Tiptree Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts are in U.S. dollars; financial amounts below are rounded to millions unless stated otherwise. Tiptree is a holding company with specialty insurance, asset management, and mortgage segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $172.7M | $144.9M | $473.4M | $430.4M |
| Net income (loss) attributable to common stockholders | $(0.6)M | $(3.1)M | $23.8M | $(6.5)M |
| Diluted earnings (loss) per share | $(0.02) | $(0.11) | $0.69 | $(0.22) |
| Operating EBITDA (non-GAAP) | $14.4M | $15.5M | $38.4M | $42.2M |
| Adjusted EBITDA (non-GAAP) | $7.7M | $4.8M | $23.2M | $23.3M |
Q3 revenue rose 19.1%, largely on higher earned premiums and service fees, while the common-stockholder loss narrowed. Nine-month common-stockholder profit primarily reflects the Care sale; continuing operations recorded a $5.1M loss, while discontinued operations reported $34.5M of net income, including the sale gain. Non-GAAP EBITDA measures are not substitutes for GAAP results.
- Insurance growth and underwriting: Nine-month gross written premiums were $619.5M, up 10.5%; net written premiums were $336.5M, up 11.3%. Specialty insurance pre-tax income was $15.8M versus $1.7M. The combined ratio was 93.1% for the nine months, compared with 93.2%; in Q3 it was 93.2% versus 92.6%.
- Other segments: Nine-month asset-management pre-tax income fell to $1.5M from $13.1M, mainly due to lower CLO distributions and fees. Mortgage pre-tax income was $0.9M versus $0.5M, while Q3 mortgage income declined to $0.4M from $1.5M amid lower origination volume.
- Balance sheet and liquidity: At September 30, total assets were $1.797B, total liabilities $1.401B, and stockholders’ equity $396.0M. Cash and cash equivalents were $82.8M; cash, cash equivalents and restricted cash totaled $93.5M. Management said available cash, subsidiary distributions and financing access should fund operations for at least 12 months.
- Debt: Debt was $375.7M at face value ($365.3M net of discounts and financing costs), versus $356.1M face value at year-end 2017. Corporate debt was $235.1M and asset-based debt $140.6M. The filing reports compliance with debt covenants or waivers for any non-compliance events.
- Cash flow and shareholder returns: Nine-month operating cash flow was $43.6M, investing cash flow $(92.1)M, and financing cash flow $(7.0)M; cash, cash equivalents and restricted cash decreased $55.5M. Tiptree repurchased 2.11M shares at an average $6.51 and declared $0.105 per share in dividends for the first nine months.
- Book value: Management-reported book value per share (non-GAAP) was $10.77, compared with $9.67 at September 30, 2017.
Material changes and unusual items
- Tiptree sold Care and two senior-living properties on February 1, 2018, receiving about 16.6M Invesque shares. The sale produced a $46.2M gain; the filing reports approximately $44.2M of pre-tax comprehensive income on the transaction. Care is presented as discontinued operations.
- The Invesque investment was carried at fair value. Tiptree reported $6.7M of Invesque dividends for the first nine months, partly offset by $8.3M of unrealized losses in the “Other” segment; management also attributed material consolidated unrealized losses to changes in Invesque’s share price. The shares were subject to sale restrictions.
- In April, Tiptree completed a reorganization merger with Tiptree Financial Partners, ending the dual-class structure and eliminating the related non-controlling interest. It also repurchased shares under a buyback program.
- The comparison with 2017 is affected by discontinued Care operations and Tiptree’s 2017 exits from consolidated CLOs. The 2018 nine-month profit is therefore not a straightforward measure of recurring continuing-operations earnings.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management described growth opportunities in warranty and specialty-program insurance and geographic expansion, while noting that investments in new products and geographies may affect near-term results.
- Management estimated a 24%–26% consolidated effective tax rate for 2018. It identified economic conditions, interest rates, market volatility, regulation, underwriting results and fair-value changes as factors that can materially affect results.
- Invesque’s valuation and dividends are significant sensitivities: Tiptree warned that a decline in share value or dividends could materially adversely affect its financial condition and results.
- The company is defending the long-running Mullins class action concerning certain credit insurance policies. Management said it did not expect a materially adverse outcome but could not estimate a reasonably possible loss range; punitive damages are a stated industry risk.
- Insurance reserves, reinsurance recoverables, Level 3 valuations and mortgage warehouse funding involve estimation, counterparty or liquidity risks. The filing reports $392.6M of reinsurance receivables; the three largest non-affiliated reinsurer balances totaled $93.2M and were described as collateralized.
- The board declared a subsequent quarterly dividend of $0.035 per share on November 1, 2018, payable November 26, 2018. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported nine-month profit and book-value growth depends on the Care transaction and the fair value and dividends of Invesque shares.
- Whether premium growth can be sustained while claims, commissions and expenses rise, and how loss development and reinsurance recoverables evolve.
- Recurring earnings trends in asset management and mortgage operations, including CLO fee and distribution run-off and mortgage volumes and margins.
- Debt maturities, variable-rate exposure, warehouse-facility renewals and the availability of cash at regulated subsidiaries; insurance subsidiary dividends are subject to statutory limits.
- Developments in the Mullins litigation and any material changes in the estimated exposure, reserve adequacy or other contingencies.