TIPTREE INC. quarterly report, Q2 FY2022

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Tiptree Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Amounts below are in millions of dollars unless otherwise noted. Tiptree operates Insurance and Mortgage segments, plus other investment and maritime businesses.

Financial performance

  • Q2 revenue: $339.8, up 13.4% year over year. First-half revenue: $664.7, up 11.8%.
  • GAAP earnings: Q2 net loss attributable to common stockholders was $22.4, versus income of $8.0 a year earlier; first-half loss was $23.4, versus income of $36.6. Diluted EPS was $(0.64) for Q2 and $(0.67) for the first half.
  • Key earnings driver: Income tax expense was $26.6 in the first half, including $25.5 of expense from the Fortegra tax deconsolidation associated with the Warburg transaction. Pre-tax income was $4.8 for Q2 and $3.9 for the first half.
  • Management’s non-GAAP measures: Adjusted net income was $14.0 for Q2 and $29.4 for the first half, compared with $13.1 and $26.3, respectively. Adjusted EBITDA was $55.4 for Q2 and $40.5 for the first half; the Q2 figure includes a $54.0 Warburg-related gain-to-book-value adjustment. These measures are not GAAP results.
  • Cash flow and liquidity: First-half operating cash flow was $284.5, investing cash use was $23.6, and financing cash use was $101.7. Cash and cash equivalents were $337.9 at June 30, versus $175.7 at year-end 2021; restricted cash was another $13.4. Management said available cash, subsidiary distributions, financing access and investment sales should fund operations for at least the next 12 months.
  • Debt and equity: Balance-sheet debt, net, was $261.8, down from $393.3 at year-end; this excludes $62.3 of debt presented within liabilities held for sale. Total stockholders’ equity was $525.3, including $134.9 of non-controlling interests. Book value per share, a non-GAAP measure, was $10.75.
  • Insurance performance: First-half Insurance revenue increased 21.4% to $576.4. Gross written premiums and premium equivalents rose 16.1% to $1,195.6. The combined ratio improved to 90.7% from 91.8% (below 100% generally indicates underwriting profit), while segment pre-tax income fell to $23.8 from $36.2, reflecting investment losses. Insurance adjusted net income increased to $40.1 from $26.9.
  • Mortgage and other businesses: First-half Mortgage pre-tax income declined to $4.3 from $18.9, as origination volume fell 16.9% and gain-on-sale margins decreased to 4.5% from 5.8%. Maritime pre-tax income increased to $16.4 from $2.5, including a $7.1 vessel-sale gain. Invesque investment losses weighed on other results.

Material changes versus prior periods

  • In June, Warburg invested $200.0 in Fortegra. At quarter-end, Tiptree owned approximately 79.2% of Fortegra, Warburg 17.4%, and management and directors 3.4%, before potential warrant exercise and preferred-stock conversion. The transaction reduced Tiptree’s ownership below 80%, causing Fortegra to leave Tiptree’s consolidated tax return group while remaining consolidated for GAAP reporting.
  • Higher interest rates contributed to $38.4 of first-half unrealized losses on available-for-sale securities in other comprehensive income and a $28.3 decline in Tiptree’s accumulated other comprehensive income/loss balance. The filing also reports $45.4 of first-half unrealized losses on these securities in its Adjusted EBITDA reconciliation.
  • Insurance revenue and written premium growth was offset at the earnings level by fair-value investment losses and higher claims and commission costs. Mortgage origination activity weakened as rates rose.
  • Tiptree repaid its $114.1 corporate secured term loan in June in connection with the Warburg transaction. It also repaid the vessel-backed loan at a discount, recognizing a $1.2 gain. The company reported compliance with debt covenants or applicable waivers at June 30.

Outlook, risks and unusual items

  • No specific full-year earnings or revenue guidance is provided. Management noted that interim results are not necessarily indicative of full-year results.
  • Management identifies inflation and rising interest rates as risks to claims costs, investment values, floating-rate debt costs and mortgage activity. It cautions that claims-cost increases may pressure underwriting margins if they cannot be reflected in premiums.
  • Insurance investment values, Invesque shares and other fair-value holdings may be volatile. Selling fixed-income securities before recovery could crystallize losses. The filing also notes potential uncertainty in replacing LIBOR with a successor benchmark.
  • Shipping results are exposed to cyclical charter rates, global trade and recession risk. The sale of one dry bulk vessel closed for $21.5; two remaining vessels were under agreements to sell for $46.2, with closing expected in Q3 2022.
  • Luxury remained classified as held for sale, subject to regulatory approval. Tiptree also acquired UK compliance-services provider ITC in April for approximately $15.0 net of acquired cash, plus potential earn-outs.
  • A long-running Kentucky class action remains pending; motions had not been decided, no trial date was set, and the company said it could not estimate a reasonably possible loss range. Management believes the matter should not materially adversely affect its financial position.
  • The company declared a $0.04-per-share quarterly dividend after quarter-end, payable August 29, 2022. The first-half dividend declared was $0.08 per share.

Important facts for investors to verify

  • How much of the reported GAAP loss reflects the Fortegra tax deconsolidation, and how do the non-GAAP adjustments reconcile to reported earnings?
  • Whether Fortegra sustains premium growth and underwriting performance as claims severity, business mix and inflation evolve.
  • Whether unrealized investment losses recover, and the exposure of book value and earnings to Invesque and other fair-value investments.
  • Mortgage volumes, gain-on-sale margins, servicing asset assumptions and warehouse financing availability in a higher-rate environment.
  • Completion and proceeds of the two remaining vessel sales, the Luxury sale, and any material outcome in the Kentucky litigation.
  • Debt maturities, floating-rate exposure, subsidiary dividend restrictions and the effect of Fortegra’s preferred dividends, conversion rights and warrants on Tiptree’s ownership and cash flows.