Tiptree Financial Inc. — Q1 2015 Form 10-Q
Period: Three months ended March 31, 2015; unaudited. Unless otherwise noted, amounts are in U.S. dollars. The company is a diversified holding company with insurance and insurance services, specialty finance, asset management, real estate, and corporate and other segments.
Financial performance and position
- Revenue: $88.0 million, versus $10.9 million in Q1 2014. The increase chiefly reflects Fortegra, acquired in December 2014; the periods are not directly comparable. Fortegra contributed $72.4 million of segment revenue.
- Profitability: Continuing-operations loss was $4.4 million, versus income of $2.3 million. Net loss before non-controlling interests was $2.0 million; net loss available to Class A common stockholders was $979,000, or $0.03 per share, compared with income of $1.6 million, or $0.15 per share. PFG discontinued operations contributed $2.3 million of net income.
- Segment results: Pre-tax profit was $4.0 million in insurance and insurance services, $435,000 in specialty finance, and $2.2 million in asset management. Real estate recorded a $4.2 million loss and corporate and other an $8.3 million loss. CLO-related net income fell to $742,000 from $4.6 million, principally because of losses on the company’s subordinated-note holdings.
- Margins and non-GAAP measure: Fortegra’s net losses and loss adjustment expenses were $12.5 million, or 33.3% of net earned premiums. Total adjusted EBITDA was $13.0 million versus $10.6 million, including discontinued operations; adjusted EBITDA from continuing operations was $4.8 million versus $4.5 million. Management cautions that adjusted EBITDA is non-GAAP and not a substitute for GAAP results.
- Cash flow: Net cash provided by operations was $593,000, versus $26.6 million. Continuing-operations operating cash flow was negative $30.4 million; discontinued operations provided $31.0 million. Investing activities used $50.9 million, including $83.7 million of real estate purchases; financing activities provided $70.5 million. Net cash increased $20.1 million, while unrestricted cash of continuing operations at quarter-end was $46.4 million.
- Assets and equity: Total assets were $8.46 billion, up from $8.20 billion at year-end; total stockholders’ equity was $397.2 million, down from $401.6 million. Assets and liabilities include $1.89 billion and $1.80 billion, respectively, related to consolidated CLOs, and large PFG balances classified as held for sale.
- Debt and liquidity: Debt excluding consolidated CLO obligations increased to $473.6 million from $363.2 million. The company also reported $1.80 billion of CLO liabilities, which are non-recourse to Tiptree’s general assets, and $80.8 million of debt associated with PFG held for sale. Unrestricted cash was $46.4 million and restricted cash $27.7 million. The company expected approximately $151.5 million of gross cash proceeds from the PFG sale and was required to use $25 million to repay Fortress borrowings.
Material changes and transactions
- Fortegra’s first full quarter of consolidation added insurance premiums, service fees, ceding commissions, claims, commissions, and acquisition-related amortization and expenses.
- Care acquired six seniors housing communities for $54.8 million and formed an 80%-owned joint venture that acquired five communities for $30.1 million. Real estate assets rose to $209.1 million from $131.3 million; purchases were substantially debt-financed.
- Tiptree amended its Fortress credit agreement to add $25 million of term loans. The amendment requires repayment of $25 million upon the PFG sale and provides for a 2% prepayment premium on voluntary early repayment before June 30, 2016.
- After quarter-end, the company sold its Telos 2 subordinated notes for $19.7 million. The board declared a $0.025-per-share Class A dividend payable June 1, 2015.
- Management said Siena’s and Luxury’s specialty-finance revenues increased; Siena’s earnings improved and Luxury reported a small pre-tax profit. The planned Reliance mortgage-bank acquisition was expected to close in Q3 2015.
Outlook, risks, contingencies, and unusual items
- The filing gives no quantitative full-year earnings or revenue guidance. Management said it intended to use cash resources to grow the businesses and might seek additional debt or equity funding for acquisitions or investments. Interim results are not necessarily indicative of full-year results.
- Management identified a material weakness in internal control over financial reporting, involving review of income-tax accounting, cash-flow presentation and classification, and acquisition accounting. Disclosure controls were deemed ineffective as of March 31, 2015. The company reported corrective actions and new hires, and was seeking a replacement CFO and additional accounting staff.
- Fortegra’s class action concerning policy coverage remained pending; the company could not estimate a reasonably possible loss range. Management believed the case should not materially adversely affect the company but noted punitive-damage risk. A separate Fortegra acquisition class action was settled on April 20, 2015 through additional disclosures, with merger terms unchanged.
- Fortegra had $276.1 million of reinsurance receivables; the three largest unrelated reinsurer balances totaled $148.7 million. Management did not believe the concentration presented a loss risk. Investors should also consider insurance claims experience, debt and interest-rate exposure, collateral and covenant requirements, and the significant Level 3 valuation inputs disclosed in the filing.
- Management reported that Care’s Terraces Portfolio guarantors failed a net-worth covenant, but the lender waived compliance. Other major subsidiary borrowers reported covenant compliance at quarter-end.
- The company early adopted accounting guidance for consolidated CLOs, and revised prior-period presentation for accounting and reclassification matters. The 2014 comparison is also affected by the retrospective presentation of PFG as discontinued operations and by acquisition timing.
Most important facts for investors to verify
- Progress, final terms, proceeds, and required debt repayment upon the PFG sale.
- Remediation and subsequent testing of the disclosed material weakness, including CFO and finance-team staffing.
- Fortegra’s underwriting, claims and loss-adjustment trends, reinsurance recoverability, and the outcome of the pending litigation.
- Debt maturities, covenant headroom, interest costs, and the distinction between Tiptree debt and non-recourse CLO obligations.
- Whether Care’s new seniors-housing acquisitions and joint ventures generate adequate cash flow to support their financing and operating costs.
- Reliance acquisition timing and funding, and whether reported adjusted EBITDA reconciles to sustainable continuing-operations performance.