Tiptree Financial Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unless noted, financial figures are in U.S. dollars; amounts below are rounded to millions. Tiptree is a diversified holding company with insurance and insurance services, specialty finance, real estate, asset management, and corporate and other segments. It owned approximately 81% of the Operating Company at quarter-end.
Financial performance and position
- Revenue: Q3 revenue was $119.1 million, versus $20.3 million in the adjusted prior-year quarter; nine-month revenue was $306.3 million, versus $40.8 million. The sharp increase primarily reflects Fortegra, acquired in December 2014, and growth in specialty finance and real estate. The periods are not directly comparable.
- Profit and EPS: Continuing-operations pretax loss was $3.6 million in Q3 and $11.0 million for nine months, compared with pretax income of $4.9 million and $7.3 million, respectively, in 2014. Net loss available to Class A common stockholders was $4.6 million in Q3 (EPS loss of $0.13); nine-month net income was $9.4 million (EPS of $0.29), including $23.3 million from discontinued operations, including the PFG sale gain.
- Adjusted EBITDA: Continuing-operations adjusted EBITDA, a non-GAAP measure, was $4.9 million in Q3 versus $7.6 million; nine-month adjusted EBITDA was $16.8 million versus $15.9 million. Total nine-month adjusted EBITDA, including discontinued operations, was $50.0 million versus $37.0 million.
- Cash flow and liquidity: Nine-month net cash provided was $12.3 million from operating activities, while investing used $103.3 million and financing provided $108.3 million; cash increased $17.4 million. Quarter-end unrestricted cash was $98.7 million and restricted cash was $34.0 million. Management said cash, subsidiary distributions, and financing access should be adequate for at least 12 months.
- Debt and balance sheet: Total assets were $3.50 billion and total equity was $406.8 million. Debt outside consolidated CLO liabilities was $625.5 million, up from $363.2 million at year-end 2014. Consolidated CLO liabilities were a further $1.725 billion; the filing says CLO assets are ring-fenced and the CLO debt is non-recourse to Tiptree. Unrestricted cash was $98.7 million.
- Margins and segments: Mortgage originations totaled $442.5 million in Q3 and $881.7 million for nine months. Mortgage net revenue margin increased to 363.5 basis points in Q3 from 139.4, and to 286.0 basis points for nine months from 160.4, reflecting Reliance’s higher-margin agency and FHA/VA mix as well as higher volume. Q3 pretax income was $10.1 million for insurance and insurance services and $1.3 million for specialty finance; real estate recorded a $2.6 million loss and corporate and other a $14.5 million loss.
Material changes versus prior comparable periods
- Q3 loss from continuing operations and lower adjusted EBITDA reflected CLO subordinated-note losses, reduced CLO distributions after note sales, higher real estate depreciation and amortization, and increased corporate costs for financial reporting and control improvements. A $7.9 million prior-year gain on repayment of a Care loan also made comparisons less favorable.
- Fortegra, acquired in December 2014, added substantial insurance revenue and expenses. Reliance, acquired July 1, 2015, expanded mortgage volume. Tiptree sold PFG on June 30, 2015 for $142.8 million cash, with about $7.3 million in additional payments due over two years; PFG is reported as discontinued operations.
- Total assets declined from $8.20 billion at year-end 2014 to $3.50 billion, principally due to the PFG sale and removal of its separate-account assets, partly offset by the Reliance acquisition. Some 2014 figures were adjusted for accounting adoption, reclassifications, and immaterial prior-period corrections.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or revenue guidance is provided. Management expects liquidity to cover operations for at least the next 12 months, subject to subsidiary distribution limits, financing conditions, and other factors.
- Management cited continued volatility in CLO markets and subordinated-note valuations, including sensitivity to defaults, loss severity, and discount rates. It expects valuation volatility to continue. CLO risk-retention rules effective in December 2016 may tie up capital and affect future CLO activity.
- Potentially higher interest rates could weigh on mortgage demand, profitability, and borrowing costs. New mortgage disclosure rules (TRID) effective October 3, 2015 could delay closings; CFPB regulation and enforcement may also affect insurance product sales and mortgage/NPL servicing and collections.
- Controls: Disclosure controls were ineffective at September 30, 2015. A material weakness involving income-tax accounting, cash-flow presentation, and acquisition accounting remained unremediated and untested. Management warned that further deficiencies or material weaknesses could be identified during ongoing testing.
- Contingency: Fortegra faces a certified class action concerning the term of coverage under certain insurance policies. The company is defending the case, considers a material adverse outcome unlikely, but cannot estimate a reasonably possible loss range.
- Other items: The company invested $20.9 million in non-performing residential mortgage loans during Q3, bringing the portfolio to $30.6 million at quarter-end; it expected near-term losses as costs precede potential recoveries. Fair-value estimates for these loans rely on significant unobservable assumptions.
Important facts for investors to verify
- Whether the material weakness has been fully remediated and independently tested, and whether any additional control deficiencies emerge.
- How much of reported earnings and growth is recurring, given acquisitions, PFG’s disposal, the sale of CLO notes, and the one-time prior-year Care loan gain.
- The performance and valuation assumptions of the NPL portfolio, CLO subordinated-note holdings, and other Level 3 assets.
- Debt maturities, borrowing availability, covenant compliance, and the extent to which subsidiary cash can be distributed to the holding company; distinguish Tiptree debt from non-recourse CLO obligations.
- Reliance’s mortgage volumes and margins, Fortegra’s claims and commission trends, and the effect of interest rates and regulatory changes on those businesses.