Q3 2020 Tiptree Inc Earnings Call

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As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Sandra Bell Chief Financial Officer. Thank you you may begin.

Good morning, and welcome to our third quarter 2020 earnings call. We are joined today by our executive Chairman, Michael Barnes and CEO, Jonathan a lonnie.

You can find the slides that accompany this review on our Investor Relations Web site. Please.

Reading undercover 19 constraints.

Our businesses have continued their positive trends.

Production and sales volumes are at all time highs in many of our product lines of businesses.

As management and employees have adapted well to the new environment, staying dedicated to serving our customers while pursuing new opportunities.

Based on our belief in the strength and future growth of the company tipped.

Investment portfolio, we take a long term view, therefore variability and the timing of investment gains and losses is to be expected.

We continue to maintain over 85% of our portfolio in high credit quality and liquid securities with an average rating of double a.

For Tiptree capital operating EBITDA was $36 1 million for the first nine months up substantially from the prior year driven by strong performance in our mortgage operation.

A mortgage volumes were up 54% year over year with notable improvements and gain on sale margins.

Low mortgage rates due to the fed intervention combined with rising home prices in certain markets has resulted in higher refinancing mortgage volumes.

In this year of market stress and uncertainty.

Our mortgage business has shown its strength and serves as an example of our objectives when allocating capital, namely the source scalable cash flowing businesses, having embedded optionality, while also providing portfolio diversification to tip trees platform.

Including contributions from our warranty acquisition.

Operating EBITDA for the quarter was $31.9 million up 84% from the prior year yeah.

Insurance business can be seen in premiums and premium equivalent.

As a reminder, much of the growth in this metric ends up on the balance sheet as gap recognizes the revenue over the life of the contracts.

Year to date premium and equivalents were up 26% led by the acquisition of Smart auto care and the growth in light commercial and other specialty programs.

Additionally, deferred revenues and unarmed premiums, which represent future earnings potential stand at 1.15 billion up 46% year over year, driven by 20% organic growth and the acquisition of Smart auto care.

Turning to page six we highlight our capital allocated between our insurance business and Tiptree capital along with their respective returns to assist investors and understanding tip trees enterprise value.

We evaluate our return on capital using operating EBITDA, which for the latest 12 month period was $98 million up 53% from the latest 12 month period ending.

Q3 2019.

Are operating return Uninvested capital of approximately 16.5% is driven by a 16.6% return it an insurance and a 25, 8% return and to treat capital.

The key drivers for the period, where growth and underwriting income and fee revenue in warranty service contracts and in light commercial specialty programs.

Positive contributions for mortgage and shipping operations, and Tiptree capital and reduce corporate expenses, driven primarily by lower incentive compensation.

With that let's turn to our insurance company results.

For the first three quarters of 2020 improvement in sales volume was driven by gross and warranty like commercial and other specialty programs.

Year to date gross written premiums and equivalent where one 2 billion up 239 million of which 148 million was incremental from our acquisition of smart auto care.

For your loss was 14 million driven by unrealized and realized losses of 22 million on equities.

Equities and other securities in the portfolio.

13, $8 million of which was related to invest.

On page 11.

We present the results of Tiptree capital, which today consists of our invest shares.

<unk> and mortgage operations.

For the first three quarters of the year the pretax loss was driven by unrealized losses on our invest shares.

Which is tied to mark to market based on its share price year.

Year to date operating EBITDA and Tiptree capital increased to 36.1 million, primarily driven by increased mortgage volumes and margin and a full quarter of operations from the vessels purchased in 2019, and our maritime shipping business.

As Michael mentioned, our mortgage business as benefited from several tailwind, including higher refinance volumes supported by both low rates and rising home prices Marr.

Margins are 150 to 200 basis points higher than normal driven by covid related capacity constraints.

And lastly, we've been able to retain mortgage servicing rates at relatively low valuation providing opportunity for value appreciation and future rising interest rate environment.

Now, we will turn the call back to Michael to conclude our prepared remarks.

Thanks Sandra.

Our third quarter results have demonstrated the resilience of our operations as we recovered positive earnings and sales trends across our businesses.

Child and Invesco.

I would love to hear you hear what your thoughts are on that in terms of is this a permanent impairment of capital there or is there a path to recovery.

And then.

Talk offline with with Sandra and about about just corporate expenses.

And I'm going in the right direction, it's still kind of a pretty large drag for a company our size I'm just curious as to where you think.

That's a going or our user plan to kind of leverage leverage it up in terms of building.

Making more acquisitions, and what not making that a smaller percentage as a whole.

Going forward, so I guess the long winded question there.

I think I got to Michael Thanks. Thank you for your question and lets start with Invesco as you know, we're we're a minority holder of it thats all that we do sit on the board of invest.

And we will keep our comments to two public information given that they will be reporting their earnings November 11.

Invesco as you know is invested in the senior housing skilled nursing and.

Medical office space, and so with Corona viruses, certainly like others. In this space certainly has dealt with the issues of this credit crunch virus amongst our various properties.

Operationally the publicly reported information has through that they've put out a statement I think since through August has stated that their operators have continue to generally perform in terms of payment under leases at about 94%. If I remember correctly has been collected without issue. Although there are some properties that they are clearly working.

With.

Who have certainly been affected by credit virus.

With regard to invest as a as a as a problem child as long term investments that we.

We invested in the senior care business going back to 2010, it's an area, we know well and although even before current environments. There were certainly issues that the senior care business was facing.

Whereas invest.

Invest in its current form is a thinly traded stock on the Toronto stock exchange that small volume clearly has can create significant volatility.

Turning management has taken important steps to maintain its liquidity and be in a defensive posture through this crisis period, they've cut expenses they reduced capital expenditure.

And they've they've cut the dividend the cutting the dividend I think as a REIT type stock. It is not technically a rebid as re type stuff I think clearly had an impact in terms of the retail.

Investment appetite and I think what we've seen is that.

Response to that so the stock has traded down.

I would say that from our own standpoint, we did not feel that this current stock prices reflective anywhere near what we would consider fair value, but there is still time theres still things to play out in that in both the resurgence of krona virus on a global scale and as well as the individual properties continuing to perform I'd say government bailouts have also.

So helps operators through this period in terms of bridging.

And allowing them to continue payments, but what continues what was to be seen so making of the kind of summarizing I. Just said we continue to be an investor we are a minority holder, although we sit on the board.

We see it is certainly a troubled sector and across the virus, but we also see the share price is not reflective of true value. What we do in the future. We'll see we'll continue to evaluate.

The situation as we as we go along.

And the last thing I'll say is currently the company is not facing any liquidity issues. So it's having cut the dividend reduced expenses pulled back capital expenditure. We think it's in a position to try to get through this crisis and then realize what we would consider fair value.

Before I move on to the expense question does that generally answer the question on investment.

Yes, basically we have another question if it which is totally speculative if they do come into.

Liquidity crisis would you be a provider of capital.

To get them through that.

Yes, I'd say as I said thats not an issue right now if that work it would not likely be an issue for some time is there.

Third debts are fairly.

Strung out and not immediately do they have anything really coming due or or covenant issues to my knowledge. So so.

The answer is we would have to evaluate it at that time.

We certainly.

It has been a long term investor in senior care, we understand the space well.

And and we'd have to value to the time, what the issues would be in and what capital will provide I'd mentioned that we arent alone in this investment there is other large holders.

That that we certainly would consider like minded and very commercially minded in terms of wanting to certainly.

Protect and see and realize the value that we will consider nearer to fair value than we're currently trading. So few you certainly can look at the public shareholding and see there are other large investors that I would consider very like minded to ourselves that would likely want to see this investment continue.

Okay. Thanks.

Thanks.

With regard to expenses.

Sandra do you want to take this one I'll just say before I turn it over to Sandra that our objective certainly is to grow net through a period, where we've seen market volatility and the.

And again, our shares as certainly could be more broadly trade that we would certainly like to see a more active trading but when the shares trade down we will evaluate the opportunity to buy them.

And so we have been buying shares as we said in our in our comments earlier, we've been a buyer of shares.

Over the years as the opportunity presents itself and as we consider the value of the shares where we can acquire them in in open market transactions or or through programs.

So our objective certainly is to grow and I think it by growing it would diminish the percentage of our corporate ongoing expenses and bring that more in line with what we would consider appropriate we certainly I'd say have done a very good job of looking for ways to reduce expenses all give credit to standard team will continue to evaluate how to reduce it.

Expenses.

And and I think they've done a great job there Sandra do you want to comment on that.

Hi, Michael like I think as Weve spoken in the past, we did not flow to add head.

Headcount at the corporate level and matter of fact, we have been investing and cell technology, which allows us to be scalable.

Hi, good timing, they yaghi sense, our people and our main expenses are in public accounting and supporting capital and that thing and we do believe that we don't want to add any there that slices and continue to scale and grow. So thats expense has continued at synta.

Line as a percentage of Michael OSAT.

Michael does that answer your question.

Yes.

It just it's just frustrating from our perspective, we see something that you know this.

Really not much reason why this company should trade stock to trade.

Less than book, especially with that Jim you got there and insurance business.

So, let's not forget our and let's not forget our mortgage business that had a phenomenal quarter, but is actually really kicked into gear and you look at our businesses. We think we love all of our children equally we think they're all great businesses.

And getting through and getting through this getting getting through this period.

Krona pandemic, we've really shown the resilience of our business, which.

Which is why we own.

But I appreciate your point and I couldn't agree more I think I think we are significantly undervalued to intrinsic value level under GAAP book value and I think any simple.

Calculation of earnings potential with a with a market multiple could it be one can with the back of an envelope create a breakout value that would give a.

So anyway, a sum of the parts value, let's call it that would give a clear indication of our intrinsic value.

So how do you raise the profile of the company and the stock split the Investor community to.

Through the channel.

We've certainly taken steps to emphasize our insurance operation.

We've also tried to simplify our financial reporting to really two components, our insurance reporting and our other our trachea capital.

Accordingly, we have also and I attribute this to John Falani, our CEO have taken significant steps over the years to shed non core non scalable businesses.

We've also taken a lot of steps to exit exposure to the overall credit markets and to look for capital allocation to repeatable cash flowing.

Positive earnings and so I think we've achieved that but how do we differentiate I would like to believe over time through growth in book value did.

Dividend distributions.

That are consistent and hopefully increasing as we increase our book value.

And earnings.

I'd like to think that people will ultimately recognize the value of our investments the value of our company and want to own us.

Okay, and what we believe is three so.

Others do too.

Great. Thank you I appreciate I appreciate the comments.

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The next question comes from Walter Schenker with Mass partners. Please proceed with your question.

The last two and a it was a perfect lead into my comments.

Hey.

It's really relate to and and first I commend management first steadily buying stock and I.

Complaining about the company and not more aggressively buying stock I realize there are limitations.

On what you can buy but.

But.

A million and a half dollars I think that was the number stands right on exactly about a million and a half shares many of them have shares to be clear, that's now, okay $10 million not including our dividend okay.

Im sorry, I was in the car, but you know again.

Again, I think the most attractive.

We are able to buy a moderate amount of stock since it has had some liquidity and stay down here I still believe that the most attractive.

Alternative for the company is to maximize buying back stock I know historically not this year, maybe you only responding mostly responded to launch blocks, but $5 with a 10 dollar book and the pieces, which are worth a lot more it seems to me that.