Q4 2020 Tiptree Inc Earnings Call
[music].
Greetings welcome to Tiptree, Inc. Fourth quarter 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to Sandra Bell Chief Financial Officer. Thank you you may begin good morning, and welcome to our year end 'twenty 'twenty earnings call we are joy.
And today by our executive Chairman Michael Barnes.
You can find the slides that accompany this review on our Investor Relations website.
Please note that some of our comments today will contain forward looking statements based on our current view of our business and actual future results may differ materially. Please.
Please see our most recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over to Michael just a few additional housekeeping items.
Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail on this morning's presentation reconciliations of non-GAAP financial measures and the other associated disclosures are contained in our SEC filings the appendix to our presentation and posted.
On our website with that I will turn the call over to Michael.
Thank you Sandra and good morning to everyone.
Despite the many challenges this past year as a result of COVID-19 are controlled operating businesses continued to grow profitably in 2020, demonstrating the resilience of our diversified operations.
Revenues, excluding mark to market the increased 17%.
And adjusted net income of $51 4 million increased 86% from the prior year.
That being said Tiptree total return for 2020 as measured by change in book value per share plus dividends paid was negative 4%.
Merely due to an unrealized loss on our holdings in investing of real estate investment company focused on senior care properties, a sector hit, particularly hard by the pandemic.
Even with this decline we believe the tip trees overall intrinsic value increased significantly in 2020 and.
And is materially greater than our GAAP book value would suggest.
For our insurance and mortgage businesses production and sales volumes are at all time highs as management and employees have adapted well to the new environment staying dedicated to serving our customers while continuing to pursue new opportunities.
In addition, our investments in shipping were stable for the year.
And for the first few months of 2021, we are in an environment of unseasonably high charter rates as a result of the current technical imbalance and global shipping supply and demand.
Given our confidence in the strength of these core operating trends.
Tiptree repurchased close to two 4 million shares in 2020, representing approximately 7% of the outstanding shares at year end 2019.
These repurchases were executed throughout the year at an average 43% discount to book value per share.
In combination with share that senior management has directly purchased in open market transactions.
Insider ownership has increased to approximately 32% as of December 31, 2020.
In our insurance business there for Tegra management team continues to execute on its growth objectives.
Gross written premiums and premium equivalents of nearly $1 7 billion.
We're up 29% over 2019, driven by continuing growth in commercial and warranty programs as sales volumes accelerated in the second half of 2020.
Our acquisition of Smart auto care completed at the beginning of 2020 has more than met our expectations driving significant sales growth in our auto warranty product lines contributing approximately $250 million of gross written premiums and premium equivalents.
The launch of <unk> for Tegra of specialty insurance company in late September gives us the ability to write business on an admitted and non admitted basis and specialty commercial and niche personal lines in order to take advantage of a hardening market, which we expect will continue in the near to medium term.
Insurance margins remain consistent with our combined ratio of 91, 5% showing improvement relative to prior periods as our product mix shifts to more profitable lines.
Our total investments and cash and cash equivalents within for Tegra ended the year at $713 million up 26% year over year in line with our underlying premium growth.
We continue to maintain 83% of our portfolio in high credit quality and liquid securities with an average rating of double a.
One item I'd like to specifically note with regard to my earlier comments on Tiptree the intrinsic value.
Given for <unk> growth trajectory and its adjusted net income of $43 4 million, it's value alone would significantly exceed tip trees book value when benchmarked to earnings multiples of potatoes publicly traded peers.
Within Tiptree capital adjusted net income was $33 million for the year up substantially from the prior year driven by strong performance in our mortgage operations, which had a record year.
Mortgage volumes were up 45% year over year with notable improvements in gain on sale margin.
And the share of market uncertainty our mortgage business has shown its strength and serves as an example of our objectives when allocating capital, namely the sorts of scalable cash flowing businesses with great management, and having embedded upside optionality, while also providing portfolio.
Diversification the tiptree sources of revenue.
While tiptree capital generated strong operating results it.
It contributed a pretax loss of $30 million due to the unrealized mark to market losses, resulting from a decline in invest share price, which I mentioned previously.
With that I'll pass it to Sandra who will take you through the financial results in more detail.
Thank you Michael.
On page four of the presentation, we highlight the company's key financial metrics for the fourth quarter and total year 2020.
Net income before non controlling interest for the quarter was $16 2 million an increase of $11 6 million over the prior year driven by continued growth in our insurance business and strong performance in our mortgage operation.
The net loss for the year was $25 2 million driven by Unreal, It unrealized mark to market losses on our holdings of invest.
Excluding investment gains and losses revenues were up 18% for the quarter and 17% for the total year.
Driven by improvement in insurance top line results, including contributions from our warranty acquisition and increased volumes and margins in our mortgage business.
Adjusted net income for the quarter was $16 2 million up 54 per cent from the prior year.
For the total year 'twenty 'twenty that same metric was 51 4 million up 86 per cent compared to 2019.
The growth in both periods was driven by the same factors that supported improvement in revenue.
On the bottom of the page we show a bridge from adjusted net income to total pretax income highlighting the key differences between the two metrics.
Book value per share as of year end 'twenty 'twenty was $10.90.
Which represented a decrease of $5 four per cent versus the prior year, primarily due to negative marks on equities.
Book value per share increased five 2% in the fourth quarter of 'twenty 'twenty, driven by net income and share buybacks during the quarter.
Our capital and liquidity position remains strong with.
With cash and cash equivalents of the $136 9 million as of the end of the year, including $80 million held outside of our statutory insurance companies.
On page five we have updated our kpis trend.
'twenty 'twenty, we have refined our key operating related non-GAAP measure moving from operating EBITDA to adjusted net income.
Those metrics remain of realized and unrealized gains and losses.
Purchase accounting amortization stock based compensation and nonrecurring items.
Adjusted net income different from operating EBITDA does not add back corporate interest expense or taxes.
We believe that adjusted net income better aligns with similar metrics that are used by our peers.
<unk> in the insurance industry.
Organic growth in adjusted net income was 49 per cent for the quarter and 77 per cent for the total year. These.
These strong operating results were driven by the outperformance of our mortgage business and continued stable positive earnings performance in our insurance operation.
We continue to see strong momentum in our insurance company top line results as evidenced by gross written premium and premium equivalents.
'twenty 'twenty premiums and equivalents increased 29% led by the acquisition of Smart auto care and expansion in commercial and other specialty programs.
As a reminder, much of the increase in this metric ends up on the balance sheet as GAAP recognizes the revenue over the life of the contract.
Deferred revenues and unearned premium, which represent the future earnings potential.
At 1.26 billion up 48 per cent 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 return.
To assist investors in understanding tiptree intrinsic value.
In total our 'twenty 'twenty adjusted return on average equity improved to $13 one per cent an increase from six 8% in 2019.
Our insurance business for Tegra improved its adjusted return on average equity to 15, 2% from 12, 3% in the prior year.
Driven by growth in the capital light warranty service contract business and growth in commercial and personal lines programs, all while maintaining a consistent combined ratio in the low nineties.
Our mortgage business generated outsize returns on capital driven by growth in volumes and margin.
Both of which were partially offset by increased interest expense, resulting from our upsized corporate borrowing facility completed in early 'twenty 'twenty.
With that let's turn to our insurance company results.
For 'twenty 'twenty improvement in sales volume was driven by growth in warranty commercial and other specialty programs.
Gross written premiums and equivalents reached one 7 billion up 29% in total or 12%, excluding our acquisition of smart auto care.
In the fourth quarter, we saw premium growth accelerated to 36% year over year led by U S warranty program, which increased 71% U S insurance programs, which grew 22 per cent and European warranty programs, which grew 83 per cent.
For the year underwriting and fee margin increased $30 million or 21 per cent.
Our combined ratio improved to 91, 5%.
Demonstrating our ability to continue to grow profitably in our insurance business. Despite the economic headwinds we experienced in 2020.
Adjusted return on average equity continues to trend positively, reaching an annualized 18, 6% in the fourth quarter of 'twenty 'twenty.
We expect continued growth through our capital light.
Glee integrated warranty offerings and commercial and other specialty programs, the latter of which is benefiting from hardening market.
In October as part of our overall plan to increase financing capacity to support that growth we.
We financed we refinanced our asset based premium finance facility extending the maturity for three years and upsizing the amount of $75 million.
This complements the refinancing of four Tigris revolving credit facility completed in the second quarter.
Turning to the insurance investment portfolio on page nine.
Our total investments and cash and equivalents grew by 100 of $47 million year over year up 26 per cent.
589 million of or investments or <unk> 83 per cent is held in liquid highly rated fixed income securities or cash the.
The average rating on that portion of the portfolio was double a which we believe provides excellent strength to our capital base.
For the year net investment income was $9 9 million up $1 2 million driven by the growth in the portfolio. Despite the low interest rate environment.
For the year net realized and unrealized losses were $11 9 million driven by unrealized losses on our invest holdings.
On page 11, we present the results of Tiptree capital, which today consists of our invest shares shipping and mortgage operations.
For the year, the pretax loss was driven by unrealized losses on our investment in desk mentioned earlier.
2020, adjusted net income in Tiptree capital increased to 33 through $33 1 million, primarily driven by improvements in mortgage volumes and margin.
And a full year of operations from the vessels purchased in 2019, and our maritime shipping business.
As Michael mentioned, our mortgage business has benefited from several tailwind include a high including higher refinance volumes supported by the low rates and rising home prices.
Margins were 150 to 200 basis points higher than normal driven by Covid related capacity constraints and lastly, we've been able to retain mortgage servicing rights at relatively low valuations providing opportunity for value appreciation in future of rising interest rate environment.
Now, we will turn the call back to Michael to conclude our prepared remarks.
Thanks Sandra.
Our 2020 results have demonstrated the benefits from our diversified portfolio of controlled operating businesses.
In our insurance operations, the capital light fee generating warranty programs complement our niche specialty insurance focus.
And with the addition of for Tigris spec width of fatigue or specialty we have added substantial capacity in excess and surplus lines to complement our growth it admitted programs.
The earnings strength of our mortgage business in a low interest rate environment serves as a great example of the embedded upside optionality and diversity of our capital allocation.
And despite the uncertainty in the economy, our liquidity remained strong during 2020, we refinanced our borrowing facilities across the company, the extending maturities and increasing capacity to support growth.
As you look forward, we believe Tiptree is well positioned to continue executing on our long term growth objectives with that we will open the line for questions.
Thank you if he would like to ask the question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the.
Star Keys, one moment, while we poll for questions.
Yeah.
Our first question is from Walter Schenker with M. A Z partners. Please proceed.
Hi, This is Sandra this is from Michael.
It's sort of a long winded question, but there is zero chance tiptree will ever get the valuation it deserves as long as you have two very disparate operations between Tiptree capital, which was the hedge fund worst virtually anything goes on a very outstanding insurance business.
So as you pointed out the insurance business alone worried freestanding I would argue itself of more than twice unapproved share basis, where the total company is now trading.
Why wouldn't you split the company of why won't you split the company now that its big enough on insurance into two pieces to create shareholder value.
Yeah.
Walter Thanks for joining today and I think that's an excellent question I'll tell you that the first I agree with your with the back of the envelope valuation.
Sort of the determination in terms of of the insurance company, having substantial value relative to what our GAAP book might state.
And we do recognize that.
Here of your point about the fact that we do have our Tiptree capital, which is opportunistic and focuses on the best allocation of capital.
And I will say, we are always reviewing how we can best provide value to our tiptree shareholders, we take everything into consideration.
We have certainly been watching the of the.
The markets in terms of the valuations that insurer insurers have right now, particularly in our category. So I will tell you that we are always reviewing our options.
And it is our priority to provide value to tiptree shareholders I.
I think I'll leave my comments of that Okay, then per Sandra just one other question.
There are always a lot of moving pieces in your.
Quarterly reports.
And looking at an outstanding fourth quarter.
Operationally if I as you present non-GAAP operational earnings what was in the fourth quarter, which was singularly atypical so that I can't well why can't I, then look at the fourth quarter and say this is it.
Again.
At least from an insurance standpoint, a base going forward.
And therefore for the.
The next year and Youre not going to forecast, but you know if I do that and they grow some.
We'd expect the year to be something on the order of four times, where the fourth quarter was I realize on the capital mortgage had a great year invest because they do somewhat better shipping is doing better but those are all different pieces and hard to forecast.
Thank you Walter and nice to have you on the call. So yeah.
Your observations are right on.
On the first half of the year of was obscured a little bit by the impact on and best and then you know they day COVID-19 related slowdown across the country.
I agree with you 100% on the insurance side, we have a little bit of seasonality in the second half of the year just because of.
Things like going back to school the.
Orders are bought them, but I think if you take the fourth quarter.
Which is also reflective of the growth and annualize it the way you're thinking about it is of good trajectory for the insurance business specifically.
I will say on the mortgage side.
You know we are continuing to see strong volume.
Consistent with both the low interest rate environment, and obviously the uptick in home prices.
So the big difference in the fourth quarter to be perfectly honest was it the operating performance wasn't obscured by.
By either of those first two factors I mentioned.
Okay, and so on my last comment I'm smiling I do that a lot and it's giving me an opportunity to buy stock to I guess, the good news about having a convoluted hard to understand the company is it's allowed insiders the company investors to buy stock at what seems to be facility the price relative to the value.
Use of the pieces.
Thank you.
I appreciate it.
Yeah.
As a reminder of the star one on your telephone keypad, if he would like to ask a question. We'll just pause for a brief moment to see if there's any final questions.
Okay.
Our next question is from Alex the Stan with Barclays. Please proceed.
Hey, guys.
Late quarter, just two quick ones.
Could you guys comment.
Little bit on you you made a small acquisition it looks like in December or.
Early January on the insurance side.
He talked about that your framework for making acquisitions at insurance, specifically and some of the criteria that you look for and if youre able to comment on.
Just valuation ranges that you typically try to pay.
And then the second question is just on top of the allegation you've been clear on the past, but I'm just curious if there's any update.
If I look back over the top.
Few years.
Outside of the great warranty purchase that you made are the soft year.
You know the capital was deployed in really interesting way of shipping was a big one and so I guess kind of going forward can you just help us understand where you guys sort of keeping the market now and what the best uses of capital dark today from your perspective looking over the next couple of years.
Yes.
So it kind of wondering why.
Why don't I start and then I'll ask you that too to add anything to my answer, but Alex first thanks for the question of both good questions and.
I'll start with acquisitions of we are always looking to acquire add on businesses bolt on acquisitions that complement our existing operations and where we see obviously of.
On the.
The value creation ideally from either the preexisting relationship which offer on our acquisitions come from or where we can acquire it with very little capital commitment in which was additive in terms of overall fee income.
And so we are always looking for per acquisitions bolt on acquisitions, and if you see through our history. There has been something I would say that's been consistent.
The smart auto being one of the more significant we've made in the last year and you've seen that would be very accretive to overall returns I would say that's true across all of our investments all of our businesses. Although insurance has been I'd say one of those it's been most opportunistic.
As it relates to the allocation of capital.
We.
We are fully allocated I'd say in terms of our businesses, although we do like keeping a fair amount of liquidity. As was previously noted we are always looking for opportunities to allocate capital and I think of you have already characterized.
Our focus which I did in our comments earlier, we are always looking for positive cash flowing operating businesses with repeatable income great management teams scalability, but if there's I'd say of characteristic we're always looking for on our businesses. It's the have a good return on.
On capital in the normal environment, ideally limitations on downside or counsel counter cyclical relative to recessions like our warranty business has some element of.
And you'd see sort of in our mortgage business with lower rates, having some element of but we're always looking for is the ability to have embedded optionality with a I'd say.
But skewed upside in terms of the opportunity set I think we've seen that certainly in our warranty business. We've seen that just more recently in our mortgage business that is always what we are looking for right now I think some of the best returns on capital that we're getting are from our existing businesses. So to the extent we can continue to provide.
Capital as required to our existing businesses. That's our first priority on acquisitions as part of that and then we are also always looking for new acquisitions.
To date, I'd say that we have not seen a lot that we find attractive in terms of new acquisitions.
As well as our desire to support our existing operations Sandra do you want to add anything to that.
I'll just add one quick thing.
Alex to your first question the small acquisition, we made at the end of the year was to basically added direct to consumer channel to our auto warranty does also it's very complementary to the platform we bought in smart on up here.
And it's a good example of how we're looking for capital light.
Warranty type businesses, the continued to generate cash flow that allows us to use our capital much more efficiently for example.
In the context of the E N S.
The business that we are growing in a hardening market. So I just noticed the good example, about how we think about acquisitions, particularly in the warrant in the name.
For the type of business.
Great. Thank you.
We have reached the had never a question and answer session I would like to turn the conference back over to Sandra Bell for closing remarks.
Thank you Ken on <unk>.
Thank you everyone for joining us today.
As always if you have any questions. Please feel free to reach out to me directly.
This concludes our conference call for the year end 2020.
Thank you.
Thank you. This concludes today's call you may disconnect your lines at this time and thank you for your participation.