Tiptree Inc. — 2019 Form 10-K Summary
Business context and reporting period
Tiptree is a holding company whose main earnings source is specialty insurance and warranty operations (Tiptree Insurance); Tiptree Capital includes investments and businesses in areas such as mortgage finance, maritime transportation and Invesque. This filing covers the fiscal year ended December 31, 2019. Financial statements are audited; Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $772.7 million | $625.8 million |
| Pre-tax income (loss), continuing operations | $29.1 million | ($19.8 million) |
| Net income attributable to common stockholders | $18.4 million | $23.9 million |
| Diluted EPS | $0.50 | $0.69 |
| Operating EBITDA (non-GAAP) | $63.6 million | $54.9 million |
| Adjusted EBITDA (non-GAAP) | $63.0 million | $28.8 million |
| Cash dividends per share paid | $0.155 | $0.135 |
- Revenue increased 23.5%, primarily on higher earned premiums, improved investment marks, stronger specialty-finance results, a full year of shipping operations and a $7.6 million gain from selling the Telos CLO management business.
- Common-stockholder net income declined from 2018 despite improved continuing operations, largely because 2018 included $43.8 million of net income from discontinued operations, including the Care sale gain.
- Insurance gross written premiums rose 17.0% to $1,015.3 million; net written premiums rose 15.1% to $537.2 million. Underwriting margin increased 14.0% to $145.7 million. The combined ratio was 92.6%, little changed from 92.5%.
- Insurance investment total return improved to 5.4% from 0.3%; net portfolio income was $26.4 million versus $1.2 million. Net investment income alone fell to $14.0 million from $19.2 million, partly due to lower LIBOR and reduced exposure to leveraged credit.
- Total assets were $2.20 billion and stockholders’ equity was $411.4 million at year-end, compared with $1.86 billion and $399.3 million, respectively, a year earlier. Book value per share, a non-GAAP measure, rose to $11.52 from $10.79.
- Operating cash flow was $23.7 million, down from $57.7 million. Investing activities used $8.3 million, versus $109.1 million used in 2018; financing activities provided $36.9 million, versus $2.0 million used. Cash, cash equivalents and restricted cash totaled $144.6 million; unrestricted cash and cash equivalents were $133.1 million.
- Debt, net of discounts and financing costs, was $374.5 million, versus $354.1 million; face-value debt was $383.5 million. Debt included $253.2 million of corporate debt and $130.3 million of asset-based debt. Management said liquidity was expected to be adequate for at least the next 12 months, subject to subsidiary distribution restrictions and financing access.
Material changes and unusual items
- Insurance pre-tax income more than doubled to $41.0 million, helped by premium growth and investment gains compared with prior-year losses. Tiptree Capital reported $21.0 million of continuing pre-tax income, compared with a $7.8 million loss.
- In April 2019, the company sold Telos asset-management contracts and related assets, recording a $7.6 million pre-tax gain. In July 2019, its insurance business acquired a majority interest in Defend, an automotive finance and insurance administrator, for approximately $4.6 million net cash consideration.
- On January 3, 2020, Tiptree acquired Smart AutoCare. The filing reports $110 million paid to the seller at closing, with $8.25 million escrowed, and a separate $102 million payment by seller affiliates to Freedom Insurance Company in connection with a reinsurance commutation. Additional earn-outs may be payable, including up to $50 million in cash and up to $30 million in cash or stock, subject to performance conditions.
- On February 21, 2020, Tiptree refinanced its Fortress facility with a new $125 million facility maturing in 2025, at LIBOR (subject to a 1.00% floor) plus 6.75%, with quarterly principal installments. The facility includes leverage covenants and other restrictions.
- The company repurchased 1.47 million shares for $9.1 million during 2019 and declared dividends of $0.16 per share for the year. It reported an 8.2% total annual return measured by book-value-per-share growth plus dividends.
Outlook, risks and contingencies
Management emphasized continued growth in specialty insurance and warranty, including expansion into new products and markets. It provided no specific numerical earnings or revenue guidance. Management identified economic conditions, interest rates, markets, regulation and consumer activity as important influences; it noted that the businesses generally benefit from a healthy consumer, stable markets and global growth.
- Key exposures include insurance reserve adequacy, reinsurance counterparty collectability, regulatory capital and restrictions on dividends from insurance subsidiaries. Reinsurance receivables were $539.8 million at year-end; the company said substantial balances were collateralized or supported by highly rated reinsurers.
- Invesque represented a significant investment: Tiptree held approximately 31% of its shares. Changes in share value or dividend policy could materially affect results and financial condition.
- Other material risks include illiquid or fair-value-estimated assets; mortgage warehouse funding and loan repurchase obligations; shipping-rate volatility, vessel impairment and environmental requirements; interest-rate and credit risk; cybersecurity and privacy incidents; and acquisition integration and financing risks.
- Fortegra is defending the long-running Mullins class action concerning coverage terms for certain credit-insurance policies. Management believes the outcome should not be materially adverse but could not estimate a reasonably possible loss range. Other ordinary-course proceedings were not expected by management to be material.
Investor verification priorities
- Verify the quality and sustainability of 2019 earnings, including the impact of fair-value gains, the Telos sale gain, tax items and the absence of the prior-year Care disposal gain.
- Review the insurance reserve development, especially the reported $5.2 million increase in prior-year case development, and assess reinsurance recoverability and collateral coverage.
- Assess the Smart AutoCare acquisition economics, earn-out exposure, commutation effects, integration progress and resulting funding needs.
- Examine debt maturities, covenant headroom, refinancing terms and the reliance of mortgage operations on short-term warehouse facilities; distinguish face-value debt from debt net of financing costs.
- Monitor Invesque valuation and dividends, shipping investment returns, and the unresolved Mullins litigation, for which the filing provides no clear loss estimate.