Tiptree Financial Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports unaudited fourth-quarter results. The registrant’s legal name is Tiptree Financial Inc.; the filing describes a diversified holding company operating through insurance and insurance services, specialty finance, real estate, asset management, and corporate and other businesses. Unless noted, amounts are U.S. dollars.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $440.1 million | $80.3 million |
| Pre-tax income (loss), continuing operations | $(12.4) million | $0.8 million |
| Net income (loss) available to common stockholders | $5.8 million | $(1.7) million |
| Basic and diluted EPS | $0.17 | $(0.10) |
| Adjusted EBITDA, continuing operations | $25.9 million | $24.1 million |
| Total Adjusted EBITDA, including discontinued operations | $58.4 million | $58.9 million |
| Cash and cash equivalents at year-end | $69.4 million | $53.0 million |
| Total assets at year-end | $2.50 billion | $8.20 billion |
| Total stockholders’ equity | $397.7 million | $401.6 million |
Continuing-operations net loss was $13.8 million in 2015 versus $3.4 million in 2014. 2015 common-stockholder income included $22.6 million from discontinued operations, including a $15.6 million after-tax gain on the PFG sale. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results.
Cash flow: Net cash used in operating activities was $6.3 million; investing activities used $215.1 million; financing activities provided $237.8 million. Cash increased $16.4 million. The filing separately reports $20.9 million of operating cash provided by CLO-related VIEs and $20.9 million used by continuing operations excluding VIEs.
Debt and liquidity: Balance-sheet debt, net, was $673.2 million, excluding $698.3 million of liabilities of consolidated CLOs. The CLO notes are non-recourse to the Company’s general assets. Operating Company’s Fortress borrowing was $45.5 million, bearing LIBOR (minimum 1.25%) plus 6.50%, with maturity in September 2018. Unrestricted cash was $69.4 million. Management expected cash, subsidiary distributions, and access to financing to fund operations for at least 12 months. Subsidiary-level debt includes mortgage warehouse lines, property mortgages, insurance-company facilities, and a leveraged-loan fund credit facility.
Fourth quarter: Revenue was $129.2 million, expenses were $127.2 million, and the continuing-operations pre-tax loss was $1.4 million. Net loss available to common stockholders was $3.7 million.
Material changes versus the prior year
- Revenue rose substantially, principally because Fortegra was consolidated for nearly all of 2015 but only about one month of 2014; Reliance was acquired in July 2015; and Care’s property portfolio expanded. Comparisons are therefore materially affected by acquisitions and disposals.
- Despite higher revenue, continuing-operations pre-tax results turned to a loss, driven chiefly by $25.9 million of realized and unrealized losses on CLO subordinated-note investments, reduced CLO distributions after asset sales, higher real-estate depreciation and amortization, and increased corporate control/reporting costs. The 2014 comparison also included a $7.9 million Westside Loan repayment gain.
- Specialty finance improved to $6.3 million pre-tax income from a $2.0 million loss, with mortgage origination volume increasing to $1.24 billion from $538.7 million and Siena benefiting from loan growth and fees.
- Real estate recorded a $9.5 million pre-tax loss versus $3.2 million income, despite rental revenue increasing to $43.1 million from $19.7 million, as property-related costs, interest, and depreciation rose with acquisitions.
- Asset-management pre-tax income declined to $5.4 million from $6.2 million, as fees from older CLOs fell with amortizing assets and lower incentive fees.
- The PFG subsidiary was sold on June 30, 2015 for $142.8 million cash at closing, with approximately $7.3 million of future payments. Its results are presented as discontinued operations. Total assets also fell sharply due to the disposition and CLO deconsolidations following an accounting-standard adoption and sales of CLO subordinated notes.
Outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management expected CLO-loan and subordinated-note valuation volatility to continue through 2016, citing late-2015 credit-market dislocation, particularly in leveraged loans exposed to energy, metals, and mining.
- Management expected minimal NPL income through the first half of 2016, with potential realizations from loan or property sales in the second half. The filing reports $39.7 million invested in NPLs during 2015 and $47.7 million total investment by the report date.
- The 2015 CLO subordinated-note losses included $8.0 million of realized losses on Telos 2 and Telos 4 sales and substantial unrealized markdowns. Retained CLO holdings and related fee participation rights had a fair value of $28.7 million at year-end, versus $94.3 million a year earlier.
- Significant execution and financing risks include acquisition integration, refinancing and warehouse-facility access, real-estate operating performance, insurance claims and reinsurance recoverability, mortgage repurchase obligations, interest-rate and credit-spread changes, and reliance on estimated fair values for illiquid Level 3 investments.
- Regulatory risks include insurance capital and dividend restrictions, mortgage and consumer-protection rules, healthcare-property regulation, and CLO risk-retention rules effective beginning December 24, 2016, which may require capital to remain invested.
- Control weakness: Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2015. KPMG issued an adverse opinion on internal-control effectiveness but an unqualified opinion on the financial statements. Material weaknesses involved Care managed properties and Luxury Mortgage process controls and resources, and management review of taxes, business combinations, and cash-flow presentation. Management planned remediation during 2016; effectiveness had not yet been validated.
- Other notable items: The 2014 cash-flow statement was revised for immaterial errors in presentation; the filing says cash balances and liquidity were unaffected. The Company early adopted consolidation guidance that deconsolidated CLO entities, affecting comparability. A Fortegra class action remains pending; management could not reasonably estimate a loss range, while stating it did not expect a materially adverse financial effect.
- Effective January 1, 2016, Tiptree, TFP, and Operating Company reorganized their federal tax structure as a consolidated group. The company paid $0.10 per Class A share in 2015 dividends and repurchased $4.0 million of stock.
Investor verification priorities
- Reconcile GAAP continuing-operations losses with common-stockholder profit, discontinued operations, the PFG sale gain, and non-GAAP Adjusted EBITDA.
- Review the assumptions, market evidence, and sensitivity of CLO and NPL fair values, including the Level 3 valuation inputs and potential losses on warehouse assets.
- Assess debt maturities, borrowing costs, collateral and covenant requirements, and the availability of subsidiary distributions to support parent-company liquidity.
- Track remediation and independent testing of the identified material weaknesses, including whether future filings or cash-flow presentations require correction.
- Monitor CLO formation and risk-retention costs, mortgage volumes and repurchase claims, insurance reserves and reinsurance concentrations, and the Fortegra class action.