Tiptree Financial Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2014, compared with 2013. Tiptree is a diversified holding company with insurance and insurance services, specialty finance, asset management, and real estate operations. It consolidates its Operating Company and subsidiaries, including CLOs; CLO assets and liabilities are generally ring-fenced and are not available to Tiptree’s general creditors. Luxury Mortgage was acquired in January 2014. At quarter-end, Tiptree’s combined direct and indirect ownership of Operating Company was approximately 53%.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $42.8 million | $29.9 million | $102.6 million | $71.8 million |
| Total expenses | $36.7 million | $25.0 million | $97.9 million | $71.8 million |
| Net income (loss) available to Class A common stockholders | $0.3 million | $1.8 million | $2.4 million | $6.6 million |
| Class A diluted EPS | $0.01 | $0.18 | $0.18 | $0.64 |
| Operating cash flow | Not presented by quarter | $65.7 million | $41.1 million |
- Consolidated net loss was $13.5 million in Q3 2014 versus net income of $1.9 million a year earlier. For the nine months, consolidated net loss was $20.0 million versus net income of $12.0 million. The 2013 nine-month result included $17.1 million of discontinued-operation income, including the Bickford portfolio sale.
- CLO consolidation materially affects GAAP results: CLOs recorded a $19.6 million net loss in Q3 and a $23.8 million net loss for the nine months, driven in part by credit-market mark-to-market declines. Management’s non-GAAP Economic Net Income was $5.5 million for Q3 and $8.2 million year to date, versus $1.9 million and $6.9 million, respectively. ENI is not a substitute for GAAP results.
- Revenue growth reflected acquired and expanded operations, including Care properties and Luxury, increased interest income, mortgage-loan sale gains, and the $7.9 million gain on repayment of the Westside Loan. Q3 expenses rose 46.7%, faster than revenue growth of 43.3%, with higher interest, payroll, professional fees, and operating costs.
- At September 30, unrestricted cash was $179.9 million and restricted cash was $23.8 million. Total assets were $7.05 billion, including $4.46 billion of separate-account assets and $1.63 billion of consolidated CLO assets. Total stockholders’ equity was $547.8 million; Tiptree-attributable equity was $247.3 million.
- Reported debt was $425.3 million, excluding $1.42 billion of consolidated CLO liabilities. Debt increased from $360.6 million at December 31, 2013. The company also reported $19.2 million of short U.S. Treasury positions. Cash provided by operating activities was partly attributable to VIE activity; investing used $242.9 million and financing provided $236.5 million during the nine months.
- Gross margin is not presented as a clear, comparable metric for this diversified financial-services business.
Changes, outlook, and risks
- Revenue increased 43% year over year for both the quarter and nine-month period, but common-stockholder income declined. The nine-month comparison is also affected by the prior-year Bickford sale and discontinued operations.
- Management expected to use a substantial portion of available cash toward the approximately $218 million Fortegra acquisition, then expected to close in Q4 2014 or Q1 2015 subject to customary conditions and insurance regulatory approvals. Management described the acquisition as potentially a material positive contributor to 2015 results, without assurance.
- After quarter-end, Tiptree agreed to sell PFG to a Blackstone affiliate for approximately $155 million, plus additional consideration tied to PFASC cash, with closing expected in Q3 2015 subject to conditions and regulatory approval. Management expected to reinvest proceeds. The filing stated that PFG’s COLI/BOLI administration-fee revenue was expected to remain relatively steady through 2014, but not continue for Tiptree in 2015 following the sale.
- Management expected to sponsor CLOs in 2015 and said Telos 6 was expected to close in Q4 2014. It cautioned that regulatory uncertainty, reduced institutional demand, wider AAA spreads, credit-market movements, and loan valuation losses could weigh on CLO issuance and returns.
- Other cited sensitivities include interest-rate exposure in long-duration tax-exempt assets, mortgage-market volume and regulatory changes, and rising operating and financing costs. Additional funding may be needed for acquisitions, CLO formation, or subsidiary regulatory capital; subsidiaries’ distributions are subject to financing and regulatory restrictions.
- Two Fortegra-shareholder lawsuits were subject to a settlement memorandum requiring supplemental disclosures; court approval remained pending. Management did not expect ordinary-course litigation to have a material adverse effect. Management reported disclosure controls were effective, while evaluation of internal controls for businesses contributed in 2013 was ongoing.
Key facts for investors to verify
- Whether the Fortegra acquisition closed as planned, its final funding and financing, and its realized contribution to earnings and cash flow.
- Whether the PFG sale closed, final proceeds and adjustments, and the resulting loss of administration-fee income and impact on capital and liquidity.
- Underlying CLO credit performance, valuation assumptions and Level 3 exposures, and the difference between consolidated GAAP CLO results and Tiptree’s economic interest.
- Debt maturities, borrowing costs, covenant compliance, warehouse funding needs, and the amount of unrestricted cash remaining after transactions.
- Share-count and ownership changes from TFP unit exchanges; Class A shares rose materially, including further exchanges after quarter-end.
- Resolution of the Fortegra litigation and completion of the pending internal-control evaluation for contributed businesses.