Tiptree Financial Inc. — Q3 2016 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Tiptree is a diversified holding company with insurance and insurance services, specialty finance, real estate, asset management, and corporate and other segments. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $134.1m | $120.9m | $399.7m | $311.0m |
| Income (loss) before tax, continuing operations | $11.6m | $(3.6)m | $27.6m | $(11.0)m |
| Net income (loss), before non-controlling interests | $7.8m | $(6.4)m | $22.3m | $11.4m |
| Net income (loss) attributable to Class A shareholders | $5.9m | $(4.6)m | $17.6m | $9.4m |
| Diluted EPS | $0.19 | $(0.13) | $0.53 | $0.29 |
| Adjusted EBITDA, continuing operations (non-GAAP) | $20.1m | $4.9m | $52.9m | $16.8m |
Nine-month 2015 net income included $23.3m from discontinued operations, including a $16.3m gain on the 2015 sale of Philadelphia Financial Group (PFG). The 2016 comparison therefore reflects continuing operations only. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- Total assets were $2,866.7m, up from $2,495.0m at year-end 2015. Total stockholders’ equity was $381.3m, versus $397.7m; equity attributable to Tiptree was $286.8m, versus $312.8m.
- Cash and cash equivalents were $66.0m, down from $69.4m; restricted cash was $22.1m. Debt, net, excluding consolidated CLO debt, was $774.1m, compared with $667.0m. Debt face value was $782.4m.
- Consolidated CLOs had $995.7m of assets and $943.2m of liabilities. The company says CLO assets are collateral for CLO obligations and unavailable to its general creditors; CLO debt is not a general obligation of Tiptree. Tiptree’s exposure is principally its subordinated-note interests and accrued fees.
- For the nine months, operating cash flow was negative $32.1m, investing cash flow was negative $253.2m, and financing cash flow was positive $281.8m; cash declined $3.4m. Management attributed operating cash use chiefly to growth in insurance receivables and other working-capital movements, and investing use to real estate, loans and principal investments.
- Management said cash, subsidiary distributions and access to financing were expected to fund operations for at least the next 12 months. Mortgage operations rely partly on short-term, uncommitted warehouse financing; availability and renewal are not assured.
Material changes and segment performance
- Insurance: Nine-month segment revenue increased to $256.2m from $238.9m and pretax income rose to $25.1m from $20.4m. In Q3, however, revenue fell 10% and pretax income declined to $8.0m from $10.1m. Management cited reduced ceding commissions following severe storms in Louisiana and the Southeast, increased claims, and lower warranty revenue; higher earned premiums and investment income partly offset the effects. The adjusted combined ratio was 92.6% in Q3 versus 90.2%, and 92.6% year to date versus 92.9%.
- Specialty finance: Nine-month revenue nearly doubled to $67.8m and pretax income increased to $5.5m from $2.3m, mainly reflecting Reliance’s inclusion, higher mortgage originations and Siena loan growth. Mortgage origination volume was $1,330.6m for nine months, versus $881.7m.
- Real estate: Revenue increased to $44.2m from $33.3m, while the segment’s pretax loss narrowed to $5.5m from $8.8m. Nine-month NOI, a non-GAAP measure, rose to $15.8m from $11.7m. The portfolio comprised 27 senior-housing properties at quarter-end. Tiptree and Care partners acquired three communities for total consideration of $84.6m during the nine months.
- Asset management and CLO investments: Asset-management pretax income rose to $5.0m from $3.0m for nine months; fee-earning AUM was $1.9bn, compared with $1.8bn a year earlier. Management cited incentive fees and the launch of Telos 7. CLO and principal-investment results also improved substantially from prior-year mark-to-market losses, making investment valuation a significant earnings driver.
- Corporate costs and capital: Corporate and other pretax loss narrowed to $2.6m from $28.0m year to date, aided by investment performance, but corporate payroll and professional costs increased as the company expanded financial-reporting and control resources. Subsidiaries purchased 6.596m Class A shares for $42.5m during the nine months; management said the purchases were accretive to book value per share and expected to be accretive to GAAP EPS.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said it expects NOI margins to improve as recently acquired senior-housing facilities ramp up and stabilize.
- Management highlighted exposure to interest-rate changes, credit-market conditions, loan defaults and prepayments, market liquidity, mortgage activity, insurance claims, and regulatory conditions. Much subsidiary debt is floating rate; interest-rate swaps hedge some exposures. A $1.5m unrealized loss on Care’s swaps was recorded in other expense during the nine months.
- Three material weaknesses in internal control over financial reporting remained as of September 30: controls and monitoring over Care managed properties, sufficient knowledgeable resources for those processes, and precise management review of year-end income-tax accounting. Disclosure controls were consequently deemed ineffective. Luxury Mortgage control weaknesses were reported remediated; remediation of the remaining weaknesses was underway but not fully implemented and tested.
- Fortegra is defending a certified class action concerning coverage duration under certain policies. The company said it could not reasonably estimate a loss range, while management did not expect the outcome to be materially adverse. The filing notes that punitive damages have been awarded against other companies in the industry.
- The nine-month effective tax rate was 19.2%, including $4.0m of discrete tax benefits, primarily tied to a tax restructuring effective January 1, 2016. The filing also reports prior-period cash-flow presentation corrections described as immaterial, with no effect on ending cash.
- The board declared a $0.025-per-share Class A dividend on November 7, 2016, payable November 28, 2016.
Most important facts for investors to verify
- Whether the remaining material weaknesses are remediated and tested, particularly controls over Care properties and income taxes.
- Whether mortgage warehouse facilities and other financing remain available, and how the increase in debt affects interest costs and liquidity.
- Whether insurance claims, ceding commissions and the adjusted combined ratio stabilize after Q3 storm-related impacts.
- How much future earnings depend on fair-value marks, CLO subordinated-note performance, incentive fees and the one-time tax benefit.
- Developments in the Fortegra class action, including any material change to the currently unestimable potential loss.