockholders is allocated to the unvested corporate restricted stock units.
Diluted net income attributable to Common Stockholders includes the effect of unvested subsidiaries’ RSUs, when dilutive. The
assumed exercise of all potentially dilutive instruments are included in the diluted net income per Common Share calculation,
if dilutive.
F- 63
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
The following table presents a reconciliation of basic and diluted net income per Common Share for the following periods:
Net income (loss) from continuing operations
$
20,122
$
(13,887) $
9,232
Year Ended December 31,
2018
2017
2019
Less:
Net income (loss) attributable to non-controlling interests
Net income allocated to participating securities
Net income (loss) from continuing operations attributable to Common Shares
Net income (loss) from discontinued operations
Less:
Net income (loss) from discontinued operations attributable to non-controlling
interests
Net income allocated to participating securities
Net income (loss) from discontinued operations attributable to Common Shares
Net income (loss) attributable to Common Shares - basic
Effect of Dilutive Securities:
Securities of subsidiaries
Adjustments to income relating to exchangeable interests, net of tax
Net income (loss) attributable to Common Shares - diluted
Weighted average number of shares of Common Stock outstanding - basic
Weighted average number of incremental shares of Common Stock issuable from
exchangeable interests and contingent considerations
Weighted average number of shares of Common Stock outstanding - diluted
Basic:
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss) attributable to Common Shares
Diluted:
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss) attributable to Common Shares
(22) Related Party Transactions
1,761
472
17,889
—
—
—
—
17,889
(723)
—
17,166
$
$
(612)
—
(13,275)
43,770
6,562
—
37,208
23,933
—
—
23,933
$
$
2,603
123
6,506
(3,998)
(973)
(56)
(2,969)
3,537
(128)
736
4,145
34,578,292
34,715,852
29,134,190
—
34,578,292
—
34,715,852
8,172,442
37,306,632
0.52
—
0.52
0.50
—
0.50
$
$
$
$
(0.38) $
1.07
0.69
$
(0.38) $
1.07
0.69
$
0.22
(0.10)
0.12
0.21
(0.10)
0.11
$
$
$
$
$
$
On February 15, 2019, the Company and Corvid Peak (formerly known as Tricadia) entered into a Strategic Combination
Agreement (the Strategic Combination Agreement) and Amended and Restated Transition Services Agreement (the Transition
Services Agreement). Corvid Peak is a related party of the Company because Corvid Peak is deemed to be controlled by Michael
Barnes, the Company’s Executive Chairman. Tiptree agreed to invest $75 million to seed new investment funds to be managed
by Corvid Peak. As of December 31, 2019, $25 million was funded with the remainder funded in the first quarter of 2020. The
Company will pay Corvid Peak an annual management fee of 1.25% of the net asset value of invested capital, 1.25% of the $75
million commitment to the extent not invested, and an incentive fee equal to 20% of the net profits. The Company incurred
$1,006 of management and incentive fees to Corvid Peak for the year ended December 31, 2019.
No consideration was paid at the closing of the Strategic Combination Agreement. Tiptree will over time receive a 51% economic
interest in certain profit share interests in Corvid Peak, in increments stepping up by 10.2% each year, beginning in 2021.
Beginning on January 1, 2026, Tiptree has the right to acquire the remaining economic interests in Corvid Peak that are held by
Mr. Barnes, based upon a fair value-based formula. Beginning on January 1, 2027, Mr. Barnes has the reciprocal right to put
his remaining economic interests in Corvid Peak to Tiptree using the same formula. Mr. Barnes has substantive participating
rights over specified actions at Corvid Peak so long as he owns at least 10% of the equity of Corvid Peak. The Company has
concluded that it will account for any ownership interest it obtains in Corvid Peak using the equity method of accounting until
such time as a controlling financial interest (as defined in the applicable accounting guidance) in Corvid Peak is obtained.
Pursuant to the Transition Services Agreement, Tiptree and Corvid Peak have mutually agreed to provide certain services to one
another (the Services). At the present time, the Services consist primarily of Tiptree providing to Corvid Peak office space, legal
F- 64
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
and compliance services, information technology services, insurance coverage, and certain finance, accounting and tax services.
The Services are provided on arms’-length terms. The effective date of the Transition Services Agreement is January 1, 2019.
The Transition Services Agreement will terminate upon a change of control of Corvid Peak. Corvid Peak may terminate any
Services upon 30 days written notice and Tiptree may terminate any Services upon 150 days written notice, but Tiptree may not
terminate any Services prior to June 30, 2020.
Payments under the Transition Services Agreement in the year ended December 31, 2019, 2018 and 2017 were not material.
On December 20, 2019, the Company and Arif Inayatullah, a greater than 5% stockholder of the Company, entered into a partner
emeritus agreement (Emeritus Agreement), effective January 1, 2020. The Company will provide Mr. Inayatullah office space,
accounting, tax research and IT support services, one Bloomberg terminal and healthcare and other benefits consistent with
Company employees in exchange for advice and other consulting services as requested by the Company’s Executive Committee.
(23) Summarized Quarterly Information (Unaudited)
Total revenues
Total expenses
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from continuing operations
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Common Stockholders
Net (loss) income per Common Share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
Weighted average number of Common Shares:
Basic
Diluted
2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
183,903
178,748
5,155
854
4,301
376
3,925
0.11
—
0.11
0.11
—
0.11
$
$
$
$
$
$
191,072
175,367
15,705
3,501
12,204
458
11,746
0.33
—
0.33
0.32
—
0.32
$
$
$
$
$
$
$
189,185
190,783
(1,598)
(649)
(949)
508
(1,457) $
208,568
198,691
9,877
5,311
4,566
419
4,147
(0.04) $
—
(0.04) $
(0.04) $
—
(0.04) $
0.12
—
0.12
0.11
—
0.11
34,673,054
34,673,054
34,527,230
34,527,230
34,552,171
34,552,171
34,562,219
34,578,357
F- 65
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
Total revenues
Total expenses
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from continuing operations
Income (loss) before taxes from discontinued operations
Gain on sale of discontinued operations
Less: Provision (benefit) for income taxes
Net income (loss) from discontinued operations
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Common Stockholders
Net (loss) income per Common Share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
Weighted average number of Common Shares:
Basic
Diluted
(24) Subsequent Events
Acquisition of Smart AutoCare
2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
148,072
155,115
(7,043)
(1,568)
(5,475)
152,709
151,132
1,577
701
876
624
46,184
12,327
34,481
29,006
5,446
23,560
$
(0.15) $
0.94
0.79
$
(0.15) $
0.94
0.79
$
—
—
—
—
876
50
826
0.02
—
0.02
0.02
—
0.02
$
$
$
$
$
$
$
172,668
173,806
(1,138)
(611)
(527)
152,377
165,569
(13,192)
(4,431)
(8,761)
—
—
—
—
(527)
91
(618) $
(0.02) $
—
(0.02) $
(0.02) $
—
(0.02) $
—
10,676
1,387
9,289
528
363
165
(0.25)
0.26
0.01
(0.25)
0.26
0.01
29,861,496
29,861,496
36,593,154
37,386,319
36,402,129
36,402,129
35,921,632
35,921,632
On January 3, 2020, a subsidiary of the Company acquired (the Acquisition) all of the equity interests of Accelerated Service
Enterprise LLC, SAC Holdings Inc., Dealer Motor Services, Inc., Independent Dealer Group, Inc., Ownershield, Inc., Freedom
Insurance Company, Ltd., SAC Admin, Inc., SAC Insurance Company, Inc., Smart AutoCare, Inc. and Smart AutoCare
Administration Solutions, Inc. (together the Target Entities), pursuant to the Equity Interest Purchase Agreement (the Purchase
Agreement) between Tiptree Warranty Holdings, LLC (Buyer) and Peter Masi (Seller), dated as of December 16, 2019. Concurrent
with the Acquisition, Freedom Insurance Company, Ltd, (Freedom) terminated reinsurance agreements with affiliates of Seller
(the Commutation Transaction).
Tiptree paid Seller $110 million in cash at closing, $8.25 million of which will be held in an escrow account for 18 months to
satisfy indemnity claims. Simultaneously, pursuant to the Commutation Transaction, affiliates of Seller paid Freedom $102
million in cash. The Purchase Agreement also provides for an earn out of up to $50 million in cash based on the Target Entities
achieving specified performance metrics measured on the third and fifth anniversary of closing and an additional earn out of up
to $30 million payable in cash or Tiptree Common Stock based on the Target Entities achieving other certain specified performance
metrics measured on the fourth and fifth anniversary of closing. In addition, the purchase price will be subject to a true-up
following the fifth anniversary of the closing based on the adequacy of certain legacy reserves, offset by certain earnings on
new business.
New Fortress Credit Facility
On February 21, 2020, Tiptree Operating Company, LLC (Borrower) borrowed $125 million under a new credit agreement
(Credit Agreement) with Fortress Credit Corp. (Fortress). The proceeds were used to repay the Borrower’s prior credit agreement
with Fortress described in (10) Debt, net, in the notes to consolidated financial statements, and for working capital and general
corporate purposes. The Credit Agreement will mature on February 21, 2025. Loans under the Credit Agreement bear interest
F- 66
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except share data)
at a variable rate per annum equal to the LIBOR (with a minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum.
The principal amounts of the loans are to be repaid in consecutive quarterly installments.
Borrower’s obligations under the Credit Agreement are guaranteed by Tiptree Inc., Tiptree Insurance Holdings, LLC, Caroline
Holdings LLC, Reliance Holdings, LLC, Tiptree Asset Management Company, LLC, Tiptree Marine LLC, Tiptree Direct
Holdings LLC, Tiptree Warranty Holdings, LLC and each of Borrower’s subsequently acquired or organized direct wholly
owned first-tier domestic subsidiaries that is a holding company for investments, assets, operations or business lines, and any
other subsidiary of the Borrower that guarantees the payment of any other material indebtedness of the Borrower or a Guarantor
(collectively, the Guarantors). The obligations under the Credit Agreement are secured by liens on substantially all of the assets
of the Borrower and each Guarantor (subject to certain customary exceptions).
The Credit Agreement contains various customary affirmative and negative covenants of Tiptree Inc., the Borrower and the
Guarantors (subject to customary exceptions), including, but not limited to, limitations on indebtedness, liens, investments and
acquisitions, negative pledges, junior payments, conduct of business, transactions with affiliates, dispositions of assets,
prepayment of certain indebtedness and limits on guarantees by subsidiaries of the Borrower’s and the Guarantors’ indebtedness.
The Credit Agreement also contains a financial covenant which provides that Tiptree will not permit its Corporate Leverage
Ratio (as defined in the Credit Agreement) as of the last day of any fiscal quarter to be greater than 4.5:1.00 in 2020 and 2021,
4.25:1:00 in 2022, 4:00:1:00 in 2023 and 3.75:1:00 in 2024.
The Credit Agreement also requires customary mandatory repayment provisions (subject to customary exceptions) and requires
that net cash proceeds from the sale by Tiptree and certain of its subsidiaries of capital stock of Invesque Inc. be applied to
prepay loans until the outstanding principal amount of loans is $62.5 million, with remaining proceeds subject to reinvestment
rights. Prepayments, whether mandatory or voluntary, reduce future scheduled amortization payments in the order they come
due. The Credit Agreement also requires the payment of a prepayment fee upon a repricing transaction or equity issuance
consummated after the closing date, or the sale of Tiptree Insurance, or any of its material subsidiaries.
The Credit Agreement contains events of default customary for similar financings with corresponding grace periods, including
failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and
warranties, certain cross defaults, certain bankruptcy related events, monetary judgment defaults and a change of control. Upon
the occurrence of an event of default, the outstanding obligations under the Credit Agreement may be accelerated and become
immediately due and payable.
Dividend
On March 5, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.04 per share to holders of Common
Stock with a record date of March 23, 2020, and a payment date of March 30, 2020.
F- 67
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Executive Chairman, Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of December 31, 2019. Based upon that evaluation, the Company’s
Executive Chairman, Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were effective as of December 31, 2019.
The Company is committed to maintaining a strong internal control environment which is accompanied by management’s ongoing
focus on processes and related controls to achieve accurate and reliable financial reporting. However, all systems of internal
control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation. Projections of the effectiveness of
internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) of the Exchange Act. The Company conducted an evaluation of the effectiveness of its internal control
over financial reporting based upon the framework established in the Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are made only in accordance with the authorization of management and
the Board of Directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
If the Company identifies any material weaknesses, the COSO Framework does not allow the Company to conclude that our
internal control over financial reporting is effective. A material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual
or interim consolidated financial statements will not be prevented or detected on a timely basis.
Based upon its assessment, management concluded that the Company’s internal control over financial reporting as of December 31,
2019 was effective using the COSO Framework.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by Deloitte
& Touche LLP, an independent registered public accounting firm that audited the Company’s consolidated financial statements
as of and for the year ended December 31, 2019, as stated in their report, included in Item 8 of this Form 10-K, which expresses
an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
(c) Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the three months ended December 31, 2019 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
56
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning our executive officers is incorporated herein by reference to information included in the Proxy Statement for
the Company’s 2020 Annual Meeting of Stockholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to information included in
the Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders.
Information regarding our audit committee and our audit committee financial experts is incorporated herein by reference to information
included in the Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders.
Information required by Item 405 of Regulation S-K is incorporated herein by reference to information included in the Proxy Statement
for the Company’s 2020 Annual Meeting of Stockholders.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein by reference to information included in the Proxy
Statement for the Company’s 2020 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to
information included in the Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to such contractual relationships and independence is incorporated herein by reference to the information in
the Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
Information with respect to principal accounting fees and services and pre-approval policies are incorporated herein by reference to
information included in the Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders.
PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Form 10-K:
(a)(1) All Financial Statements
Index to Financial Statements:
Consolidated Balance Sheet as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Page
F- 4
F- 5
F- 6
F- 8
F- 9
F- 11
Schedule II—“Condensed Financial Information of Registrant”, is filed as part of this Annual Report on Form 10-K and should
be read in conjunction with the financial statements and notes thereto contained in Item 8—“Financial Statements and
Supplementary Data.”
57
The financial statements of Invesque Inc. required by Rule 3-09 of Regulation S-X will be provided as Exhibits 99.1 and 99.2
to this report.
All other financial statements and financial statement schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instruction, are not material or are not applicable and, therefore, have
been omitted.
(a)(3) Exhibits
Exhibit
No.
Description
Agreement and Plan of Merger, dated April 9, 2018, by and among Tiptree Financial Partners, L.P. and Tiptree
Inc. (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33549),
filed on April 10, 2018 and herein incorporated by reference).
Fifth Articles of Amendment and Restatement of the Registrant, effective June 6, 2018 (previously filed as
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on June 7, 2018 and
herein incorporated by reference).
Fourth Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-33549), filed on January 4, 2017 and herein incorporated by
reference).
Articles Supplementary of the Registrant, dated December 29, 2014 (previously filed as Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on December 29, 2014 and herein
incorporated by reference).
Form of Certificate of Common Stock (previously filed as Exhibit 4.1 to the Registrant’s Current Report on
Form 8-A/A (File No. 001-33549), filed on June 7, 2018 and herein incorporated by reference.
Form of Warrant to Purchase Common Stock (Expiring June 30, 2022) (previously filed as Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on April 10, 2018 and herein incorporated
by reference).
Description of the Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934.
Registrant’s 2017 Omnibus Incentive Plan (previously filed as Exhibit 10.1 to the Registrant’s Form S-8
Registration Statement (File No. 333-218827), filed on June 19, 2017 and herein incorporated by reference).**
Form of Non-Qualified Stock Option Agreement under the Registrant’s 2017 Omnibus Incentive Plan
(previously filed as Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K (File No. 001-33549), filed
on March 14, 2018 and herein incorporated by reference)**
Form of Restricted Stock Unit Agreement under the Registrant’s 2017 Omnibus Incentive Plan (annual vesting)
(previously filed as Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K (File No. 001-33549), filed
on March 14, 2018 and herein incorporated by reference). **
Form of Restricted Stock Unit Agreement under the Registrant’s 2017 Omnibus Incentive Plan (cliff vesting)
(previously filed as Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K (File No. 001-33549), filed on
March 14, 2018 and herein incorporated by reference). **
Form of Non-Qualified Stock Option Agreement under the Registrant’s 2017 Omnibus Incentive Plan (for 2020
and beyond).
Form of Restricted Stock Unit Agreement under the Registrant’s 2017 Omnibus Incentive Plan (for 2020 and
beyond) (annual vesting).
Form of Restricted Stock Unit Agreement under the Registrant’s 2017 Omnibus Incentive Plan (for 2020 and
beyond) (cliff vesting).
Form of Indemnification Agreement (previously filed as Exhibit 10.9 to the Registrant’s Registration Statement
on Form S-11, as amended (File No. 333-141634), filed on June 7, 2007 and herein incorporated by reference).
Amended and Restated Transition Services Agreement between Tricadia Holdings, L.P. and Tiptree Inc., dated
as of February 15, 2019 (previously filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File
No. 001-33549), filed on April 22, 2019 and herein incorporated by reference).
2.1
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
58
Exhibit
No.
Description
Credit Agreement, dated as of February 21, 2020, between Tiptree Inc., Tiptree Operating Company, LLC,
Fortress Credit Corp. as Administrative Agent, Collateral Agent and Lead Arranger, and the lenders party
thereto. (previously filed as Exhibit 10.1 to Form 8-K (File No. 001-33549), filed February 21, 2020 and herein
incorporated by reference).
Governance and Investor Rights Agreement, dated as of February 1, 2018, by and between Invesque Inc. and
Tiptree Operating Company, LLC (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form
8-K (File No. 001-33549), filed on February 7, 2018 and herein incorporated by reference).
Equity Interest Purchase Agreement, dated December 16, 2019, by and among Tiptree Warranty Holdings, LLC
and Peter Masi (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
001-33549), filed on December 17, 2019 and herein incorporated by reference).
Partner Emeritus Agreement, dated December 20, 2019, by and between Tiptree Inc. and Arif Inayatullah
(previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on
December 20, 2019 and herein incorporated by reference).
Subsidiaries of the Registrant (filed herewith).
Consent of Independent Registered Public Accounting Firm (filed herewith).
Consent of KPMG LLP, Independent Auditors of Invesque Inc. (filed herewith).
Certification of Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
Consolidated Unaudited Financial Statements of Invesque Inc. as at December 31, 2019 and 2018 (filed herewith).
Consolidated Financial Statements of Invesque Inc. as at December 31, 2018 and 2017 (filed herewith).
10.10
10.11
10.12
10.13
21.1
23.1
23.2
31.1
31.2
31.3
32.1
32.2
32.3
99.1
99.2
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
* Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL (eXtensible
Business Reporting Language): (i) the Consolidated Balance Sheets (audited) for December 31, 2019 and December 31, 2018,
(ii) the Consolidated Statements of Operations (audited) for the years ended December 31, 2019, 2018 and 2017, (iii) the
Consolidated Statements of Comprehensive Income (Loss) (audited) for the years ended December 31, 2019, 2018 and 2017,
(iv) the Consolidated Statements of Changes in Stockholders’ Equity (audited) for the years ended December 31, 2019, 2018
and 2017, (v) the Consolidated Statements of Cash Flows (audited) for the years ended December 31, 2019, 2018 and 2017 and
(vi) the Notes to the Consolidated Financial Statements (audited).
** Denotes a management contract or compensatory plan, contract or arrangement.
Item 16. Form 10-K Summary
None.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Tiptree Inc. has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
March 11, 2020
Tiptree Inc.
By:/s/ Jonathan Ilany
Jonathan Ilany
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Jonathan Ilany
Jonathan Ilany
/s/ Sandra Bell
Sandra Bell
/s/ Timothy Schott
Timothy Schott
/s/ Michael G. Barnes
Michael G. Barnes
/s/ Paul M. Friedman
Paul M. Friedman
/s/ Lesley Goldwasser
Lesley Goldwasser
/s/ John E. Mack
John E. Mack
/s/ Bradley E. Smith
Bradley E. Smith
/s/ Dominique Mielle
Dominique Mielle
Chief Executive Officer and
Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Principal Accounting Officer
(Principal Accounting Officer)
March 11, 2020
March 11, 2020
March 11, 2020
Executive Chairman and Director
March 11, 2020
March 11, 2020
March 11, 2020
March 11, 2020
March 11, 2020
March 11, 2020
Director
Director
Director
Director
Director
60
Schedule II — Condensed Financial Information of Registrant
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
2018
2017
2019
(All amounts in thousands)
Revenues
Interest income(1)
Other income
Total revenues
Expenses
Other expenses
Total expenses
$
$
$
— $
—
—
3
3
18,364
18,361
—
18,361
—
—
—
18,361
$
137
10
147
30
30
(13,392)
(13,275)
—
(13,275) $
414
36,794
37,208
23,933
$
417
5
422
—
—
6,370
6,792
163
6,629
(3,025)
—
(3,025)
3,604
As of December 31,
2018
2019
397,395
87
580
398,062
$
$
388,016
673
194
388,883
— $
— $
— $
35
326,140
1,698
70,189
398,062
398,062
$
1,782
1,782
—
36
331,892
(2,058)
57,231
387,101
388,883
$
$
$
$
$
$
$
$
Equity in earnings (losses) of subsidiaries, net of tax(1)
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from continuing operations
Discontinued operations:
Income from discontinued operations, net of tax and non-controlling interest
Gain on sale of discontinued operations, net of tax and non-controlling interest
Discontinued operations, net of tax and non-controlling interest
Net income (loss) attributable to Tiptree Inc. Common Stockholders
(1)
Eliminated in consolidation.
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED BALANCE SHEETS
(All amounts in thousands, except share data)
Assets
Investment in subsidiaries (1)
Cash and cash equivalents
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Other liabilities
Total liabilities
Stockholders' Equity
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
Common stock: $0.001 par value, 200,000,000 shares authorized, 34,562,553 and 35,870,348 shares issued
and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders' equity
(1)
Eliminated in consolidation.
61
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Operating Activities:
Net income (loss) attributable to Tiptree Inc. Common Stockholders
Adjustments to reconcile net income to net cash provided by operating activities
Equity in earnings of subsidiaries(1)
Changes in operating assets and liabilities
Changes in other operating assets and liabilities
Net cash provided by (used in) operating activities
Financing Activities:
Distributions from subsidiaries (1)
Dividends paid
Repurchases of Common Stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash (received) paid for income taxes
(1)
Eliminated in consolidation.
Note 1. Basis of Presentation
Years Ended December 31,
2018
2017
2019
$
18,361
$
23,933
$
3,604
(18,364)
(23,816)
(3,345)
(583)
(586)
14,587
(5,502)
(9,085)
—
(586)
673
87
2,168
$
$
4,772
4,889
—
(4,781)
—
(4,781)
108
565
673
$
3,805
4,064
—
(3,499)
—
(3,499)
565
—
565
(5,915) $
14
$
$
Tiptree Inc. (Tiptree or the Company) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree is a holding
company that allocates capital across a broad spectrum of businesses, assets and other investments. Tiptree’s principal operating
subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider of specialty insurance,
warranty products and related administration services. Tiptree also allocates its capital across a diverse group of select investments
that we refer to as Tiptree Capital. Tiptree’s Common Stock is traded on the Nasdaq Capital Market under the symbol “TIPT”.
Pursuant to the terms discussed in Note—(10) Debt, net in the notes to consolidated financial statements, a secured corporate credit
agreement of a subsidiary of Tiptree restricts that subsidiary’s ability to pay or make any dividend or distribution to Tiptree Inc. In
addition, certain other subsidiaries’ activities are regulated, or subject to specific restriction on transfers as a result of financing
arrangements. As a result of these restrictions, these condensed financial statements of the Registrant have been prepared in accordance
with Rule 12-04 of Regulation S-X, as restricted net assets of the Company's subsidiaries (as defined in Rule 4-08(e)(3) of Regulation
S-X) exceed 25% of the Company's consolidated net assets as of December 31, 2019.
The Company is a holding company without any operations of its own. These condensed financial statements have been prepared on
a "parent-only" basis. Under a parent-only presentation, the Parent Company's investments in subsidiaries are presented under the
equity method of accounting. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. Stock based compensation expense associated with equity incentive
awards issued by the Parent Company and the related tax effects are recorded at the subsidiary level where the employees provide
the services. The accompanying condensed financial information should be read in conjunction with the Tiptree Inc. consolidated
financial statements and related Notes thereto.
Note 2. Dividends Received
The Company received distributions of $14,587, $4,781, and $3,499 for the years ended December 31, 2019, 2018 and 2017,
respectively.
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