Tiptree Inc. — Q3 2023 Form 10-Q
Business context and period: Tiptree is a holding company with Insurance (principally Fortegra) and Mortgage reportable segments, plus other investments and businesses. This unaudited report covers the quarter and nine months ended September 30, 2023; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $416.5 | $363.5 | $1,202.7 | $1,028.2 |
| Income before taxes | $21.1 | $25.1 | $53.0 | $29.0 |
| Net income (loss) attributable to common stockholders | $2.2 | $14.2 | $7.1 | $(9.1) |
| Diluted earnings (loss) per share | $0.04 | $0.38 | $0.18 | $(0.26) |
| Adjusted net income (non-GAAP) | $24.0 | $19.4 | $65.1 | $48.8 |
- Revenue and profit: Q3 revenue rose 14.6%, led by insurance premium and service-fee growth, but common-stockholder income fell as vessel-sale income was absent and Invesque investment losses increased. Nine-month common-stockholder results improved from a loss to income, reflecting insurance growth and the prior-year Fortegra-related tax charge.
- Insurance: Nine-month segment revenue was $1,159.9 million and pretax income was $85.6 million, versus $903.4 million and $39.1 million, respectively, in 2022. Gross written premiums and premium equivalents grew 24.7% to $2,439.9 million. The nine-month combined ratio was 90.5%, modestly better than 90.7%; the loss ratio rose to 40.3% from 37.7%, offset by a lower acquisition ratio.
- Mortgage and other operations: Mortgage recorded a nine-month pretax loss of $0.9 million versus $3.4 million of income. Originations fell 29.5% to $663.7 million amid higher mortgage rates. Tiptree Capital—Other had a $3.6 million pretax loss, compared with $20.5 million of income, largely reflecting the prior-year vessel sales and the absence of Luxury mortgage operations consolidated in 2022.
- Cash flow and liquidity: Nine-month operating cash flow was $93.6 million, down from $400.9 million; investing cash flow was $(144.7) million, while financing cash flow was $39.6 million. Cash and cash equivalents were $514.7 million at quarter-end, excluding $22.7 million of restricted cash. Management said cash, subsidiary distributions, financing access and investment sales were expected to support operations for at least the next 12 months and longer term.
- Debt and equity: Debt was $323.6 million net of financing costs ($331.9 million face value), up from $259.4 million net at year-end 2022. Total stockholders’ equity was $543.6 million. The quarter-end debt balance included $206.0 million of corporate debt and $125.9 million of asset-based debt. Borrowings are substantially floating-rate or asset-backed; mortgage warehouse funding availability is an identified dependency.
- Margins and distributions: Insurance’s nine-month combined ratio below 100% indicates underwriting profitability under the company’s definition. Tiptree declared $0.15 per common share in dividends for the first nine months, versus $0.12 in 2022. Book value per share, a non-GAAP measure, was $10.78 versus $10.68 at September 30, 2022.
Material changes, outlook and risks
- Fortegra’s growth drove much of the increase in consolidated assets, revenue and earnings. The company acquired a majority interest in UK automotive protection provider Premia in February 2023 for approximately $19.7 million net of cash acquired.
- The nine-month effective tax rate was 55.0%, primarily reflecting deferred taxes on Tiptree’s investment in Fortegra, which it owns at less than 80%. The associated deferred tax liability was $48.6 million at September 30, 2023. Management’s adjusted earnings exclude selected items and are not GAAP results.
- Management cited inflation-related claims severity and replacement costs, changing insurance business mix, interest-rate and investment-market volatility, reinsurance/counterparty exposure, and elevated mortgage rates and reduced mortgage volumes as risks. AFS securities had $62.8 million of gross unrealized losses at quarter-end; management said it expected to hold the securities in loss positions until recovery.
- Insurance reserves included $0.9 million of unfavorable prior-year development for the first nine months, primarily from commercial-line claim severity. Management described this as insignificant relative to premiums and reserves, but reserve estimates remain judgmental.
- The company disclosed a long-running Kentucky credit-insurance class action. It is appealing adverse interlocutory rulings; management believes resolution should not materially harm financial position, but said a reasonably possible loss range cannot currently be estimated.
- After quarter-end, a Fortegra subsidiary entered into a three-year $125 million secured credit agreement that extended a revolving facility’s maturity to October 2026 and increased commitments from $100 million. A mortgage warehouse line was also terminated and repaid in October, with a new $65 million line in place. No specific consolidated earnings guidance was provided.
Investor verification priorities
- Assess whether Fortegra’s premium and fee growth can continue while the loss ratio, claim severity and reinsurance recoverables remain controlled.
- Reconcile GAAP common-stockholder earnings with adjusted net income, including the effects of non-controlling interests, investment marks and Fortegra-related deferred taxes.
- Review liquidity and debt maturity/refinancing exposure, floating-rate costs, warehouse-line availability and restrictions on distributions from regulated insurance subsidiaries.
- Evaluate the sensitivity of earnings and book value to Invesque and other fair-value investments, unrealized fixed-income losses, and mortgage market conditions.
- Monitor the Kentucky litigation, insurance reserve development, and the final purchase-price allocation for Premia.