Tiptree Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are to Q1 2023 unless otherwise stated. Dollar amounts below are in millions unless noted. Tiptree operates specialty insurance through Fortegra, a mortgage business through Reliance, and other investment and operating businesses. Fortegra was approximately 79.3% owned by Tiptree at quarter-end, before potential warrant exercise and preferred-stock conversion.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $498.2 | $381.6 |
| Income before taxes | $29.7 | $8.2 |
| Net income attributable to Tiptree common stockholders | $9.1 | $(1.1) |
| Diluted earnings per share | $0.22 | $(0.03) |
| Operating cash flow | $62.7 | $43.0 |
| Dividends declared per common share | $0.06 | $0.05 |
- Revenue increased 30.6%; earned premiums, net rose 30.9% to $347.3 million and service and administrative fees rose 20.1% to $110.5 million. Net realized and unrealized gains were $15.6 million, versus $2.2 million in Q1 2023.
- GAAP net income improved to $15.9 million before non-controlling interests. Tiptree’s share was $9.1 million. Management-reported adjusted net income, a non-GAAP measure, was $20.5 million versus $12.6 million; adjusted return on average equity was 19.5% versus 12.6%.
- Insurance segment revenue was $478.8 million and pretax income was $36.8 million, up from $19.4 million. Its combined ratio was 90.3% versus 91.6%; the loss ratio rose to 46.3% from 40.5%, offset by a lower acquisition ratio of 31.2% versus 37.4% and lower operating expense ratio of 12.8% versus 13.7%.
- Insurance gross written premiums and premium equivalents increased 6.8% to $663.4 million; net written premiums increased 13.2% to $318.2 million, including the effect of higher retention under a quota-share reinsurance arrangement. Mortgage pretax income was $0.8 million, versus a $2.6 million loss, on higher volumes and improved mortgage-servicing fair value adjustments.
Balance sheet, debt and liquidity
- Total assets were $5,189.9 million at March 31, 2024, versus $5,139.3 million at December 31, 2023. Total stockholders’ equity was $598.6 million, including $173.9 million of non-controlling interests; Tiptree stockholders’ equity was $424.7 million.
- Cash and cash equivalents were $474.6 million; restricted cash was $128.4 million. Combined cash, cash equivalents and restricted cash were $603.0 million, up $110.4 million during the quarter. Investing activities provided $40.5 million, principally as investment sales and maturities exceeded purchases.
- Debt, net, was $405.8 million, compared with $402.4 million at year-end; face-value debt was $414.7 million. Debt includes $289.0 million of corporate debt and $125.7 million of asset-based debt. Q1 interest expense was $8.3 million, up from $6.5 million.
- Management said available cash, subsidiary distributions, financing access and investment sales are expected to fund operations for at least the next 12 months and over the long term. Insurance subsidiary distributions are subject to regulatory and other restrictions; approximately $24.3 million was available for ordinary dividends without regulatory approval. Mortgage warehouse facilities are short-term and include uncommitted sources.
Material changes, outlook and risks
- Growth in insurance underwriting and fee activity drove the earnings improvement. Net written premiums also benefited from increasing Fortegra’s retention from 30% to 40%, effective April 1, 2023.
- Q1 insurance claims and loss-adjustment expenses increased 53.4% to $175.4 million, attributed to business growth and a shift toward commercial lines. The company recorded $0.8 million of unfavorable prior-year claims development, which management characterized as insignificant in context.
- Investment results are volatile: fair-value changes on equity and other investments affect current earnings, while unrealized available-for-sale bond losses generally affect other comprehensive income. Q1 included $4.8 million of such bond losses in OCI. The company cited interest-rate, credit, equity-market and liquidity risks, and noted that selling investments before maturity to pay claims could realize losses.
- Income tax expense was $13.8 million, including $4.5 million related to deferred taxes on Tiptree’s investment in Fortegra following tax deconsolidation. The reported effective tax rate was 46.5%; management’s rate excluding those deferred taxes was 31.5%.
- Other expenses included $3.2 million of legal and other costs associated with preparation of Fortegra’s registration statement for a withdrawn IPO. A non-cash fair-value increase in the Warburg Fortegra warrant liability also affected expenses; the liability was $7.7 million at quarter-end.
- Management provided no specific earnings or revenue guidance. It highlighted economic, inflation, interest-rate, regulatory, underwriting, reserve, reinsurance-counterparty and mortgage-market risks. It cautioned that continued elevated mortgage rates could weigh on mortgage operations and funding. The filing reported no material changes to the risk factors in the 2023 Form 10-K.
- A long-running Kentucky class action remains on appeal. Tiptree is vigorously defending it, says the outcome is not expected to be materially adverse, but cannot estimate a reasonably possible loss range. On April 30, 2024, the board declared a $0.06 per-share quarterly dividend, payable May 28, 2024.
Important facts for investors to verify
- Whether insurance growth and underwriting profitability persist as the loss ratio rises and business mix changes; review reserve development and reinsurance protection.
- How much reported earnings depend on fair-value gains and losses, including exposure to Invesque and other concentrated or less-liquid investments.
- The effect of Fortegra’s tax deconsolidation, preferred-stock dividends, Warburg securities and potential dilution on earnings attributable to Tiptree shareholders.
- Debt costs, upcoming maturities and the renewal and availability of short-term mortgage warehouse financing; distinguish unrestricted from restricted cash.
- Developments in the Kentucky litigation and any change in the company’s ability to estimate potential exposure.