Tiptree Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted. Dollar amounts are in millions unless stated otherwise.
Business context
Tiptree is a holding company with specialty insurance, asset management, mortgage and other investment activities. In April 2018, Tiptree completed a reorganization merger with Tiptree Financial Partners, eliminating its dual-class structure. It sold its senior living business, Care, on February 1, receiving Invesque shares; Care is reported as discontinued operations.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Total revenue | $152.7 (+9.7%) | $300.8 (+5.4%) |
| Income (loss) from continuing operations, before tax | $1.6 | ($5.5) |
| Net income (loss) attributable to common stockholders | $0.8; EPS $0.02 | $24.4; EPS $0.73 |
| Operating EBITDA (non-GAAP) | $15.1 (+5.6%) | $24.0 (−10.1%) |
| Adjusted EBITDA (non-GAAP) | $10.2 | $15.5 |
First-half reported earnings included $34.5 million of after-tax income from discontinued operations, including a $46.2 million pre-tax gain on the Care sale. Continuing operations had a $4.6 million net loss. Thus, reported first-half net income and EPS were materially affected by the disposal gain.
- Revenue and insurance: Earned premiums were $100.0 million in Q2 and $201.7 million for the half, up 14.4% in each period. First-half gross written premiums rose 12.0% to $393.7 million and net written premiums rose 11.8% to $205.0 million. Specialty insurance pre-tax income was $8.7 million in Q2 and $10.1 million for the half.
- Underwriting: Specialty insurance combined ratio was 92.3% in Q2 versus 92.4%, and 93.1% year to date versus 93.6%. A ratio below 100% indicates underwriting profit under the company’s definition. Prior-year claims development was adverse by $4.9 million in the first half of 2018.
- Investment results and other segments: Q2 net realized and unrealized gains were $11.5 million, while the first-half total was $18.1 million versus $27.7 million. The company reported $4.2 million of Invesque dividends for the half, partly offset by $5.8 million of unrealized losses on those shares. Asset management results declined as CLO distributions and fees fell; mortgage operations recorded modest pre-tax income.
- Cash flow and liquidity: First-half operating cash flow was $10.2 million, down from $27.2 million; investing cash flow was negative $49.6 million versus positive $29.1 million; financing cash flow was positive $0.1 million versus negative $28.7 million. Cash, cash equivalents and restricted cash declined $39.3 million. At June 30, unrestricted cash was $91.5 million and restricted cash was $18.1 million. Management said available resources and subsidiary financing were expected to fund operations for at least 12 months.
- Balance sheet and debt: Total assets were $1,729.5 million, down from $1,989.7 million at year-end, principally reflecting the Care sale. Total equity was $400.8 million. Debt, net, was $366.2 million, compared with $346.1 million at year-end; debt at face value was $376.5 million. The May Fortress amendment increased the borrowing to $75 million, extended maturity to September 2020, and set the rate at one-month LIBOR (1.25% floor) plus 5.50%. The filing reports covenant compliance or waivers for outstanding borrowings.
- Capital returns: Tiptree repurchased 1.37 million shares for about $8.9 million during the half at an average $6.45 per share. Book value per share, a non-GAAP measure, was $10.74. The first-half declared dividend was $0.07 per share; a $0.035 quarterly dividend was declared after quarter-end.
Changes, outlook and risks
Q2 net income before non-controlling interests improved to $0.9 million from a $5.3 million loss, supported by stronger specialty insurance results and lower corporate expenses. For the first half, Operating EBITDA declined as reduced asset-management contributions more than offset insurance growth. Management cited growth in insurance written premiums and opportunities in warranty, programs and geographic expansion, including entry into Europe. It did not provide earnings guidance. Management estimated a 24%–26% consolidated effective tax rate for 2018; actual first-half taxes included effects associated with the Care sale.
Results remain exposed to market values and interest rates, including volatility in the Invesque holding, which represented about 31% of Invesque at June 30 and was subject to sale restrictions. Management cautioned that a decline in its share value or dividends could materially affect results. Mortgage operations depend partly on short-term warehouse financing. Insurance performance depends on pricing, claims reserves, reinsurance recoveries and retention; the filing also notes adverse prior-year claims development. A long-running Kentucky class action concerning credit insurance coverage remains unresolved; the company is defending it, but cannot estimate a reasonably possible loss range. Management reported no material change in previously disclosed risk factors and assessed disclosure controls as effective.
Important facts for investors to verify
- How much of reported earnings and book-value change reflects the Care sale, and what continuing operations earn without disposal-related items.
- Invesque share valuation, contractual sale restrictions and sustainability of dividend income.
- Insurance reserve adequacy, adverse claims development, and collectability/collateralization of reinsurance receivables.
- Debt maturities, variable-rate exposure, covenant terms and continued access to mortgage warehouse facilities.
- Progress on Luxury’s planned sale and developments in the Kentucky class action, for which the loss range is not estimable.