Tiptree Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Tiptree operates specialty insurance and warranty businesses, mortgage operations, and other investments and maritime transportation.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $286.6 | $224.0 | $881.0 | $552.9 |
| Income (loss) before taxes | $3.6 | $13.9 | $54.5 | $(63.4) |
| Net income (loss) attributable to common stockholders | $2.0 | $12.8 | $38.6 | $(43.4) |
| Diluted earnings (loss) per share | $0.06 | $0.35 | $1.11 | $(1.27) |
| Adjusted net income (non-GAAP) | $20.7 | $17.8 | $47.0 | $35.2 |
| Adjusted EBITDA (non-GAAP) | $12.4 | $20.3 | $84.6 | $(32.8) |
- Revenue and earnings: Q3 revenue rose 27.9%, but common-stockholder income declined as net realized and unrealized results weakened. Nine-month revenue rose 59.3% and the company returned to profitability from a prior-year loss. Nine-month net realized and unrealized gains were $120.3 million, versus $6.6 million in 2020; investment marks were a major factor in the year-over-year earnings swing.
- Insurance: Nine-month segment revenue increased 49.6% to $721.5 million; pretax income was $49.6 million versus $0.4 million. Gross written premiums and premium equivalents rose 43.7% to $1.69 billion. The combined ratio improved to 91.0% from 92.1% (underwriting ratio 74.9%; expense ratio 16.1%).
- Mortgage: Nine-month pretax income increased to $25.1 million from $20.8 million, supported by servicing revenue and mortgage-servicing-rights fair-value gains. Q3 pretax income fell to $6.3 million from $14.5 million as origination volume and gain-on-sale margins declined.
- Other Tiptree Capital: Nine-month pretax income was $12.9 million versus a loss of $59.4 million, primarily reflecting the reversal from Invesque and other investment losses to gains and stronger maritime results. Maritime pretax income increased to $7.7 million from $1.0 million amid higher dry-bulk charter rates.
- Cash flow: Nine-month operating cash flow was $186.0 million, investing cash flow was $(201.3) million, and financing cash flow was $(0.5) million. Cash, cash equivalents and restricted cash ended at $172.1 million, including $150.5 million of unrestricted cash and cash equivalents.
- Balance sheet and debt: Total assets were $3.38 billion and total stockholders’ equity $402.1 million at September 30. Debt, net, was $374.8 million; Luxury, classified as held for sale, had a separately presented $163.7 million debt balance. Unearned premiums and deferred revenue totaled $1.56 billion. The company reported compliance with debt covenants or applicable waivers.
- Margins and returns: Nine-month GAAP return on average equity was 14.8%, versus negative 14.3% in 2020; adjusted return on average equity was 16.2%, versus 12.2%. Company-wide margins are not presented as a single comparable measure; the insurance combined ratio is its principal underwriting metric.
Material changes, outlook, risks and unusual items
- Insurance growth reflected expansion in admitted and excess-and-surplus lines, warranty programs, distribution, and acquisitions including Sky Auto. Higher earned premiums and fees were accompanied by higher claims, commissions, and operating costs.
- Management said cash resources, subsidiary distributions, financing access and investment sales should be adequate for at least the next 12 months. It provided no specific earnings or revenue guidance and cautioned that interim results are not necessarily indicative of full-year results.
- On October 11, 2021, Fortegra agreed to a $200 million investment by a Warburg Pincus affiliate, in a combination of equity and warrants. Proceeds are expected to repay certain indebtedness and further capitalize Fortegra. Closing is subject to customary conditions and regulatory approvals; the company expected closing in Q1 2022. The investment was announced October 12.
- Luxury remained held for sale under a definitive sale agreement and was not classified as a discontinued operation. Tiptree recorded $1.2 million of impairment for the nine months ended September 30, 2021.
- Investment fair-value volatility is material: Q3 included $12.6 million of Invesque losses, while the nine-month period included $4.2 million of Invesque gains. Invesque is a significant holding, and further share-price declines could materially affect results.
- Other identified risks include interest-rate and credit-market movements, floating-rate debt and LIBOR transition uncertainty, mortgage warehouse financing availability, and volatile dry-bulk charter rates. Insurance results depend on underwriting, reserves, reinsurance and claims experience.
- A Kentucky class action involving certain credit insurance policies received a July 2021 partial summary judgment for plaintiffs on certain disability policies. Tiptree intends to challenge the ruling; it said it could not estimate a reasonably possible loss range and did not believe resolution would materially harm its financial position.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Fortegra investment closes, its final terms and ownership impact, and the use of proceeds.
- The status and proceeds of the Luxury sale, including the treatment of its separately reported debt and any further impairment.
- How much of reported earnings and adjusted measures reflects recurring underwriting, servicing and shipping performance versus investment fair-value changes and other adjustments.
- Insurance loss-reserve development, reinsurance recoverability and the sustainability of the combined ratio as premium volume grows.
- Liquidity and refinancing needs, including warehouse-line renewals, floating-rate exposure and any benchmark-rate transition effects.
- The outcome and potential financial exposure from the Kentucky litigation; the filing does not provide a clear estimate of reasonably possible loss.