Tiptree Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. Amounts are U.S. dollars unless stated otherwise.
Business context
Tiptree is a holding company focused on specialty insurance, supplemented by investment management and other investments under Tiptree Capital. Specialty Insurance is its sole reportable segment. During 2018, the company sold its senior living business, Care, to Invesque for approximately 16.6 million Invesque shares and other consideration, and completed a reorganization that eliminated its dual-class share structure.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $625.8 million | $581.8 million |
| Income (loss) from continuing operations | $(13.9) million | $9.2 million |
| Net income attributable to common stockholders | $23.9 million; diluted EPS $0.69 | $3.6 million; diluted EPS $0.11 |
| Operating EBITDA (non-GAAP) | $54.9 million | $60.9 million |
| Adjusted EBITDA (non-GAAP) | $28.8 million | $38.0 million |
| Book value per share (non-GAAP) | $10.79 | $9.97 |
Revenue grew 7.6%, primarily on higher earned premiums and service and administrative fees. The reported common-stockholder profit was substantially supported by discontinued operations, including a $56.9 million pretax gain on the Care sale; continuing operations recorded a loss. The 2017 comparison included a one-time $15.2 million tax benefit from U.S. tax reform.
- Specialty Insurance: Gross written premiums rose 13.0% to $868.1 million and net written premiums rose 11.7% to $466.8 million. Earned premiums were $427.8 million. The combined ratio improved slightly to 92.5% from 92.9%; segment pretax income was $18.6 million, versus $5.4 million.
- Q4 2018: Revenue was $152.4 million; continuing-operations net loss was $8.8 million; net income attributable to common stockholders was $0.2 million, or $0.01 per diluted share. Discontinued operations included $9.3 million of net income in the quarter, including an additional Care-sale earnout gain.
- Cash flow: Operating activities provided $57.7 million; investing activities used $109.1 million; financing activities used $2.0 million. Cash, cash equivalents and restricted cash decreased $53.4 million. Unrestricted cash was $86.0 million at year-end, down from $110.7 million.
- Balance sheet and debt: Total assets were $1.865 billion and total stockholders’ equity was $399.3 million. Debt, net, was $354.1 million. Debt face value was $364.3 million, comprising $232.1 million of corporate debt and $132.2 million of asset-based debt; certain Luxury debt was separately classified in liabilities held for sale.
- Shareholder returns: Tiptree repurchased $14.2 million of shares and paid $5.0 million in dividends during 2018. Dividends declared were $0.14 per share.
Material changes and management commentary
- Care’s sale generated approximately $150.7 million of consideration, including Invesque shares. At year-end, Tiptree held 16.6 million shares, approximately 31% of Invesque, valued at $113.1 million. Invesque-related fair-value losses weighed on results.
- Operating EBITDA declined 9.7%, principally as lower returns from Tiptree Capital’s credit investments outweighed stronger Specialty Insurance performance. Tiptree Capital’s continuing pretax result shifted to a $7.8 million loss from $20.3 million of income.
- Management said cash and cash equivalents, subsidiary distributions and financing access should be adequate for at least the next 12 months. Mortgage operations rely on short-term warehouse facilities, some of which are uncommitted.
- In February 2019, Tiptree agreed to invest $75 million to seed funds managed by Tricadia in connection with obtaining management control and a profit participation. This is a subsequent event, not a 2018 operating result.
Risks, contingencies and unusual items
- Results are exposed to market movements and valuation estimates, notably Invesque shares, loans, credit investments and vessels; some investments have limited liquidity or rely on unobservable fair-value inputs.
- Insurance risks include claims-reserve uncertainty, reinsurer collectability, statutory capital and dividend restrictions, distributor concentration, and regulatory changes. Reinsurance receivables were $420.4 million; management reported collateral or letters of credit for a substantial portion.
- Other risks include interest-rate and credit-spread changes, refinancing and warehouse-funding availability, mortgage loan repurchase or indemnity claims, and cyclical shipping-market conditions.
- The long-running Mullins class-action case concerns coverage terms in certain credit insurance policies. Management is defending the case and did not believe it would materially harm financial position, but stated that a reasonably possible loss range could not be estimated.
- The independent auditor gave an unqualified opinion on the financial statements and on internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of 2018’s reported profit and book-value growth reflects the Care disposition and earnout, versus recurring continuing operations?
- Whether Specialty Insurance premium growth can be sustained while maintaining underwriting performance and reserve adequacy.
- Invesque’s share value, dividend policy, transfer restrictions and concentration in Tiptree’s assets.
- Debt maturities, borrowing costs, covenant headroom and continued access to mortgage warehouse financing.
- The funding, related-party terms and expected returns of the $75 million Tricadia commitment, and any material developments in the Mullins litigation.