Tiptree Inc. (TIPT) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Tiptree is a holding company with Insurance and Mortgage reportable segments; its largest operating business is specialty insurer and service provider Fortegra. Unless noted, amounts below are in millions of U.S. dollars.
Financial performance and position
- Revenue: $381.6, up 17.5% from $324.9. Growth in insurance premiums and service fees was partly offset by lower mortgage and other business revenue.
- Profit: Consolidated net income was $3.2, versus a net loss of $0.9. After $4.2 attributable to non-controlling interests, the loss attributable to Tiptree common stockholders was $1.1, or $0.03 per share, compared with a $1.0 loss, also $0.03 per share. The 2023 effective tax rate was 61.5%, chiefly reflecting deferred taxes on Tiptree’s Fortegra investment.
- Non-GAAP results: Adjusted net income was $17.3 versus $15.5; Adjusted EBITDA was $23.4 versus negative $14.9. These management-defined measures are not GAAP substitutes.
- Cash flow: Operating activities provided $43.0, down from $149.1. Investing activities used $247.5, largely for investment purchases and the Premia acquisition; financing activities provided $78.3. Cash, cash equivalents and restricted cash ended at $425.9, down $124.9 from year-end. Unrestricted cash and cash equivalents were $412.0.
- Margins and segments: Insurance’s combined ratio was 91.3% versus 90.5% (below 100% generally indicates underwriting profit); insurance pre-tax income rose to $19.4 from $14.7. Mortgage reported a $2.6 pre-tax loss versus $4.3 income; originations fell 42.8% to $202.8. Other operations had $1.4 pre-tax income versus a $7.7 loss; corporate expenses were $10.1 versus $12.2.
- Balance sheet and debt: Total assets were $4,308.0, up from $4,039.6 at December 31, 2022; total equity was $541.6 versus $533.6. Net debt was $347.5 versus $259.4. The increase included a $75.0 draw on Fortegra’s revolving facility and higher asset-based and mortgage warehouse borrowings. The company reported compliance with debt covenants or waivers for any non-compliance.
- Other metrics: Book value per share, a non-GAAP measure, was $10.91 versus $10.51 at March 31, 2022. The quarterly common dividend was $0.05 per share, up from $0.04.
Material changes versus Q1 2022
- Insurance gross written premiums and premium equivalents increased 24.9% to $750.3; insurance revenue rose 30.4% to $368.4. Insurance growth reflected specialty lines and service contracts, with higher investment income also contributing.
- Insurance losses and loss adjustment expenses rose 37.3% to $114.3, while the combined ratio increased 0.8 percentage point to 91.3%. Management attributed the ratio change mainly to product mix.
- Mortgage origination volumes and segment revenue declined amid higher mortgage rates; lower volumes and a negative mortgage-servicing-rights fair-value adjustment contributed to the segment’s swing to a pre-tax loss.
- Other revenue fell substantially, principally reflecting Luxury’s deconsolidation and the 2022 sale of five vessels. Invesque-related losses were lower than in the prior-year quarter.
- Q1 2023 other comprehensive income was $8.4, versus a $20.5 loss in Q1 2022, including a $9.5 change in unrealized gains on available-for-sale securities. AFS securities’ fair value was $810.4 versus $612.0 at year-end 2022.
Outlook, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided. Management expects available cash, subsidiary distributions, financing access and investment sales to support operations for at least the next 12 months, while noting that subsidiary distributions and funding depend on business, regulatory and financing conditions.
- Management commentary and risks: Management cites inflation and claims-cost pressure, interest-rate and investment-market volatility, fair-value movements, mortgage-rate sensitivity, and floating-rate borrowing costs. Mortgage operations depend in part on short-term, uncommitted warehouse financing. Reinsurance recoverables and counterparty performance are also relevant; management said major reinsurer receivables were substantially collateralized and did not identify a concentration-related loss risk.
- Contingency: In the long-running Mullins credit-insurance class action, the court issued adverse partial-summary-judgment rulings in 2022; Tiptree appealed. A trial was scheduled for December 2023. The company says it is vigorously defending the matter, but cannot estimate a reasonably possible loss range; management does not currently expect a materially adverse financial-position outcome.
- Acquisition and financing: Fortegra acquired a majority interest in UK automotive-protection provider Premia in February for approximately $22.5 net cash consideration. Preliminary purchase accounting recorded $19.7 of goodwill and $17.0 of intangible assets. Fortegra also drew $75.0 on its revolving credit facility, partly for the acquisition and general purposes.
- Taxes and capital: The Fortegra-related outside-basis deferred tax liability was $44.1 at quarter-end. Insurance subsidiaries exceeded applicable statutory capital and risk-based-capital thresholds. Ordinary dividends available from U.S. insurance subsidiaries without regulatory approval were approximately $32.9.
- The board declared a further $0.05-per-share quarterly dividend on May 2, 2023. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- Whether insurance premium growth and the sub-100% combined ratio persist as business mix shifts and claim costs respond to inflation.
- Mortgage origination trends, servicing-asset valuations, and continued access to warehouse funding as interest rates and volumes change.
- Investment portfolio marks and liquidity needs, including unrealized AFS losses, concentrated equity holdings and Invesque exposure.
- Debt balances, floating-rate interest costs, covenant compliance, and the capacity to fund growth while maintaining liquidity.
- Premia’s final purchase-price allocation and performance, and any resulting goodwill or intangible-asset impairment indicators.
- Developments in the Mullins litigation, including the appeal, trial status and any eventual estimate of potential exposure.
- The quality and collectability of reinsurance receivables and whether collateral remains adequate.
- The assumptions behind Adjusted net income and Adjusted EBITDA, and their reconciliation to GAAP results.