Tiptree Financial Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 31, 2015. The filing identifies the registrant as Tiptree Financial Inc. (NASDAQ: TIPT). Comparative 2013 figures are adjusted, including for accounting changes and discontinued-operation presentation.
Business context
Tiptree is a diversified holding company with businesses in insurance and insurance services, specialty finance, asset management, real estate, and corporate investments. It acquired Fortegra in December 2014 and included only post-acquisition results. It agreed to sell PFG to Blackstone; PFG’s results are presented as discontinued operations. Tiptree Financial directly and indirectly owned approximately 77% of Operating Company at year-end.
Financial results and key metrics
| Metric | FY 2014 | FY 2013, adjusted |
|---|---|---|
| Revenue from continuing operations | $80.3 million | $23.7 million |
| Expenses from continuing operations | $99.1 million | $36.3 million |
| Income before taxes, continuing operations | $0.8 million | $16.3 million |
| Continuing-operations result | Loss of $3.4 million | Income of $15.7 million |
| Discontinued operations, net | Income of $7.9 million | Income of $25.0 million |
| Net income (loss) available to common stockholders | Loss of $1.7 million; diluted EPS $(0.10) | Income of $10.4 million; diluted EPS $1.01 |
| Operating cash flow | $91.0 million provided | $3.0 million used |
| Investing cash flow | $494.2 million used | $689.2 million used |
| Financing cash flow | $363.9 million provided | $724.2 million provided |
| Unrestricted cash at year-end | $53.0 million | $97.6 million |
| Total assets / total stockholders’ equity | $8.20 billion / $401.7 million | $6.87 billion / $396.9 million |
- Reported cash flow includes substantial activity from consolidated CLOs and discontinued operations. Excluding both, operating activities used $30.9 million in 2014.
- Debt excluding consolidated CLO notes was $363.2 million at year-end, versus $269.6 million in 2013. Consolidated CLO liabilities were $1.88 billion; the filing describes CLO debt as non-recourse to Tiptree’s general assets. The debt table reports $47.5 million outstanding under the Fortress facility; $25 million of additional Fortress borrowing was drawn in January 2015.
- Cash interest paid was $65.1 million. Tiptree paid no cash dividends in 2014. Adjusted EBITDA, a non-GAAP measure, was $24.2 million for continuing operations and $59.0 million for the company overall, versus $20.3 million and $68.6 million, respectively, in 2013.
Material changes versus the prior period
- Revenue rose to $80.3 million, reflecting Fortegra’s post-acquisition contribution, Luxury’s first full year in the results, and Care’s expanded property portfolio. The comparison is affected by changes in business mix and period coverage.
- Common-stockholder results fell from $10.4 million of income to a $1.7 million loss. Continuing operations moved to a $3.4 million loss; 2013 discontinued-operation income included a $15.5 million gain on the Bickford property sale, which did not recur.
- Expenses included $6.1 million of Fortegra acquisition costs that management said were not expected to recur, alongside higher payroll, depreciation and amortization, and interest expense. Net income attributable to consolidated CLOs declined to $19.5 million from $28.9 million, including lower gains on retained CLO interests.
- Assets increased $1.3 billion, principally from Fortegra and two additional CLO issuances. Reported total equity increased modestly, while the portion attributable to Tiptree Financial Inc. rose to $284.5 million from $99.0 million, largely following TFP unit exchanges for Class A shares.
Outlook, transactions, risks and unusual items
- Management expected Fortegra to contribute significantly to 2015 revenue and net income, while noting its 2014 results covered only the post-acquisition period and included closing costs and adjustments. No quantified earnings or revenue guidance is provided.
- The PFG sale was expected to close in the third quarter of 2015, subject to customary conditions and regulatory approval. At an estimated $165 million total purchase price, management estimated a $35.2 million pretax gain over year-end book value and an incremental tax provision of about $11.1 million. The sale was not assured; PFG’s 2015 results were to remain with the business when sold. Tiptree also agreed to repay $25 million of Fortress borrowing when the sale closes.
- A proposed Reliance First Capital acquisition, for $7.5 million cash and 1,625,500 Class A shares, plus up to 2 million additional performance-based shares, was expected to close by the end of Q3 2015, subject to approvals. The filing also reports subsequent Care acquisitions and a Fortegra purchase of the remaining ProtectCELL interest.
- Principal risks include regulatory and statutory-capital constraints on insurance subsidiaries, reinsurance collectability, claims-reserve adequacy, dependence on distribution partners, interest-rate and credit-market exposure, leverage and refinancing, illiquid or fair-value-sensitive assets, acquisition integration, and holding-company dependence on subsidiary distributions. The filing also notes risks from privacy or systems breaches and the requirement to maintain an exemption from the Investment Company Act.
- Fortegra faced a certified Kentucky class action scheduled for trial in September 2015; management said it was vigorously defending the case and did not expect a material adverse outcome, while acknowledging potential punitive-damage exposure. A Fortegra acquisition-related class action had a preliminary disclosure-only settlement; final approval was pending at filing.
- The 2014 effective tax rate on continuing operations was 525.5%, principally reflecting state taxes, non-deductible Fortegra transaction costs, and valuation-allowance changes; management cautioned it did not bear a customary relationship to statutory rates. Tiptree early adopted ASU 2014-13 retrospectively for CLO accounting. Management reported effective disclosure controls and internal control over financial reporting; Luxury was excluded from the annual internal-control assessment.
Investor verification priorities
- Confirm the status, final proceeds, taxes, and required Fortress repayment associated with the PFG sale, and assess the resulting change in ongoing earnings and cash generation.
- Evaluate Fortegra’s full-year post-acquisition performance, underwriting and claims development, reinsurance recoverables and counterparties, and whether acquisition-related costs were genuinely nonrecurring.
- Reconcile reported operating cash flow with cash generated outside consolidated CLOs and discontinued operations; review unrestricted cash, subsidiary distribution restrictions, debt maturities, covenants, and the effect of the January 2015 borrowing.
- Review the basis and sensitivity of CLO retained-interest valuations, other Level 3 assets, and the retrospective accounting adjustments; distinguish non-recourse CLO obligations from debt payable by Tiptree and its operating subsidiaries.
- Track resolution of the Fortegra litigation and Reliance transaction approvals, and verify the impact of the high effective tax rate, valuation allowances, and potential limits on net operating loss use.