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
Specialty Insurance continued to grow as gross written premiums for 2018 were $868.1 million, up 13.0%. Net written premiums were $466.8 million, up 11.7%, driven by growth in credit and other specialty products.
On March 28, 2018, we expanded into Europe with the creation of Fortegra Europe Insurance Company Limited (“FEIC”).
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”. 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 specialty insurance business generally focuses on products which have low severity but high frequency loss experiences and are short-duration. Our insurance 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 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 programs insurance business model to other niche products and markets.
The shipping industry is highly competitive and fragmented. Demand is a function of world economic conditions and the consequent requirement 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 market conditions, along with company and industry specific factors, can impact the fair value of our vessels and their operating results.
The following is a summary of our consolidated financial results for the year ended December 31, 2018, 2017 and 2016. 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 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, 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.
For the year ended December 31, 2018, revenues were $625.8 million, which increased $44.0 million, or 7.6%, over the prior year period. The increase was driven by growth in earned premiums and service and administrative fees. Earned premiums were $427.8 million for the year ended December 31, 2018, up from $371.7 million in the comparable 2017 period driven by growth in net written
The increase in revenues from 2016 to 2017 was $75.4 million, or 14.9%, driven by growth in earned premiums and net investment income in our insurance operations, partially offset by reduced service and administrative fees, ceding commissions, and unrealized losses on equities in our specialty insurance investment portfolio, as compared to prior period gains. In addition to the growth in revenues, the combination of unearned premiums and deferred revenues on the balance sheet grew by $93.0 million or 19.9%.
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 in contrast to our fixed income securities, which are marked to market through accumulated other comprehensive income (“AOCI”) in stockholders equity. 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 pretax gain on sale of $56.9 million. During 2017, we made a strategic decision to decrease our overall exposure to CLO subordinated notes, which resulted in deconsolidation of the CLOs we manage and decreased our earnings from CLO distributions when comparing the year ended December 31, 2018 versus the prior year periods.
(1) Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs. Includes $20.7 million of unrealized losses attributable to Invesque shares for the year ended December 31, 2018 from the date of the sale (February 1, 2018).
(2) Includes Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.
For the year ended December 31, 2018, net income available to Common Stockholders was $23.9 million, an increase of $20.3 million from the prior year period. For the year ended December 31, 2017, net income available to Common Stockholders was $3.6 million, a decrease of $21.7 million from the prior year period. The key drivers of net income available to Common Stockholders were the same factors which impacted the net income before non-controlling interests.
Operating EBITDA for the year ended December 31, 2018 was $54.9 million compared to $60.9 million for the 2017 period, a decrease of $6.0 million, or 9.7%. Operating EBITDA for the year ended December 31, 2017 was $60.9 million an increase of $0.3 million, or 0.1%. The key drivers of the change for both periods were driven by increased Operating EBITDA from specialty insurance operations, which were more than offset by lower distributions on credit investments within Tiptree Capital.
Total stockholders’ equity was $396.8 million as of December 31, 2017 compared to $390.1 million as of December 31, 2016. As exchanged book value per share for the period ended December 31, 2017 was $9.97, a decrease from $10.14 as of December 31, 2016. The key drivers of the period-over-period impact were increases in net income that drove 2017 diluted earnings per share of $0.11 and the purchase of 1.0 million shares at an average 28% discount to book value. Those increases were more than offset by dividends paid of $0.12, officer compensation share issuances, and the exercise of an option in June 2017, the latter of which resulted in 1.5 million shares being issued at $5.36 per share. In 2017, Tiptree returned $11.8 million to shareholders through share repurchases and dividends paid.
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.
The following tables present the specialty insurance segment results for the year ended December 31, 2018, 2017 and 2016.
Our specialty 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 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 2018 versus 2017 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 20.5% from $560.2 million as of December 31, 2017 to $675.2 million as of December 31, 2018.
Pre-tax income was $18.6 million for the year ended December 31, 2018, an increase of $13.2 million, over the prior year period. The primary drivers of the increase were lower net realized and unrealized losses of $11.7 million in the 2018 period versus $16.5 million of losses in the 2017 period primarily related to equities and loans held at fair value in the portfolio. Insurance operations results also improved versus the prior year period, driven primarily by increased underwriting margin of $14.4 million, which was partially offset by increased other expenses of $3.3 million primarily associated with increased premium taxes and pursuing acquisition opportunities. Interest expense increased by $3.1 million from the prior year period, primarily associated with the issuance of the Junior Subordinated Notes in late 2017.
For the year ended December 31, 2018, total revenues were $549.9 million, up $70.9 million, or 14.8%, primarily driven by an increase in earned premiums of $56.1 million and increases in service and administrative fees of $7.2 million. The increase in earned premiums
Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31, 2018, total expenses were $531.3 million compared to $473.6 million in the 2017 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2017 period.
For the year ended December 31, 2018, policy and contract benefits were $152.1 million, up $28.1 million, primarily as a result of growth in earned premiums. Losses as a percentage of underwriting revenues increased over the prior year period which was driven by specialty programs, and offset by reduced commissions paid to our distribution partners.
For the year ended December 31, 2017, total expenses were $473.6 million compared to $347.4 million in the 2016 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2016 period. Total commission expense for year ended December 31, 2017 was $241.8 million compared to $147.3 million in 2016. The primary drivers of the increase were the commission expense associated with the higher retention rate on our credit protection products. Commission expense, excluding the impacts of VOBA, was $244.1 million for 2017, up $86.1 million, driven primarily by the increase in retention of credit insurance products, partially offset by declines in commissions related to the mobile protection and other warranty products.
within the investment portfolio. Other expenses for the year ended December 31, 2017 were $38.6 million, up $5.6 million from 2016 primarily as a result of increased premium taxes as written and earned premiums grew. 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, which was $0.2 million for the year ended December 31, 2017 versus $3.3 million for the prior year period. This was partially offset by increases in amortization of other intangibles including customer relationships, trade names and software licensing.
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.
Total gross written premiums for the year ended December 31, 2018 were $868.1 million, which represented an increase of $99.8 million, or 13.0%, from the prior year period. The amount of business retained was 53.8%, down slightly from 54.5% in the prior year period. Total net premiums written for 2017 were $466.8 million, up $48.8 million, or 11.7%, driven primarily by growth in credit and specialty programs. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion.
Total gross written premiums for the year ended December 31, 2017 were $768.3 million, which represented an increase of $60.0 million, or 8.5%, from the prior year period. The amount of business retained was 54.4%, up from 47.6% in the prior year period. Total net premiums written for 2017 were $418.0 million, up $80.9 million, or 24.0%. The increase in retention and net written premiums was consistent with our strategy and largely driven by our captive reinsurer retaining credit protection products that were ceded to third party reinsurers prior to 2016.
The following table presents product specific revenue and expenses within the specialty insurance segment. We generally limit 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 manage and 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.
(2) For the year ended December 31, 2016, Warranty underwriting margin was higher by $4.7 million due to the impacts of VOBA purchase accounting.
(3) For the year ended December 31, 2018 and 2017, Services and other underwriting margin was higher by $0.9 million and $1.5 million due to the impacts of VOBA purchase accounting.
Underwriting margin for the year ended December 31, 2017 was $113.4 million, up from $112.4 million in 2016. Credit protection adjusted underwriting margin was $67.4 million, an increase from 2016 results by $2.6 million, or 4.0%. Underwriting margin for warranty products was $25.7 million for 2017, down $0.8 million, from 2016 driven by $5.0 million of VOBA purchase accounting impacts in the 2016 period. The period-over-period declines experienced from our mobile protection products slowed, and was more than offset by growth in furniture, appliances, and auto warranty business. Specialty programs underwriting margin for 2017 was $9.8 million, up 8.2% from 2016, as certain non-standard auto programs were exited over the last year. Services and other contributed $10.5 million in 2017.
Invested Capital, Total Capital, Operating EBITDA and Operating Ratios - Non-GAAP(1)
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, excluding 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 average annualized yield, 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.
(1) Average Annualized Yield % represents the ratio of annualized net investment income, realized and unrealized gains (losses) less investment portfolio interest expense to the average of the prior two quarters total investments less investment portfolio debt plus cash, but does not reflect the cumulative return on the portfolio.
For the year ended December 31, 2018, the net investment portfolio income was $2.8 million compared to a loss of $6.8 million in the comparable 2017 period. Net investment income was $19.2 million, up $2.9 million, or 17.8% from 2017 driven primarily by increases in total investments and increases in LIBOR on floating rate loans. For the year ended December 31, 2018, fair market value changes on equities resulted in unrealized and realized losses of $9.5 million ($3.6 million from Invesque common shares) compared to $23.8 million in 2017. The late-year sell-off in the U.S. leveraged loan market drove unrealized losses of $7.0 million compared to $1.0 million of realized gains in 2017. The average annualized yield for the year improved from (1.9)% in 2017 to 0.7% in 2018. The improvement was a result of increased net investment income, lower asset-based interest expense, and reduced realized and unrealized losses compared to the prior year.
For the year ended December 31, 2017, the net investment portfolio loss was $6.8 million compared to $24.6 million of income in the comparable 2016 period. The average annualized yield declined from 8.0% in 2016 to (1.9)% in 2017 as a result of unrealized losses of $22.3 million, primarily related to investments in equities, compared to unrealized gains of $10.0 million in 2016. For 2017, fair market valuation on equities resulted in $23.8 million of unrealized losses compared to $7.3 million of unrealized gains in 2016. In addition, interest expense increased by $3.5 million as a result of increased borrowings on credit asset investments and non-performing loans. Those factors were partially offset by increases in net investment income of $3.3 million, as interest income improved period-over-period, and realized gains improved by $1.1 million, primarily from gains on sales of our non-performing residential loans.
The following table summarizes the total revenues, pre-tax income from continuing and discontinued operations from Tiptree Capital.
Tiptree Capital earns revenues from net interest income; mortgage gains and fees; management fees from CLOs under management; distributions, realized and unrealized gains on the Company’s investment holdings (primarily Invesque, and, historically, CLO subordinated notes).
Discontinued Operations includes the results from Care, previously reported in the Senior Living segment. For the year ended December 31, 2018, the pre-tax income was $57.5 million compared to a loss of $6.2 million in the 2017 period. The increase was driven by a $56.9 million pre-tax gain on sale of Care, including $10.7 million of earnout consideration, which was recognized in December 2018 related to Invesque’s sale of properties previously owned by Care.
(1) For further information relating to Invested Capital and Operating EBITDA, including a reconciliation to GAAP financials, see “-Non-GAAP Reconciliations.”
Employee compensation and benefits, including incentive compensation expense, increased $0.2 million for the year ended December 31, 2018 compared to the 2017 period driven by employee benefit expenses. Interest expense for the year ended December 31, 2018 was $5.0 million, an increase of $0.2 million driven by higher LIBOR and increased average borrowings. As of December 31, 2018, the outstanding borrowings were $72.1 million compared to $28.5 million at December 31, 2017. Other expenses were $10.8 million for 2018 as compared to $9.8 million in 2017. The period-over-period increase was driven by increased rent and one-time deal related expenses.
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 the U.S. federal statutory income tax rate. The effective tax rate for the year ended December 31, 2017 was higher than the U.S. federal statutory income tax rate of 35.0% due to the revaluation of deferred tax attributes following federal tax reform.
Total stockholders’ equity was $399.3 million as of December 31, 2018 compared to $396.8 million as of December 31, 2017, primarily driven by net income offset by the stock repurchases and dividends for the year ended December 31, 2018.
We completed a corporate reorganization in April 2018 that eliminated Tiptree’s dual class stock structure. As of December 31, 2018 there were 35,870,348 shares of Common Stock outstanding as compared to 35,003,004 as of December 31, 2017.
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, 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.
Corporate Debt interest expense includes Secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in specialty insurance, asset management, mortgage and other operations is not added-back for Adjusted EBITDA and Operating EBITDA.
Acquisition, start-up and disposition costs including legal, taxes, banker fees and other costs. Includes payments pursuant to a separation agreement, dated November 10, 2015.
Includes discontinued operations related to Care. For more information, see “Note-(3) Dispositions, Assets Held for Sale & Discontinued Operations.”
Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at the Insurance Company. 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 company increased EBITDA above what the historical basis of accounting would have generated.
Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs as those are recurring in nature and align with those business models.
The following table provides a reconciliation between total investments and net investments for the following periods:
(1) Consists of asset-based financing on loans, at fair value including certain credit investments and NPLs, net of deferred financing costs, see Note-(10) Debt, net for further details.
(2) Restricted cash available to invest within certain credit investment funds which are consolidated under GAAP.
As of December 31, 2018, cash and cash equivalents, excluding restricted cash, were $86.0 million, compared to $110.7 million at December 31, 2017, a decrease of $24.7 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 will reposition Fortegra’s balance sheet, strengthen the Company’s positioning with industry rating agencies, and generate a source of long term capital. See Note (10) Debt, net for additional information of our debt and that of our subsidiaries.
Cash provided by operating activities (excluding VIEs) was $57.7 million for the year ended December 31, 2018. The primary sources of cash from operating activities included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums, deferred revenues and policy liabilities in our specialty insurance segment and mortgage sales outpacing originations in our loan origination business. The primary uses of cash from operating activities including increases in reinsurance receivables and notes and account receivable in our specialty insurance segment.
Cash used in investing activities (excluding VIEs) was $109.1 million for the year ended December 31, 2018. The primary uses of cash from investing activities were purchases of investments exceeding proceeds from sales and maturities of investments in our specialty insurance segment and investments in vessels within Tiptree Capital. The primary sources of cash from investing activities were proceeds from the sale of Care and proceeds from the sale of our commercial lending business.
Cash used in financing activities (excluding VIEs) was $2.0 million for the year ended December 31, 2018. The primary uses of cash from financing activities were share repurchases and dividends paid. The primary source of cash from financing activities was related to borrowings from our secured corporate credit agreements and new borrowings which exceeded principal paydowns on residential mortgage warehouse borrowings, partially offset by principal paydowns on asset based revolving financing.
of cash from operating activities included mortgage sales outpacing originations in our loan origination business, and increases in unearned premiums and policy liabilities in our specialty insurance business. The primary uses of cash from operating activities included increases in notes and accounts receivable and reinsurance receivables, and decreases in deferred revenue and reinsurance payables in our specialty insurance business.
Cash used in investing activities (excluding VIEs) was $244.5 million for the year ended December 31, 2016. The primary uses of cash from investing activities included investments in NPLs and corporate loans in our specialty insurance business, investments in real estate properties in our senior living business and increase in loans in our loan origination business.
Cash used in investing activities - VIEs was $75.5 million for the year ended December 31, 2016 driven primarily by the purchase of loans in a consolidated CLO during the ramp up period as it converted from a warehouse to a CLO during the second quarter of 2016.
Cash provided by financing activities (excluding VIEs) was $77.5 million for the year ended December 31, 2016. The primary sources of cash from financing activities were from borrowings in our senior living business to fund investments in real estate, borrowings in our loan origination business to fund loan growth, increased debt in our specialty insurance business for working capital, and an increase in borrowings in our specialty insurance business to grow our corporate loan portfolio and fund additional investments in NPLs. The primary drivers of the cash used included paydown of a consolidated CLO warehouse debt and repurchases of common stock.
Cash provided by financing activities - VIEs was $199.4 million for the year ended December 31, 2016 driven primarily by the senior notes issued upon the conversion of a consolidated CLO from a warehouse to a CLO.
The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of December 31, 2018:
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. The consolidated financial statements are prepared under GAAP for all periods presented. All intercompany items have been eliminated for these periods.
The types of financial assets and liabilities carried at Level 2 are valued based on one or more of the following:
Quoted prices for identical or similar assets or liabilities in nonactive markets;
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.
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, 2018, 2017 and 2016, respectively.
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. As a result of this assessment, as of December 31, 2018, the consolidated valuation allowance for Tiptree was $3.1 million. The increase and/or decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2018, the Company recorded a net decrease of valuation allowances of $1.2 million as compared to an increase of $2.3 million in 2017.
In connection with our acquisitions, assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values as of the acquisition date. In measuring the fair value of net tangible and identified intangible assets acquired, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. The determination of fair value involved the use of significant judgment and estimation.
GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit might be less than its carrying value. No such events or circumstances have occurred during the years ended December 31, 2018, 2017 and 2016, respectively.
Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles requiring amortization. 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. See Note-(2) Summary of Significant Accounting Policies, in the accompanying consolidated financial statements for further detail.
Certain loans originated by the Company within its commercial lending business are asset backed loans held for investment and are carried at amortized cost. An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when the Company believes the uncollectibility of a loan balance is confirmed. Management reviews its methodology for its calculation of its loss provision as deemed necessary which is at least on an annual basis.
Although we sell substantially all of the loans we originate in our mortgage business, we remain subject to claims for repurchases or indemnities related to mortgage loans we originate in the event of early payment defaults or breaches of representations and warranties regarding loan quality, compliance and certain other loan characteristics. A reserve estimated for probable claims are based on historical experience and is calculated as a reduction to gain on sale on all of the loans we originate. Management
We have audited the accompanying consolidated balance sheets of Tiptree Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, 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, 2018, 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 13, 2019, expressed an unqualified opinion on the Company's 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, 2018, 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Tiptree Inc. and subsidiaries for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
(1) See Note (1) Organization and Note (16) Stockholders’ Equity for information related to changes in the Company’s equity capitalization.
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. As such, we classify our business into one reportable segment: Specialty Insurance. Our non-insurance operations, assets and other investments, which is comprised of our non-reportable segments and other business activities, we refer to as Tiptree Capital.
On April 10, 2018, Tiptree completed a reorganization merger whereby Tiptree Financial Partners, L.P. (TFP) merged with and into Tiptree, with Tiptree continuing as the surviving company. Prior to the merger Tiptree owned approximately 84% of TFP, with the remaining portion accounted for as non-controlling interest. See Note (16) Stockholders’ Equity for additional information.
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.
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 the adoption of ASU 2016-01, an immaterial amount of equity securities classified as available for sale as of December 31, 2017 were reclassified to equity securities, at fair value as of March 31, 2018. The net unrealized loss was immaterial. 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 for the years ended December 31, 2018, 2017 and 2016.
Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service, administration fees, and loan origination fees; and
Other matters that affect the reported amounts and disclosure of contingencies in the consolidated financial statements
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.
Grants of subsidiary Restricted Stock Units (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 of 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.
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 charged to expense as incurred. Vessels acquired are recognized at their fair value as at the date of the acquisition.
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.
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.
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 and for quarterly waterfall payments, borrower escrow funds for taxes, insurance, rate-lock fees and servicing related escrow funds and collateral on warehouse borrowings.
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, retrospective commissions receivable, trust receivables and other receivables are primarily trade receivables from the specialty insurance business that are carried net of allowance at their approximate fair value.
Through the specialty 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 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.
Other assets primarily consists of prepaid expenses, income tax receivable, and furniture, fixtures and equipment, net. See Note-(14) Other Assets and Other Liabilities and Accrued Expenses.
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, 2018 and 2017, our appointed independent third-party actuaries found the Company’s reserves to be adequate.
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). 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 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 2016-09, 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 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 is 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.
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 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is 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 adds 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 is effective for the Company for interim and annual periods beginning after December 15, 2017, with early adoption permitted, and is 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 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 available for sale 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 available for sale 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 investment 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 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 exiting requirements and additional requirements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect on its consolidated financial statements.
The Company completed the sale of Care, as well as two senior living properties held in our specialty insurance business, on February 1, 2018. The pre-tax comprehensive income on the sale was approximately $54.9 million, which consists of $56.9 million gain on sale of subsidiary, $1.8 million of realized gain on the sale of the specialty insurance properties, offset by the reclassification of the interest rate swap from AOCI of $3.8 million. The gain on sale of subsidiary includes $10.7 million of earnout consideration recognized in December 2018 as a result of a disposition by Invesque of a portfolio specified in the closing document.
Total consideration received for the sale of Care was $150.7 million, including approximately 16.6 million shares of Invesque Inc. (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.
2016. The Company continued to present income and expenses attributable to Care within net income (loss) from discontinued operations through the completion of the sale.
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 redeemed CLO were consolidated in the results of the Company through the redemption date.
The following table represents detail of revenues and expenses of discontinued operations in the consolidated statements of operations for the following periods:
Certain loans originated by our former commercial lending business, which was sold in 2017, were sold were asset backed loans held for investment and were carried at amortized cost. The Company periodically reviewed these loans for impairment. Impairment losses were taken for impaired loans based on the fair value of collateral on an individual loan basis. When it was probable that the Company would be unable to collect all amounts contractually due, the loan was considered impaired.
An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses were charged against the allowance when the Company believed the uncollectibility of a loan balance was confirmed. Management reviewed its methodology for its calculation of its loss provision as deemed necessary which was at least on an annual basis.
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
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.
Investments in real estate, net were carried at cost less accumulated depreciation. Depreciation was calculated on a straight-line basis using estimated useful lives not to exceed 40 years for buildings and 9 years for building improvements and other fixed assets. Real estate associated with our Care business is classified as a discontinued operation.
Specialty Insurance operations are conducted through Fortegra Financial Corporation (Fortegra), an insurance holding company. Fortegra underwrites and provides specialty insurance products, primarily in the United States, and is a leading provider of credit insurance and asset protection products. Fortegra’s range of products and services include credit protection insurance, warranty
and service contract products, and other specialty insurance programs which underwrite niche personal and commercial lines of insurance. We also offer various other insurance related products and services throughout the U.S. through our non-regulated subsidiaries.
Tiptree Capital includes assets and operations of other non-insurance activities which include:
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:
(1) See Note (5) Investments for the components of Net realized and unrealized gains (losses) related to Tiptree Capital.
(2) See Note (5) Investments for the components of Other investment income.
All of the Company’s investments in available for sale securities (AFS) as of December 31, 2018 and December 31, 2017 are held by subsidiaries in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
The amortized cost and fair values of investments in debt 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. Excluded from this table are equity securities since they have no contractual maturity.
(2) Includes real estate, net and foreclosed residential real estate property. Real estate, net of $19,226 as of December 31, 2017 was disposed of as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
of operations. Net unrealized gains (losses) on available for sale securities are included within other comprehensive income, and as such, are not included in this table:
The Company has established a valuation allowance against its accounts and premiums receivable of $217 and $196 as of December 31, 2018 and December 31, 2017, respectively. Bad debt expense totaled $39, $48 and $36 for the years ended December 31, 2018, 2017 and 2016, respectively.
(3) Disposed of as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
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 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 TBA mortgage backed securities to economically hedge the risk of potential changes in the value of the loans that would result from the commitments.
The following table presents the pretax impact of the cash flow hedging derivative instruments on the consolidated financial
The following table summarizes the balance of the Company’s debt obligations, net of discounts and deferred financing costs.
The following narrative is a summary of certain of the terms of our debt agreements for the period ended December 31, 2018:
bears interest at a rate equal to the 30-day 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 a maturity date of December 20, 2018, and was renewed with a new maturity date of April 28, 2019. It contains terms and conditions typical for a transaction of this type, such as maximum debt incurrence and restricted payments. As of December 31, 2018 and December 31, 2017, nothing was outstanding under the agreement.
A subsidiary in our specialty 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.
The Company has financed purchases of certain investments in corporate loans with asset-based leverage. These investments are held in our specialty insurance business. Such borrowings are generally recourse only to the specific investments. Repayment is based upon a specific maturity date of August 2023 with a maximum borrowings of $105,000 (reduced from $150,000 in
November 2018) and an interest rate of LIBOR plus 2.00%. As of December 31, 2018 and December 31, 2017, a total of $81,343 and $101,428, respectively, was outstanding under the financing agreement.
An asset backed revolving borrowing in our specialty insurance premium finance business with a maximum borrowing capacity of $15,000 matured in April 2017. A new borrowing, maturing in April 2019 with an interest rate of LIBOR plus 2.60% and a maximum borrowing capacity of $25,000, was used to pay off the matured borrowing. As of December 31, 2018 and December 31, 2017, a total of $4,749 and $5,449, respectively, was outstanding under the financing agreement.
The Company, through a subsidiary in its mortgage business has three warehouse borrowings with a total borrowing capacity
at December 31, 2018 of $76,000. 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, 2018 and 2017, a total of $46,091 and $48,810, respectively, was outstanding under such financing agreements.
As of December 31, 2018, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.
on prices provided by an independent pricing service and a third party investment manager who provide a single price or quote per security.
The fair values of publicly traded common and preferred stocks were obtained from market value quotations provided by an independent pricing service and fall under Level 1 of the fair value hierarchy. The fair values of non-publicly traded common and preferred stocks were based on prices obtained from an independent pricing service using unobservable inputs and fall under Level 3 of the fair value hierarchy.
The Company’s investment in Invesque is subject to certain contractual and functional sale restrictions. The functional restriction period is sequential to the contractual restriction period. As of December 31, 2018, the weighted average estimated contractual sale restriction period was 3 months, with 70% of the shares restricted from sale for a period from 1 to 7 months. In addition, as of December 31, 2018 the weighted average estimated functional restriction period was 0.8 months, with 70% of the shares restricted for a period from 0.75 to 2.25 months. The fair value of the Invesque shares is based on the market price adjusted for the impact of these restrictions, and as a result of the discount on the Invesque investment, the fair value measurement falls under Level 2 of the fair value hierarchy.
Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified as 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.
Derivatives are comprised of interest rate lock commitments (IRLC) and to be announced mortgage backed securities (TBA). 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 its 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 result in a Level 3 classification. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors. 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 result in a Level 2 classification.
The following is quantitative information about Level 3 assets with significant unobservable inputs used in fair valuation.
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 as Level 2 of the fair value hierarchy. See Note (6) Notes and Accounts Receivable, net.
The following tables present undiscounted information about incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported 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 99% of incurred losses have been paid within three years of the accident period.
For the year ended December 31, 2017, the Company’s specialty insurance business experienced an increase in prior year case development of $3,347. This included $2,345 in non-standard auto and $1,466 in warranty. This development was partially offset by favorable development in its credit lines of business. The warranty and credit lines of business are primarily in retrospective commission arrangements that minimally impact the operating income of the Company.
The following table presents information about incurred and paid loss development and average claim duration as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported 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.
The following table presents supplementary information about average historical claims duration as of December 31, 2018 for short duration contracts:
As discussed in Note (2) Summary of Significant Accounting Policies, the Company adopted ASU 2014-09 and other ASUs related to Topic 606 as of January 1, 2018. 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. There was no impact to any prior period amounts or transition adjustment recorded as a result of the adoption of the new standard.
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 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.
(1) Related to the gain contingency on sale of Care recorded in December 2018. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
The CLOs are considered variable interest entities (VIE) and the Company consolidates entities when it is determined to be the
On June 21, 2017, a subsidiary of the Company purchased 1,000,000 shares of Common Stock of the Company for aggregate consideration of $7,300. The shares acquired are accounted for as treasury shares and therefore are not outstanding for accounting or voting purposes.
The Company's regulated insurance company subsidiaries may pay dividends to our insurance holding company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to our insurance holding company are permitted only with prior approval of the insurance department of the applicable state of domicile. The Company eliminated all dividends from its subsidiaries in the consolidated financial statements. For the year ended December 31, 2018 and December 31, 2017, respectively, the Company's insurance company subsidiaries did not pay any ordinary or extra ordinary dividends.
At December 31, 2018, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $13,532. 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.
Under the National Association of Insurance Commissioners (NAIC) 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 insurance company subsidiaries' RBC levels, as calculated in accordance with the NAIC’s RBC instructions, exceeded all RBC thresholds as of December 31, 2018.
(1) Relates to the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
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 2013 and 2017 Equity Plan for the periods indicated, excluding awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Common Stock:
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 vested and unvested balance (assuming full vesting) translates to 3,626,887 shares of Common Stock if converted as of December 31, 2018.
(1) Book value targets for grants in 2018, 2017, and 2016 are $9.97, $10.14, and $8.96, respectively.
The following table presents total stock-based compensation expense and the related income tax benefit recognized on the consolidated statements of operations:
The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 6.0%. Both the U.S. federal rate and the state statutory rates are 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:
As of December 31, 2018, the Company had total U. S. Federal net operating loss carryforwards (NOLs) of $40.2 million arising from continuing operations. The following table presents the U.S. Federal NOLs by tax year of expiration:
The table below summarizes the Company’s contractual obligations by period that payments are due:
The Company calculates basic net income per Common Share based on the weighted average number of Common Shares outstanding (inclusive of vested restricted share units). The unvested restricted share units have the non-forfeitable right to participate in dividends declared and paid on 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, and for the year ended December 31, 2018, 2017 and 2016, the income available to Common Stockholders was allocated to the unvested restricted stock units.
Diluted net income per Common Shares for the period includes the effect of potential equity of subsidiaries as well as potential Common Stock. For the year ended December 31, 2018 the assumed exercise of all dilutive instruments were anti-dilutive to continuing operations and not included in diluted net income per Common Share calculation.
On June 30, 2012, TAMCO, TFP and Tricadia entered into the Transition Services Agreement (TSA) in connection with the internalization of the management of the Company. Pursuant to the TSA, Tricadia currently provides the Company with office space. In prior years, Tricadia provided the Company with the services of Michael Barnes, Tiptree’s Executive Chairman, office
Payments under the TSA in the year ended December 31, 2018, 2017 and 2016 were not material.
See Note (16) Stockholders’ Equity for information on the settlement of an option with a related party.
As of March 11, 2019, the Company purchased and retired an aggregate of 1,472,730 shares of its Common Stock for $9.1 million in the aggregate in open market purchases and block purchases.