Tiptree Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial amounts below are in millions unless noted. Tiptree is a holding company with Insurance (principally Fortegra) and Mortgage reportable segments, plus other Tiptree Capital activities.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $404.5 | $339.8 | $786.1 | $664.7 |
| Net income (loss) attributable to common stockholders | $6.0 | $(22.4) | $4.9 | $(23.4) |
| Diluted EPS | $0.16 | $(0.64) | $0.13 | $(0.67) |
| Adjusted net income (non-GAAP) | $23.8 | $14.0 | $41.1 | $29.4 |
| Adjusted EBITDA (non-GAAP) | $25.6 | $55.4 | $49.0 | $40.5 |
Revenue growth reflected stronger insurance earned premiums, fees and investment income, partly offset by weaker mortgage and shipping activity. The prior-year GAAP loss was materially affected by $25.5 million of tax expense related to Tiptree’s investment in Fortegra following the Warburg transaction. Q2 2023’s effective tax rate was 50.0%; the filing attributes elevated rates primarily to deferred taxes on Tiptree’s outside-basis investment in Fortegra. Adjusted measures are non-GAAP and should not be treated as substitutes for GAAP results.
- Insurance: Six-month revenue was $753.1 million, up 30.7%; pretax income was $49.9 million versus $23.8 million. Gross written premiums and premium equivalents rose 34.3% to $1.605 billion. The six-month combined ratio was 91.2% versus 90.7% a year earlier; Q2 was 90.5% versus 90.9%.
- Mortgage: Six-month pretax loss was $1.3 million versus $4.3 million income. Origination volume fell 34.9% to $430.7 million, while gain-on-sale margin improved to 4.8% from 4.5%.
- Other Tiptree Capital: Six-month pretax income was $2.9 million versus $1.4 million. Lower shipping activity after the 2022 sale of five vessels and Luxury’s deconsolidation reduced year-over-year revenue.
For the six months, operating cash flow was $36.4 million, down from $284.5 million; investing cash outflow was $272.6 million and financing cash inflow was $80.9 million. Cash, cash equivalents and restricted cash ended at $398.0 million, compared with $550.8 million at year-end 2022. Management says liquidity is expected to fund operations for at least the next 12 months and over the long term.
At June 30, total assets were $4.634 billion, total liabilities $4.088 billion and stockholders’ equity $546.1 million. Cash and cash equivalents excluding restricted cash were $372.4 million. Net debt was $361.2 million, versus $259.4 million at December 31, 2022; total debt at face value was $369.6 million. Fortegra had $80.5 million outstanding on a $200 million revolving facility, and mortgage warehouse borrowings were $61.0 million. Tiptree reported compliance with debt covenants or applicable waivers.
Material changes, outlook and risks
- Fortegra acquired a majority interest in UK automotive-protection provider Premia in February for approximately $19.7 million net cash consideration. The preliminary allocation included $18.4 million of goodwill and $18.2 million of intangible assets.
- One mortgage warehouse lender is exiting the market, accelerating the maturity of a line to September 30, 2023. The company said it was negotiating replacement facilities and expected to replace the line on substantially similar terms; this is not assured.
- Management cited inflation in claims replacement costs and labor, higher short-term rates, elevated mortgage rates, market and investment valuation volatility, reinsurance and reserve risks, and potential reduced mortgage funding availability as factors that could affect results. It cautioned that interim results are not necessarily indicative of full-year performance. No quantified full-year earnings guidance is provided in the filing.
- Insurance losses and loss-adjustment expenses increased with business growth and a shift toward commercial lines; the six-month period included $2.5 million of unfavorable prior-year claims development. Management considers it insignificant relative to premiums and reserves, but claims severity and reserve adequacy remain important risks.
- AFS securities had $52.8 million of gross unrealized losses at June 30. Management stated it was more likely than not the securities could be held until recovery; forced sales could realize losses. Invesque’s publicly traded shares are a significant, highly reduced-value investment and further declines could affect results.
- The company disclosed the long-running Mullins credit-insurance class action. It is appealing rulings on two subclasses; trial was scheduled for December 2023. Management said it could not estimate a reasonably possible loss range, while believing resolution should not materially harm financial position.
- On August 1, the board declared a $0.05-per-share quarterly dividend, payable August 28. The company also adopted a deferred compensation plan effective August 1.
Important facts for investors to verify
- Whether the mortgage warehouse line due September 30 was replaced, and the replacement’s capacity, pricing and terms.
- Subsequent insurance claims severity, reserve development, combined ratio and the effect of inflation and commercial-lines mix.
- Reinsurance recoverable balances, collateral and counterparty exposure as those balances grow.
- Cash generation and liquidity needs, including investment purchases, debt maturities and access to subsidiary distributions subject to regulatory limits.
- Progress and final purchase accounting for Premia, and the contribution of the acquisition to growth and earnings.
- The outcome and potential financial exposure of the Mullins litigation; the filing does not provide a clear estimable loss range.
- How GAAP earnings compare with non-GAAP adjusted results, particularly given the outside-basis tax effects and investment fair-value volatility.