TIPTREE INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows: • Overview • Results of Operations • Non-GAAP Measures and Reconciliations • Liquidity and Capital Resources • Critical Accounting Policies and Estimates • Off-Balance Sheet Arrangements OVERVIEW Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Our principal operating subsidiary and primary source of earnings, Fortegra, along with its subsidiaries, is a leading provider of specialty insurance, underwriting warranty and service contract products and related service solutions. We also generate earnings from a diverse group of select investments that we refer to as Tiptree Capital, which includes our Mortgage segment and our other, non-insurance businesses and assets. We evaluate our performance primarily by the comparison of our shareholders’ long-term total return on capital, as measured by Adjusted Net Income, Adjusted EBITDA and growth in book value per share plus dividends. Our 2020 highlights include: Overall: • Net loss of $29.2 million was driven by unrealized losses on equities, primarily our holding of Invesque, partially offset by growth in insurance underwriting operations and growth in volume and margins in our mortgage business. • Adjusted net income was up 86.4% to $51.4 million, from $27.6 million in 2019, driven by improvement in insurance and mortgage operations. Adjusted return on average equity was 13.1%, as compared to 6.8% in 2019. • Book value per share of $10.90 as of December 31, 2020, when combined with dividends paid, decreased 4.0% from the prior year, driven by a combination of net losses, partially offset by share repurchases during the year. • In 2020, 2019 and 2018, we purchased and retired 2,384,286, 1,472,730 and 2,177,235 shares of our common stock, respectively, for $37.1 million in aggregate, at an average 42% discount to book value. • Cash and cash equivalents of $136.9 million as of December 31, 2020, of which $80.0 million resides outside our statutory insurance subsidiaries. Insurance: • Total revenues grew 8.8% to $691.1 million, from $635.1 million in 2019, driven primarily from growth in commercial, warranty and niche personal lines programs. • Earned premiums, net, service and administrative fees and ceding commissions grew a combined 11.6% to a total of $686.0 million in 2020, from $615.0 million in 2019, driven by the same factors that drove overall revenue growth. • Income before taxes of $26.9 million decreased 27.2% as compared to $37.0 million in 2019, primarily driven by net realized and unrealized losses on investments as compared to gains in the prior year. Return on average equity was 8.1% in 2020 as compared to 10.7% in 2019. • Adjusted net income increased 32.4% to $43.4 million, as compared to $32.8 million in 2019. Adjusted return on average equity was 15.2%, as compared to 12.3% in 2019 driven by the same growth factors that impacted revenues. • The combined ratio improved to 91.5%, as compared to 92.4% in 2019, driven by the shift in business mix toward warranty and commercial programs. • Gross written premiums and premium equivalents were $1,666.9 million for the year ended December 31, 2020, as compared to $1,297.0 million for the year ended December 31, 2019, up 28.5% as a result of growth in commercial and warranty programs, including from the acquisition of Smart AutoCare described below. • As of December 31, 2020, total cash and cash equivalents combined with total investments were $712.9 million, as compared to $565.9 million as of December 31, 2019. As of December 31, 2020, 82.6% of the portfolio invested in high-credit quality fixed income securities with an average S&P rating of AA and a weighted average duration of 2.4 years. • In January 2020, we acquired Smart AutoCare, a rapidly growing vehicle warranty and service contract administrator in the United States which contributed approximately $248.8 million of gross written premiums and 48 premium equivalents for the year ended December 31, 2020. The acquisition expanded our warranty distribution channels and dramatically increased our presence in the auto warranty sector. • On December 31, 2020, we acquired Sky Auto for approximately $25 million of cash consideration to further expand our presence in the auto warranty sector. The acquisition supplements our distribution with direct marketing capabilities. Mortgage: • Income before taxes of $31.1 million in 2020, as compared to $3.0 million in 2019, driven by growth in volumes and margins as interest rates dropped and home prices increased in 2020. • Adjusted net income improved for the year ended December 31, 2020 by $24.6 million, driven by the same factors that impacted net income. • Return on average equity of 50.9% and adjusted return on average equity of 60.5% in 2020, as compared to 7.1% and 12.0%, respectively, in 2019. Key Trends: Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions and GDP growth, market liquidity and volatility, consumer confidence, U.S. demographics, employment and wage growth, business confidence and investment, inflation, interest rates and spreads, the impact of the regulatory environment, and the other factors set forth in Part I, Item 1A in this Form 10-K. Generally, our businesses are positively affected by a healthy U.S. consumer, stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely, rising unemployment, volatile markets, rapidly rising interest rates, changing regulatory requirements and slowing business conditions can have a material adverse effect on our results of operations or financial condition. Our insurance business generally focuses on products which have low severity but high frequency loss experiences and are short duration. As a result, the business has historically generated significant fee-based revenues. In general, the types of products we offer tend to have limited aggregation risk and, thus, limited exposure to catastrophic and residual risk. We mitigate our underwriting risk through a combination of reinsurance and retrospective commission structures with our distribution partners and/or third-party reinsurers. To mitigate counterparty risk, we ensure our distribution partners’ captive reinsurance entities are over-collateralized with highly liquid investments, primarily cash and cash equivalents. Our insurance results primarily depend on our pricing, underwriting, risk retention and the accuracy of reserves, reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. While our insurance operations have historically maintained a relatively stable combined ratio which support steady earnings, our initiatives to change our business mix along with economic factors could generate different results than we have historically experienced. We believe there will continue to be growth opportunities to expand our warranty and specialty programs insurance business model to other niche products and markets. During 2020, the world has been impacted by the spread of the novel coronavirus (COVID-19). In March 2020, the World Health Organization deemed the outbreak of COVID-19 to be a pandemic, creating significant volatility, unpredictability and economic disruption. The markets the Company serves in the United States, UK and Europe have been impacted by weakened economic conditions, temporary business closures, shelter in place rules from governing bodies, reduced consumer spending and job losses, among other impacts of the COVID-19 pandemic. In response, the Company has taken various measures to ensure the availability of our products and services to our customers, the functioning of our critical support systems and steps to ensure the safety and security of our employees. The effects of COVID-19 were not significant to the Company’s operating businesses’ results for the year ended December 31, 2020. It is not possible to reliably estimate the length and severity of the developments related to the COVID-19 pandemic and the impact on the financial results and condition of the Company and its operating subsidiaries in future periods. Our insurance investment portfolio primarily serves as a source to pay claims and secondarily as a source of income for our operations. Our investments include fixed maturity securities, loans, credit investment funds, and equity securities. Many of our investments are held at fair value. Changes in fair value for loans, credit investment funds, and equity securities are reported quarterly as unrealized gains or losses in revenues and can be impacted by changes in interest rates, credit risk, or market risk, including specific company or industry factors. Our equity holdings are relatively concentrated. General equity market trends, along with company and industry specific factors, can impact the fair value of our holdings and can result in unrealized gains and losses affecting our results. Common shares of Invesque represent a significant asset on our consolidated balance sheet, both as part of our insurance investment portfolio and separately in Tiptree Capital. Our investment in Invesque, which operates in the seniors housing and 49 skilled nursing industries, is carried on our balance sheet at fair value. During 2020, the decline in Invesque’s stock price had a material impact on the carrying value of our investment. In response to the uncertainty in the industry, Invesque announced in early April that it was suspending dividends to conserve liquidity until the impact of COVID-19 on occupancy rates and its operations is better known. While Invesque has announced that they are continuing to collect rents on its properties at approximately 94% of contractual obligations through September 2020, any changes in their operations or ability to collect rents could continue to have a significant impact on their stock price and delay any potential restoration of their dividend. Decreases in the fair value of Invesque’s common stock and changes to its dividend payout levels had a significant impact on our results of operations, and could continue to do so should Invesque’s operations continue to be negatively affected as a result of the pandemic. The maritime transportation industry is highly competitive and fragmented. Demand for shipping capacity is a function of global economic conditions and the related demand for commodities, production and consumption patterns, and affected by events which interrupt production, trade routes, and consumption. The COVID-19 pandemic significantly impacted economic activity in China, the United States, Europe, and across developing markets, reducing demand for oil and other commodities. The sharp reduction in demand negatively affected charter rates for dry-bulk commodities, other than grains, in the first half of the year. The oversupply in oil markets initially led to significant demand for floating storage, increasing charter rates for product tankers. Both of these trends began to reverse in the second half of the year, with rates for dry bulk vessels improving and rates for product tankers softening. The shipping industry is cyclical with high volatility in charter hire rates and profitability, which can change rapidly. General global economic conditions, along with company and industry specific factors, are expected to continue to impact the fair value of our vessels and associated operating results. Our business can also be impacted in various ways by changes in interest rates, which can result in fluctuations in the fair value of our investments, revenues associated with floating rate investments, volume and revenues in our mortgage business and interest expense associated with floating rate debt used to fund many of our operations. Certain of our investments are LIBOR based, which has resulted in lower investment income during this period of extended low rates. However, low mortgage rates due to the Federal Reserve intervention in mortgage markets, combined with limitations on operating capacity in the mortgage industry due to the COVID-19 pandemic, and rising home prices in certain markets, has resulted in a combination of higher mortgage volumes and margins, which has been a benefit to our mortgage operations. The current low interest rate environment also benefits our interest cost on debt, although our corporate debt facility with Fortress is subject to a LIBOR floor, which limits further declines in our interest cost at the corporate level. There can be no assurance that these positive trends will continue, the reversal of which could have a materially negative impact to our results of operations, and which may only be partially mitigated by the benefit to our LIBOR based investments. A discussion of our performance for the year ended December 31, 2020 compared to the year ended December 31, 2019 and for the year ended December 31, 2019 compared to the year ended December 31, 2018 appears below. RESULTS OF OPERATIONS The following is a summary of our consolidated financial results for the year ended December 31, 2020, 2019 and 2018. 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. 50 Selected Key Metrics ($ in thousands, except per share information) For the Year Ended December 31, GAAP: 2020 2019 2018 Total revenues $ 810,301 $ 772,728 $ 625,826 Net income (loss) attributable to common stockholders $ (29,158) $ 18,361 $ 23,933 Diluted earnings per share $ (0.86) $ 0.50 $ 0.69 Cash dividends paid per common share $ 0.160 $ 0.155 $ 0.135 Return on average equity (6.4) % 5.0 % 7.5 % Non-GAAP: (1) Adjusted net income $ 51,431 $ 27,598 $ 22,283 Adjusted return on average equity 13.1 % 6.8 % 5.6 % Adjusted EBITDA $ 4,541 $ 68,085 $ 26,659 Book value per share $ 10.90 $ 11.52 $ 10.79 (1) For information relating to Adjusted net income, Adjusted return on average equity, Adjusted EBITDA and book value per share, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.” Revenues For the year ended December 31, 2020, revenues were $810.3 million, which increased $37.6 million, or 4.9% compared to the prior year, primarily due to a combination of growth in commercial and warranty programs in our insurance business and revenues associated with our mortgage business. Offsetting these increases were net realized and unrealized losses of $83.6 million for the year ended December 31, 2020, on Invesque and other equity securities. For the year ended December 31, 2019, revenues were $772.7 million, which increased $146.9 million, or 23.5%, over 2018. The increase was primarily driven by growth in earned premiums and service and administrative fees in our Insurance business, lower unrealized losses on Invesque, improvements in mortgage results, the inclusion of a full year of revenue from shipping operations, and the gain on sale of our CLO asset management business. The combination of unearned premiums and deferred revenues on the balance sheet grew by $410.4 million, or 48.3%, from December 31, 2019 to December 31, 2020 as a result of increased gross written premiums and premium equivalents, primarily in commercial and warranty programs, and the acquisition of Smart AutoCare. The table below provides a break down between net realized and unrealized gains and losses from Invesque and other securities which impacted our consolidated results on a pre-tax basis. Many of our investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these investments to be relatively volatile between periods. Our fixed income securities are primarily marked to market through AOCI in stockholders’ equity and do not impact net realized and unrealized gains and losses until they are sold. ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Net realized and unrealized gains (losses) (1) $ (1,817) $ 12,189 $ (9,167) Net realized and unrealized gains (losses) - Invesque $ (81,813) $ (1,200) $ (20,739) Discontinued operations (Care) (2) $ — $ — $ 57,484 (1) Excludes Invesque and Mortgage realized and unrealized gains and losses. The year ended December 31, 2019 includes a $7.6 million gain on sale of our CLO business. (2) Represents Care for the year ended December 31, 2018 including a $56.9 million pre-tax gain on sale. See Note (4) Dispositions, Assets and Liabilities Held for Sale and Discontinued Operations. Net Income (Loss) Attributable to common stockholders For the year ended December 31, 2020, net loss available to common stockholders was $29.2 million, a decrease of $47.5 million from net income of $18.4 million in 2019. The decrease for the year ended December 31, 2020 was primarily driven by the same factors that impacted revenues in the respective periods. For the year ended December 31, 2019, net income available to common stockholders was $18.4 million, a decrease of $5.6 million from 2018. The decrease was primarily driven by income from discontinued operations of $43.8 million in 2018, which included the gain on sale of Care. This non-recurring gain was offset by improved insurance operating performance, the realized gain on the sale of our CLO management business, and increased realized and unrealized gains on investments in 2019. 51 Adjusted net income & Adjusted return on average equity - Non-GAAP Adjusted net income for the year ended December 31, 2020 was $51.4 million, an increase of $23.8 million from 2019. The 2020 Adjusted return on average equity was 13.1%, as compared to 6.8% in 2019, with the increase in both metrics driven by improved performance in our insurance and mortgage operations. Adjusted net income for the year ended December 31, 2019 was $27.6 million, an increase of $5.3 million from 2018. The 2019 Adjusted return on average equity was 6.8% as compared to 5.6% in 2018, with the increase in both metrics driven by improvements in insurance and mortgage operations, combined with the inclusion of a full year of maritime transportation operations. Adjusted EBITDA - Non-GAAP Adjusted EBITDA for the year ended December 31, 2020 was $4.5 million, a decrease of $63.5 million from 2019, which was substantially driven by unrealized losses on Invesque and other equity securities. Adjusted EBITDA for the year ended December 31, 2019 was $68.1 million, an increase of $57.6 million from 2018. The key drivers of the increase in the year ended December 31, 2019 were the same factors that drove improved performance in Adjusted net income plus lower unrealized losses on investments in the insurance portfolio and on Invesque and the gain on sale of our CLO management business. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income. Book Value per share - Non-GAAP Total stockholders’ equity was $373.5 million as of December 31, 2020 compared to $411.4 million as of December 31, 2019. In 2020, Tiptree returned $19.3 million to shareholders through share repurchases and dividends paid. Book value per share for the period ended December 31, 2020 was $10.90, a decrease from book value per share of $11.52 as of December 31, 2019. The key drivers of the reduction from the prior year were losses per share and dividends paid of $0.160 per share. The decrease was partially offset by the purchase of 2,384,286 million shares at an average 43% discount to book value. Total stockholders’ equity was $411.4 million as of December 31, 2019 compared to $399.3 million as of December 31, 2018. The increase was primarily driven by net income, offset by share repurchases and dividends paid. In 2019, Tiptree returned $14.4 million to shareholders through share repurchases and dividends paid. Book value per share for the year ended December 31, 2019 was $11.52, an increase from book value per share of $10.79 as of December 31, 2018. The key drivers of the period-over-period impact were earnings per share and the purchase of 1.5 million shares at an average 45% discount to book value. Those increases were offset by dividends paid of $0.155 per share and officer compensation share issuances. Results by Segment We classify our business into two reportable segments, Insurance and Mortgage, with the remainder of our operations aggregated into Tiptree Capital - Other. Corporate activities include holding company interest expense, corporate employee compensation and benefits, and other expenses, including, but not limited to, public company expenses. For the year ended December 31, 2020, Mortgage has been broken out of Tiptree Capital as a reportable segment because for the year ended December 31, 2020 it met the quantitative threshold for disclosure. Prior year segments have been conformed to the current year presentation. The following table presents the components of total income (loss) before taxes. Income (loss) before taxes ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Insurance $ 26,948 $ 37,030 $ 14,172 Mortgage 31,102 2,959 335 Tiptree Capital - other (61,242) 23,391 (4,059) Corporate (35,660) (34,241) (30,244) Income (loss) before taxes from continuing operations $ (38,852) $ 29,139 $ (19,796) Income (loss) before taxes from discontinued operations $ — $ — $ 57,484 Adjusted net income - Non-GAAP (1) 52 ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Insurance $ 43,423 $ 32,806 $ 31,271 Mortgage 28,578 3,929 (53) Tiptree Capital - other 4,497 14,083 12,068 Corporate (25,067) (23,220) (21,003) Adjusted net income (1) $ 51,431 $ 27,598 $ 22,283 (1) For further information relating to Adjusted net income, including a reconciliation to GAAP income (loss) before taxes, see “—Non-GAAP Reconciliations.” Insurance Our principal operating subsidiary, Fortegra, is a specialty insurance program underwriter and service provider, which focuses on niche business mixes and fee-oriented services. Our combination of specialty insurance underwriting, warranty and service contract products, and related service solutions delivered through a vertically integrated business model creates a blend of traditional underwriting revenues, investment income and unregulated fee revenues. We are an agent-driven business model, distributing our products through independent insurance agents, consumer finance companies, online retailers, auto dealers, and regional big box retailers to deliver products that complement the consumer transaction. The following tables present the Insurance segment results for the year ended December 31, 2020 and 2019. Results of Operations - 2020 Compared to 2019 ($ in thousands) For the Year Ended December 31, 2020 2019 Change % Change Revenues: Earned premiums, net $ 477,991 $ 499,108 $ (21,117) (4.2) % Service and administrative fees 186,973 106,239 80,734 76.0 % Ceding commissions 21,101 9,608 11,493 119.6 % Net investment income 9,916 8,667 1,249 14.4 % Net realized and unrealized gains (losses) (11,944) 6,896 (18,840) NM% Other revenue 7,024 4,567 2,457 53.8 % Total revenues $ 691,061 $ 635,085 $ 55,976 8.8 % Expenses: Net losses and loss adjustment expenses 178,248 151,009 27,239 18.0 % Member benefit claims 58,650 19,672 38,978 198.1 % Commission expense 280,210 303,057 (22,847) (7.5) % Employee compensation and benefits 65,089 49,789 15,300 30.7 % Interest expense 15,487 14,766 721 4.9 % Depreciation and amortization 10,835 9,105 1,730 19.0 % Other expenses 55,594 50,657 4,937 9.7 % Total expenses $ 664,113 $ 598,055 $ 66,058 11.0 % Income (loss) before taxes (1) $ 26,948 $ 37,030 $ (10,082) (27.2) % Key Performance Metrics: Gross written premiums and premium equivalents $ 1,666,942 $ 1,297,042 $ 369,900 28.5 % Return on average equity 8.1 % 10.7 % Underwriting ratio 74.6 % 76.5 % Combined ratio 91.5 % 92.4 % Non-GAAP Financial Measures (2) : Adjusted net income $ 43,423 $ 32,806 $ 10,617 32.4 % Adjusted return on average equity 15.2 % 12.3 % (1) Net income was $22,821 and $27,160 for the years ended December 31, 2020 and 2019, respectively. (2) See “—Non-GAAP Reconciliations” for a discussion of non-GAAP financial measures. Revenues Earned Premiums, net 53 Earned premiums, net represent the earned portion of our gross written premiums, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements, as well as the earned portion of our assumed premiums. Our insurance policies generally have a term of six months to seven years depending on the underlying product and premiums are earned pro rata over the term of the policy. At the end of each reporting period, premiums written but not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Service and Administrative Fees Service and administrative fees represent the earned portion of our gross written premiums and premium equivalents, which is generated from non-insurance programs including warranty service contracts, motor club programs and other services offered as part of our vertically integrated product offerings. Such fees are typically positively correlated with transaction volume and are recognized as revenue when realized and earned. At the end of each reporting period, gross written premiums and premium equivalents written for service contracts not earned are classified as deferred revenue, which are earned in subsequent periods over the remaining term of the policy. Ceding Commissions and Other Revenue Ceding commissions and other revenue consists of commissions earned on policies written on behalf of third-party insurance companies with no exposure to the insured risk and certain fees earned in conjunction with underwriting policies. Other revenue also includes the interest income earned on our premium finance product offering. Net Investment Income We earn investment income on our portfolio of invested assets. Our invested assets are primarily comprised of fixed maturity securities, and may also include cash and cash equivalents and equity securities. The principal factors that influence net investment income are the size of our investment portfolio, the yield on that portfolio and expenses due to external investment managers. Net Realized and Unrealized Gains (Losses) Net realized and unrealized gains (losses) on investments are a function of the difference between the amount received by us on the sale of a security and the security’s cost-basis, as well as any “other-than-temporary” impairments and allowances for credit losses which are recognized in earnings. In addition, we carry our equity securities at fair value with unrealized gains and losses included in this line. Revenues - 2020 compared to 2019 For the year ended December 31, 2020, total revenues increased 8.8%, to $691.1 million, as compared to $635.1 million for the year ended December 31, 2019. Earned premiums, net of $478.0 million decreased $21.1 million, or 4.2%, driven by increased ceding of credit insurance and collateral protection premiums, and increased credit insurance cancellations driven by COVID-19 stimulus payments to consumers. This was partially offset by growth in commercial, warranty insurance and niche personal lines programs. Service and administration fees of $187.0 million increased by 76.0% driven by our acquisition of Smart AutoCare and growth in warranty insurance revenues. Excluding Smart AutoCare, service and administrative fees increased by 11.7% driven by growth in our other warranty programs. Ceding commissions of $21.1 million increased by $11.5 million, or 119.6%, driven by growth in commercial lines and higher fees associated with the increase in ceded premiums in credit insurance and collateral protection programs. Other revenues increased by $2.5 million, or 53.8%, driven by growth in our premium and warranty finance programs. For the year ended December 31, 2020, 31.1% of our revenues were derived from fees that are not solely dependent upon the underwriting performance of our insurance products, resulting in more diversified and consistent earnings. For the year ended December 31, 2020, 79.3% of our fee-based revenues were generated in non-regulated service companies, with the remainder in our regulated insurance companies. For the year ended December 31, 2020, net investment income was $9.9 million driven by interest income on fixed income securities and dividends on equity securities. Net realized and unrealized losses were $11.9 million, a decline of $18.8 54 million, driven by realized and unrealized losses on equity securities in the 2020 period, as compared to gains on equity securities and other investments in the 2019 period. Expenses Underwriting and fee expenses under insurance and warranty service contracts include losses and loss adjustment expenses, member benefit claims and commissions expense. Net Losses and Loss Adjustment Expenses Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded and the costs of administering claims for insurance lines. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Loss occurrences in our insurance products are characterized by low severity and high frequency. Factors affecting loss frequency and loss severity include the volume of underwritten contracts, changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements, and original pricing of the product for purposes of the loss ratio in relation to loss emergence over time. Losses and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Member Benefit Claims Member benefit claims represent the costs of services and replacement devices incurred in warranty and motor club service contracts. Member benefit claims represent claims paid on behalf of contract holders directly to third-party providers for roadside assistance and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement payment, provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when incurred. Commission Expense Commission expenses reflect commissions we pay retail agents, program administrators and managing general underwriters, net of ceding commissions we receive on business ceded under certain reinsurance contracts. In addition, commission expenses include premium-related taxes. Commission expenses related to each policy we write are deferred and amortized to expense in proportion to the premium earned over the policy life. Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to agents, distributors and retailers selling our products, including credit insurance policies, warranty service contracts and motor club memberships. When claims increase, in most cases our distribution partners bear the risk through a reduction in their retrospective commissions. Commission rates are, in many cases, set by state regulators, such as in credit and collateral protection programs and are also impacted by market conditions and the retention levels of our distribution partners. Operating and Other Expenses Operating and other expenses represent the general and administrative expenses of our insurance operations including employee compensation and benefits and other expenses, including, technology costs, office rent, and professional services fees, such as legal, accounting and actuarial services. Interest Expense Interest expense consists primarily of interest expense on our corporate revolving debt, our Notes, our preferred trust securities due June 15, 2037 (“Preferred Trust Securities”) and asset-based debt for our premium finance and warranty service contract financing, which is non-recourse to Fortegra. Depreciation and Amortization 55 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 – 2020 compared to 2019 For the year ended December 31, 2020, net losses and loss adjustment expenses were $178.2 million, member benefit claims were $58.7 million and commission expense was $280.2 million, as compared to $151.0 million, $19.7 million and $303.1 million, respectively, for the year ended December 31, 2019. The increases in net losses and loss adjustment expenses of $27.2 million, or 18.0%, and member benefit claims of $39.0 million, or 198.1%, were driven by growth in our U.S. Insurance business and the acquisition of Smart AutoCare. Commission expense declined by $22.8 million, or 7.5%, driven by a decline in retrospective commission payments, largely offsetting the increase in net losses and loss adjustment expense. For the year ended December 31, 2020, employee compensation and benefits were $65.1 million and other expenses were $55.6 million, as compared to $49.8 million and $50.7 million, respectively, for the year ended December 31, 2019. Employee compensation and benefits increased by $15.3 million, or 30.7% driven by the acquisition of Smart AutoCare and investments in human capital associated with our growth objectives in admitted, E&S and warranty programs. Other expenses increased by $4.9 million, or 9.7%, driven by increases in acquisition related expenses, and premium taxes, which grew in line with premiums. Included in other expenses were $3.4 million and $2.0 million for the years ended December 31, 2020 and 2019, respectively, related to non-recurring professional fees associated with investment banking and legal expenses for our acquisitions of Smart AutoCare and Sky Auto. For the year ended December 31, 2020, interest expense was $15.5 million as compared to $14.8 million for the year ended December 31, 2019. The increase in interest expense of $0.7 million, or 4.9%, was driven by higher outstanding asset-based debt for our premium and warranty finance programs, partially offset by decreases in LIBOR over 2020. For the year ended December 31, 2020, depreciation and amortization expense was $10.8 million, including $9.2 million of intangible amortization related to purchase accounting associated with the acquisitions of both Smart AutoCare and Fortegra, as compared to $9.1 million and $7.5 million of intangible amortization from purchase accounting related to Fortegra, respectively, for 2019. 56 The following tables present the Insurance segment results for the year ended December 31, 2019 and 2018. Results of Operations - 2019 Compared to 2018 ($ in thousands) For the Year Ended December 31, 2019 2018 Change % Change Revenues: Earned premiums, net $ 499,108 $ 427,837 $ 71,271 16.7 % Service and administrative fees 106,239 102,315 3,924 3.8 % Ceding commissions 9,608 9,651 (43) (0.4) % Net investment income 8,667 13,876 (5,209) (37.5) % Net realized and unrealized gains (losses) 6,896 (11,664) 18,560 NM% Other revenue 4,567 2,571 1,996 77.6 % Total revenues $ 635,085 $ 544,586 $ 90,499 16.6 % Expenses: Net losses and loss adjustment expenses 151,009 134,852 16,157 12.0 % Member benefit claims 19,672 17,243 2,429 14.1 % Commission expense 303,057 262,460 40,597 15.5 % Employee compensation and benefits 49,789 45,536 4,253 9.3 % Interest expense 14,766 18,202 (3,436) (18.9) % Depreciation and amortization 9,105 10,779 (1,674) (15.5) % Other expenses 50,657 41,342 9,315 22.5 % Total expenses $ 598,055 $ 530,414 $ 67,641 12.8 % Income (loss) before taxes (1) $ 37,030 $ 14,172 $ 22,858 161.3 % Key Performance Metrics: Gross written premiums and premium equivalents $ 1,297,042 $ 1,096,464 $ 200,578 18.3 % Return on average equity 10.7 % 4.0 % Underwriting ratio 76.5 % 76.4 % Combined ratio 92.4 % 92.2 % Non-GAAP Financial Measures (2) : Adjusted net income $ 32,806 $ 31,271 $ 1,535 4.9 % Adjusted return on average equity 12.3 % 12.3 % (1) Net income was $27,160 and $9,600 for the year ended December 31, 2019 and 2018, respectively. (2) See “—Non-GAAP Reconciliations” for a discussion of non-GAAP financial measures. Revenues For the year ended December 31, 2019, total revenues increased 16.6%, to $635.1 million, as compared to $544.6 million for the year ended December 31, 2018. Earned premiums, net, increased $71.3 million, or 16.7%, driven by growth in commercial, warranty and collateral protection programs. Service and administration fees increased by 3.8% driven by growth in warranty programs. For the year ended December 31, 2019, 19.4% of our revenues were derived from fees that are not solely dependent upon the underwriting performance of our insurance products, resulting in more diversified and consistent earnings. For the year ended December 31, 2019, 77.7% of our fee-based revenues were generated in non-regulated service companies, with the remainder in our regulated insurance companies. Revenues attributable to investing activities consisted of $8.7 million of investment income and $6.9 million of net realized and unrealized gains for the year ended December 31, 2019, as compared to $13.9 million of investment income and $11.7 million of net realized and unrealized losses, respectively, for the year ended December 31, 2018. The decrease in investment income of $5.2 million, or 37.5%, was driven by lower interest rates and higher than average cash balances, partially offset by higher average balance of investments during the year ended December 31, 2019. The improvement in net realized and unrealized gains and losses period over period was driven by current period gains on equity securities as compared to losses in 2018. 57 Expenses For the year ended December 31, 2019, net losses and loss adjustment expenses and member benefit claims, totaled $170.7 million, as compared to $152.1 million for the year ended December 31, 2018. The increase was driven by growth in our U.S. Insurance block of business including increases in commercial, collateral protection and warranty programs. Commission expense grew by $40.6 million, or 15.5%, driven by the same growth factors that impacted net losses and loss adjustment expense and member benefit claims. For the year ended December 31, 2019, employee compensation and benefits were $49.8 million and other expenses were $50.7 million, as compared to $45.5 million and $41.3 million, respectively, for the year ended December 31, 2018. Employee compensation and benefits increased by $4.3 million, or 9.3% driven by investments in human capital associated with our growth objectives in commercial and warranty programs. Other expenses increased by $9.3 million, or 22.5%, driven by increases in premium taxes, which grew in line with premiums. For the year ended December 31, 2019, interest expense was $14.8 million, as compared to $18.2 million for the year ended December 31, 2018. The decrease in interest expense was driven primarily by decreases in LIBOR over 2019. For the year ended December 31, 2019, depreciation and amortization expense was $9.1 million, including $7.5 million of intangible amortization related to purchase accounting associated with the acquisition of Fortegra, as compared to $10.8 million and $9.1 million of intangible amortization, respectively, for 2018. Key Performance Metrics We discuss certain key performance metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance. Gross Written Premiums and Premium Equivalents Gross written premiums and premium equivalents represent total gross written premiums from insurance policies and warranty service contracts issued, as well as premium finance volumes during a reporting period. They represent the volume of insurance policies written or assumed and warranty service contracts issued during a specific period of time without reduction for policy acquisition costs, reinsurance costs or other deductions. Gross written premiums is a volume measure commonly used in the insurance industry to compare sales performance by period. Premium equivalents are used to compare sales performance of warranty service and administrative contract volumes to gross written premiums. Investors also use these measures to compare sales growth among comparable companies, while management uses these measures to evaluate the relative performance of various sales channels. The below table shows gross written premiums and premium equivalents by business mix for the years ended December 31, 2020, 2019 and 2018. Year Ended December 31, ($ in thousands) Gross Written Premiums and Premium Equivalents 2020 2019 2018 U.S. Insurance $ 1,063,743 $ 965,544 $ 886,793 U.S. Warranty Solutions 549,983 297,289 208,854 Europe Warranty Solutions 53,216 34,209 817 Total $ 1,666,942 $ 1,297,042 $ 1,096,464 Total gross written premiums and premium equivalents for the year ended December 31, 2020 were $1.7 billion as compared to $1.3 billion in 2019. For the year ended December 31, 2020, U.S. Insurance increased by $98.2 million, or 10.2%, driven by growth in commercial, warranty insurance and niche personal lines, which were partially offset by increased cancellations from the impact of increased stimulus related to COVID-19 in credit insurance and collateral protection programs. Our E&S insurance subsidiary, Fortegra Specialty Insurance Company, was formed October 1, 2020, and we believe our E&S lines will drive significant growth. For the year ended December 31, 2020, U.S. Warranty Solutions increased by $252.7 million, or 85.0%, driven primarily by the acquisition of Smart AutoCare and growth in premium and warranty finance volumes. Europe Warranty Solutions increased by $19.0 million, or 55.6% driven by growth in auto and consumer goods warranty programs. 58 Fortegra has continued to expand product lines to increase gross written premiums and premium equivalents, including the acquisitions of Smart AutoCare (January 2020) and Sky Auto (December 2020). We believe the continued growth in warranty and admitted and E&S commercial programs, in addition to the acquisition of Smart AutoCare and Sky Auto, will result in increased gross written premiums and premium equivalents, and therefore growth in unearned premiums and deferred revenues on the balance sheet. The growth in gross written premiums and premium equivalents, combined with higher retention in select products, has resulted in an increase of $410.4 million, or 48.3%, in unearned premiums and deferred revenue on the balance sheet. As of December 31, 2020, unearned premiums and deferred revenues were $1,259.7 million, as compared to $849.3 million as of December 31, 2019. Total gross written premiums and premium equivalents for the year ended December 31, 2019 were $1.3 billion as compared to $1.1 billion in 2018. U.S. Insurance programs increased by $78.7 million for the year ended December 31, 2019, or 8.9%, driven by growth in commercial, warranty insurance and collateral protection lines. U.S. Warranty Solutions increased by $88.4 million for the year ended December 31, 2019, or 42.3%, driven primarily by growth in auto warranty and premium and warranty finance volumes. Europe Warranty Solutions increased by $33.4 million, as we expanded into Europe in 2019. The growth in gross written premiums and premium equivalents, combined with higher retention in select products, has resulted in an increase of $175.7 million, or 26.1%, in unearned premiums and deferred revenue on the balance sheet. As of December 31, 2019, unearned premiums and deferred revenues were $849.3 million, as compared to $673.6 million as of December 31, 2018. Combined Ratio, Underwriting Ratio and Expense Ratio Combined ratio is an operating measure, which equals the sum of the underwriting ratio and the expense ratio. Underwriting ratio is the ratio of the GAAP line items net losses and loss adjustment expenses, member benefit claims and commission expense to earned premiums, net, service and administrative fees and ceding commissions and other revenue. Expense ratio is the ratio of the GAAP line items employee compensation and benefits and other underwriting, general and administrative expenses to earned premiums, net, service and administrative fees and ceding commissions and other revenue. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. These ratios are commonly used in the insurance industry as a measure of underwriting profitability, excluding earnings on the insurance portfolio. Investors commonly use these measures to compare underwriting performance among companies separate from the performance of the investment portfolio. Management uses these measures to compare the profitability of various products we underwrite as well as profitability among programs of our various agents and sales channels. Our focus on underwriting expertise, A.I. driven lead generation, and technology-enhanced administration improves productivity, lowers administrative costs and results in agent relationships sustained over the long term. The combined ratio was 91.5% for the year ended December 31, 2020, which consisted of an underwriting ratio of 74.6% and an expense ratio of 16.9%, as compared to 92.4%, 76.5% and 15.9%, respectively, for the year ended December 31, 2019. The improvement in the combined ratio and underwriting ratio year over year is primarily due to the shift in business mix as the result of the growth in commercial and warranty programs, while the increase in the expense ratio is primarily driven by the impact of purchase accounting on the recognition of revenues and expenses associated with our acquisition of Smart AutoCare. The combined ratio for December 31, 2019 was 92.4% compared to 92.2% for 2018, reflecting the consistency of our underwriting profitability from period to period. 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 8.1% for the year ended December 31, 2020, as compared to 10.7%, for the year ended December 31, 2019, with the decline driven by realized and unrealized losses in the 2020 period, as compared to realized and unrealized gains in the 2019 period, partially offset by improvement in revenues associated with underwriting activities. 59 Return on average equity was 10.7% for the year ended December 31, 2019, as compared to 4.0%, for the year ended December 31, 2018, with the improvement driven by realized and unrealized gains in the 2019 period, as compared to realized and unrealized losses in the 2018 period, combined with overall improvement in underwriting operations. Non-GAAP Financial Measures Underwriting and Fee Revenues and Underwriting and Fee Margin - Non-GAAP (1) In order to better explain to investors the underwriting performance of the Company’s programs and the respective retentions between the Company and its agents and reinsurance partners, we use the non-GAAP metrics – underwriting and fee revenues and underwriting and fee margin. We generally manage our exposure to the risks we underwrite using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our agents (e.g., commissions paid are adjusted based on the actual underlying losses incurred), which mitigate our risk. Period-over-period comparisons of revenues and expenses are often impacted by the agents and their PORC’s choice as to their risk retention appetite, specifically earned premiums, net, service and administration fees, ceding commissions, and other revenue, all components of revenue, and losses and loss adjustment expenses, member benefit claims, and commissions paid to our agents and reinsurers. Generally, when losses are incurred, the risk which is retained by our agents and reinsurers is reflected in a reduction in commissions paid. Underwriting and fee revenues represents total revenues excluding net investment income, net realized and unrealized gains (losses). See “—Non-GAAP Reconciliations” for a reconciliation of underwriting and fee revenues to total revenues in accordance with GAAP. Underwriting and fee margin represents income before taxes excluding net investment income, net realized and unrealized gains (losses), employee compensation and benefits, other expenses, interest expense and depreciation and amortization. We deliver our products and services on a vertically integrated basis to our agents. As such, underwriting and fee margin exclude general and administrative expenses, interest income, depreciation and amortization and other corporate expenses, including income taxes, as these corporate expenses support our vertically integrated delivery model and are not specifically supporting any individual business line. See “—Non-GAAP Reconciliations” for a reconciliation of underwriting and fee margin to total revenues in accordance with GAAP. The below table shows underwriting and fee revenues and underwriting and fee margin by business mix for the years ended December 31, 2020, 2019 and 2018. Year Ended December 31, ($ in thousands) Underwriting and Fee Revenues (1) Underwriting and Fee Margin (1) 2020 2019 2018 2020 2019 2018 U.S. Insurance $ 499,712 $ 519,086 $ 448,453 $ 98,842 $ 99,025 $ 79,898 U.S. Warranty Solutions 170,726 93,598 93,672 69,642 43,945 47,684 Europe Warranty Solutions 22,651 6,834 233 7,497 2,808 219 Total $ 693,089 $ 619,518 $ 542,358 $ 175,981 $ 145,778 $ 127,801 (1) For further information relating to the Company’s underwriting and fee revenues and underwriting and fee margin, including a reconciliation to GAAP financials , see “—Non-GAAP Reconciliations.” Underwriting and fee revenues were $693.1 million for the year ended December 31, 2020, as compared to $619.5 million, for the year ended December 31, 2019. Of the total underwriting and fee revenues for the year ended December 31, 2020, the drivers by business mix were U.S. Insurance $499.7 million, U.S. Warranty Solutions $170.7 million and Europe Warranty Solutions $22.7 million, as compared to $519.1 million, $93.6 million and $6.8 million, respectively, for the year ended December 31, 2019. Total underwriting and fee revenues were up $73.6 million, or 11.9% driven by growth in U.S. and Europe Warranty Solutions, partially offset by a decline in U.S. Insurance. The decrease in U.S. Insurance was $19.4 million, or 3.7%, driven by increased ceded premiums and increased cancellations from the impacts of increased stimulus related to COVID-19 in our credit insurance and collateral protection programs. This was partially offset by growth in commercial, warranty insurance and niche personal lines programs. The increase in U.S. Warranty Solutions was $77.1 million, or 82.4%, driven by the acquisition of Smart AutoCare and growth in auto, consumer goods, and premium and warranty finance programs. Europe Warranty Solutions increased by $15.8 million, or 231.4%, driven by growth in auto and consumer goods 60 warranty programs. Underwriting and fee margin was $176.0 million for the year ended December 31, 2020 as compared to $145.8 million for the year ended December 31, 2019. Total underwriting and fee margin was up $30.2 million, or 20.7%, driven by growth in U.S. and Europe Warranty Solutions. U.S. Insurance was flat to prior year as the growth in commercial, warranty insurance, and niche personal lines offset the impacts of COVID-19 on our credit insurance and collateral protection lines. U.S. Warranty Solutions increased by $25.7 million, or 58.5%, driven by the acquisition of Smart AutoCare and growth in auto, consumer goods, and premium and warranty finance programs. Europe Warranty Solutions increased by $4.7 million, or 167.0%, driven by growth in auto and consumer goods warranty programs in those markets. Underwriting and fee revenues were $619.5 million for the year ended December 31, 2019, as compared to $542.4 million for the year ended December 31, 2018. Total underwriting and fee revenues were up $77.1 million, or 14.2% driven by growth in U.S. Insurance and Europe Warranty Solutions. Underwriting and fee margin was $145.8 million for the year ended December 31, 2019 as compared to $127.8 million for the year ended December 31, 2018. Total underwriting and fee margin was up $17.9 million, or 14.0%, in 2019 as compared to 2018, driven by growth in U.S. Insurance and Europe Warranty Solutions. 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 year ended December 31, 2020, adjusted net income and adjusted return on average equity were $43.4 million and 15.2%, respectively, as compared to $32.8 million and 12.3%, respectively, for the year ended December 31, 2019. The improvement in both of these metrics was driven by the growth in commercial, warranty and niche personal lines. For the year ended December 31, 2019, adjusted net income and adjusted return on average equity were $32.8 million and 12.3%, respectively, as compared to $31.3 million and 12.3%, respectively, for the year ended December 31, 2018. The stability in both of these metrics demonstrates our ability to continue to underwrite our programs profitably. 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. Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments Our insurance investment portfolio includes investments held in statutory insurance companies and in unregulated entities. The portfolios held in statutory insurance companies are subject to different regulatory considerations, including with respect to types of assets, concentration limits, affiliate transactions and the use of leverage. Our investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations. As such, volatility from realized and unrealized gains and losses may impact period-over-period performance. Unrealized gains and losses on equity securities and loans held at fair value impact current period net income, while unrealized gains and losses on Available for Sale (“AFS”) securities impact AOCI. Our net investment income includes interest and dividends, net of investment expenses, on our invested assets. We report net realized and unrealized gains and losses on our investments separately from our net investment income. For the year ended December 31, 2020, net investment income was $9.9 million driven by interest income on fixed income securities and dividends on equity securities. Net realized and unrealized losses were $11.9 million, a decline of $18.8 61 million, driven by realized and unrealized losses on equity securities in the 2020 period (primarily Invesque), as compared to gains on equity securities and other investments in the 2019 period. For the year ended December 31, 2019, net investment income was $8.7 million driven by interest income on fixed income securities and dividends on equity securities. Net realized and unrealized gains were $6.9 million, an increase of $18.6 million, driven by realized and unrealized gains on equity securities and other investments carried at fair value in the 2019 period, as compared to losses on equity securities and other investments in the 2018 period. Tiptree Capital Tiptree Capital consists of our Mortgage segment, which includes the operating results of Reliance, our mortgage business, and Tiptree Capital - Other, which consists of our other non-insurance operating businesses and investments. As of December 31, 2020, Tiptree Capital - Other includes our Invesque shares, maritime transportation operations, and the mortgage operations of Luxury, which is held for sale. Mortgage Through our Mortgage operating subsidiary, Reliance, we originate, sell, securitize and service one-to-four-family, residential mortgage loans, comprised of conforming mortgage loans, Federal Housing Administration (“FHA”), Veterans Administration (“VA”), United States Department of Agriculture (“USDA”), and to a lesser extent, non-agency jumbo prime. We are an approved seller/servicer for Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”). The Company is also an approved issuer and servicer for Government National Mortgage Association (“GNMA” or “Ginnie Mae”). The Company originates residential mortgage loans through its retail distribution channel (directly to consumers), with branches in 37 states as of the year ended December 31, 2020. The following tables present the Mortgage segment results for the year ended December 31, 2020, 2019 and 2018. Results of Operations ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Revenues: Net realized and unrealized gains (losses) $ 96,590 $ 53,815 $ 42,397 Other revenue 15,575 12,306 9,227 Total revenues $ 112,165 $ 66,121 $ 51,624 Expenses: Employee compensation and benefits 58,226 42,411 34,765 Interest expense 1,188 1,790 1,260 Depreciation and amortization 956 809 544 Other expenses 20,693 18,152 14,720 Total expenses $ 81,063 $ 63,162 $ 51,289 Income (loss) before taxes $ 31,102 $ 2,959 $ 335 Key Performance Metrics: Return on average equity 50.9 % 7.1 % 1.4 % Non-GAAP Financial Measures (1) : Adjusted net income $ 28,578 $ 3,929 $ (53) Adjusted return on average equity 60.5 % 12.0 % (0.2) % (1) See “—Non-GAAP Reconciliations” for a discussion of non-GAAP financial measures. Revenues Net Realized and Unrealized Gains (Losses) Net realized and unrealized gains (losses) include gains on sale of mortgage loans and the fair value adjustment in mortgage servicing rights. Gains on the sale of mortgage loans represent the difference between the selling price and carrying value of loans sold and are recognized upon settlement. Such gains also include the changes in fair value of loans held for sale and 62 loan-related hedges and derivatives. We transfer the risk of loss or default to the loan purchaser, however, in some cases we are required to indemnify purchasers for losses related to non-compliance with borrowers’ creditworthiness and collateral requirements. Because of this, we recognize gains on sale net of required indemnification and premium recapture reserves. The fair value adjustment on mortgage servicing rights represents fair value adjustments considering estimated prepayments and other factors associated with changes in interest rates, plus actual run-off in the servicing portfolio. We report these adjustments separate from servicing income and servicing expense. Other Revenue Other revenue includes loan origination fees, interest income, and mortgage servicing income. Loan origination fees are earned as mortgage loans are funded. Servicing fees are earned over the life of the loan. Interest income includes interest earned on loans held for sale and interest income on bank balances and short-term investments. Revenues – 2020 as compared to 2019 and 2019 as compared to 2018 For the year ended December 31, 2020, we funded $1,658.1 million of loans, compared to $1,142.6 million for 2019, an increase of $515.5 million, or 45.1%. The increase in origination volumes is primarily attributed to the lower interest rate environment and rising home prices in 2020 compared to 2019. Gain on sale margins also increased to 6.32% for the year ended December 31, 2020, up 165 basis points from 4.67% for the year ended December 31, 2019. For the year ended December 31, 2019, we funded $1,142.6 million of loans, compared to $918.0 million for 2018, an increase of $224.6 million or 24.5%. The increase in volumes was partly offset by gain on sale margins, which decreased to 4.67% for the year ended December 31, 2019 from 4.86% for the year ended December 31, 2018. Net realized and unrealized gains (losses) for the year ended December 31, 2020 were $96.6 million, compared to $53.8 million for 2019, an increase of $42.8 million or 79.5%. The primary drivers of increased gains on sale were increases in origination volumes and gains on sale margins, partially offset by negative fair value adjustments in our mortgage servicing rights of $4.0 million as interest rates declined. Net realized and unrealized gains (losses) for the year ended December 31, 2019 were $53.8 million, compared to $42.4 million for 2018, an increase of $11.4 million or 26.9%. The increase was driven primarily by increased mortgage origination volumes, partially offset by negative fair value adjustments in our mortgage servicing rights of $2.1 million. Other revenue for the year ended December 31, 2020 was $15.6 million, compared to $12.3 million for 2019, an increase of $3.3 million or 26.8% driven by increased loan origination volumes and servicing fees. Other revenue for the year ended December 31, 2019 was $12.3 million, compared to $9.2 million for 2018. The increase of $3.1 million or 33.7% was also due to by increased loan origination volumes and servicing fees. Expenses Employee Compensation and Benefits Employee compensation and benefits includes salaries, commissions, benefits, bonuses, other incentive compensation and related taxes for employees. Commissions expense for sales staff generally varies with loan origination volumes. Interest Expense Interest expense represents borrowing costs under our warehouse and other credit facilities used primarily to fund loan originations. Amortization of deferred financing costs, including commitment fees, is included in interest expense. Depreciation and Amortization Depreciation expense is mainly associated with furniture, fixtures and equipment while amortization expense is primarily associated with a trade name and internally developed software. Other Expenses Other expenses include loan origination expenses, namely, leads, appraisals, credit reporting and licensing fees, general and administrative expenses, including office rent, insurance, legal, consulting and payroll processing expenses, and servicing expense. 63 Expenses – 2020 as compared to 2019 and 2019 as compared to 2018 For the year ended December 31, 2020, employee compensation and benefits was $58.2 million, compared to $42.4 million in 2019, an increase of $15.8 million or 37.3%. This increase was driven primarily by increased commissions on higher origination volumes, in addition to increased incentive compensation. Employee compensation and benefits was $42.4 million for the year ended December 31, 2019 compared to $34.8 million in 2018, an increase of $7.6 million or 21.8%. Higher origination volumes contributed to higher commissions and incentive compensation expense in 2019. For the year ended December 31, 2020, interest expense was $1.2 million compared to $1.8 million in 2019, a decrease of $0.6 million or 33.3%. This is due to the reduced interest rate environment decreasing our cost of funds, partially offset by higher loan volumes. For the year ended December 31, 2019, interest expense was $1.8 million compared to $1.3 million in 2018, an increase of $0.5 million. The increase in interest expense was due to a higher debt balance associated with funding growth in loan originations. For the year ended December 31, 2020, depreciation and amortization expense was $1.0 million compared to $0.8 million for 2019, up $0.2 million, due to purchases of fixed assets. For the year ended December 31, 2019, depreciation and amortization expense was $0.8 million compared to $0.5 million for 2018, up $0.3 million due to purchases of fixed assets and the deployment of a new company-wide phone system. For the year ended December 31, 2020, other expenses were $20.7 million compared to $18.2 million in 2019. The $2.5 million increase was driven by increased loan origination expenses, including marketing costs and rent. Other expenses for the year ended December 31, 2019 were $18.2 million compared to $14.7 million in 2018 with the increase driven by higher loan origination expenses, including marketing costs, increased rent and office expenses. Income (loss) before taxes Income before taxes for the year ended December 31, 2020 was $31.1 million, compared to $3.0 million in 2019. The primary driver of the increase was the increase in revenue noted above, partially offset by higher compensation and other costs associated with the improved financial performance Income before taxes for the year ended December 31, 2019 was $3.0 million, compared to $0.3 million in 2018. The primary driver of the increase was the increase in revenue noted above, offset by higher compensation and other costs associated with higher mortgage originations. Tiptree Capital - Other The following tables present a summary of Tiptree Capital - Other results for the year ended December 31, 2020, 2019 and 2018. Results of Operations Year Ended December 31, ($ in thousands) Total revenue Income (loss) before taxes 2020 2019 2018 2020 2019 2018 Senior living (Invesque) $ (65,123) $ 9,140 $ (7,910) $ (65,123) $ 9,140 $ (7,910) Maritime transportation 22,697 16,591 3,811 1,493 1,610 (2,888) Other (1) 49,501 45,791 33,715 2,388 12,641 6,739 Total $ 7,075 $ 71,522 $ 29,616 $ (61,242) $ 23,391 $ (4,059) (1) Includes our held for sale mortgage originator (Luxury), asset management, and certain intercompany elimination transactions. Revenues Tiptree Capital - Other earns revenues from the following sources: net interest income; revenues on our held for sale mortgage originator; asset management fees from CLOs under management (prior to the sale of our Telos asset management business which occurred on April 26, 2019); distributions and realized and unrealized gains on the Company’s investment holdings (primarily Invesque); and charter revenue from vessels within our maritime transportation operations. Revenues for the year ended December 31, 2020 were $7.1 million, compared to $71.5 million for 2019. The primary driver of revenues for the year ended December 31, 2020 were unrealized losses of $67.7 million on Invesque and the suspension of its monthly dividend payment, offset by a full year of tanker operations in our maritime transportation business and growth in mortgage gain on sale revenues in our held for sale mortgage originator. 64 Revenues for the year ended December 31, 2019 were $71.5 million, an increase of $41.9 million, primarily driven by a full year of dry-bulk shipping operations and an overall increase in charter rates in our maritime transportation business, lower unrealized losses on our investment in Invesque, and the gain on sale of our CLO business. For the year ended December 31, 2019, we received $10.1 million of dividends from Invesque and incurred $1.0 million of unrealized losses compared to $9.2 million of dividends and $17.1 million of unrealized losses in the 2018 period. Income (loss) before taxes The loss before taxes from Tiptree Capital - Other for the year ended December 31, 2020 was $61.2 million, compared to income of $23.4 million in 2019. The primary drivers of the decrease were unrealized losses and discontinued dividend income on our investment in Invesque. Non-recurrence of the gain on sale of the management contracts and related assets for the CLOs managed in our asset management business in the 2019 period also drove the 2020 decline in income before taxes. Income (loss) before taxes from continuing operations for the year ended December 31, 2019 was $23.4 million, compared to a loss of $4.1 million in the 2018 period. The primary driver of improvement in income (loss) before taxes was the gain on sale of the management contracts and related assets for the CLOs managed in our asset management business and lower unrealized losses on Invesque. Income (loss) before taxes from our maritime transportation operations improved by $3.9 million primarily driven by a full year of dry-bulk operations, an overall increase in charter rates, and non-recurring start-up expenses impacting the 2018 period. Results from Discontinued Operations Discontinued operations include the results from Care, previously reported in the Senior Living segment. In the year ended December 31, 2018, income (loss) before taxes was $57.5 million, which included a $56.9 million gain on sale of Care. Adjusted net income - Non-GAAP (1) ($ in thousands) Year Ended December 31, 2020 2019 2018 Senior living (Invesque) (1) $ 2,001 $ 8,004 $ 7,129 Maritime transportation 2,291 1,695 (1,519) Other 205 4,384 6,458 Total $ 4,497 $ 14,083 $ 12,068 (1) See “—Non-GAAP Reconciliations” for a discussion of non-GAAP financial measures. Adjusted net income decreased to $4.5 million for the year ended December 31, 2020 compared to $14.1 million in 2019. The key driver of the decrease was the dividend income on our investment in Invesque was discontinued in April 2020. Adjusted net income increased to $14.1 million for the year ended December 31, 2019 compared to $12.1 million in 2018. The key driver of the adjusted net income increases was a full year of operations in our maritime transportation business, partially offset by the management fees due to the sale of our CLO business. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income. Corporate The following tables present a summary of corporate results for the year ended December 31, 2020, 2019 and 2018. Results of Operations ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Employee compensation and benefits $ 7,718 $ 6,542 $ 7,248 Employee incentive compensation expense 7,477 9,323 7,471 Interest expense 10,016 6,292 5,011 Depreciation and amortization 807 652 248 Other expenses 9,642 11,432 10,266 Total expenses $ 35,660 $ 34,241 $ 30,244 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, 65 legal and accounting staff. Other expenses primarily consisted of audit and professional fees, insurance, office rent and other related expenses. Employee compensation and benefits, including incentive compensation expense, was $15.2 million for the year ended December 31, 2020 compared to $15.9 million for 2019, driven primarily by a reduction in employee incentive compensation. Interest expense for the year ended December 31, 2020 was $10.0 million, up from $6.3 million in 2019, driven by a higher average outstanding balance during the 2020 periods associated with our acquisition of Smart AutoCare in January 2020. As of December 31, 2020, the outstanding borrowing was $120.3 million, compared to $68.2 million at December 31, 2019. Employee compensation and benefits, including incentive compensation expense, increased $1.2 million for the year ended December 31, 2019 compared to 2018, driven primarily by employee incentive compensation. Interest expense for the year ended December 31, 2019 was $6.3 million, an increase of $1.3 million, driven by higher LIBOR rates during 2019. As of December 31, 2019, the outstanding borrowing was $68.2 million, compared to $72.1 million at December 31, 2018. Provision for Income Taxes Provision for income taxes - Total Operations The total benefit for income taxes of $13.6 million for the year ended December 31, 2020, total provision for income taxes of $9.0 million for the year ended December 31, 2019 and total provision for income taxes of $7.8 million for the year ended December 31, 2018 are reflected as components of net income (loss). For the year ended December 31, 2020, the Company’s effective tax rate was equal to 35.1%. The effective rate for the year ended December 31, 2020 was higher than the U.S. federal statutory income tax rate of 21.0%, primarily from the impact of expected refunds arising from the CARES Act. For the year ended December 31, 2019, the Company’s effective tax rate was equal to 31.0%. The effective rate for the year ended December 31, 2019 was higher than the U.S. federal statutory income tax rate of 21%, primarily from the impact of the non-recurring return-to-provision, as well as ongoing state and foreign taxes. For the year ended December 31, 2018, the Company’s effective tax rate was equal to 20.6%. The effective rate for the year ended December 31, 2018 was lower than the statutory rate of 21.0% primarily due to the dividends received deduction and other discrete items. On March 27, 2020, the CARES Act was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses. During the year ended December 31, 2020, the Company recorded a $7.3 million benefit for income taxes related to the ability to carry back net operating losses to prior periods under the CARES Act, resulting in a decrease of our deferred tax asset of $16.8 million and increase to our current receivable of $24.1 million. The Company continues to assess the potential tax impacts of this legislation on its financial position and results of operations. Provision for income taxes - Continuing Operations The Company had a benefit for income taxes from continuing operations of $13.6 million for the year ended December 31, 2020, provision for income taxes from continuing operations of $9.0 million for the year ended December 31, 2019, and a benefit for income taxes from continuing operations of $5.9 million for the year ended December 31, 2018. The effective tax rate on income from continuing operations was equal to 35.1% for the year ended December 31, 2020, 31.0% for the year ended December 31, 2019, and 29.9% for the year ended December 31, 2018. Differences from the U.S. federal statutory income tax rate for the year ended December 31, 2020 are primarily from the impact of expected refunds arising from the CARES Act. Differences from the U.S. federal statutory income tax rate for the year ended December 31, 2019 are due to the impact of the non-recurring return-to-provision, as well as ongoing state and foreign taxes. Differences from the U.S. federal statutory income tax rate for the year ended December 31, 2018 are due to the dividends received deduction and other discrete items. Balance Sheet Information Tiptree’s total assets were $2,995.8 million as of December 31, 2020, compared to $2,198.3 million as of December 31, 2019. The $797.5 million increase in assets is primarily attributable to the growth in our Insurance segment, in particular the acquisition of Smart AutoCare. 66 Total stockholders’ equity was $373.5 million as of December 31, 2020, compared to $411.4 million as of December 31, 2019, primarily driven by the year to date net loss, stock repurchases and dividends. As of December 31, 2020, there were 32,682,462 shares of common stock outstanding, as compared to 34,562,553 as of December 31, 2019. The following table is a summary of certain balance sheet information: As of December 31, 2020 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Total Total assets $ 2,452,798 $ 217,138 $ 302,068 $ 23,756 $ 2,995,760 Corporate debt $ 160,000 $ — $ — $ 120,313 $ 280,313 Asset based debt 27,510 55,994 15,800 — 99,304 Tiptree Inc. stockholders’ equity $ 288,799 $ 55,448 $ 102,048 $ (90,151) $ 356,144 Non-controlling interests - Other 8,910 5,013 3,471 — 17,394 Total stockholders’ equity $ 297,709 $ 60,461 $ 105,519 $ (90,151) $ 373,538 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 of the Company’s programs 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 Fee Margin — Non-GAAP (Insurance only) The following tables present program specific revenue and expenses by business mix. We generally manage our exposure to the underwriting risk we assume using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid are adjusted based on the actual underlying losses incurred), which mitigate our risk. Period-over-period comparisons of revenues and expenses are often impacted by the PORCs and distribution partners’ choice as to whether to retain risk, specifically service and administration 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 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. Underwriting and Fee Revenues — Non-GAAP We define underwriting and fee revenues as total revenues from our Insurance segment excluding net investment income and net realized and unrealized gains (losses). Underwriting and fee revenues represents revenues generated by our underwriting and fee-based operations and allows us to evaluate our 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. 67 ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Total revenues $ 691,061 $ 635,085 $ 544,586 Less: Net investment income (9,916) (8,667) (13,876) Less: Net realized and unrealized gains (losses) 11,944 (6,896) 11,664 Underwriting and fee revenues $ 693,089 $ 619,522 $ 542,374 Underwriting and Fee Margin — Non-GAAP We define underwriting and fee margin as income before taxes from our 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 programs. 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 our 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 underwriting and fee program. Underwriting and fee income 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. ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Income (loss) before income taxes $ 26,948 $ 37,030 $ 14,172 Less: Net investment income (9,916) (8,667) (13,876) Less: Net realized and unrealized gains (losses) 11,944 (6,896) 11,664 Plus: Depreciation and amortization 10,835 9,105 10,779 Plus: Interest expense 15,487 14,766 18,202 Plus: Employee compensation and benefits 65,089 49,789 45,536 Plus: Other expenses 55,594 50,657 41,342 Underwriting and fee margin $ 175,981 $ 145,784 $ 127,819 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. 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 of FFC 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. 68 Year Ended December 31, 2020 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Expenses Total Income (loss) before taxes $ 26,948 $ 31,102 $ (61,242) $ (35,660) $ (38,852) Less: Income tax (benefit) expense (3,725) (7,066) 13,624 10,794 13,627 Less: Net realized and unrealized gains (losses) (1) 13,804 4,018 67,668 — 85,490 Plus: Intangibles amortization (2) 9,213 — — — 9,213 Plus: Stock-based compensation expense 2,287 2,482 174 3,172 8,115 Plus: Non-recurring expenses 3,418 — 624 758 4,800 Plus: Non-cash fair value adjustments — — (2,141) — (2,141) Less: Tax on adjustments (8,522) (1,958) (14,210) (4,131) (28,821) Adjusted net income $ 43,423 $ 28,578 $ 4,497 $ (25,067) $ 51,431 Adjusted net income $ 43,423 $ 28,578 $ 4,497 $ (25,067) $ 51,431 Average stockholders’ equity 285,760 47,202 138,606 (79,092) 392,476 Adjusted return on average equity 15.2 % 60.5 % 3.2 % NM% 13.1 % Year Ended December 31, 2019 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Expenses Total Income (loss) before taxes $ 37,030 $ 2,959 $ 23,391 $ (34,241) $ 29,139 Less: Income tax (benefit) expense (8,455) (640) (4,457) 4,535 (9,017) Less: Net realized and unrealized gains (losses) (3) (6,896) 2,056 (6,148) — (10,988) Plus: Intangibles amortization (2) 7,510 — — — 7,510 Plus: Stock-based compensation expense 2,891 170 — 3,299 6,360 Plus: Non-recurring expenses 1,975 — 202 2,079 4,256 Plus: Non-cash fair value adjustments — — (153) — (153) Less: Tax on adjustments (1,249) (616) 1,248 1,108 491 Adjusted net income $ 32,806 $ 3,929 $ 14,083 $ (23,220) $ 27,598 Adjusted net income $ 32,806 $ 3,929 $ 14,083 $ (23,220) $ 27,598 Average stockholders’ equity 266,397 32,785 161,133 (54,978) 405,337 Adjusted return on average equity 12.3 % 12.0 % 8.7 % NM% 6.8 % Year Ended December 31, 2018 Tiptree Capital ($ in thousands) Insurance Mortgage Other Corporate Expenses Total Income (loss) before taxes from continuing operations $ 14,172 $ 335 $ (4,059) $ (30,244) $ (19,796) Income (loss) before taxes from discontinued operations (4) — — 57,484 — 57,484 Less: Income tax (benefit) expense (4,054) 118 (13,241) 9,372 (7,805) Less: Net realized and unrealized gains (losses) 11,664 (528) 18,771 — 29,907 Plus: Intangibles amortization (2) 9,077 — — — 9,077 Plus: Stock-based compensation expense 3,458 152 — 3,049 6,659 Plus: Non-recurring expenses 2,559 — 1,179 (1,380) 2,358 Plus: Non-cash fair value adjustments — — (56,293) — (56,293) Less: Tax on adjustments (5,605) (130) 8,227 (1,800) 692 Adjusted net income $ 31,271 $ (53) $ 12,068 $ (21,003) $ 22,283 Adjusted net income $ 31,271 $ (53) $ 12,068 $ (21,003) $ 22,283 Average stockholders’ equity 253,244 31,483 114,529 (1,238) 398,018 Adjusted return on average equity 12.3 % (0.2) % 10.5 % NM% 5.6 % ___________________________ 69 The footnotes below correspond to the tables above, under “—Adjusted Net Income - Non-GAAP and “—Adjusted Return on Average Equity - Non-GAAP”. Notes (1) For the year ended December 31, 2020, included $1,860 of incentive fees paid with respect to specific unrealized and realized gains that are added-back to Adjusted net income. (2) Specifically associated with acquisition purchase accounting. See Note (3) Acquisitions. (3) For the year ended December 31, 2019, includes $7,598 gain on sale of our CLO management business. (4) Includes discontinued operations related to Care. For more information, see Note (4) Dispositions, Assets and Liabilities Held for Sale and Discontinued Operations. Adjusted EBITDA - Non-GAAP The Company defines Adjusted EBITDA as GAAP net income of the Company plus corporate interest expense, plus income taxes, plus depreciation and amortization expense, less the effects of purchase accounting, plus non-cash fair value adjustments, plus significant non-recurring expenses, and plus unrealized gains (losses) on available for sale securities reported in other comprehensive income. Adjusted EBITDA is used to determine incentive compensation for the Company’s executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. ($ in thousands) For the Year Ended December 31, 2020 2019 2018 Net income (loss) attributable to common stockholders $ (29,158) $ 18,361 $ 23,933 Add: net (loss) income attributable to non-controlling interests 3,933 1,761 5,950 Less: net income from discontinued operations — — 43,770 Income (loss) from continuing operations $ (25,225) $ 20,122 $ (13,887) Corporate debt related interest expense (1) 23,322 19,754 18,162 Consolidated provision (benefit) for income taxes (13,627) 9,017 (5,909) Depreciation and amortization (2) 17,268 13,083 11,614 Non-cash fair value adjustments (3) (7,122) (3,156) (391) Non-recurring expenses (4) 4,800 4,257 2,358 Unrealized gains (losses) on AFS securities 5,125 5,008 (2,100) Adjusted EBITDA from continuing operations $ 4,541 $ 68,085 $ 9,847 Income (loss) from discontinued operations $ — $ — $ 43,770 Consolidated provision (benefit) for income taxes — — 13,714 Non-cash fair value adjustments (3) — — (40,672) Adjusted EBITDA from discontinued operations $ — $ — $ 16,812 Total Adjusted EBITDA $ 4,541 $ 68,085 $ 26,659 _______________________________ Notes (1) Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt is not added-back for Adjusted EBITDA. (2) Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues were less favorably stated. Thus, the purchase accounting effect related to our insurance companies increased EBITDA above what the historical basis of accounting would have generated. (3) For our maritime transportation operations, depreciation and amortization is deducted as a reduction in the value of the vessel. For our insurance operations, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA. For Care (Discontinued Operations), the reduction in EBITDA is related to accumulated depreciation and amortization, and certain operating expenses, which were previously included in Adjusted EBITDA in prior periods. (4) Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs. Book Value per share - Non-GAAP Management believes the use of this financial measure provides supplemental information useful to investors as book value is frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares. 70 ($ in thousands, except per share information) As of December 31, 2020 2019 2018 Total stockholders’ equity $ 373,538 $ 411,415 $ 399,259 Less: Non-controlling interests 17,394 13,353 12,158 Total stockholders’ equity, net of non-controlling interests $ 356,144 $ 398,062 $ 387,101 Total common shares outstanding 32,682 34,563 35,870 Book value per share $ 10.90 $ 11.52 $ 10.79 LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to fund our operations and grow our businesses. We may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs. In February 2020, we refinanced our existing facility with Fortress, extending the maturity to February 2025 and increasing the principal amount to $125 million, generating approximately $53 million of cash after repaying the existing facility and expenses. A portion of those funds were invested in Insurance to fund our warranty business, with the remainder used to provide additional liquidity. Our subsidiaries’ ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings. In April 2020, Invesque suspended its dividend to conserve liquidity until the impact of COVID-19 on occupancy rates and its operations is better known. The suspension has negatively impacted our cash flow. However, we expect our cash and cash equivalents and distributions from operating subsidiaries, our subsidiaries’ access to financing, and sales of investments to be adequate to fund our operations for at least the next 12 months. As of December 31, 2020, cash and cash equivalents, excluding restricted cash, were $136.9 million, compared to $133.1 million at December 31, 2019, an increase of $3.8 million primarily as a result of increased gross written premiums and premium equivalents, including our acquisition of Smart AutoCare. Our mortgage business relies on short term uncommitted sources of financing as a part of their normal course of operations. To date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw on other sources of liquidity to fund our mortgage business. See Note (11) Debt, net in the notes to consolidated financial statements, for additional information regarding our mortgage warehouse borrowings. We believe that our cash flow from operations will provide us with sufficient capital to continue to grow our business and fund interest on the outstanding debt, capital expenditures and other general corporate needs over the next several years. As we continue to expand our business, including by any acquisitions we may make, we may, in the future, require additional working capital for increased costs. For purposes of determining enterprise value and Adjusted EBITDA, we consider corporate credit agreements and preferred trust securities, which we refer to as corporate debt, as corporate financing and associated interest expense is added back. The below table outlines this amount by debt outstanding and interest expense at the insurance company and corporate level. Corporate Debt ($ in thousands) Corporate Debt Outstanding as of December 31, Interest Expense for the year ended December 31, 2020 2019 2018 2020 2019 2018 Insurance $ 160,000 $ 185,000 $ 160,000 $ 13,305 $ 13,390 $ 13,149 Corporate 120,313 68,210 72,090 10,017 6,292 5,013 Total $ 280,313 $ 253,210 $ 232,090 $ 23,322 $ 19,682 $ 18,100 71 As of December 31, 2020, our $125 million credit facility with Fortress carries a rate of LIBOR (with a minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum. We are required to make quarterly principal payments of approximately $1.56 million. See Note (11) Debt, net in the notes to consolidated financial statements for details. On August 4, 2020, Fortegra entered into an Amended and Restated Credit Agreement by and among Fortegra and its wholly-owned subsidiary, LOTS Intermediate Co., as borrowers, the lenders from time to time party thereto, certain of Fortegra’s subsidiaries, as guarantors, and Fifth Third Bank, National Association, as the administrative agent and issuing lender (the “Fortegra Credit Agreement”). The Fortegra Credit Agreement provides for a $200.0 million revolving credit facility, all of which is available for the issuance of letters of credit, with a sub-limit of $17.5 million for swing loans, and matures on August 4, 2023. Consolidated Comparison of Cash Flows ($ in thousands) For the Year Ended December 31, Total cash provided by (used in): 2020 2019 2018 Net cash (used in) provided by: Operating activities $ 140,169 $ 23,742 $ 57,724 Investing activities (123,491) (8,327) (109,107) Financing activities 31,749 36,928 (2,003) Net increase (decrease) in cash, cash equivalents and restricted cash $ 48,427 $ 52,343 $ (53,386) Operating Activities Cash provided by operating activities was $140.2 million for the year ended December 31, 2020. In 2020, the primary sources of cash from operating activities included proceeds from mortgage loans outpacing originations and growth in unearned premiums and net deferred revenues, partially offset by increases in notes and accounts receivable and reinsurance receivables from our insurance operations. Cash provided by operating activities was $23.7 million for the year ended December 31, 2019. In 2019, the primary sources of cash from operating activities included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums, reinsurance payables, and deferred revenues, offset by increases in notes and accounts receivable and reinsurance receivables related to growth in our insurance operations. Cash provided by operating activities was $57.7 million for the year ended December 31, 2018. In 2018, the primary sources of cash from operating activities included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums, reinsurance payables, deferred revenues and policy liabilities and unpaid claims in our insurance segment and proceeds from mortgage loans outpacing originations, offset by increases in reinsurance receivables, deferred acquisition costs and notes and account receivable in our insurance segment. Investing Activities Cash used in investing activities was $123.5 million for the year ended December 31, 2020. In 2020, the primary use of cash from investing activities was the purchase of investments outpacing proceeds from the sales of investments in our insurance investment portfolio, and the issuance of notes receivable outpacing proceeds. Cash used in investing activities was $8.3 million for the year ended December 31, 2019. In 2019, the primary use of cash from investing activities was the issuance of notes receivables outpacing proceeds. This was offset by proceeds associated with a contingent earn-out from our sale of Care, proceeds from the sale of our Telos business, and sales and maturities of investments in excess of purchases in our insurance investment portfolio. Cash used in investing activities was $109.1 million for the year ended December 31, 2018. In 2018, the primary uses of cash were purchases of investments exceeding proceeds from sales and maturities of investments in our insurance investment portfolio, and investments in vessels within our maritime transportation, offset by proceeds from the sale of Care and proceeds from the prepayment of a seller note in connection with the sale of our commercial lending business. Financing Activities Cash provided by financing activities was $31.7 million for the year ended December 31, 2020. In 2020, proceeds from borrowings outpaced principal repayments, which was partially offset by the repurchase of $13.9 million of the Company’s 72 common stock and the payment of $5.6 million in dividends. Cash provided by financing activities was $36.9 million for the year ended December 31, 2019. In 2019, our new borrowings from various debt arrangements exceeded our principal repayments primarily due to increased borrowings on our mortgage warehouse facilities due to increased volume in our mortgage business, increased borrowing on our secured corporate credit agreement in our insurance business to support growth, and a vessel backed term loan, offset by the repayment of asset based borrowings in our credit loan fund, held within our insurance investment portfolio. Net cash provided by increased borrowings under our debt facilities was offset by the repurchase of $9.1 million of the Company’s common stock and the payment of $5.5 million in dividends. Cash used in financing activities was $2.0 million for the year ended December 31, 2018. In 2018, the uses of cash from financing activities were the repurchase of $14.1 million of the Company’s common stock and the payment of $4.8 million in dividends, offset by net new borrowings under our debt facilities, including borrowings from our secured corporate credit agreement and net new borrowings on residential mortgage warehouse borrowings, partially offset by principal repayments on asset based revolving financing in our insurance portfolio. Contractual Obligations The table below summarizes consolidated contractual obligations by period for payments that are due as of December 31, 2020: ($ in thousands) Less than 1 year 1-3 years 3-5 years More than 5 years Total Corporate debt, including interest (1) $ 27,675 $ 53,877 $ 134,320 $ 196,941 $ 412,813 Asset based debt 58,940 33,073 9,618 — 101,631 Total debt (2) $ 86,615 $ 86,950 $ 143,938 $ 196,941 $ 514,444 Operating lease obligations (3) 8,665 14,789 11,621 16,091 51,166 Total $ 95,280 $ 101,739 $ 155,559 $ 213,032 $ 565,610 (1) Estimated interest obligation calculated for corporate debt as the outstanding borrowing balance is fixed. The junior subordinated notes have an option to redeem 10 years from the issue date. (2) See Note (11) Debt, net, in the accompanying consolidated financial statements for additional information. (3) Minimum rental obligation for office leases. The total rent expense for the year ended December 31, 2020, 2019 and 2018 was $7.4 million, $8.6 million and $7.5 million, respectively. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company’s significant accounting policies are described in Note (2) Summary of Significant Accounting Policies. As disclosed in Note (2), the preparation of financial statements in conformity with 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. Fair Value Option In addition to the financial instruments that the Company is required to measure at fair value, the Company has elected to make an irrevocable election to utilize fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized and unrealized gains (losses) within the consolidated statements of operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Impairment Vessels, net Vessels are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. Potential impairment indicators are primarily based upon a comparison of the 73 market value of a vessel to its carrying value. Market values are based upon quoted prices from industry-recognized sources. The Company evaluates market quotes of vessels for reasonableness by comparison to available market transactions or internal valuation models. An impairment charge would be recognized if the estimated undiscounted future net cash flows expected to result from the operation and subsequent disposal of the vessel are less than the vessel’s carrying amount. Goodwill and Intangible Assets, net The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill and indefinite-lived intangible assets are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Finite-lived intangible assets are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. At both December 31, 2020 and December 31, 2019, we had two reporting units for goodwill impairment testing, of which the fair value substantially exceeded carrying value as of that date. See Note (9) Goodwill and Intangible Assets, net. Available for Sale Securities, at Fair Value (AFS) AFS are securities that are not classified as trading or held-to-maturity and are intended to be held for indefinite periods of time. AFS securities include those debt securities that management may sell as part of its asset/liability management strategy or in response to changes in interest rates, resultant prepayment risk or other factors. AFS securities are held at fair value on the consolidated balance sheet with changes in fair value including non-credit related losses, net of related tax effects, recorded in the AOCI component of stockholders’ equity in the period of change. Upon the disposition of an AFS security, the Company reclassifies the gain or loss on the security from AOCI to net realized and unrealized gains (losses) on the consolidated statements of operations. For AFS securities, the Company reviews its securities portfolio for impairment and determines if impairment is related to credit loss or non-credit loss. In making the assessment of whether a loss is from credit or other factors, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows is less than the amortized cost basis, a credit loss exists and an allowance is created, limited by the amount that the fair value is less than the amortized cost basis. Subsequent activity related to the credit loss component (e.g. write-offs, recoveries) is recognized as part of the allowance for credit losses on AFS securities. For AFS securities which have an expectation of zero risk nonpayment of the amortized cost basis (e.g. U.S. Treasury securities or agency securities), the expected credit loss is zero. Reserves Unpaid claims are reserve estimates that are established in accordance with GAAP using generally accepted actuarial methods. Credit life and accidental death and destruction (AD&D) unpaid claims reserves include claims in the course of settlement and incurred but not reported (IBNR) claims. Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other Fortegra product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables or a combination of these factors. In arriving at the unpaid claims reserves, the Company conducts an actuarial analysis on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method. The unpaid claims reserves represent the Company’s best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented. 74 During the year ended December 31, 2020 , the Company experienced an increase in prior year development of $5.4 million primarily as a result of higher than expected claim frequency from business written by a small group of producers of our personal and commercial lines of business. The underlying cause of this development was the result of a subset of risk where the loss ratio pegs used in our year end actuarial determination was low given the ultimate frequency that emerged. During the year ended December 31, 2019 , the Company experienced an increase in prior year development of $5.2 million primarily in our non-standard auto business. The underlying cause of this development was higher than expected claim frequency. Management considers the prior year development for each of the two years to be insignificant when considered in the context of our annual earned premiums, net as well as our net losses and loss adjustment expenses and member benefit claims expenses. Earned premiums, net in 2020 were $478.0 million and net losses and loss adjustment expenses were $178.2 million, which resulted to a loss ratio of 37.2%. Without the $5.4 million prior year development, the calendar year loss ratio would have been approximately 1% lower, and for comparison the 2019 and 2018 loss ratio were 30.3% and 31.5%, respectively. In general, the Company's loss ratio results have been predictable and consistent over time. We analyze our development on a quarterly basis and given the short duration nature of our products, favorable or adverse development emerges quickly and allows for timely reserve strengthening, if necessary, or modifications to our product pricing or offerings. Based upon our internal analysis and our review of the statement of actuarial opinions provided by our actuarial consultants, we believe that the amounts recorded for policy liabilities and unpaid claims reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date. Deferred Acquisition Costs The Company defers certain costs of acquiring new and renewal insurance policies, and other products as follows: Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company’s insurance company subsidiaries had the transactions not occurred. These capitalized costs are amortized as the related premium is earned. Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned. The Company evaluates whether all deferred acquisition costs are recoverable at year-end, and considers investment income in the recoverability analysis for insurance policy related deferred acquisition costs. As a result of the Company’s evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended December 31, 2020, 2019 and 2018. Revenue Recognition The Company earns revenues from a variety of sources: Earned Premiums, net Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance policies by the Company’s distributors and premiums written for insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including PORCs, earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer. Service and Administrative Fees The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated 75 with transaction volume and are recognized as revenue as they become both realized and earned. Revenues from contracts with customers were $163.6 million, $89.0 million and $76.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, and include warranty service contracts, motor clubs, other service and administrative fees, vessel related revenue and management fee income. See Note (14) Revenue from Contracts with Customers for more detailed disclosure regarding these revenues. Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended December 31, 2020, 2019 and 2018, the Company did not incur a loss with respect to a specific significant service fee contract. Administrative Fees. Administrative fee revenue includes the administration of premium associated with our producers and their PORCs. In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Ceding Commissions Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. The adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company’s benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage. Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes the enactment date. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting guidance requires these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. The Company establishes valuation allowances for deferred tax assets when, in its judgment, it concludes that it is more likely than not that the deferred tax assets will not be realized. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdictions. Changes in economic conditions and the competitive environment may impact the accuracy of the Company’s projections. On a quarterly basis, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to the Company’s valuation allowance is appropriate. Significant Accounting Policies Related to Dispositions, Assets and Liabilities Held for Sale and Discontinued Operations Revenue Recognition Rental Revenue (Care) Rental revenue from residents in managed properties are recognized monthly as services are provided, as lease periods for residents are short-term in nature. The Company recognizes rental revenue from triple net lease properties on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time 76 pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher than those in the primary term are excluded from the calculation of straight-line rent if the renewals are not reasonably assured. The Company commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease. Recently Issued Accounting Standards For a discussion of recently issued accounting standards, see Note (2) Summary of Significant Accounting Policies, in the accompanying consolidated financial statements. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of business, we enter into various off-balance sheet arrangements including entering into derivative financial instruments and hedging transactions, operating leases and sponsoring and owning interests in consolidated and non-consolidated variable interest entities. Further disclosure on our off-balance sheet arrangements as of December 31, 2020 is presented in the “Notes to Consolidated Financial Statements” in “Part II. Item 8. Notes to Consolidated Financial Statements” of this filing as follows: • Note (10) Derivative Financial Instruments and Hedging • Note (21) Commitments and Contingencies 77