Tiptree Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results cover a diversified holding company with specialty insurance, asset management, senior living and specialty finance businesses. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $164.5 | $132.2 | $486.3 | $395.1 |
| Net income (loss) before non-controlling interests | $(3.4) | $7.8 | $(7.4) | $22.3 |
| Net income (loss) attributable to Class A holders | $(3.1) | $5.9 | $(6.5) | $17.6 |
| Diluted EPS | $(0.11) | $0.19 | $(0.22) | $0.53 |
| Adjusted EBITDA (non-GAAP) | $4.8 | $20.1 | $23.3 | $52.9 |
Revenue rose 24.5% in Q3 and 23.1% year to date, led chiefly by higher earned premiums, growth in senior-living rental income from acquisitions, and improved specialty-finance origination margins. Net losses replaced prior-year profits, primarily because of adverse mark-to-market results in the specialty insurance investment portfolio and lower CLO-related fees and distributions. Adjusted EBITDA fell 76.0% for Q3 and 55.8% year to date.
- Specialty insurance: Pretax loss of $2.3 million in Q3 and pretax income of $1.7 million year to date, versus prior-year income of $10.7 million and $35.6 million. The nine-month adjusted combined ratio was 93.6%, compared with 88.5% (GAAP ratio: 93.2% versus 86.3%). A ratio below 100% indicates underwriting profit. Higher premium retention increased earned premiums but also commissions and benefits; investment results weakened.
- Asset management: Pretax income was $3.0 million in Q3 and $13.1 million year to date, down from $6.5 million and $14.7 million. Fee-earning AUM was $1.6 billion, down from $1.9 billion a year earlier, as older CLOs ran off and were not replaced.
- Senior living: Pretax losses were $1.5 million in Q3 and $5.4 million year to date. NOI, a non-GAAP property measure, increased to $7.4 million in Q3 and $20.2 million year to date, but managed-property NOI margins declined amid renovation-related occupancy softness and acquisition costs.
- Specialty finance: Pretax income was $2.6 million in Q3 and year to date, versus $4.2 million and $5.5 million. Q3 mortgage origination volume declined 23.8%, while year-to-date volume declined 10.9%; improved margins and commercial lending growth partly offset lower mortgage volume and higher expenses.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $111.8 million at September 30, 2017, versus $63.0 million at year-end 2016; restricted cash was an additional $23.4 million.
- Nine-month operating cash flow was $24.5 million, compared with cash used of $30.7 million in 2016. Investing activities provided $185.8 million, chiefly reflecting CLO-related asset sales and repayments; financing activities used $161.6 million.
- Total assets were $2.45 billion, down from $2.89 billion at year-end, principally due to deconsolidation and liquidation of CLOs. Stockholders’ equity was $391.1 million, including $292.0 million attributable to Tiptree Inc.
- Debt, net, was $865.6 million, excluding debt of consolidated CLOs; consolidated CLO liabilities were separately reported at $354.3 million. Debt, net, increased from $793.0 million at year-end. Debt maturities and borrowing rates vary by facility; much subsidiary borrowing is floating-rate.
- The $57.0 million Fortress holding-company credit facility matures September 18, 2018. Management intended to extend or refinance it, but cautioned that satisfactory terms were not assured. Management expected cash, subsidiary distributions and financing access to fund operations for at least 12 months.
- Book value per share, as exchanged (non-GAAP), was $9.67, versus $9.93 a year earlier. Dividends declared were $0.03 per share in Q3 and $0.09 for the nine months.
Changes, outlook and risks
- Specialty insurance retained more credit-protection risk after its captive reinsurer replaced a third-party reinsurer. Net written premiums grew substantially, while ceding commissions declined and commission and claims costs increased. Management described the change as part of its strategy to expand underwriting and investment earnings.
- Tiptree acquired 12 senior-living properties during 2017 (two managed and ten triple-net lease properties); total consideration for the two business-combination acquisitions was $26.0 million. Management said recently renovated or acquired properties had not yet reached stabilized occupancy and expected potential NOI-margin improvement as they stabilize.
- Tiptree sold its Telos 5 subordinated-note interest in January and liquidated Telos 7 in August, reducing consolidated CLO assets and liabilities and its CLO investments. Older CLO runoff and declining AUM pressured management fees and distributions.
- On October 16, 2017, Fortegra issued $125 million of 8.50% junior subordinated notes due 2057 and used substantially all net proceeds to repay and terminate its existing credit facility. The notes are unsecured Fortegra obligations, junior to its senior debt, and are not guaranteed by Tiptree or its other entities.
- Principal risks discussed include market and credit-driven investment valuation volatility, insurance pricing and claim-reserve uncertainty, senior-living occupancy and labor costs, CLO runoff and fee pressure, mortgage warehouse funding availability, and exposure to interest rates and floating-rate debt. Tiptree reported compliance with debt covenants or applicable waivers and stated that insurance subsidiaries exceeded RBC thresholds.
- Fortegra continues to defend a certified Kentucky class action concerning coverage terms in certain credit-insurance policies. Management did not expect a materially adverse outcome but could not estimate a reasonably possible loss range; punitive damages in similar industry cases are noted as a risk.
- No specific earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Investor verification priorities
- Reconcile the deterioration in reported earnings and Adjusted EBITDA to insurance investment marks, CLO runoff, and other non-recurring or non-cash items; assess the company’s non-GAAP definitions.
- Review the composition, liquidity and valuation sensitivity of investments, particularly concentrated equity holdings and Level 3 loans, and the effect of further market or credit changes.
- Assess the 2018 Fortress maturity and subsidiary funding needs, including the terms and consequences of Fortegra’s subsequent note issuance and the increase in debt.
- Track insurance retention, commissions, claims development and adjusted combined ratios to determine whether premium growth translates into sustainable underwriting returns.
- Verify senior-living occupancy, renovation progress, property-level margins and acquisition financing; monitor fee-earning AUM and CLO distributions as older vehicles run off.
- Monitor the Kentucky litigation and any change in management’s assessment, as the filing provides no estimable loss range.