Tiptree Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Tiptree is a diversified holding company with specialty insurance, asset management, senior living and specialty finance businesses. Financial amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $157.9 | $132.2 | $321.8 | $262.9 |
| Net income (loss) attributable to Class A common stockholders | $(4.4) | $6.1 | $(3.3) | $11.7 |
| Diluted EPS | $(0.15) | $0.17 | $(0.12) | $0.33 |
| Adjusted EBITDA (non-GAAP) | $6.8 | $17.4 | $18.6 | $32.8 |
| Interest expense | $9.3 | $6.5 | $18.1 | $12.9 |
Revenue rose 19.5% in Q2 and 22.4% for the first half. The company nevertheless swung to losses, principally due to weaker investment marks, higher compensation and interest costs, and a higher Reliance contingent earn-out liability. The earn-out fair-value increase was $3.1 million in Q2 and $3.5 million year to date. Adjusted EBITDA, a non-GAAP measure, fell 60.9% in Q2 and 43.3% for the first half.
- Cash flow: First-half operating cash flow was $27.2 million, investing cash flow was $14.2 million, and financing cash flow was a use of $28.7 million. Cash and cash equivalents ended June at $75.8 million, up from $63.0 million at year-end; restricted cash was a further $39.3 million.
- Balance sheet and debt: Total assets were $2.54 billion and total stockholders’ equity $390.7 million. Debt, net, excluding consolidated CLO liabilities, was $822.0 million, compared with $793.0 million at December 31, 2016. Consolidated CLO liabilities were separately reported at $510.5 million, including $482.0 million of CLO debt; the filing says this debt is non-recourse to Tiptree’s general assets.
- Liquidity: Management said cash, subsidiary distributions and financing access should be adequate for operations for at least the next 12 months. The $57.5 million Fortress facility matures September 18, 2018; Tiptree intends to extend or refinance it but cautions that acceptable terms are not assured.
- Dividends: $0.03 per share was declared for each of the first two quarters. The board subsequently declared another $0.03 quarterly dividend, payable August 28, 2017.
Material changes and segment performance
- Specialty insurance: Revenue increased, largely reflecting higher retained premiums after a captive reinsurer replaced a third-party reinsurer for certain credit products. Segment pretax income was $4.1 million for the first half, down from $25.0 million. Investment portfolio results weakened materially: first-half net portfolio income was a $0.3 million loss versus $13.1 million income a year earlier. The adjusted combined ratio worsened to 94.0% from 88.1% for the first half.
- Asset management: First-half pretax income increased to $10.1 million from $8.2 million, aided by favorable CLO investment marks and incentive fees. Fee-earning AUM declined to $1.6 billion from $2.0 billion a year earlier as older CLOs ran off. Tiptree sold its Telos 5 subordinated-note investment in January, deconsolidating the CLO and reducing reported assets and liabilities.
- Senior living: First-half revenue rose 27.5% to $36.3 million and NOI, a non-GAAP measure, rose to $12.8 million from $10.0 million, while the segment still reported a $3.8 million pretax loss. Tiptree acquired 12 senior-living properties during the first half for an aggregate purchase price of $80.7 million; added operating, interest, depreciation and amortization costs weighed on results. Management cited occupancy pressure during renovations and said newly acquired properties had not yet fully stabilized.
- Specialty finance: First-half revenue increased to $45.3 million from $38.8 million, but pretax income declined to approximately breakeven from $1.3 million. Improved mortgage margins and commercial lending growth were offset by the Reliance earn-out revaluation and higher expenses.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management describes a long-term capital-allocation strategy and expects senior-living properties to contribute more as occupancy and operations stabilize.
- Management identifies sensitivity to interest rates, credit and equity market movements, insurance pricing and claims reserves, and senior-living occupancy and labor costs. Tiptree also relies on short-term, uncommitted mortgage warehouse financing in its mortgage business.
- Fair-value volatility was significant: the specialty insurance portfolio recorded first-half unrealized losses, including losses on equity holdings. The Reliance contingent consideration is also remeasured through earnings and is sensitive to performance and Tiptree’s share price.
- Fortegra remains a defendant in the Mullins class action concerning credit insurance policy coverage. Tiptree is defending the case, believes the outcome should not be materially adverse, but cannot reasonably estimate a loss range; punitive damages are a stated concern.
- Insurance subsidiaries had $112.95 million of statutory capital and surplus and approximately $9.43 million available for ordinary dividends without regulatory approval. The company reported compliance with debt covenants, or waivers where needed, and said disclosure controls were effective.
Important facts for investors to verify
- Whether investment portfolio marks and the Reliance earn-out continue to materially affect reported earnings and the gap between GAAP results and Adjusted EBITDA.
- Progress on refinancing or extending the Fortress facility before its September 2018 maturity, and liquidity available at the parent company versus subsidiaries.
- Specialty insurance retention, loss development and the adjusted combined ratio as the reinsurance strategy changes.
- Senior-living occupancy, property-level NOI and integration/stabilization of recently acquired facilities.
- Trends in asset-management AUM and CLO run-off, and the potential outcome and exposure in the Mullins litigation.