Tiptree Inc. (TIPT) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial-statement amounts are rounded to millions unless stated otherwise.
Business context
Tiptree is a holding company with one reportable segment, Tiptree Insurance, which provides specialty insurance, warranty products and related services. Tiptree Capital includes mortgage, maritime, specialty-finance and other investments. On January 3, 2020, Tiptree acquired Smart AutoCare, a vehicle-warranty business, for $111.8 million in cash at closing.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $199.2 million | $191.1 million | $328.9 million | $375.0 million |
| Net income (loss) attributable to common stockholders | $3.8 million | $11.7 million | $(56.2) million | $15.7 million |
| Diluted EPS | $0.10 | $0.32 | $(1.64) | $0.43 |
| Operating EBITDA (non-GAAP) | $22.2 million | $12.7 million | $38.0 million | $25.3 million |
| Adjusted EBITDA (non-GAAP) | $12.6 million | $22.9 million | $(58.3) million | $37.5 million |
Q2 revenue increased 4.2%, mainly from higher service and administrative fees, including Smart AutoCare. First-half revenue fell 12.3%, primarily due to investment marks. First-half net realized and unrealized investment losses were $32.3 million GAAP-wide; management separately cited $90.2 million of losses on specified investments for its non-GAAP reconciliation. These measures have different scopes.
- Insurance: First-half segment pretax loss was $13.0 million versus $20.1 million income a year earlier, reflecting $28.0 million of investment losses versus $5.8 million of gains. Insurance Operating EBITDA rose to $29.0 million from $28.5 million. The combined ratio improved to 92.6% from 93.2%; below 100% indicates underwriting profit under the company’s definition.
- Capital: First-half pretax loss was $48.1 million versus $17.6 million income, driven principally by $58.4 million of unrealized losses on Invesque. Specialty-finance and maritime Operating EBITDA improved.
- Insurance volumes: First-half gross written premiums rose 6.2% to $489.5 million, while net written premiums fell 15.2% to $232.9 million, including the effect of lower credit-protection volumes and increased cession. Underwriting margin, a non-GAAP measure, increased to $82.3 million from $67.6 million.
Cash flow, balance sheet and liquidity
- At June 30, 2020, total assets were $2.48 billion and total stockholders’ equity was $347.2 million, down from $411.4 million at December 31, 2019. Book value per share was $9.97, compared with $11.47 a year earlier; management attributed the decrease primarily to investment losses and dividends, partly offset by share repurchases.
- Cash and cash equivalents were $80.6 million, of which $70.2 million was outside statutory insurance subsidiaries. Restricted cash was $77.3 million; cash, cash equivalents and restricted cash totaled $157.9 million.
- First-half operating cash flow was $60.3 million, versus $1.8 million in 2019; investing cash outflow was $36.1 million, versus $156.3 million provided; financing cash outflow was $13.8 million, versus $64.5 million. Operating cash flow benefited from mortgage-loan sales exceeding originations and growth in warranty deferred revenue.
- Debt, net, on the balance sheet was $402.3 million. The debt note reports $413.7 million of face-value debt before unamortized discounts and financing costs. Separately, $71.1 million of debt was included in liabilities held for sale. The debt schedule lists $62.7 million of principal maturities for the remainder of 2020 and $50.6 million in 2021.
- The February 2020 refinancing established a $125 million secured term loan maturing in February 2025 at LIBOR, subject to a 1% floor, plus 6.75%. An insurance-company revolving facility had $17.6 million drawn against $75 million capacity at quarter-end; its maturity was extended to October 2020. Management said the company expected available cash, subsidiary distributions and financing access to fund operations for at least 12 months.
Material changes, outlook and risks
- Smart AutoCare contributed $29.9 million of revenue and a $0.1 million pretax loss from acquisition through June 30. Purchase accounting remains preliminary. The agreement includes contingent earn-outs of up to $80 million, subject to performance conditions, and a legacy-reserve true-up.
- COVID-19 disrupted auto-dealer and retail distribution, contributing to lower second-quarter credit-protection and warranty volumes. Reduced driving and service activity also reduced claims in some areas. Management expected insurance sales to continue growing in 2020, but at a slower pace; this is not a formal earnings forecast.
- Management identified continued market volatility, potential further COVID-19 disruption, concentrated equity exposures, and the impact of low interest rates as risks. Invesque suspended its dividend in April and its share-price decline materially affected results. Shipping rates and vessel values also remain exposed to uncertain global demand and oil-market conditions.
- Management reported compliance with debt covenants or that any non-compliance had been waived. The company had $13.4 million of insurance-subsidiary ordinary dividend capacity without regulatory approval, subject to statutory restrictions.
- The company declared a $0.04-per-share quarterly dividend in August 2020. It repurchased 1.34 million shares for $8.5 million during the first half. A July 2020 reorganization changed the corporate structure; an August 2020 Fortegra credit agreement provided a $200 million revolving facility, available for letters of credit, with a $17.5 million swing-loan sublimit.
- A long-running Kentucky class action concerning credit-insurance coverage remains pending. Tiptree is defending the matter, says it does not expect a material adverse resolution, but cannot estimate a reasonably possible loss range.
Most important facts for investors to verify
- How much of first-half losses reflects temporary fair-value movements, particularly Invesque, and how concentrated are remaining investment exposures?
- Whether Smart AutoCare integration, final purchase accounting, legacy reserves and contingent earn-outs materially change returns or liabilities.
- Whether COVID-related distribution disruption, premium trends, claim costs and reinsurance terms affect insurance underwriting and the stated slower-growth outlook.
- Near-term debt maturities, warehouse-line renewals, covenant headroom, and the availability of cash held within regulated insurance subsidiaries.
- The potential financial exposure from the Kentucky class action and the timing or outcome of the Luxury sale.