Tiptree Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; unaudited. Tiptree is a holding company with one reportable segment, Tiptree Insurance, and other activities grouped as Tiptree Capital. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $129.7 | $183.9 |
| Pre-tax income (loss) | $(81.8) | $5.2 |
| Net income (loss) attributable to common stockholders | $(60.0); diluted EPS $(1.74) | $3.9; diluted EPS $0.11 |
| Operating EBITDA (non-GAAP) | $15.8 | $12.6 |
| Adjusted EBITDA (non-GAAP) | $(70.9) | $14.6 |
| Operating cash flow | $25.2 provided | $8.2 used |
| Investing cash flow | $47.3 used | $94.7 provided |
| Financing cash flow | $29.7 provided | $82.0 used |
Revenue fell 29.5%, chiefly due to investment valuation losses amid COVID-19 market volatility. Reported net realized and unrealized losses were $62.4 million; management cited $83.9 million of losses in the Adjusted EBITDA reconciliation. Insurance underwriting and fee revenue grew, but did not offset investment losses and higher expenses. The income tax benefit was $21.2 million.
Insurance gross written premiums rose 39.5% to $276.8 million and net written premiums rose 9.5% to $132.5 million. Underwriting margin, a non-GAAP measure, increased 29.5% to $42.1 million. The insurance combined ratio was 93.3%, compared with 93.5%; below 100% indicates underwriting profit under the company’s definition. Insurance pre-tax loss was $27.1 million, including $33.6 million of investment losses. Tiptree Capital had a $46.3 million pre-tax loss, primarily reflecting a $48.5 million unrealized loss on Invesque.
At March 31, total assets were $2,422.7 million and total stockholders’ equity was $344.3 million, versus $2,198.3 million and $411.4 million, respectively, at December 31, 2019. Book value per share, a non-GAAP measure, was $9.73; management reported a 15.2% decline including dividends. Cash and cash equivalents were $108.8 million, of which $84.0 million was outside statutory insurance subsidiaries; restricted cash was $45.4 million. Cash, cash equivalents and restricted cash totaled $154.2 million for cash-flow reporting.
Debt, net, was $433.1 million; the debt table reports $444.9 million face value before discounts and financing costs. The February refinancing established a $125 million Fortress term loan due in 2025, with a 6.75% margin over LIBOR subject to a 1% LIBOR floor. An insurance revolving facility had $48.2 million drawn against $75 million capacity and was extended to July 2020. Mortgage warehouse borrowings were $67.9 million. Management said the company was in compliance with debt covenants or had waivers, and expected liquidity to be adequate for at least 12 months.
Material changes and transactions
- On January 3, 2020, Tiptree acquired Smart AutoCare. Cash paid at closing was $111.8 million, with a simultaneous $102 million payment to the acquired insurer under a commutation transaction. The deal includes potential earn-outs of up to $80 million, subject to specified performance measures, and a reserve-related purchase-price adjustment. Preliminary purchase accounting recorded $64.5 million goodwill and $93.7 million intangible assets. Post-acquisition revenue was $14.6 million and pre-tax loss was $1.0 million.
- Insurance service and administrative fees increased 68.7% to $43.7 million, reflecting warranty and credit-program growth and the acquisition. Policy and contract benefits increased 49.3% to $60.9 million; commissions declined 6.0% to $70.4 million.
- In February, Tiptree refinanced its prior Fortress facility, increasing principal to $125 million and extending maturity to February 2025. The company said the transaction generated approximately $53 million of cash after repayment and expenses.
- The company repurchased 583,131 shares for $3.9 million, at an average $6.76 per share, and declared a $0.04 per-share quarterly dividend. A subsequent $0.04 dividend was declared May 5, payable May 25, 2020.
- Luxury remained classified as held for sale under a definitive sale agreement. At quarter end, related assets held for sale were $85.0 million and liabilities were $79.9 million; no impairment was recorded.
Outlook, risks and contingencies
Management expected insurance sales to continue growing in 2020, but at a slower pace as COVID-19 disrupted auto dealerships, retail partners and other distribution channels. Reduced driving and service calls could also reduce claims. Management said prolonged economic shutdown could further slow business growth and cause additional investment losses. Invesque suspended its dividend after quarter end, reducing expected cash inflows; its occupancy and operating performance were identified as uncertain.
Management also cited shipping-market volatility: weaker economic activity reduced demand for dry-bulk shipping, while oil oversupply increased demand for tanker storage. Low interest rates may reduce income on certain floating-rate investments, while the LIBOR floor limits further reductions in corporate borrowing costs. Investment values, especially Invesque and other fair-value holdings, remain exposed to market and issuer-specific changes. The company’s large reinsurance receivables and dependence on financing facilities are additional liquidity and counterparty considerations; management stated certain major reinsurer receivables were collateralized.
A long-running Kentucky class action involving certain credit insurance policies seeks compensatory and punitive damages. The company is defending the case, considers a material adverse outcome unlikely, but said it cannot reasonably estimate a loss range. Other ordinary-course proceedings were not believed likely to have a material adverse effect. Management identified no material changes to previously disclosed risk factors apart from COVID-19. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of the reported loss reflects fair-value marks that could reverse, and how concentrated and liquid are the affected investments, especially Invesque?
- Whether COVID-19 materially affects insurance distribution, warranty sales, claims, investment values, maritime operations, and the timing of recovery.
- Smart AutoCare’s final purchase-price allocation, post-acquisition performance, legacy reserve adequacy, and any earn-out or true-up obligations.
- Availability and renewal terms of short-term revolving and warehouse facilities, covenant headroom, and the distinction between reported net debt and face-value obligations.
- Insurance reserve development, including the $6.4 million of adverse prior-year case development reported for the quarter, and the collectability and collateral support for reinsurance receivables.
- Whether Invesque’s dividend suspension and potential operating weakness affect Tiptree’s cash flows, liquidity, and book value.