Tiptree Financial Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Tiptree is a diversified holding company with insurance and insurance services, specialty finance, asset management, and real estate businesses. It consolidates its Operating Company and subsidiaries; CLO consolidation materially increases reported assets and liabilities even though CLO obligations generally have no recourse to Tiptree’s general assets. Unless otherwise noted, amounts below are in millions.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $29.4 | $19.8 | $59.8 | $41.9 |
| Net income (loss) from continuing operations | $(4.3) | $(12.0) | $(6.5) | $(7.0) |
| Net income available to Class A common stockholders | $1.1 | $3.4 | $2.1 | $4.7 |
| Basic and diluted EPS | $0.10 | $0.33 | $0.20 | $0.46 |
| Economic Net Income attributable to Tiptree (non-GAAP) | $1.3 | $1.9 | $2.7 | $4.9 |
- Revenue growth reflected acquired Care properties, higher interest income and Luxury Mortgage loan-sale gains. Total expenses also rose, principally with acquisitions, higher payroll, and increased interest expense.
- For the six months, operating cash flow was $100.6 million, investing cash flow was $(277.7) million, and financing cash flow was $178.6 million. Cash increased $1.5 million. Operating cash flow included substantial VIE activity and changes in amounts due to brokers, dealers and trustees.
- At June 30, unrestricted cash was $122.1 million and restricted cash was $22.8 million. Total assets were $7.38 billion and total liabilities were $6.82 billion. These totals include $4.80 billion of matched separate-account assets and liabilities and substantial consolidated CLO balances.
- Reported debt, excluding consolidated CLO liabilities, was $285.7 million, down from $360.6 million at year-end 2013. Consolidated CLO liabilities were $1.52 billion, compared with $1.18 billion. Management reported compliance with relevant debt covenants, including certain Luxury facilities under waivers valid through June 30, 2014.
- Economic book value per share, including Tiptree-level net assets, was $10.69, versus $10.52 at December 31, 2013; this is a non-GAAP measure.
Material changes versus prior periods
- Q2 revenue increased 48.8% year over year, while income available to Class A stockholders fell 68.6%. The prior-year comparison benefited from a $16.3 million discontinued-operations gain and income related to the sale of the Bickford portfolio.
- Six-month revenue rose 42.7%, but income available to Class A stockholders declined 55.7%, also largely reflecting the absence of the prior-year Bickford sale and discontinued-operations income.
- Specialty finance results improved with Luxury’s contribution, loan-sale gains, and expanded lending and warehouse activity. Insurance segment profit was broadly stable year over year for the first half. Asset management profit declined as fees from older CLOs and the Bickford portfolio fell; real estate profit was much lower than the prior-year period, which included the Bickford sale gain.
- Luxury Mortgage was acquired in January 2014. Telos issued Telos CLO 2014-5 in May, and the company capitalized a warehouse for a planned sixth CLO.
Outlook, risks and unusual items
- Management expected administrative servicing fees to remain relatively steady in 2014 absent significant policyholder terminations. It expected to deploy a significant portion of cash into assets, CLO sponsorship, existing businesses and new investments; no specific earnings or revenue guidance was provided.
- Management said it hoped to achieve profitable scale in asset-based lending in the second half of 2014, but gave no assurance. It noted uncertainty around mortgage-market volumes and new mortgage rules.
- CLO issuance had increased, but regulatory uncertainty and wider spreads on AAA tranches could constrain issuance or reduce returns on new CLO subordinated notes. Long-duration tax-exempt assets are sensitive to interest rates; management said the 2014 value increase may not continue.
- On August 11, 2014, Tiptree agreed to acquire Fortegra Financial for approximately $218 million in cash, subject to customary closing conditions, including regulatory approvals. After quarter-end, Tiptree also contributed another $20 million to the Telos 6 warehouse and received a $29.8 million Westside loan payoff, with an approximately $7.8 million gain.
- On August 5, 2014, Tiptree issued approximately 11.1 million Class A shares in exchange for TFP partnership units, materially increasing Class A shares outstanding. The filing reports 21.7 million Class A and 19.9 million Class B shares outstanding as of August 12.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Management stated disclosure controls were effective; evaluation of internal controls for businesses contributed in 2013 remained in progress, with completion expected by year-end 2014.
Important facts for investors to verify
- Reconcile reported GAAP losses and common-stockholder income with CLO consolidation, non-controlling interests, and the company’s non-GAAP Economic Net Income and Economic Book Value measures.
- Assess the quality and sustainability of revenue growth, including acquisition-related contributions, mortgage loan-sale gains, tax-exempt investment marks, and servicing-fee concentration.
- Review liquidity available at the parent and subsidiaries, debt maturities and covenants, warehouse funding needs, and the planned cash deployment and Fortegra financing.
- Evaluate CLO market, credit-spread, interest-rate, valuation, and refinancing risks, including the reported significant Level 3 assets and the effects of CLO paydown periods.
- Confirm the effects of the post-quarter share exchange on ownership, share count, and per-share measures, and monitor completion conditions and funding for the Fortegra acquisition.