Tiptree Financial Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Tiptree is a diversified holding company with insurance, specialty finance, real estate, asset management, and corporate operations. Comparisons with 2014 are affected by acquisitions, discontinued-operation presentation, and the sale of Philadelphia Financial Group (PFG).
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $99.2 | $9.6 | $187.2 | $20.5 |
| Continuing-operations pretax income (loss) | $(1.6) | $0.8 | $(7.4) | $2.4 |
| Continuing-operations income (loss) | $(1.2) | $1.8 | $(5.6) | $4.1 |
| Net income available to common stockholders | $15.0 | $2.0 | $14.0 | $3.7 |
| Basic/diluted EPS | $0.47 | $0.19 | $0.44 | $0.35 |
| Adjusted EBITDA, continuing operations (non-GAAP) | $7.2 | $3.8 | $12.0 | $8.3 |
Common-stockholder earnings included discontinued operations of $21.0 million for the quarter and $23.3 million for the half year. These amounts included the $16.3 million after-tax gain on the PFG sale. Continuing operations remained loss-making. The filing does not provide a single consolidated operating-margin measure.
- Cash flow: First-half operating cash flow was $(7.6) million, investing cash flow was $26.9 million, and financing cash flow was $69.4 million. Unrestricted cash rose to $170.1 million at June 30 from $53.0 million at year-end; restricted cash was $30.1 million.
- Debt and liquidity: Debt excluding consolidated CLO obligations was $464.4 million, up from $363.2 million at year-end. Consolidated CLO liabilities were a further $1.835 billion; these are obligations of the CLOs, are non-recourse to Tiptree’s general assets, and should be distinguished from company debt. Management said cash, subsidiary distributions, and financing access were expected to fund operations for at least 12 months.
- Balance sheet: Total assets were $3.37 billion versus $8.20 billion at year-end, principally because PFG’s separate-account assets and liabilities were removed upon sale. Total stockholders’ equity was $405.3 million versus $401.6 million.
Material changes and business developments
- PFG was sold on June 30 for $142.8 million cash, with approximately $7.3 million in additional payments due over the following two years. Tiptree used $25 million of sale proceeds to repay Fortress borrowings; management estimated sale-related taxes at approximately $25.9 million.
- Fortegra, acquired in December 2014, contributed $78.5 million of Q2 revenue and $6.3 million of pretax income. Its inclusion is a major reason 2015 revenue and expenses are much higher than in 2014; the periods are not directly comparable.
- Insurance and insurance services generated $10.3 million first-half pretax income. Management cited growth in credit-life, warranty, and specialty auto products, partly offset by competitive pressure in mobile-device protection and motor-club volumes.
- Specialty finance reported $1.0 million first-half pretax income, versus a $1.5 million loss a year earlier, reflecting higher lending and mortgage-origination volumes. The real-estate segment recorded a $6.2 million first-half pretax loss, as higher rental income from portfolio expansion was offset by increased expenses, depreciation, and amortization.
- Asset management first-half pretax income declined to $4.5 million from $4.9 million, mainly from lower fees on older CLOs as their assets amortized. CLO-related income also fell: first-half consolidated CLO net income was $2.7 million versus $11.7 million, reflecting losses on Tiptree’s subordinated-note holdings and sales of Telos 2 and Telos 4 notes.
- Tiptree invested $9.7 million in non-performing residential mortgage loans and $25 million in a leveraged credit-opportunities fund. Sales of Telos 2 and Telos 4 subordinated notes generated $39.7 million net cash proceeds and an $8.0 million first-half realized loss.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance was provided. After quarter-end, Tiptree acquired Reliance First Capital for $7.5 million cash and 1,625,500 Class A shares, with potential additional share consideration tied to performance. Management expects it to complement Luxury Mortgage and contribute to specialty finance.
- After quarter-end, Tiptree contributed a further $30 million to a new CLO warehouse vehicle. The board also declared a $0.025-per-share quarterly dividend, payable August 31, 2015.
- Controls: Management concluded disclosure controls were not effective at June 30. A material weakness involving income-tax accounting, cash-flow presentation, and acquisition accounting had not yet been fully remediated and tested. The company reported corrective procedures and additional accounting hires, but the weakness remained until remediation could be validated.
- Litigation: Fortegra faces a certified class action concerning policy coverage terms. Management is defending the case and does not expect a material adverse outcome, but said a reasonably possible loss range could not be estimated. The filing notes the possibility of large punitive awards in comparable credit-insurance cases.
- Other exposures: The business is exposed to credit, interest-rate, reinsurance-counterparty, and valuation risks. Three unrelated reinsurers accounted for $150.6 million of receivables; management stated it did not believe the concentration created a risk of loss. Some loan and CLO assets use Level 3 fair-value inputs.
- The filing revised prior-period presentation and disclosed an immaterial prior-period income-statement misstatement related to real-estate depreciation, as well as a cash-flow classification revision. Fortegra acquisition purchase-price allocations remained preliminary. Reported adjusted EBITDA is non-GAAP and includes discontinued operations; Q2 and first-half totals were materially affected by the PFG sale.
Key investor verification points
- Separate recurring continuing-operations performance from the PFG disposal gain and other discontinued-operation results; assess the non-GAAP EBITDA reconciliation and adjustments.
- Review the status and testing of the material-weakness remediation, and whether later filings report effective controls.
- Assess debt maturities, borrowing costs, subsidiary covenant headroom, and the distinction between Tiptree debt and non-recourse CLO obligations.
- Monitor Fortegra claims, commissions, reinsurance recoverability, and the outcome and potential exposure of the class action.
- Evaluate the performance and funding needs of Reliance, the mortgage and credit strategies, the expanded seniors-housing portfolio, and the new CLO investments.