Tiptree Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed June 6, 2017. Tiptree is a diversified holding company with specialty insurance, asset management, senior living and specialty finance businesses. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Revenue | $163.9 | $130.7; up 25.4% |
| Income before tax | $2.5 | $5.0 |
| Net income attributable to Class A stockholders | $1.1 | $5.6 |
| Diluted EPS | $0.03 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $11.8 | $15.3 |
| Operating cash flow | $49.2 | $13.5 |
| Investing cash flow | $25.2 | $(85.9) |
| Financing cash flow | $(70.2) | $46.2 |
| Cash and cash equivalents at period end | $67.2 | $63.0 at December 31, 2016 |
| Total assets | $2,467.0 | $2,890.1 at December 31, 2016 |
| Debt, net, excluding consolidated CLO debt | $751.9 | $793.0 at December 31, 2016 |
| Stockholders’ equity | $393.8 | $390.1 at December 31, 2016 |
Restricted cash was $27.5 million. Consolidated CLO liabilities were $535.3 million; the filing says CLO debt is non-recourse to Tiptree and CLO assets are not available to its general creditors. Tiptree reported $10.15 book value per share, as exchanged, versus $9.10 a year earlier. The company declared a $0.03-per-share dividend for Q1.
The insurance combined ratio rose to 94.7% from 85.4% (the adjusted ratio was 95.1% versus 88.5%), indicating weaker underwriting performance. Segment pretax results were: specialty insurance $4.8 million versus $12.2 million; asset management $5.6 million versus $2.7 million; senior living loss of $1.5 million versus $3.9 million; specialty finance income of $0.5 million versus a $1.0 million loss; and corporate and other loss of $6.8 million versus $5.1 million.
Material changes and drivers
- Revenue growth reflected higher earned premiums, investment income, senior-living rental revenue and specialty-finance activity. Net income declined largely because the prior-year period included a $4.0 million tax-reorganization benefit; pretax income also fell.
- Specialty insurance earned premiums doubled to $89.2 million, principally because a captive reinsurer retained more credit-protection business. Net written premiums increased 82.2%, while gross written premiums declined 9.4%. Higher retention also increased commissions and policy benefits; lower service fees and ceding commissions and reduced investment gains weighed on results.
- Specialty insurance pretax income fell to $4.8 million, with management citing lower underwriting margin, higher interest and stock-compensation expense, and lower investment gains. Portfolio net investment income improved, but net portfolio income declined to $3.8 million from $6.3 million and annualized yield fell to 4.4% from 9.0%.
- Asset-management pretax income increased to $5.6 million, mainly on favorable fair-value marks and CLO earnings. Fee-earning AUM declined to $1.75 billion from $1.89 billion a year earlier as older CLOs ran off.
- Senior-living revenue increased 27.6%; segment NOI (non-GAAP) rose to $6.3 million from $4.9 million, while the segment remained loss-making before tax. Specialty finance returned to pretax profitability as mortgage origination volume increased 14.6% to $381.4 million and commercial-lending earning assets grew.
Outlook, risks, contingencies and unusual items
- Management expects cash, subsidiary distributions and financing access to be adequate for at least the next 12 months, but provided no specific earnings or revenue guidance. It noted that subsidiary distributions may be constrained by financing terms, regulation and business conditions.
- On January 18, 2017, Tiptree sold its ownership in a CLO’s subordinated notes and deconsolidated the CLO. This materially reduced reported assets and liabilities; management stated that the CLO obligations are not Tiptree’s obligations.
- Debt includes floating-rate borrowings, mortgage warehouse facilities and a $58.0 million Fortress facility maturing in September 2018. Management relies on short-term, uncommitted warehouse financing for mortgage operations. The filing reports $39.0 million of long-term debt principal due during the remainder of 2017 and $132.1 million due in 2018, excluding CLO notes.
- Fair-value and credit risks include Level 3 assets, non-performing residential loans, leveraged loans, derivatives and CLO interests. NPL valuation depends on unobservable assumptions including property values, discount rates and resolution timing. Reinsurance receivables were $311.8 million; the three largest unrelated-reinsurer balances totaled $73.8 million and were described as collateralized.
- Fortegra remains a defendant in a certified Kentucky class action involving credit-insurance coverage. A February 2017 court ruling denied summary judgment on certain disability policies; the company cannot estimate a reasonably possible loss range, while management believes resolution should not materially harm its financial position. Other ordinary-course proceedings were not considered likely to have a material adverse effect.
- Subsequent events included senior-living acquisitions announced in April and May, including seven skilled-nursing facilities for $32.0 million, mostly financed. On June 5, TFP settled the Tricadia option by delivering 1,510,920 Class A shares held by a subsidiary for approximately $8.1 million.
- The cover page checks “No” for having filed all required reports during the preceding 12 months and for submitting and posting required interactive data files. The filing text does not explain these checked responses; verify their status and implications. Management separately concluded disclosure controls were effective and reported no material control changes during the quarter.
Important facts for investors to verify
- Confirm the cover-page “No” responses regarding prior required filings and interactive data submissions, and whether any filing-compliance issue was outstanding.
- Assess whether increased insurance risk retention can sustain underwriting returns given the deterioration in the combined ratio and the rise in claims and commissions.
- Review the composition, valuation assumptions and realizability of Level 3 assets, NPLs, CLO interests and reported investment gains.
- Track refinancing and renewal of warehouse facilities, the holding-company Fortress maturity, floating-rate exposure and liquidity available outside restricted or CLO assets.
- Evaluate CLO runoff and declining fee-earning AUM, senior-living acquisition financing and operating performance, and the dilution and other effects of the Tricadia settlement and subsequent acquisitions.