Tiptree Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Tiptree is a holding company with one reportable segment, Tiptree Insurance, and non-insurance businesses and investments grouped as Tiptree Capital. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $224.0 | $189.2 | $552.9 | $564.2 |
| Net income (loss) attributable to common stockholders | $12.8 | $(1.5) | $(43.4) | $14.2 |
| Diluted EPS | $0.35 | $(0.04) | $(1.27) | $0.39 |
| Operating EBITDA (non-GAAP) | $31.9 | $17.3 | $69.9 | $42.6 |
| Adjusted EBITDA (non-GAAP) | $20.4 | $6.2 | $(37.9) | $43.7 |
- Quarter: Pre-tax income was $13.9 million versus a $1.6 million loss in Q3 2019. Revenue growth reflected warranty-related service and administrative fees and mortgage gains. The reported $39.0 million of net realized and unrealized gains included substantial mortgage-related gains, partly offset by losses on Invesque and other equity holdings.
- Nine months: Pre-tax loss was $63.4 million versus income of $19.3 million in 2019. The principal drag was fair-value losses, particularly on Invesque. A $22.0 million income tax benefit included a $6.0 million CARES Act benefit from carrying back net operating losses.
- Insurance: Gross written premiums and equivalents rose 25.0% to $464.6 million in Q3 and 25.5% to $1,175.6 million year to date; excluding Smart AutoCare acquisition contribution, increases were 7.4% and 9.7%, respectively. The combined ratio improved to 90.4% for Q3 and 91.8% year to date, from 92.1% and 92.8%. Insurance pre-tax income was $13.4 million in Q3 but only $0.4 million for the nine months, reflecting investment losses and higher operating costs.
- Cash flow: Nine-month operating cash flow was $68.2 million, versus $19.4 million in 2019; investing cash outflow was $65.4 million, versus $67.7 million of inflow; financing cash inflow was $33.3 million, versus $27.8 million of outflow. Cash, cash equivalents and restricted cash totaled $181.6 million at September 30; unrestricted cash and cash equivalents were $103.5 million, including $72.4 million outside statutory insurance subsidiaries.
- Balance sheet and liquidity: Total assets were $2,794.9 million, total liabilities $2,433.2 million, and total stockholders’ equity $361.7 million. Debt, net, was $397.8 million; face-value debt was $410.8 million, including $281.9 million corporate debt and $128.9 million asset-based debt. The company reported compliance with borrowing covenants or waivers for any non-compliance. Management said available cash, subsidiary distributions and financing were expected to cover operations for at least 12 months.
- Other capital metrics: Book value per share was $10.36, down from $11.43 a year earlier, but up $0.39 from Q2. Tiptree repurchased 1.48 million shares for $9.2 million year to date and declared $0.12 per share in dividends for the first nine months. A further $0.04 quarterly dividend was declared November 2, payable November 30, 2020.
Material changes, outlook and risks
- Tiptree acquired Smart AutoCare on January 3, 2020 for $111.8 million in cash, net of working-capital adjustments, with potential earn-outs and a reserve-related true-up. The preliminary allocation included $64.5 million of goodwill and $93.7 million of intangible assets. Acquired operations contributed $48.0 million revenue through September 30 and approximately $205.9 million to deferred revenue growth.
- Management cited continued uncertainty from COVID-19. Warranty sales volumes had returned to more normal levels in Q3 as the economy reopened; credit-protection sales recovered more slowly. Renewed shutdowns could reduce sales and disrupt distribution channels. Market volatility could also cause further investment losses.
- Invesque suspended its dividend in April 2020. Tiptree recorded $79.8 million of nine-month losses on its Invesque investment, including unrealized losses; the investment’s valuation and potential dividend resumption remain sensitive to senior-housing operations and market conditions.
- Mortgage operations benefited from low rates, increased volume and margins; management cautioned that a reversal in these conditions could adversely affect results. Shipping results remain exposed to volatile charter rates and pandemic-related trade and commodity conditions.
- On August 4, Fortegra entered a $200 million revolving credit facility, available for letters of credit and with a $17.5 million swing-loan sublimit. A post-quarter October 16 agreement added a $75 million secured facility for Fortegra subsidiaries, non-recourse to Fortegra and its other subsidiaries. The filing provides no formal earnings guidance.
- A long-running certified class action concerning the term of certain credit insurance policies remains pending. Management is vigorously defending it but cannot reasonably estimate a loss range; it believes resolution should not materially adversely affect the company’s financial position. Other proceedings were not expected by management to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating growth in warranty, specialty insurance and mortgage lending is sustainable, and how Smart AutoCare performs against acquisition earn-out and reserve terms.
- The extent to which future earnings and book value remain exposed to Invesque and other fair-value investments, and whether Invesque restores its dividend.
- Insurance loss development: nine-month prior-year case development increased by $12.9 million, primarily in non-standard auto, light commercial and collateral protection lines.
- Debt maturity, interest-rate and covenant exposure, including the corporate facility’s LIBOR floor and the mortgage business’s reliance on warehouse financing.
- Potential COVID-19 effects on sales, claims, distribution partners, investment valuations and liquidity, as well as the unresolved litigation and any acquisition purchase-price adjustments.