TIPTREE INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented in this section as follows:
•Overview
•Results of Operations •Non-GAAP Measures and Reconciliations •Liquidity and Capital Resources •Critical Accounting Policies and Estimates
OVERVIEW
Tiptree allocates capital to select small and middle market companies with the mission of building long-term value. Established in 2007, we have a significant track record investing in the insurance sector and across a variety of other industries, including mortgage, specialty finance and shipping. Our largest operating subsidiary, Fortegra, is a leading provider of specialty insurance products and related services. We also generate earnings from a diverse group of select investments that we refer to asTiptree Capital , which includes our Mortgage segment and other, non-insurance businesses and assets. We evaluate performance primarily by the comparison of stockholders' long-term total return on capital, as measured by growth in stock price plus dividends paid, in addition to Adjusted Net Income and Adjusted EBITDA.
Our year-to-date 2023 highlights include:
Overall:
•Tiptree reported a net loss of$1.1 million for the first quarter, compared to a net loss of$1.0 million in the prior year, driven primarily by lower mortgage and shipping revenues, partially offset by growth in insurance operations. Return on average equity was (1.1)%, compared to (0.9)% in 2022. •Adjusted net income of$17.3 million increased$1.8 million from$15.5 million in 2022, driven by improvement in insurance operations. Adjusted return on average equity was 12.9%, as compared to 15.8% in 2022. •Tiptree increased its quarterly dividend to$0.05 per share, representing an increase of 25%.
Insurance:
•Gross written premiums and premium equivalents were$750.3 million for the three months endedMarch 31, 2023 , as compared to$600.9 million for the three months endedMarch 31, 2022 , up$149.5 million as a result of growth in specialty insurance lines and fee-based service contract offerings. •Total revenues increased$85.9 million to$368.4 million , from$282.5 million in 2022, driven by increases in earned premiums, net, service and administrative fees and net investment income. •Combined ratio of 91.3%, driven by consistent underwriting performance and the scalability of Fortegra's operating platform. •Income before taxes of$19.4 million as compared to$14.7 million in 2022. Return on average equity was 16.7% in 2023 as compared to 14.7% in 2022. The increases were driven by growth in underwriting and fee revenues and increased net investment income. •Adjusted net income increased$1.8 million to$22.9 million , as compared to$21.1 million in 2022. Adjusted return on average equity was 26.1%, as compared to 28.2% in 2022. •InFebruary 2023 , Fortegra acquiredPremia Solutions Limited , one of the largest providers of automotive protection products in theUnited Kingdom , for net cash consideration of approximately$22.5 million .Tiptree Capital : •Mortgage loss before taxes was$2.6 million in 2023, as compared to income of$4.3 million in 2022, with the decrease driven by declines in origination volumes and negative marks on the mortgage servicing rights asset in 2023 compared to positive marks in 2022. •Maritime transportation income before taxes decreased to$0.2 million in 2023, as compared to$2.7 million in 2022, as a result of the sale of all three dry bulk vessels and two product tankers in 2022. 44 --------------------------------------------------------------------------------
Key Trends:
Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions and GDP growth, market liquidity and volatility, consumer confidence,U.S. demographics, employment and wage growth, business confidence and investment, inflation, interest rates and spreads, the impact of the regulatory environment, and the other factors set forth in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 . Generally, our businesses are positively affected by a healthyU.S. consumer, stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely, rising unemployment, volatile markets, rapidly rising interest rates, inflation, changing regulatory requirements and slowing business conditions can have a material adverse effect on our results of operations or financial condition. Insurance results primarily depend on pricing, underwriting, risk retention and the accuracy of reserves, reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. Factors affecting these items, including conditions in financial markets, the global economy and the markets in which we operate, fluctuations in exchange rates, interest rates and inflation, including the current period of inflationary pressures, may have a material adverse effect on our results of operations or financial condition. Fortegra designs, markets and underwrites specialty property and casualty insurance products for select target markets or niches. The types of products Fortegra offers tend to have limited aggregation risk and limited exposure to catastrophic and residual risk. The business has historically generated significant fee-based revenues by incorporating value-add coverages and services. Underwriting risk is mitigated through a combination of reinsurance and retrospective commission structures with agents, distribution partners and/or third-party reinsurers. To mitigate counterparty risk, Fortegra ensures its reinsurance receivables are placed with highly rated and appropriately capitalized counterparties or with our distribution partners' captive insurance vehicles which are collateralized with highly liquid investments, cash or letters of credit. While Fortegra's insurance operations have historically maintained a relatively stable combined ratio, initiatives to change the business mix along with these economic factors could generate different results than the business has historically experienced. In particular, the current period of rising inflation can have an impact on replacement costs associated with claims from our customers. To the extent we are unable to pass the higher costs of claims through higher premiums, lower underwriting margins could adversely affect our profitability. In addition, fluctuations of theU.S. dollar relative to other currencies, including the British pound and Euro, would have an impact on book value between periods. Fortegra's investment portfolio includes fixed maturity securities, loans, credit investment funds, and equity securities. Many of those investments are held at fair value. In recent periods, theU.S. fixed income markets experienced a significant rise in interest rates. Rising interest rates have and could continue to impact the value of Fortegra's fixed maturity securities, with any unrealized losses recorded in equity, and if realized, could impact our results of operations. Offsetting the impact of a rising interest rate environment, new investments in fixed rate instruments from both maturities and portfolio growth can result in higher interest income on investments. The weighted average duration of our fixed income available for sale securities is less than three years. While our asset and liability mix is relatively matched, should we need to liquidate any of these investments before maturity to pay claims, any realized losses could materially negatively impact our results of operations. Changes in fair value for loans, credit investment funds, and equity securities in Fortegra's investment portfolio are reported as unrealized gains or losses in revenues and can be impacted by changes in interest rates, credit risk, currency risk, or market risk, including specific company or industry factors. In addition, our equity holdings are relatively concentrated. General equity market trends, along with company and industry specific factors, can impact the fair value which can result in unrealized gains and losses affecting our results. Rising 10-year treasury yields, and the tapering of theFederal Reserve's purchases of mortgage-backed securities, has resulted in substantial increases in mortgage interest rates. Low mortgage interest rates driven by theFederal Reserve intervention in mortgage markets, and rising home prices in certain markets, provided tailwinds to the mortgage markets in 2020 and 2021, which benefited our mortgage operations and margins. The substantial rise in rates in recent periods resulted in a sharp reversal of those trends, with volumes and margins declining significantly. Only partially offsetting the declines in our mortgage origination business is an increase in the fair value of our mortgage servicing portfolio as rising rates slow prepayment speeds, with a resulting increase in servicing income. Continued rising or elevated mortgage rates could have a materially negative impact on our mortgage operations, and is likely to be only partially mitigated by the improvement in mortgage servicing revenues. A sustained period of negative profitability in the mortgage industry could also impact the availability of funding sources for our mortgage business. Rising interest rates can also impact the cost of floating interest rate debt obligations, while declining rates can decrease the cost of debt. Our secured revolving and term credit agreements, preferred trust securities and asset based revolving financing are all floating rate obligations. A continuation of rising rates could have a material impact on our costs of floating rate debt. Common shares of Invesque represent a significant asset on our condensed consolidated balance sheets. Our investment in Invesque, which operates in the seniors housing, skilled nursing and medical office industries, is carried on our condensed consolidated balance sheets at fair value. The combination of the COVID-19 pandemic impacting occupancy rates and other market factors impacting operating costs has resulted in a significant decline in Invesque's stock price over the past three 45 --------------------------------------------------------------------------------
years. Any additional declines in the fair value of Invesque's common stock
could continue to have a significant impact on our results of operations and the
value of the investment.
A discussion of our performance for the three months ended
compared to the three months ended
RESULTS OF OPERATIONS
The following is a summary of our condensed consolidated financial results for the three months endedMarch 31, 2023 and 2022. In addition to GAAP results, management uses the Non-GAAP measures Adjusted net income, Adjusted return on average equity, Adjusted EBITDA and book value per share as measurements of operating performance. Management believes these measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze financial performance and comparison among companies. Management uses Adjusted net income and adjusted return on average equity as part of its capital allocation process and to assess comparative returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company's executive officers. Adjusted net income represents income before taxes, less provision (benefit) for income taxes, and excluding the after-tax impact of various expenses that we consider to be unique and non-recurring in nature, stock-based compensation, net realized and unrealized gains (losses), and intangibles amortization associated with purchase accounting. The Company defines Adjusted EBITDA as GAAP net income of the Company plus corporate interest expense, plus income taxes, plus depreciation and amortization expense, less the effects of purchase accounting, plus non-cash fair value adjustments, plus significant non-recurring expenses, and plus unrealized gains (losses) on available for sale securities that are reported in other comprehensive income. Adjusted net income, Adjusted return on average equity and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. See "Non-GAAP Reconciliations" for a reconciliation of these measures to their GAAP equivalents.
Selected Key Metrics
Three
Months Ended
($ in thousands, except per share information) March 31, GAAP: 2023 2022 Total revenues$ 381,625 $ 324,903
Net income (loss) attributable to common stockholders
Diluted earnings per share$ (0.03)
Cash dividends paid per common share$ 0.05 $ 0.04 Return on average equity (1.1) % (0.9) % Non-GAAP: (1) Adjusted net income$ 17,284 $ 15,452 Adjusted return on average equity 12.9 % 15.8 % Adjusted EBITDA$ 23,362 $ (14,905) Book value per share$ 10.91 $ 10.51
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Revenues
For the three months ended
increased
increase was driven by growth in earned premiums, net, and service and
administrative fees in our insurance business, partially offset by lower
mortgage and shipping revenues compared to 2022.
The table below provides a break down between net realized and unrealized gains and losses from Invesque and other securities which impacted our consolidated results on a pre-tax basis. Many investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect earnings related to these investments to be relatively volatile between periods. Fixed income securities are primarily marked to market through AOCI in stockholders' equity and do not impact net realized and unrealized gains and losses until they are sold. Three Months Ended ($ in thousands)March 31, 2023 2022
Net realized and unrealized gains (losses) - Invesque
Net realized and unrealized gains (losses)(1)
$ (4,675) $
1,518
(1) Excludes Invesque and Mortgage realized and unrealized gains and losses.
46 --------------------------------------------------------------------------------
Net Income (Loss) Attributable to common stockholders
For the three months endedMarch 31, 2023 , the net loss attributable to common stockholders was$1.1 million , compared to a net loss of$1.0 million in the prior year period, primarily driven by lower mortgage and shipping revenues and the tax impacts of the WP Transaction, partially offset by growth in Fortegra's underwriting and fee operations.
Adjusted net income & Adjusted return on average equity - Non-GAAP
Adjusted net income for the three months endedMarch 31, 2023 was$17.3 million , an increase of$1.8 million , or 11.9%, from the three months endedMarch 31, 2022 , driven by growth in our insurance operations. For the three months endedMarch 31, 2023 , adjusted return on average equity was 12.9%, as compared to 15.8% atMarch 31, 2022 , with the decrease driven by the higher average equity balances as a result of the WP Transaction which closed inJune 2022 .
Adjusted EBITDA - Non-GAAP
Adjusted EBITDA for the three months endedMarch 31, 2023 was$23.4 million , an increase of$38.3 million from 2022 driven by improved operating performance in our insurance business and realized and unrealized gains on investments (including impacts to AOCI) compared to losses in the prior year period.
Book Value per share - Non-GAAP
Total stockholders' equity was$541.6 million as ofMarch 31, 2023 compared to$383.2 million as ofMarch 31, 2022 , with the increase driven by the WP Transaction and cash exercise of Tiptree warrants, partially offset by comprehensive loss in 2022 primarily resulting from unrealized losses on Available for Sale ("AFS") securities and negative impacts from foreign currency translation. In the three months endedMarch 31, 2023 , Tiptree returned$1.8 million to stockholders through dividends paid. Book value per share for the period endedMarch 31, 2023 was$10.91 , an increase from book value per share of$10.51 as ofMarch 31, 2022 driven by the comprehensive income per share and the net increase toTiptree Inc. stockholders' equity from the WP Transaction, partially offset by dividends paid of$0.17 per share, and issuance of shares as a result of the exercise of warrants and vesting of equity awards.
Results by Segment
We classify our business into two reportable segments, Insurance and Mortgage, with the remainder of our operations aggregated intoTiptree Capital - Other. Corporate activities include holding company interest expense, corporate employee compensation and benefits, and other expenses, including public company expenses. 47 --------------------------------------------------------------------------------
The following tables present the components of Revenue, Income (loss) before
taxes and Adjusted net income for the following periods:
Three Months Ended ($ in thousands) March 31, 2023 2022 Revenues: Insurance$ 368,444 $ 282,529 Mortgage 11,561 25,401 Tiptree Capital - other 1,620 16,973 Corporate - - Total revenues$ 381,625 $ 324,903 Income (loss) before taxes: Insurance$ 19,445 $ 14,682 Mortgage (2,565) 4,266 Tiptree Capital - other 1,442 (7,651) Corporate (10,149) (12,249)
Total income (loss) before taxes
Non-GAAP - Adjusted net income: (1) Insurance$ 22,939 $ 21,124 Mortgage (853) (1,556) Tiptree Capital - other 1,413 2,528 Corporate (6,215) (6,644) Total adjusted net income$ 17,284 $ 15,452
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Insurance Our principal operating subsidiary, Fortegra, is a specialty insurance underwriter and service provider, which focuses on niche lines and fee-oriented services. The combination of specialty insurance underwriting, service contract products, and related service solutions delivered through a vertically integrated business model creates a blend of traditional underwriting revenues, investment income and unregulated fee revenues. The business is an agent-driven model, distributing products through independent insurance agents, consumer finance companies, online retailers, auto dealers, and regional big box retailers to deliver products that complement the consumer transaction. As ofMarch 31, 2023 , Fortegra was owned approximately 79.4% by Tiptree, 17.4% by Warburg and 3.2% by management and directors of Fortegra, before giving effect to the exercise of outstanding warrants and the conversion of outstanding preferred stock. The following tables and discussion present the Insurance segment results, including non-controlling interests, for the three months endedMarch 31, 2023 and 2022. 48 --------------------------------------------------------------------------------
Results of Operations - Three Months Ended
($ in thousands) Three Months Ended March 31, 2023 2022 Change % Change Revenues: Earned premiums, net$ 265,330 $ 208,416 $ 56,914 27.3 % Service and administrative fees 92,032 71,835 20,197 28.1 % Ceding commissions 3,645 2,537 1,108 43.7 % Net investment income 5,109 3,167 1,942 61.3 % Net realized and unrealized gains (losses) (4,607) (6,643) 2,036 (30.6) % Other revenue 6,935 3,217 3,718 115.6 % Total revenues$ 368,444 $ 282,529 $ 85,915 30.4 % Expenses:
Net losses and loss adjustment expenses 114,327
$ 31,051 37.3 % Member benefit claims 27,348 21,170 6,178 29.2 % Commission expense 146,450 117,423 29,027 24.7 % Employee compensation and benefits 24,613 22,026 2,587 11.7 % Interest expense 6,081 4,759 1,322 27.8 % Depreciation and amortization 4,811 4,354 457 10.5 % Other expenses 25,369 14,839 10,530 71.0 % Total expenses$ 348,999 $ 267,847 $ 81,152 30.3 % Income (loss) before taxes (1)$ 19,445 $ 14,682 $ 4,763 32.4 % Key Performance Metrics: Gross written premiums and premium equivalents$ 750,329 $ 600,855 $ 149,474 24.9 % Return on average equity 16.7 % 14.7 % Underwriting ratio 78.3 % 77.6 % Expense ratio 13.0 % 12.9 % Combined ratio 91.3 % 90.5 % Non-GAAP Financial Measures (2): Adjusted net income$ 22,939 $ 21,124 $ 1,815 8.6 % Adjusted return on average equity 26.1 % 28.2
%
(1) Net income was
to
(2) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Revenues Earned Premiums, net represents the earned portion of gross written and assumed premiums, less the earned portion that is ceded to third-party reinsurers under reinsurance agreements. Fortegra's insurance policies generally have a term of six months to seven years depending on the underlying product and premiums are earned pro rata over the term of the policy. At the end of each reporting period, premiums written but not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Service and Administrative Fees represent the earned portion of gross written premiums and premium equivalents, which is generated from non-insurance products including warranty service contracts, motor club contracts and other services offered as part of Fortegra's vertically integrated product offerings. Such fees are typically positively correlated with transaction volume and are recognized as revenue when realized and earned. At the end of each reporting period, gross written premiums and premium equivalents written for service contracts not earned are classified as deferred revenue, which are earned in subsequent periods over the remaining term of the policy. Ceding Commissions and Other Revenue consists of commissions earned on policies written on behalf of third-party insurance companies with no exposure to the insured risk and certain fees earned in conjunction with underwriting policies. Other revenue also includes the interest income earned on the premium finance product offering. Net Investment Income is earned on the portfolio of invested assets. Invested assets are primarily comprised of fixed maturity securities and may also include cash and cash equivalents and equity securities. The principal factors that influence net investment income are the size of the investment portfolio, the yield on that portfolio and expenses due to external investment managers. 49 -------------------------------------------------------------------------------- Net Realized and Unrealized Gains (Losses) on investments are a function of the difference between the amount received by us on the sale of a security and the security's cost-basis, as well as any "other-than-temporary" impairments and allowances for credit losses which are recognized in earnings. In addition, equity securities and certain other investments are carried at fair value with unrealized gains and losses included in this line.
Revenues - Three Months Ended
For the three months endedMarch 31, 2023 , total revenues increased 30.4%, to$368.4 million , as compared to$282.5 million for the three months endedMarch 31, 2022 . Earned premiums, net of$265.3 million increased$56.9 million , or 27.3%, driven by growth in specialty admitted and E&S insurance lines. Service and administrative fees of$92.0 million increased by 28.1% driven by growth in auto and consumer goods service contract revenues. Ceding commissions of$3.6 million increased by$1.1 million , or 43.7%, in line with growth in ceded premiums. Other revenues increased by$3.7 million , or 115.6%, driven by growth in premium finance product offerings and interest income on cash and cash equivalents. For the three months endedMarch 31, 2023 , 28.1% of revenues were derived from fees that were not solely dependent upon the underwriting performance of Fortegra's insurance products, resulting in more diversified earnings. For the three months endedMarch 31, 2023 , 76.3% of fee-based revenues were generated in non-regulated service companies, with the remainder in regulated insurance companies. For the three months endedMarch 31, 2023 , net investment income was$5.1 million as compared to$3.2 million in the prior year period, primarily driven by growth in investments and the increase in yields. Net realized and unrealized losses were$4.6 million , an improvement of$2.0 million , as compared to net realized and unrealized losses of$6.6 million in the prior year period, primarily driven by the change in fair value of certain equity and other investments carried at fair value. The combination of unearned premiums and deferred revenues on Fortegra's balance sheet grew to$2.1 billion , representing an increase of$319.6 million , or 18.3%, fromMarch 31, 2022 toMarch 31, 2023 as a result of growth in gross written premiums and premium equivalents, primarily related to admitted and E&S insurance lines as well as auto service contracts.
Expenses
Underwriting and fee expenses under insurance and warranty service contracts
include losses and loss adjustment expenses, member benefit claims and
commissions expense.
Net Losses and Loss Adjustment Expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded and the costs of administering claims for insurance lines. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include the volume of underwritten contracts, changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements, and original pricing of the product for purposes of the loss ratio in relation to loss emergence over time. Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Member Benefit Claims represent the costs of services and replacement devices incurred in warranty and motor club service contracts. Member benefit claims represent claims paid on behalf of contract holders directly to third-party providers for roadside assistance and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement payment, provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when incurred. Commission Expenses reflect commissions paid to retail agents, program administrators and managing general underwriters, net of ceding commissions received on business ceded under certain reinsurance contracts. Commission expenses are deferred and amortized to expense in proportion to the premium earned over the policy life. Commission expense is incurred on most product lines. The majority of commissions are retrospective commissions paid to agents, distributors and retailers selling the Company's products, including credit insurance policies, warranty service contracts and motor club memberships. When claims increase, in most cases distribution partners bear the risk through a reduction in their retrospective commissions. Commission rates are, in many cases, set by state regulators, such as in credit and collateral protection programs and are also impacted by market conditions and the retention levels of distribution partners. Operating and Other Expenses represent the general and administrative expenses of insurance operations including employee compensation and benefits and other expenses, including, technology costs, office rent, and professional services fees, such as legal, accounting and actuarial services. 50 --------------------------------------------------------------------------------
Interest Expense consists primarily of interest expense on corporate revolving
debt, notes, preferred trust securities due
Securities
contract financing, which is non-recourse to Fortegra.
Depreciation Expense is primarily associated with furniture, fixtures and equipment. Amortization Expense is primarily associated with purchase accounting amortization including values associated with acquired customer relationships, trade names and internally developed software and technology.
Expenses - Three Months Ended
For the three months endedMarch 31, 2023 , net losses and loss adjustment expenses were$114.3 million , member benefit claims were$27.3 million and commission expense was$146.5 million , as compared to$83.3 million ,$21.2 million , and$117.4 million , respectively, for the three months endedMarch 31, 2022 . The increase in net losses and loss adjustment expenses of$31.1 million , or 37.3%, was driven by growth inU.S. and European insurance lines and the shift in business mix toward commercial lines, which tend to have higher loss ratios and lower commission and expense ratios. In addition, the unfavorable prior year development of$0.3 million and$1.2 million for the three months endedMarch 31, 2023 and 2022, respectively, was a result of higher-than-expected claim severity from business written by a small group of producers of our personal and commercial lines of business. The increase in member benefit claims of$6.2 million , or 29.2%, was driven by growth in vehicle service contracts. Commission expense increased by$29.0 million , or 24.7%, generally in line with the growth in earned premiums, net and service and administrative fees. For the three months endedMarch 31, 2023 , employee compensation and benefits were$24.6 million and other expenses were$25.4 million , as compared to$22.0 million and$14.8 million , respectively, for the three months endedMarch 31, 2022 . Employee compensation and benefits increased by$2.6 million , or 11.7%, driven by investments in human capital associated with growth in admitted, E&S and warranty lines. Other expenses increased by$10.5 million , or 71.0%, driven primarily by premium taxes, marketing expenses and professional fees associated with the acquisition of Premia. For the three months endedMarch 31, 2023 , interest expense was$6.1 million as compared to$4.8 million for the three months endedMarch 31, 2022 . The increase in interest expense of$1.3 million , or 27.8%, was primarily driven by increased asset based debt for premium finance lines and the rise in short-term interest rates. For the three months endedMarch 31, 2023 , depreciation and amortization expense was$4.8 million , including$3.9 million of intangible amortization related to purchase accounting associated with the acquisitions of Fortegra, Smart AutoCare, Sky Auto, ITC and Premia, as compared to$4.4 million , including$3.9 million of intangible amortization from purchase accounting in 2022.
Key Performance Metrics
We discuss certain key performance metrics, described below, which provide
useful information about our business and the operational factors underlying its
financial performance.
Gross Written Premiums and Premium Equivalents
Gross written premiums and premium equivalents represent total gross written premiums from insurance policies and warranty service contracts issued, as well as premium finance volumes during a reporting period. They represent the volume of insurance policies written or assumed and warranty service contracts issued during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. Gross written premiums is a volume measure commonly used in the insurance industry to compare sales performance by period. Premium equivalents are used to compare sales performance of warranty service and administrative contract volumes to gross written premiums. Investors also use these measures to compare sales growth among comparable companies, while management uses these measures to evaluate the relative performance of various sales channels.
The below table shows gross written premiums and premium equivalents by business
mix for the three months ended
Three Months Ended ($ in thousands) March 31, 2023 2022 U.S. Insurance$ 502,974 $ 407,020 U.S. Warranty Solutions 211,947 162,683 Europe 35,408 31,152 Total$ 750,329 $ 600,855 51
-------------------------------------------------------------------------------- Total gross written premiums and premium equivalents for the three months endedMarch 31, 2023 were$750.3 million , representing an increase of$149.5 million , or 24.9%. The increase was driven by a combination of factors including expanding Fortegra's distribution partner network, growing specialty admitted and E&S insurance lines, and increasing penetration in the auto and consumer goods service contract sector. For the three months endedMarch 31, 2023 ,U.S. Insurance increased by$96.0 million , or 23.6%, driven by growth in specialty commercial admitted and E&S insurance lines. For the three months endedMarch 31, 2023 ,U.S. Warranty Solutions increased by$49.3 million , or 30.3%, driven by growth in auto and roadside assistance service contracts.Europe increased by$4.3 million , or 13.7%, driven by growth in auto warranty lines. The growth in gross written premiums and premium equivalents, combined with higher retention in select products as ofMarch 31, 2023 , has resulted in an increase of$319.6 million , or 18.3% in unearned premiums and deferred revenue on the condensed consolidated balance sheets as compared toMarch 31, 2022 . As ofMarch 31, 2023 , unearned premiums and deferred revenues were$2.1 billion , as compared to$1.7 billion as ofMarch 31, 2022 .
Combined Ratio, Underwriting Ratio and Expense Ratio
Combined ratio is an operating measure, which equals the sum of the underwriting ratio and the expense ratio. Underwriting ratio is the ratio of the GAAP line items net losses and loss adjustment expenses, member benefit claims and commission expense to earned premiums, net, service and administrative fees and ceding commissions and other revenue. Expense ratio is the ratio of the GAAP line items employee compensation and benefits and other underwriting, general and administrative expenses to earned premiums, net, service and administrative fees and ceding commissions and other revenue. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. These ratios are commonly used in the insurance industry as a measure of underwriting profitability, excluding earnings on the insurance portfolio. Investors commonly use these measures to compare underwriting performance among companies separate from the performance of the investment portfolio. Management uses these measures to compare the profitability of various products underwritten as well as profitability among programs between various agents and sales channels. The combined ratio was 91.3% for the three months endedMarch 31, 2023 , which consisted of an underwriting ratio of 78.3% and an expense ratio of 13.0%, as compared to 90.5%, 77.6% and 12.9%, respectively, for the three months endedMarch 31, 2022 . The combined ratio for the three month period increased by 0.8% as compared to 2022, driven by an increase in the underwriting ratio, related to changes in product mix toward lines with higher loss ratios and lower expense ratios. Return on Average Equity
Return on average equity is expressed as the ratio of net income to average
stockholders' equity during the period. Management uses this ratio as a measure
of the on-going performance of the totality of the Company's operations.
Return on average equity was 16.7% for the three months ended
compared to 14.7% for the prior year period. The increase in net income and
annualized return on average equity was driven by revenue growth and a
consistent combined ratio.
Non-GAAP Financial Measures
Underwriting and Fee Revenues and Underwriting and
In order to better explain to investors the underwriting performance of the Company's programs and the respective retentions between the Company and its agents and reinsurance partners, we use the non-GAAP metrics - underwriting and fee revenues and underwriting and fee margin. Underwritten exposures are managed using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with Fortegra's agents (e.g., commissions paid are adjusted based on the actual underlying losses incurred). Period-over-period comparisons of revenues and expenses are often impacted by the agents and their PORC's choice as to their risk retention appetite, specifically earned premiums, net, service and administration fees, ceding commissions, and other revenue, all components of revenue, and losses and loss adjustment expenses, member benefit claims, and commissions paid to Fortegra's agents and reinsurers. Generally, when losses are incurred, the risk which is retained by Fortegra's agents and reinsurers is reflected in a reduction in commissions paid. 52 -------------------------------------------------------------------------------- Underwriting and fee revenues represents total revenues excluding net investment income, net realized and unrealized gains (losses). See "-Non-GAAP Reconciliations" for a reconciliation of underwriting and fee revenues to total revenues in accordance with GAAP. Underwriting and fee margin represents income before taxes excluding net investment income, net realized and unrealized gains (losses), employee compensation and benefits, other expenses, interest expense and depreciation and amortization. Fortegra's products and services are delivered on a vertically integrated basis to its agents. As such, underwriting and fee margin exclude general and administrative expenses, interest income, depreciation and amortization and other corporate expenses, including income taxes, as these corporate expenses support the vertically integrated delivery model and are not specifically supporting any individual business line. See "-Non-GAAP Reconciliations" for a reconciliation of underwriting and fee margin to total revenues in accordance with GAAP.
The below tables show underwriting and fee revenues and underwriting and fee
margin by business mix for the three months ended
Three Months
Ended
Underwriting and Fee ($ in thousands) Underwriting and Fee Revenues (1) Margin (1) 2023 2022 2023 2022 U.S. Insurance$ 274,237 $ 210,988 $ 48,985 $ 39,879 U.S. Warranty Solutions 79,128 61,049 25,974 19,441 Europe 14,577 13,968 4,858 4,816 Total$ 367,942 $ 286,005 $ 79,817 $ 64,136
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Underwriting and fee revenues were$367.9 million for the three months endedMarch 31, 2023 as compared to$286.0 million for the three months endedMarch 31, 2022 . Total underwriting and fee revenues increased$81.9 million , or 28.6%, driven by growth in all business lines. The increase inU.S. Insurance was$63.2 million , or 30.0%, driven by growth in specialty commercial insurance lines. The increase inU.S. Warranty Solutions was$18.1 million , or 29.6%, driven by growth in auto service contracts and premium finance offerings.Europe increased by$0.6 million , or 4.4%. Underwriting and fee margin was$79.8 million for the three months endedMarch 31, 2023 as compared to$64.1 million for the three months endedMarch 31, 2022 . Total underwriting and fee margin increased$15.7 million , or 24.4%, driven by growth in all product lines.U.S. Insurance grew by$9.1 million , or 22.8%, driven by revenue growth in admitted and E&S lines.U.S. Warranty Solutions increased by$6.5 million , or 33.6%, driven by growth in auto service contracts.Europe increased by 0.9%, driven by growth in auto and consumer goods service contracts.
Adjusted Net Income and Adjusted Return on Average Equity
Adjusted net income represents income before taxes, less provision (benefit) for income taxes, and excluding the after-tax impact of various expenses that we consider to be unique and non-recurring in nature, including merger and acquisition related expenses, stock-based compensation, net realized and unrealized gains (losses), and intangibles amortization associated with purchase accounting. Adjusted return on average equity represents adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period. Management uses both these measures for executive compensation and as a measure of the on-going performance of our operations. See "-Non-GAAP Reconciliations" for a reconciliation of adjusted net income and adjusted return on average equity to income before taxes and adjusted return on average equity. For the three months endedMarch 31, 2023 , adjusted net income and adjusted return on average equity were$22.9 million and 26.1%, respectively, as compared to$21.1 million and 28.2%, respectively, for the three months endedMarch 31, 2022 . The improvement of adjusted net income was driven by the growth in underwriting and fee revenues and improved net investment income.
Net Investment Income and Net Realized and Unrealized Gains (Losses) on
Investments
The insurance investment portfolio includes investments held in statutory insurance companies and in unregulated entities. The portfolios held in statutory insurance companies are subject to different regulatory considerations, including with respect to types of assets, concentration limits, affiliate transactions and the use of leverage. Fortegra's investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors and geographies while maintaining adequate liquidity to meet claims payment obligations. As such, volatility from realized and unrealized gains and losses may 53 -------------------------------------------------------------------------------- impact period-over-period performance. Unrealized gains and losses on equity securities and loans held at fair value impact current period net income, while unrealized gains and losses on AFS securities impact AOCI. Net investment income includes interest and dividends, net of investment expenses, on invested assets. Net realized and unrealized gains and losses on investments are reported separately from net investment income. For the three months endedMarch 31, 2023 , net investment income was$5.1 million as compared to$3.2 million in the prior year period, driven by growth in investments and increasing yields. Net realized and unrealized losses were$4.6 million , compared to losses of$6.6 million in the prior year period, both driven by realized and unrealized losses on certain equity securities and other investments, including fixed income securities carried at fair value. Unrealized gains on AFS securities impacting OCI for the three months endedMarch 31, 2023 were$9.5 million , driven by the decline in yields (yields and bonds prices are inversely related) and corresponding impact to the fair value of investments inU.S. Treasuries, obligations ofU.S. government agencies, corporate securities, obligations of state and political subdivisions, and asset-backed securities.
Tiptree Capital consists of our Mortgage segment, which includes the operating results of Reliance, our mortgage business, andTiptree Capital - Other, which consists of our other non-insurance operating businesses and investments. As ofMarch 31, 2023 ,Tiptree Capital - Other includes our Invesque shares and maritime transportation operations.
Mortgage
Through our Mortgage operating subsidiary, Reliance, we originate, sell, securitize and service one-to-four-family, residential mortgage loans, comprised of conforming mortgage loans,Federal Housing Administration ("FHA"),Veterans Administration ("VA"),United States Department of Agriculture ("USDA"), and to a lesser extent, non-agency jumbo prime. We are an approved seller/servicer for Fannie Mae and Freddie Mac. We are also an approved issuer and servicer forGinnie Mae . We originate residential mortgage loans through our retail distribution channel (directly to consumers) in 39 states and theDistrict of Columbia as ofMarch 31, 2023 . The following tables present the Mortgage segment results for the following periods: Results of Operations Three Months Ended ($ in thousands)March 31, 2023 2022 Revenues:
Net realized and unrealized gains (losses)
Other revenue
4,454 4,987 Total revenues$ 11,561 $ 25,401
Expenses:
Employee compensation and benefits$ 8,220 $ 14,425 Interest expense 384 326 Depreciation and amortization 172 214 Other expenses 5,350 6,170 Total expenses$ 14,126 $ 21,135 Income (loss) before taxes$ (2,565) $ 4,266 Key Performance Metrics: Origination volumes$ 202,835 $ 354,413 Gain on sale margins 4.8 % 4.3 % Return on average equity (14.5) % 22.3 % Adjusted net income (1)$ (853) $ (1,556) Adjusted return on average equity (1) (6.3) % (10.6) %
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
54 --------------------------------------------------------------------------------
Revenues
Net Realized and Unrealized Gains (Losses) include gains on sale of mortgage loans and the fair value adjustment in mortgage servicing rights. Gains on the sale of mortgage loans represent the difference between the selling price and carrying value of loans sold and are recognized upon settlement. Such gains also include the changes in fair value of loans held for sale and loan-related hedges and derivatives. We transfer the risk of loss or default to the loan purchaser, however, in some cases we are required to indemnify purchasers for losses related to non-compliance with borrowers' creditworthiness and collateral requirements. Because of this, we recognize gains on sale net of required indemnification and premium recapture reserves. The fair value adjustment on mortgage servicing rights represents fair value adjustments considering estimated prepayments and other factors associated with changes in interest rates, plus actual run-off in the servicing portfolio. We report these adjustments separate from servicing income and servicing expense. Other Revenue includes loan origination fees, interest income, and mortgage servicing income. Loan origination fees are earned as mortgage loans are funded. Servicing fees are earned over the life of the loan. Interest income includes interest earned on loans held for sale and interest income on bank balances and short-term investments.
Revenues - 2023 compared to 2022
For the three months endedMarch 31, 2023 ,$202.8 million of loans were funded, compared to$354.4 million for 2022, a decrease of$151.6 million , or 42.8%, driven by increase in mortgage interest rates compared to 2022. Gain on sale margins increased to 4.8% for the three months endedMarch 31, 2023 , up approximately 50 basis points from 4.3% for the three months endedMarch 31, 2022 . Net realized and unrealized gains for the three months endedMarch 31, 2023 were$7.1 million , compared to$20.4 million for 2022, a decrease of$13.3 million or 65.2%. The primary driver of decreased gain on sale revenues was the decline in volumes and negative fair value adjustment in mortgage servicing rights of$1.4 million compared to a positive fair value adjustment of$6.3 million in 2022. Other revenue for the three months endedMarch 31, 2023 was$4.5 million , compared to$5.0 million for 2022, a decrease of$0.5 million , or 10.7%. The decrease for the three month period was driven primarily by lower loan origination fees, partially offset by higher mortgage servicing fees. As ofMarch 31, 2023 , the mortgage servicing asset was$39.9 million , a decrease from$41.4 million as ofDecember 31, 2022 .
Expenses
Employee Compensation and Benefits includes salaries, commissions, benefits,
bonuses, other incentive compensation and related taxes for employees.
Commissions expense for sales staff generally varies with loan origination
volumes.
Interest Expense represents borrowing costs under warehouse and other credit facilities used primarily to fund loan originations. Amortization of deferred financing costs, including commitment fees, is included in interest expense.
Depreciation is mainly associated with furniture, fixtures and equipment.
Amortization is primarily associated with a trade name and internally developed
software.
Other Expenses include loan origination expenses, namely, leads, appraisals,
credit reporting and licensing fees, general and administrative expenses,
including office rent, insurance, legal, consulting and payroll processing
expenses, and servicing expense.
Expenses - 2023 compared to 2022
For the three months endedMarch 31, 2023 , employee compensation and benefits were$8.2 million , compared to$14.4 million in 2022, a decrease of$6.2 million or 43.0%. The decrease was driven primarily by reduced commissions on lower origination volumes.
For the three months ended
an increase of
For the three months ended
compared to
decreased mortgage operational expense, including marketing costs.
55 --------------------------------------------------------------------------------
Income (loss) before taxes
The loss before taxes for the three months endedMarch 31, 2023 was$2.6 million , compared to income before taxes of$4.3 million in 2022. The decrease was driven by a decline in volumes and negative fair value adjustments on the mortgage servicing rights asset as compared to 2022, partially offset by higher mortgage servicing fees attributable to the larger servicing portfolio.
The following tables present a summary ofTiptree Capital - Other results for the following periods: Results of Operations
Three Months Ended
Income (loss) before ($ in thousands) Total revenue taxes 2023 2022 2023 2022 Senior living (Invesque)$ (1,405) $ (8,851) $ (1,405) $ (8,851) Maritime transportation (1) 360 8,862 190 2,653 Other (2) 2,665 16,962 2,657 (1,453) Total$ 1,620 $ 16,973 $ 1,442 $ (7,651) (1) Includes$0.2 million and$6.2 million of expenses related to our Maritime transportation operations for the three months endedMarch 31, 2023 and 2022, respectively. (2) Includes our formerly held for sale mortgage originator (Luxury), asset management, and certain intercompany elimination transactions.
Revenues
Tiptree Capital - Other earns revenues from the following sources: net interest income; revenues on our formerly held for sale mortgage originator (Luxury); realized and unrealized gains and losses on the Company's investment holdings (primarily Invesque); and charter revenues from vessels within the Company's maritime transportation operations. Subsequent to the sale of our dry bulk and tanker vessels, operations include two smaller vessels and other ancillary assets. Revenues for the three months endedMarch 31, 2023 were$1.6 million compared to$17.0 million for 2022 with the decline primarily driven by the deconsolidation of Luxury effectiveJuly 1, 2022 , sale of five vessels, partially offset by investment gains on securities in the Company's investment holdings and decreased investment losses on Invesque in 2023 compared to 2022.
Income (loss) before taxes
The income before taxes from
million
revenues.
Adjusted net income - Non-GAAP(1)
Three Months Ended ($ in thousands) March 31, 2023 2022 Senior living (Invesque) $ - $ - Maritime transportation 169 2,480 Other 1,244 48 Total$ 1,413 $ 2,528
(1) See "-Non-GAAP Reconciliations" for a discussion of non-GAAP financial
measures.
Adjusted net income decreased to$1.4 million for the three months endedMarch 31, 2023 compared to$2.5 million in 2022. The decrease was driven from the sale of five vessels, partially offset by interest income on cash and cash equivalents recorded in other income. 56 --------------------------------------------------------------------------------
Corporate
The following table presents a summary of corporate results for the following periods: Results of Operations Three Months Ended ($ in thousands) March 31, 2023 2022 Employee compensation and benefits$ 1,955 $ 2,368 Employee incentive compensation expense 5,834 4,663 Interest expense - 2,243 Depreciation and amortization 251 198 Other expenses 2,109 2,777 Total expenses$ 10,149 $ 12,249 Corporate expenses include expenses of the holding company for interest expense, employee compensation and benefits, and public company and other expenses. Corporate employee compensation and benefits includes the expense of management, legal and accounting staff. Other expenses primarily consisted of audit and professional fees, insurance, office rent and other related expenses. Employee compensation and benefits, including incentive compensation expense, were$7.8 million for the three months endedMarch 31, 2023 , compared to$7.0 million for 2022, driven by an increase in accrued bonus expense. Of the incentive compensation expense in the three months endedMarch 31, 2023 ,$2.3 million was stock-based compensation expense compared to$3.8 million in 2022. As ofMarch 31, 2023 , the Company had no outstanding borrowings at the holding company and therefore incurred no interest expense for the three months endedMarch 31, 2023 compared to$2.2 million in 2022. Other expenses of$2.1 million decreased by$0.7 million from the three months endedMarch 31, 2022 , primarily driven by decreased consulting and professional fees.
Provision for Income Taxes
The total income tax expense of$5.0 million for the three months endedMarch 31, 2023 and a benefit of$0.1 million for the three months endedMarch 31, 2022 is reflected as a component of net income (loss). For the three months endedMarch 31, 2023 , the Company's effective tax rate was equal to 61.5%. The effective rate for the three months endedMarch 31, 2023 was significantly higher than theU.S. statutory income tax rate of 21.0%, primarily due to the impact of outside basis deferred taxes on Tiptree's investment in Fortegra. For the three months endedMarch 31, 2022 , the Company's effective tax rate was equal to 9.0%. The effective rate for the three months endedMarch 31, 2022 was lower than theU.S. statutory income tax rate of 21.0%, primarily due to the impact of the effect of foreign operations and discrete items, partially offset by state taxes. Tiptree owns less than 80% of Fortegra and is required to record deferred taxes on the outside basis on its investment in Fortegra. This deferred tax liability represents the tax that would be due, before consideration of loss carryforwards, if Tiptree were to sell all of its Fortegra stock at its carrying value on Tiptree's balance sheet. As ofMarch 31, 2023 , this deferred tax liability relating to Fortegra was$44.1 million , which was an increase of$4.1 million from the year endedDecember 31, 2022 , of which$1.8 million was recorded in OCI and$2.3 million was recorded as a provision for income taxes. Excluding the impact of these deferred taxes, the effective tax rate for the quarter endedMarch 31, 2023 was 32.9%. OnAugust 16, 2022 , theU.S. government enacted Public Law no. 117-169, commonly referred to as the Inflation Reduction Act, which, among other things, establishes a corporate minimum tax on book earnings and an excise tax on stock buybacks. It is not expected that this legislation will have a material financial impact on the Company or its operations.
Balance Sheet Information
Tiptree's total assets were$4,308.0 million as ofMarch 31, 2023 , compared to$4,039.6 million as ofDecember 31, 2022 . The$268.4 million increase in assets is primarily attributable to the growth in the Insurance segment. Total stockholders' equity was$541.6 million as ofMarch 31, 2023 , compared to$533.6 million as ofDecember 31, 2022 , with the increase primarily driven by other comprehensive income on AFS securities for the three months endedMarch 31, 2023 . As ofMarch 31, 2023 , there were 36,734,948 shares of common stock outstanding as compared to 36,385,299 shares 57 --------------------------------------------------------------------------------
as of
the vesting of share-based incentive compensation.
The following table is a summary of certain balance sheet information:
As of March 31, 2023 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Total Total assets 3,982,362$ 167,038 $ 158,398 $ 160 $ 4,307,958 Corporate debt$ 235,000 $ - $ - $ -$ 235,000 Asset based debt 64,818 56,273 - - 121,091Tiptree Inc. stockholders' equity (1)$ 224,286 $ 52,793 $ 153,606 $ (30,038) $ 400,647 Non-controlling interests: Fortegra preferred interests 77,679 - - - 77,679 Common interests 63,231 - - - 63,231 Total stockholders' equity$ 365,196 $ 52,793 $ 153,606 $ (30,038) $ 541,557
(1) Included in Corporate equity is the deferred tax liability on the outside
basis on Tiptree's investment in Fortegra of
58 --------------------------------------------------------------------------------
NON-GAAP MEASURES AND RECONCILIATIONS
Non-GAAP Reconciliations
In addition to GAAP results, management uses the non-GAAP financial measures underwriting and fee revenues and underwriting and fee margin in order to better explain to investors the underwriting performance and the respective retentions between the Company and its agents and reinsurance partners. We also use the non-GAAP financial measures adjusted net income, adjusted return on average equity and Adjusted EBITDA as measures of operating performance and as part of our resource and capital allocation process, to assess comparative returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company's executive officers. Management believes these measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze financial performance and to compare relative performance among comparable companies. Adjusted net income, adjusted return on average equity, Adjusted EBITDA, underwriting and fee revenues and underwriting and fee margin are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for earned premiums, net income or any other measure derived in accordance with GAAP.
Underwriting and Fee Revenues and Underwriting and
(Insurance only)
We generally manage exposure to underwriting risks written by using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid are adjusted based on the actual underlying losses incurred), which mitigates Fortegra's risk. Period-over-period comparisons of revenues and expenses are often impacted by the PORCs and distribution partners' choice as to whether to retain risk, specifically service and administration fees and ceding commissions, both components of revenue, and policy and contract benefits and commissions paid to our partners and reinsurers. Generally, when losses are incurred, the risk which is retained by our partners and reinsurers is reflected in a reduction in commissions paid. In order to better explain to investors the underwriting performance and the respective retentions between the Company and its agents and reinsurance partners, we use the non-GAAP metrics underwriting and fee revenues and underwriting and fee margin. Underwriting and Fee Revenues - Non-GAAP - We define underwriting and fee revenues as total revenues from the Insurance segment excluding net investment income and net realized and unrealized gains (losses). Underwriting and fee revenues represents revenues generated by underwriting and fee-based operations and allows us to evaluate the Company's underwriting performance without regard to investment income. We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance. Underwriting and fee revenues should not be viewed as a substitute for total revenues calculated in accordance with GAAP, and other companies may define underwriting and fee revenues differently. Three Months Ended ($ in thousands) March 31, 2023 2022 Total revenues$ 368,444 $ 282,529 Less: Net investment income (5,109) (3,167)
Less: Net realized and unrealized gains (losses) 4,607 6,643
Underwriting and fee revenues
$ 367,942 $ 286,005 Underwriting andFee Margin - Non-GAAP - We define underwriting and fee margin as income before taxes from the Insurance segment, excluding net investment income, net realized and unrealized gains (losses), employee compensation and benefits, other expenses, interest expense and depreciation and amortization. Underwriting and fee margin represents the underwriting performance of our underwriting and fee-based lines. As such, underwriting and fee margin excludes general administrative expenses, interest expense, depreciation and amortization and other corporate expenses as those expenses support the vertically integrated business model and not any individual component of the Company's business mix. We use this metric as we believe it gives our management and other users of our financial information useful insight into the specific performance of our underlying business mix. Underwriting and fee margin should not be viewed as a substitute for income before taxes calculated in accordance with GAAP, and other companies may define underwriting and fee margin differently. 59 -------------------------------------------------------------------------------- Three Months Ended ($ in thousands) March 31, 2023 2022 Income (loss) before income taxes$ 19,445 $ 14,682 Less: Net investment income (5,109)
(3,167)
Less: Net realized and unrealized gains (losses) 4,607 6,643
Plus: Depreciation and amortization
4,811 4,354 Plus: Interest expense 6,081 4,759 Plus: Employee compensation and benefits 24,613 22,026 Plus: Other expenses 25,369 14,839 Underwriting and fee margin$ 79,817 $ 64,136
Adjusted Net Income - Non-GAAP
We define adjusted net income as income before taxes, less provision (benefit) for income taxes, and excluding the after-tax impact of various expenses that we consider to be unique and non-recurring in nature, including merger and acquisition related expenses, stock-based compensation, net realized and unrealized gains (losses) and intangibles amortization associated with purchase accounting. We use adjusted net income as an internal operating performance measure in the management of business as part of our capital allocation process. We believe adjusted net income provides useful supplemental information to investors as it is frequently used by the financial community to analyze financial performance between periods and for comparison among companies. Adjusted net income should not be viewed as a substitute for income before taxes calculated in accordance with GAAP, and other companies may define adjusted net income differently. Adjusted net income is presented before the impacts of non-controlling interests. We present adjustments for amortization associated with acquired intangible assets. The intangible assets were recorded as part of purchase accounting in connection with Tiptree's acquisition ofFortegra Financial in 2014, Defend in 2019, and Smart AutoCare and Sky Auto in 2020. The intangible assets acquired contribute to overall revenue generation, and the respective purchase accounting adjustments will continue to occur in future periods until such intangible assets are fully amortized in accordance with the respective amortization periods required by GAAP.
Adjusted Return on Average Equity - Non-GAAP
We define adjusted return on average equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period. See "-Adjusted Net Income-Non-GAAP" above. We use adjusted return on average equity as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted return on average equity should not be viewed as a substitute for return on average equity calculated in accordance with GAAP, and other companies may define adjusted return on average equity differently. Three Months Ended March 31, 2023 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Total Income (loss) before taxes 19,445 (2,565) 1,442 (10,149)$ 8,173 Less: Income tax (benefit) expense (4,747) 613 (263) (625) (5,022) Less: Net realized and unrealized gains (losses) 4,607 1,443 323 - 6,373 Plus: Intangibles amortization (1) 3,894 - - - 3,894 Plus: Stock-based compensation expense 33 - - 2,282 2,315 Plus: Non-recurring expenses 2,125 - - - 2,125 Plus: Non-cash fair value adjustments (118) - - - (118) Less: Tax on adjustments (2) (2,300) (344) (89) 2,277 (456) Adjusted net income$ 22,939 $ (853) $ 1,413 $ (6,215) $ 17,284 Adjusted net income$ 22,939 $ (853) $ 1,413 $ (6,215) $ 17,284 Average stockholders' equity$ 351,953 $ 53,768 $ 114,219 $ 17,626 $ 537,566 Adjusted return on average equity 26.1 % (6.3) % 4.9 % NM% 12.9 % 60 --------------------------------------------------------------------------------
Three Months Ended March 31, 2022 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Total
Income (loss) before taxes
Less: Income tax (benefit) expense (3,664)
(978) 1,794 2,934 86 Less: Net realized and unrealized gains (losses) 6,643 (6,314) 8,851 - 9,180 Plus: Intangibles amortization (1) 3,946 - - - 3,946 Plus: Stock-based compensation expense 2,319 - - 3,839 6,158 Plus: Non-recurring expenses 23 - 133 - 156 Plus: Non-cash fair value adjustments - - 1,514 - 1,514 Less: Tax on adjustments (2) (2,825) 1,470 (2,113) (1,168) (4,636) Adjusted net income$ 21,124 $ (1,556) $ 2,528 $ (6,644) $ 15,452 Adjusted net income$ 21,124 $ (1,556) $ 2,528 $ (6,644) $ 15,452 Average stockholders' equity$ 299,113 $ 58,962 $ 117,744 $ (84,152) $ 391,667 Adjusted return on average equity 28.2 % (10.6) % 8.6 % NM% 15.8 %
The footnotes below correspond to the tables above, under "-Adjusted Net Income
- Non-GAAP" and "-Adjusted Return on Average Equity - Non-GAAP".
(1) Specifically associated with acquisition purchase accounting. See Note (8)Goodwill and Intangible Assets, net. (2) Tax on adjustments represents the tax applied to the total non-GAAP adjustments and includes adjustments for non-recurring or discrete tax impacts. For the three months endedMarch 31, 2023 , included in the adjustment is an add-back of$2.3 million , respectively, related to deferred tax expense from the WP Transaction. Adjusted EBITDA - Non-GAAP The Company defines Adjusted EBITDA as GAAP net income of the Company plus corporate interest expense, plus income taxes, plus depreciation and amortization expense, less the effects of purchase accounting, plus non-cash fair value adjustments, plus significant non-recurring expenses, and plus unrealized gains (losses) on available for sale securities reported in other comprehensive income. Adjusted EBITDA is used to determine incentive compensation for the Company's executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income.
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