Tiptree Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Amounts are in U.S. dollars. Tiptree is a holding company with specialty insurance, asset management and mortgage operations.
Financial performance and position
- Revenue: $148.1 million, up 1.3% from $146.2 million. Earned premiums rose to $101.6 million from $89.2 million.
- Profit: Continuing-operations pre-tax loss was $7.0 million versus income of $4.0 million; continuing-operations net loss was $5.5 million versus income of $2.5 million. Net income attributable to Class A stockholders was $23.6 million, or $0.79 per diluted share, versus $1.1 million, or $0.03 per diluted share. The 2018 result includes a $46.2 million pre-tax gain from selling Care, reported in discontinued operations.
- Adjusted EBITDA: $5.3 million versus $11.8 million, down 55.1% year over year. This is a non-GAAP measure.
- Insurance metrics: Gross written premiums were $200.7 million, up 21.3%; net written premiums were $109.2 million, up 26.5%. The specialty insurance combined ratio improved to 93.9% from 94.7%.
- Cash flow: Operating cash flow was $3.5 million versus $49.2 million; investing cash outflow was $21.0 million versus inflow of $28.2 million; financing cash outflow was $32.8 million versus $70.2 million. Cash, cash equivalents and restricted cash totaled $100.6 million at quarter-end; unrestricted cash and cash equivalents were $81.2 million.
- Debt and liquidity: Debt, net, was $320.5 million, down from $346.1 million at December 31, 2017; face-value debt was $330.2 million. Management said available cash, subsidiary distributions and financing access were expected to fund operations for at least 12 months. The filing reports a waiver issue on a Luxury warehouse line with about $11.3 million outstanding, classified in liabilities held for sale.
- Balance sheet: Total assets were $1.69 billion versus $1.99 billion at year-end, primarily reflecting the Care sale and lower assets held for sale. Total stockholders’ equity was $407.7 million versus $396.8 million.
Material changes versus the prior comparable period
- Total revenue increased modestly, but continuing operations shifted to a pre-tax loss, reflecting lower investment and asset-management results and higher expenses.
- Specialty insurance premiums grew, with higher underwriting margin, while investment portfolio results weakened: specialty insurance net portfolio income was a $0.4 million loss versus $3.8 million income, driven primarily by equity valuation losses.
- Asset-management pre-tax income fell to $0.9 million from $5.6 million as Tiptree reduced CLO subordinated-note exposure, lowering distributions, realized gains and fee income. Fee-earning AUM declined to $1.6 billion from $1.8 billion.
- Mortgage pre-tax income was $0.2 million versus $0.3 million; origination volume declined to $207.4 million from $225.3 million.
- Care was sold on February 1 for approximately 16.6 million Invesque shares, leaving Tiptree with an approximately 34% interest at the time of sale. Tiptree recorded the gain in discontinued operations. Luxury remained classified as held for sale at quarter-end.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management estimated a 2018 consolidated effective tax rate of 24%–26% and said it did not expect a significant near-term cash-tax impact.
- Management cited growth opportunities in warranty products, insurance programs and geographic expansion, including the establishment of Fortegra Europe Insurance Company in March 2018. It also cautioned that changes in business mix and economic conditions could alter historical insurance results.
- Key sensitivities include interest rates, credit and equity markets, insurance claims and reserve estimates, reinsurance recoverability, mortgage warehouse funding, and the fair value and dividends of the concentrated Invesque holding. Invesque shares were subject to sale restrictions.
- A Kentucky class-action case concerning coverage terms of certain credit insurance policies remains pending. Management is defending the case, but the company said it could not reasonably estimate a range of loss; punitive damages are a potential risk.
- After quarter-end, TFP merged into Tiptree on April 10, eliminating the dual-class structure. On May 4, Tiptree amended its Fortress facility: outstanding borrowings increased to $75 million, maturity extended to September 2020, and the margin changed to 5.50% over one-month LIBOR, subject to a LIBOR floor.
- The board authorized up to $10 million of open-market repurchases and an additional $10 million for discretionary block repurchases. A quarterly dividend of $0.035 per share was declared in May for payment on May 29, 2018.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the one-time Care sale gain when assessing earnings and valuation.
- Track insurance premium growth alongside claim development, retention, reinsurance recoverables and the combined ratio.
- Assess the size, valuation volatility, sale restrictions and dividend dependence associated with Tiptree’s Invesque investment.
- Review debt maturities, covenants and warehouse-line renewals, including resolution of the Luxury waiver issue and terms of the amended Fortress facility.
- Compare operating cash flow and non-GAAP Adjusted EBITDA with GAAP results; both declined materially year over year, despite reported net income growth.