Tiptree Financial Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise. This filing is from Tiptree Financial Inc., formerly Care Investment Trust Inc.
Business context and reporting period
Tiptree is a diversified holding company with insurance and insurance services, specialty finance, asset management, and real estate businesses. It controls and consolidates Tiptree Operating Company, LLC, despite owning approximately 25%; Tiptree Financial Partners, L.P. (TFP) owns approximately 75%, reported as non-controlling interest.
On July 1, 2013, the Contribution Transactions combined Care’s and TFP’s businesses under Operating Subsidiary. The company’s comparative financial statements were recast for common control, so periods reflect the combined businesses rather than the previously reported standalone company. Following the transaction, Tiptree ceased qualifying as a REIT and became subject to corporate income tax retroactively from January 1, 2013.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue (realized/unrealized gains and investment income) | $41.1 | $45.1 | $105.2 | $96.7 |
| Total expenses | $37.8 | $27.6 | $105.8 | $69.8 |
| Continuing income (loss) before tax | $3.3 | $17.5 | ($0.6) | $26.8 |
| Net income available to common stockholders | $1.8 | $3.1 | $6.6 | $6.5 |
| Basic and diluted EPS | $0.18 | $0.30 | $0.64 | $0.63 |
Q3 revenue declined about 9% while expenses rose about 37%. For the nine months, revenue increased about 9%, but expenses rose about 52%. The filing does not provide a single consolidated operating-margin measure; results are affected by investment fair-value changes, acquisitions, consolidated CLOs, and non-controlling interests.
- Cash flow: Nine-month operating cash flow was $41.1, versus $42.1 in 2012; investing cash flow was negative $701.9, and financing cash flow was positive $695.9. Unrestricted cash increased $35.2 to $123.7. The large investing and financing flows were primarily CLO/VIE activity and should not be read as ordinary corporate cash flows.
- Liquidity: Unrestricted cash was $123.7 and restricted cash $34.2 at September 30. Management reported $180.8 of unrestricted cash, cash equivalents, trading securities, and available-for-sale securities. CLO cash is restricted to the individual CLOs and is not available for general corporate use.
- Assets and equity: Total assets were $6.604 billion, compared with $5.534 billion at year-end 2012; total stockholders’ equity was $555.8 million, including substantial non-controlling interest and CLO-related appropriated retained earnings.
- Debt and obligations: Balance-sheet notes payable were $146.5, mortgage notes $33.3, and loans payable $58.7. Consolidated CLO liabilities were $1.251 billion, principally CLO notes; these are non-recourse to Tiptree’s general assets, and CLO assets are not generally available to Tiptree’s creditors. Tiptree also reported an $18.9 million U.S. Treasury short position. The $50 million Fortress borrowing bears variable interest at one-month LIBOR (minimum 1.25%) plus 6.50%, is secured by substantially all Operating Subsidiary assets, and matures in 2018; additional borrowing capacity is conditional.
Material changes versus prior comparable periods
- Q3 common-stockholder earnings fell to $1.8 million from $3.1 million. Management cited lower revenue and higher expenses, including CLO activity and the absence of Bickford Portfolio operating income after its sale. The prior-year quarter included $0.7 million from discontinued operations.
- Nine-month common-stockholder earnings were broadly flat at $6.6 million versus $6.5 million, but included a $15.5 million net gain on the Bickford sale and $17.1 million of total discontinued-operations income. Continuing operations instead recorded a $5.1 million net loss after tax, compared with $26.7 million of continuing income in the prior period.
- Separate-account and administrative service fees rose to $53.2 million from $25.1 million for nine months, primarily reflecting the Hartford administration-services acquisition. New CLOs, Telos 3 and Telos 4, increased consolidated CLO assets and liabilities; consolidated CLO assets rose to $1.492 billion from $852 million.
- Interest expense rose to $12.0 million from $4.4 million for nine months. Higher payroll and CLO expenses also contributed to the expense increase.
- Fair-value results were mixed: nine-month realized and unrealized gains were $3.5 million versus $10.1 million in 2012, including weaker marks on MFCA tax-exempt holdings; the comparative period also differs in business mix and consolidated CLO activity.
Outlook, commentary, risks, and unusual items
- Outlook: No quantitative earnings or revenue guidance is provided. Management says it intends to invest in existing businesses, pursue selective majority-control acquisitions and seed investments, and focus on long-term, stable, cash-flow-positive businesses. It expects business and asset mix, and cash needs, to change over time.
- Tax change: The REIT-to-taxable-corporation transition produced $4.5 million of nine-month tax expense despite a pretax continuing-operations loss. The reported negative effective tax rate reflects, among other factors, the one-time status change and income attributable to non-controlling interests and CLO noteholders. Tiptree reported $4.8 million of net deferred tax assets and tax-loss carryforwards, subject to applicable limitations and valuation allowances.
- Capital and liquidity risks: Tiptree depends on distributions from subsidiaries, which may be restricted by insurance regulation, solvency requirements, financing covenants, or available subsidiary cash. Management noted that Telos may need capital for future CLOs and Philadelphia Financial may need capital to meet regulatory requirements; Tiptree had received no dividends from its insurance operations.
- Valuation and market risks: The company holds illiquid assets and investments valued partly with Level 3 inputs, including substantial separate-account alternative investments. Credit, interest-rate, market, foreign-exchange, counterparty, and collateral risks may affect valuations and liquidity. Management cautions that realized proceeds may differ materially from carrying values.
- Other risks and contingencies: Reinsurance does not eliminate Philadelphia Financial’s responsibility to policyholders if a reinsurer fails. The filing identifies regulatory, competitive, related-party/conflict-of-interest, and leverage risks. Ordinary-course litigation was not believed likely to have a material adverse effect. Disclosure controls were deemed effective, but management was still evaluating internal controls for businesses contributed by TFP and expected to complete that assessment with the 2014 Form 10-K.
- Corporate structure: TFP’s right to redeem Operating Subsidiary units for Class A shares, or potentially cash at Tiptree’s election, begins after July 1, 2014. Such redemptions could affect liquidity, ownership, and share count.
Important facts for investors to verify
- How much of reported earnings and cash flow is recurring versus attributable to the Bickford sale, fair-value marks, CLO consolidation, and other one-time or non-cash items.
- Which cash and investments are actually available to the parent, distinguishing unrestricted corporate liquidity from restricted insurance and CLO assets.
- The terms, covenants, collateral, and refinancing or repayment needs of corporate borrowings, the Fortress facility, warehouse financing, and non-recourse CLO debt.
- The sustainability and capital requirements of insurance administration fees, insurance subsidiary solvency, reinsurance recoverability, and potential dividend restrictions.
- The sensitivity of Level 3 valuations, tax-exempt credit investments, and separate-account alternative assets to market changes, redemptions, and realizable sale values.
- The consequences of the tax-status change, including future cash taxes and the availability of net operating losses, as well as the effects of TFP’s post-July 2014 redemption rights.