Tiptree Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing also provides unaudited fourth-quarter results. Unless otherwise noted, financial amounts below are in U.S. dollars.
Business context
Tiptree is a diversified holding company. Its principal business is Fortegra, a specialty insurer and provider of warranty products and related services. Other operations include residential mortgage origination and servicing, maritime transportation, and investments including Invesque shares. Insurance and Mortgage are reportable segments; other non-insurance activities are reported as Tiptree Capital–Other.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $810.3 million | $772.7 million |
| Net income (loss) attributable to common stockholders | $(29.2) million | $18.4 million |
| Diluted EPS | $(0.86) | $0.50 |
| Operating cash flow | $140.2 million | $23.7 million |
| Cash and cash equivalents, excluding restricted cash | $136.9 million | $133.1 million |
| Total assets | $3.00 billion | $2.20 billion |
| Debt, net | $366.2 million | $374.5 million |
| Total stockholders’ equity | $373.5 million | $411.4 million |
| Book value per share | $10.90 | $11.52 |
- Revenue grew 4.9%, but expenses increased faster, to $849.2 million from $743.6 million. The company recorded a $38.9 million pretax loss and a $13.6 million income-tax benefit.
- Management reported adjusted net income, a non-GAAP measure, of $51.4 million, up from $27.6 million, and adjusted return on average equity of 13.1%, versus 6.8%. Adjusted EBITDA fell to $4.5 million from $68.1 million. These measures are company-defined and are not substitutes for GAAP results.
- Insurance revenue increased 8.8% to $691.1 million. Pretax income declined to $26.9 million from $37.0 million, while its combined ratio improved to 91.5% from 92.4% (below 100% generally indicates underwriting profit). Gross written premiums and premium equivalents rose 28.5% to $1.67 billion.
- Mortgage pretax income rose to $31.1 million from $3.0 million. Funded loan volume increased 45.1% to $1.66 billion, and gain-on-sale margin increased to 6.32% from 4.67%.
- Tiptree Capital–Other reported a $61.2 million pretax loss, compared with $23.4 million pretax income in 2019, primarily reflecting Invesque-related losses and suspended dividends.
- Operating cash flow increased substantially, while investing activities used $123.5 million and financing activities provided $31.7 million. Cash flow included substantial mortgage-loan turnover and growth in insurance unearned premiums and deferred revenue.
- Year-end debt at face value was $379.6 million, comprising $280.3 million of corporate debt and $99.3 million of asset-based debt. Debt, net, was $366.2 million. The $120.3 million Fortress term facility bears LIBOR plus 6.75% (with a 1% LIBOR floor) and matures in February 2025. Mortgage warehouse facilities and other asset-based financing have separate maturities and collateral terms.
- Cash and cash equivalents plus investments totaled $948.3 million; some cash and investments are restricted or held within regulated insurance subsidiaries. Of cash and cash equivalents, $80.0 million was outside statutory insurance subsidiaries. Management said liquidity sources were expected to be adequate for at least 12 months.
Changes, transactions, and quarterly results
- The largest earnings drag was the decline in Invesque and other equity holdings: the filing reports $81.8 million of Invesque-related realized and unrealized losses and $83.6 million of losses on Invesque and other equity securities. Invesque’s fair value fell to $31.1 million from $111.9 million; it suspended dividends in April 2020.
- Insurance growth reflected the January acquisition of Smart AutoCare, which contributed approximately $248.8 million of gross written premiums and premium equivalents. Tiptree acquired Sky Auto on December 31, 2020 for approximately $25.2 million in cash. Smart AutoCare’s purchase agreement includes contingent earn-outs and a future reserve-related true-up.
- Luxury Mortgage was classified as held for sale, with a $4.4 million impairment recorded in 2020. Its held-for-sale assets were $181.7 million and liabilities were $175.1 million at year-end.
- The company repurchased 2.38 million shares during 2020 for approximately $13.9 million in cash; the reported average price was $5.82 per share. Cash dividends declared were $0.16 per share for the year.
- Fourth-quarter revenue was $257.4 million and net income attributable to common stockholders was $14.3 million, or $0.42 per diluted share. In fourth-quarter 2019, those figures were $208.6 million, $4.1 million, and $0.11 per diluted share.
Outlook, risks, and unusual items
- The filing gives no formal earnings or revenue guidance. Management cited growth opportunities in warranty and specialty insurance, including commercial programs, and said it believed the insurance market was in its second year of hardening. Insurance revenue has historically been seasonally higher in the third and fourth quarters.
- Management said COVID-19 effects were not significant to 2020 operating-business results, but emphasized that future effects could not be reliably estimated. Risks include economic disruption to customers and distribution channels, uncertainty in senior housing and Invesque, and volatile shipping and mortgage markets.
- Key exposures include claims-reserve uncertainty, reinsurance recoverability and concentration, investment and interest-rate risk, illiquid assets, mortgage warehouse funding and margin calls, loan repurchase obligations, and vessel charter-rate, impairment, drydocking, and regulatory risks. The holding-company structure and insurance dividend restrictions may constrain cash transfers to Tiptree.
- The company recorded a $7.3 million tax benefit related to CARES Act net-operating-loss carrybacks. Its U.S. insurance subsidiaries’ statutory capital and surplus was $202.7 million versus $65.0 million of required minimum capital and surplus; permitted ordinary dividends at year-end were approximately $13.4 million.
- The company is defending the Mullins class action concerning credit insurance coverage. Management said it did not expect the matter to be materially adverse, but stated it could not estimate a reasonably possible loss range.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Smart AutoCare, representing 12% of consolidated assets and 9% of revenue, was excluded from management’s and the auditor’s internal-control assessment for 2020.
Most important facts for investors to verify
- Whether insurance premium growth, fee revenue, and the 91.5% combined ratio remain sustainable as acquisitions are integrated and claims experience develops.
- The assumptions and potential volatility behind Invesque’s valuation, the possibility of dividend restoration, and Tiptree’s ability to realize carrying values on less-liquid investments.
- Smart AutoCare and Sky Auto integration, contingent purchase consideration, legacy reserve adequacy, and the implications of Smart AutoCare’s exclusion from the 2020 internal-control assessment.
- Mortgage profitability under changing interest rates, warehouse-facility renewals and collateral requirements, and loan repurchase or indemnification claims.
- Debt maturities, covenant headroom, subsidiary dividend restrictions, and the actual availability of cash held outside regulated insurance entities.
- Reserve development, reinsurance counterparty exposure, and the outcome and potential financial exposure of the Mullins litigation.