Tiptree Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparative results are for 2015 and 2014. The company is a diversified holding company with specialty insurance, asset management, senior living and specialty finance businesses.
Financial results and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $567.2 million | $438.5 million |
| Income (loss) from continuing operations | $32.3 million | $(13.8) million |
| Net income attributable to Class A stockholders | $25.3 million | $5.8 million |
| Diluted EPS | $0.78 | $0.17 |
| Adjusted EBITDA, non-GAAP | $78.9 million | $58.4 million |
| Cash and cash equivalents | $63.0 million | $69.4 million |
| Debt, net, excluding consolidated CLO liabilities | $793.0 million | $667.0 million |
| Total stockholders’ equity | $390.1 million | $397.7 million |
Revenue increased 29.4%; management attributed growth to higher insurance premiums, fees and investment income, asset-management incentive fees and investment returns, senior-living acquisitions, and increased mortgage volume. The $87.3 million of consolidated net realized and unrealized gains included $68.2 million of net gains on mortgage loans sold. Adjusted EBITDA is a company-defined non-GAAP measure; 2015 included $32.5 million from discontinued operations, whereas 2016 did not.
Cash flow from operating activities was $36.6 million, versus cash used of $9.5 million in 2015. Investing activities used $320.0 million and financing activities provided $277.0 million; cash decreased $6.4 million. Total assets were $2.89 billion, including $989.5 million of consolidated CLO assets. Consolidated CLO liabilities were $932.0 million; the filing states that CLO debt is non-recourse to Tiptree and CLO assets are not available to its general creditors.
The company paid $0.10 per Class A share in 2016 and repurchased 6.8 million shares for $43.8 million. Book value per share, as exchanged, a non-GAAP measure, was $10.14, up from $8.90. The board declared a subsequent quarterly dividend of $0.03 per share, payable in April 2017.
Segments and material changes
- Specialty insurance: Revenue was $394.2 million and pretax income $46.8 million, up from $32.0 million. Investment portfolio income, including realized and unrealized gains, was $27.7 million, compared with $6.5 million. The adjusted combined ratio was 89.5%, versus 87.4%; below 100% indicates underwriting profit. Net written premiums rose 85.2%, partly because Fortegra assumed $138.7 million of credit-protection contracts from a third party reinsurer beginning October 2016, increasing retained risk.
- Asset management: Pretax income was $25.3 million, compared with a $6.8 million loss, reflecting CLO-related gains and incentive fees and the launch of Telos 7. Fee-earning AUM was approximately $1.9 billion, broadly flat year over year. Tiptree sold its Telos 5 investment for $15.9 million in January 2017.
- Senior living: Revenue increased 31.7% to $60.7 million; pretax loss narrowed to $5.8 million from $9.5 million. Segment NOI, a non-GAAP measure, increased 37.5% to $22.1 million. The portfolio comprised 29 properties in 11 states.
- Specialty finance: Revenue rose 73.5% to $95.4 million and pretax income was $8.2 million. Mortgage originations increased 49.1% to $1.9 billion, with improved revenue margins; the results also reflected a full year of Reliance, acquired in July 2015.
- Corporate and other: Pretax loss was $31.1 million, versus $34.4 million. Corporate costs included spending on reporting and control infrastructure.
Liquidity, outlook, risks and unusual items
- Management expected cash, subsidiary distributions and access to financing to fund operations for at least 12 months. Subsidiary distributions may be constrained by debt covenants and regulation; insurance subsidiaries had approximately $9.0 million available for ordinary dividends without regulatory approval.
- Parent-company debt under the Fortress facility was $58.5 million, bearing interest at LIBOR (subject to a 1.25% floor) plus 6.50%, with maturity in September 2018. The company reported compliance with debt covenants or waivers for any noncompliance. Mortgage warehouse financing is short-term and some facilities are uncommitted.
- Management described favorable but uncertain economic conditions and did not provide numerical earnings or revenue guidance. It cited gradually rising rates and continued growth opportunities, while warning that higher rates could pressure mortgage demand, asset values and borrowing costs. No quantitative forward guidance is provided in the filing text.
- Key exposures include insurance reserve adequacy and reinsurance recoverability; credit, interest-rate and market risks; illiquid and Level 3 valuations, including non-performing loans and CLO interests; leverage and collateral calls; mortgage repurchase obligations and warehouse funding; senior-living occupancy, operating costs and regulation; and potential changes to CLO risk-retention rules.
- Fortegra faces a certified class action concerning coverage terms under certain policies. A motion for summary judgment was denied as to certain disability policies; the company said it could not estimate a reasonably possible loss range, while management did not expect a material adverse financial effect.
- A $4.0 million tax benefit related primarily to a tax reorganization reduced the 2016 effective tax rate to 25.3%; management stated the rate before that benefit was 34.7%. The company also reported that previously identified material weaknesses had been remediated. Management and KPMG concluded internal control over financial reporting was effective; KPMG issued unqualified opinions on the financial statements and controls, excluding three recently acquired senior-living properties from the controls audit.
Investor verification priorities
- Assess how much 2016 earnings and adjusted EBITDA depended on fair-value gains, mortgage loan sale gains, CLO recovery and the one-time tax benefit.
- Verify insurance performance after the increased risk retention, including the adjusted combined ratio, claims development, reinsurance collateral and reinsurer credit quality.
- Review debt maturities, borrowing costs, warehouse renewals and liquidity available at the parent versus regulated or otherwise restricted subsidiaries; distinguish corporate debt from non-recourse CLO obligations.
- Test the assumptions and sensitivity of Level 3 valuations, NPL recoveries, CLO investments and mortgage repurchase reserves.
- Monitor senior-living occupancy and property-level margins, specialty-finance profitability as rates change, and progress on internal-control remediation at newly acquired properties.
- Follow developments in the Mullins litigation and the implementation of CLO risk-retention requirements; the filing provides no reasonably estimable litigation loss range.