Tiptree Financial Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing was submitted March 18, 2014. The company is a diversified holding company operating in insurance and insurance services, specialty finance, asset management, and real estate.
Business context and reporting changes
July 1, 2013, contribution transactions combined substantially all of Tiptree Financial Partners’ and Care Inc.’s assets under Tiptree Operating Company. Tiptree owns approximately 25% of Operating Company and TFP approximately 75%; Tiptree consolidates Operating Company. The transactions were accounted for as a combination under common control, and comparative results were recast. Tiptree also ceased to qualify as a REIT and became a taxable corporation retroactively from January 1, 2013.
Other notable activity included issuing two CLOs, acquiring a controlling interest in Siena, expanding Care’s senior-housing portfolio, and selling the Bickford portfolio. In January 2014, Tiptree acquired 67.5% of Luxury Mortgage; its results are expected to be consolidated beginning in first-quarter 2014.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $100.9 million | $70.2 million |
| Total expenses | $99.1 million | $67.3 million |
| Income before tax, continuing operations | $6.2 million | $36.5 million |
| Continuing-operations income (loss) | $(0.7) million | $36.8 million |
| Net income | $16.4 million | $39.7 million |
| Net income available to Class A holders | $8.8 million; $0.86 per share | $8.7 million; $0.85 per share |
| Economic Net Income of Tiptree (non-GAAP) | $9.0 million | $9.0 million |
| Unrestricted cash at year-end | $120.6 million | $88.6 million |
Revenue increased 43.7%, primarily reflecting a full year of administrative service fees from the 2012 PFAS acquisition, as well as higher interest and rental income. Expenses rose 47.2%, driven mainly by payroll, interest, and other expenses. Net income included a $15.5 million gain on the Bickford sale; continuing-operations results were weighed down by a $6.9 million tax provision following the change in tax status. The reported effective tax rate on continuing operations was 111.1%.
Cash flow from operations was $(18.4) million, compared with $36.7 million provided in 2012; investing cash flow was $(689.2) million and financing cash flow was $739.6 million. Management attributes much of the investing and financing movement to the formation and consolidation of CLOs. Tiptree reported $565.9 million of total stockholders’ equity, versus $535.6 million a year earlier.
Debt on the consolidated balance sheet was $360.6 million, excluding separately presented consolidated-CLO liabilities of $1.176 billion. CLO notes payable were $1.154 billion; these are non-recourse to Tiptree and are collateralized by CLO assets. The $49.5 million Fortress borrowing bears one-month LIBOR, subject to a 1.25% floor, plus 6.50%, and matures in 2018. Management planned to deploy a significant portion of year-end cash in 2014 for acquisitions, CLO sponsorship, existing businesses, and new products.
Material changes, outlook, and risks
- Net realized and unrealized gains declined 58.0%, from $12.8 million to $5.4 million. Management cited 2012 gains from falling rates on long-duration tax-exempt assets; values were comparatively flat in 2013.
- Insurance and insurance-services segment profit increased to $14.0 million from $3.3 million, principally reflecting PFAS administrative fees. Specialty finance segment profit decreased to $16.2 million from $23.3 million, while asset-management profit fell to $1.9 million from $7.0 million. Real-estate segment profit rose to $15.3 million from $1.5 million, primarily due to the Bickford sale gain.
- Management expected PFAS administrative fees to remain relatively constant in 2014 absent significant policy terminations. It said the asset-based lending business was loss-making during its startup year and aimed to reach profitable scale in 2014, while cautioning that this was not assured.
- Management noted uncertainty in CLO issuance from regulatory developments and institutional demand, wider spreads on senior CLO tranches, and potential pressure on returns from new CLOs. Mortgage volumes are interest-rate sensitive, and the impact of new qualified-mortgage rules was uncertain.
- Key risks include credit, market and interest-rate exposure; leverage and collateral calls; illiquid or hard-to-value assets; reliance on reinsurers and ratings for PFG; policy lapses affecting PFAS fees; regulatory and healthcare-property risks; and restrictions on distributions from regulated subsidiaries. The company also disclosed potential conflicts involving executives’ outside roles and TFP’s control rights.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal controls were effective, but businesses contributed in July 2013 were excluded from the annual internal-control assessment, which management expected to complete with the 2014 Form 10-K.
Important facts for investors to verify
- Separate-account assets and liabilities were each $4.625 billion, and CLO assets and liabilities are consolidated despite limited economic exposure; distinguish these balances from assets and debt available to or owed by Tiptree generally.
- Reconcile the $16.4 million consolidated net income, $8.8 million available to Class A holders, and $9.0 million non-GAAP Tiptree Economic Net Income, including CLO and non-controlling-interest adjustments.
- Assess the sustainability of the Bickford gain, PFAS servicing fees, and 2013 segment results, as well as the outlook and performance of the newly acquired Luxury and Siena businesses.
- Review debt terms, covenant headroom, subsidiary dividend restrictions, and whether planned cash deployment and future CLO sponsorship require additional capital.
- Consider the tax transition, the unusually high reported effective tax rate, and the potential limitations on using net operating losses after ownership changes.