Tiptree Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below identify Q4 where relevant. Tiptree is a holding company whose principal business is specialty insurance, alongside asset management, mortgage operations and other investments. Senior living was classified as discontinued operations and held for sale at year-end; its sale to Invesque closed February 1, 2018.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $581.8 million | $506.4 million |
| Income (loss) before tax, continuing operations | $(3.3) million | $49.1 million |
| Net income, continuing operations | $9.2 million | $36.6 million |
| Net income attributable to Class A stockholders | $3.6 million; diluted EPS $0.11 | $25.3 million; diluted EPS $0.78 |
| Adjusted EBITDA (non-GAAP) | $38.0 million | $78.9 million |
| Operating cash flow | $46.9 million | $36.6 million |
| Cash and cash equivalents at year-end | $110.7 million | $49.8 million |
| Total assets | $2.0 billion | $2.9 billion |
| Debt, net | $346.1 million | $554.9 million |
| Total stockholders’ equity | $396.8 million | $390.1 million |
| Book value per share, as exchanged (non-GAAP) | $9.97 | $10.14 |
Revenue rose 14.9%, principally on higher earned premiums and net investment income. Profitability fell sharply: net income attributable to Class A stockholders declined 85.8%, and Adjusted EBITDA fell 51.8%. GAAP results included a $15.2 million tax benefit from remeasuring deferred tax liabilities after the Tax Act; the company reported a continuing-operations pre-tax loss despite positive after-tax income. Q4 revenue was $151.4 million, continuing-operations pre-tax income was $1.4 million, and diluted EPS was $0.31.
Specialty insurance gross written premiums grew 8.3% to $766.9 million and net written premiums grew 24.0% to $418.0 million, reflecting increased retention of credit-protection risk and warranty growth. Its combined ratio increased to 92.9% from 87.9%; the adjusted ratio rose to 93.2% from 89.5%. Insurance investment portfolio income turned to a $6.8 million loss from $24.6 million of income, primarily due to unrealized equity losses. Asset-management pre-tax income declined to $14.2 million from $25.3 million as CLO distributions and fees fell; fee-earning CLO AUM declined to $1.6 billion from $1.9 billion. Mortgage pre-tax income was $2.1 million versus $4.9 million, with lower origination volume and higher earn-out expense.
Operating cash flow was $46.9 million; investing activities provided $205.7 million, substantially reflecting CLO activity and investment sales, while financing activities used $194.4 million. Cash increased $58.2 million. Management reported approximately $90 million of cash available for investments and acquisitions after divestitures, net of cash at regulated insurance subsidiaries. This is a different measure from consolidated year-end cash.
Material changes, outlook and notable items
- In 2017, Tiptree exited or reduced several investments, including Siena and its subordinated positions in consolidated CLOs; it also agreed to sell Luxury Mortgage, subject to regulatory approval, with closing expected in the second half of 2018. The CLO exits reduced reported assets and debt through deconsolidation.
- In Q4, Fortegra issued $125 million of 8.50% junior subordinated notes due 2057, using substantially all net proceeds to repay existing debt. Tiptree’s $28.5 million Fortress facility bears floating interest and matures September 2018; management said it intended to extend or refinance it, but could not assure acceptable terms.
- The February 2018 senior-living sale exchanged the operations for 16.6 million Invesque shares. Tiptree estimated a $44.3 million pre-tax sale gain and a book-value increase of about $0.91 per share (9.1%); management expected the transaction to be accretive to 2018 GAAP EPS and Adjusted EBITDA. The shares are subject to transfer restrictions and market-value and dividend risk.
- Management estimated a 2018 consolidated effective tax rate of 24%–26% and did not expect a significant near-term cash-tax impact. No formal earnings or revenue guidance is provided in the supplied filing text.
- Other key risks include volatile fair values and illiquid investments, insurance reserve adequacy and reinsurer collectability, dependence on distribution partners, regulatory and capital constraints, mortgage warehouse funding and repurchase exposure, rising interest rates, and cybersecurity. In the Mullins class action involving credit-insurance coverage, the company said it was defending the case and could not estimate a reasonably possible loss range.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at December 31, 2017. A material weakness reported for 2015 was described as remediated.
Most important facts for investors to verify
- Reconcile the substantial decline in earnings and Adjusted EBITDA, including the effect of equity mark-to-market losses, reduced CLO income, compensation costs and the one-time tax benefit.
- Review the maturity, refinancing status and covenants of the Fortress facility and other debt, and distinguish year-end consolidated debt from liabilities classified as held for sale and post-transaction leverage disclosures.
- Confirm the final accounting, realized value and liquidity of the Invesque shares received for senior living, including applicable transfer restrictions and dividend terms.
- Track the Luxury Mortgage sale approval and closing, mortgage warehouse availability, and any loan repurchase or indemnification claims.
- Assess insurance underwriting trends, claims-reserve development, reinsurance recoverables and the impact of higher retention on risk and cash flows.
- Consider non-GAAP measures, including Adjusted EBITDA and exchanged book value per share, alongside GAAP results; these measures are not substitutes for GAAP earnings or cash flow.