Q1 2021 Tiptree Inc Earnings Call

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The morning, and welcome to our first quarter 2021 earnings call. We are joined today by our executive Chairman, Michael Barnes and CEO, Jonathan <unk> you.

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 see our most recent SEC filings, which identified the principal risks and uncertainties that could affect future performance.

In addition, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's presentation wreck.

Reconciliations of non-GAAP financial measures and 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 Senator of good morning to everyone. We are pleased to announce that the first quarter of 2021 was the record quarter for Tiptree with all of our holdings contributing to first quarter profits.

Both revenues of 295 million of net income of $36 million for all time highs for a single quarter driven by the particularly strong performance of for Tegra, our specialty insurance business reliance our mortgage business and gains on investment holdings across the company.

Revenues, excluding mark to market increased 26% and adjusted net income of $13 2 million increased 90% from the prior year.

For our insurance of mortgage businesses production and sales volumes are at all time highs and the management teams continue to drive growth while expanding margins.

Given our confidence in the strength of these core operating friends.

Tiptree repurchase close to 500000 shares in the first quarter and $2 3 million shares over the past year, representing approximately 7% of outstanding shares.

These repurchases were executed at a deep discount to book.

And then even further discount to intrinsic value.

And our insurance business, the particular management team led by Rick how long.

Our three primary investments in senior housing mortgage origination and maritime transportation all generated positive net income for the quarter and it's worth noting the tiptree capital on a standalone basis now has over $190 million of book value.

Adjusted net income within Tiptree capital was $8 million for the quarter up substantially from the prior year driven by strong performance of our mortgage operation.

<unk> volumes were up 34% year over year.

Our mortgage business continues to show of strength and serves as an example of our objectives when allocating capital, namely to source scalable cash flowing businesses with strong management and having embedded upside optionality, while also providing portfolio diversification to tiptree sources of revenue.

In addition, our investments in shipping were stable for the quarter. We entered this sector with a long term thesis based on continued global economic growth.

And a potential supply and demand imbalance and shipping capacity, given limited newbuild and higher scrapping rates for seaborne vessels.

Current charter rates are beginning to reflect that thesis for.

<unk> in the dry bulk sector.

With that I'll pass it to Sandra who will take you through the financial results in more detail.

Thank you Michael.

On page three of the presentation, we highlight tiptree key financial metrics for the first quarter 2021 compared to the prior year period.

And non-recurring items.

We believe that adjusted net income better aligned with similar metrics that are used by our peers, particularly does in the insurance industry, who have of high proportion of both capital light warranty businesses and fee based revenue.

And just the net income for the quarter increased 90% to 13.2 million from six $9 million and the prior year. These.

The strong operating results were driven by the outperformance of our mortgage business and continued positive earnings performance and for Tegra the business.

We continue to see strong momentum for Taggart's top line results.

For the first quarter of 2021 premiums and equivalents increased 29% year over year driven by growth in all lines of business, particularly commercial credit and more anti programs of note organic growth was 28% achieved through increased production.

Per agent and the continued edition of new distribution partners and agents.

As a reminder, particularly with respect to longer duration warranty contracts much of the increase in this metric ends up on the balance sheet as GAAP recognizes the revenue over the life of the contracts.

Deferred revenues and unarmed premiums, which represent the future earnings potential stood at 1.32 billion of 27% year over year.

Turning to page five we highlight of our capital allocated between for Tegra and Tiptree capital along with their respective returned to assist investors and understanding tip trees intrinsic value.

Over the last 12 months ajar.

Just did return on average equity improved 215.6% an increase from 8% in the prior year.

For tag risk adjusted return on average equity improved to $17, 3% from $13, 3% in 2020.

Driven by organic growth and capital light warranty businesses and growth in commercial and personal lines programs, all while maintaining a consistent combined ratio in the low nineties.

Our mortgage business generated outsized returns on capital driven by improvement in the volumes of margins, which of benefited from a strong housing market.

Both of which were partially offset by increased interest expense, resulting from our upsized corporate borrowing facility completed in early 2020.

With that let's dive deeper into the insurance companies results.

But before doing so I would like to take just a moment to remind everyone of the key characteristics of the business model that supports such consistent profitability and the opportunity for your future revenue and earnings growth at for Tegra.

For Tegra is of specialty ensure that focuses on underwriting small premium per risk insurance.

Underwriting programs that are geared towards more frequent but less catastrophic low severity losses.

Some of competitive point of view large standard insurers, who prefer to individually underwrite each transaction in touch every claim avoid small premium for risk insurance, because the infrastructure and personal personnel costs required preclude them from underwriting profitably for.

Tegra uses proprietary technology to overcome this challenge.

These high frequency low severity characteristics of those R. U S insurance and use and European warranty offerings generate a significant component of fee based earnings and stable and consistent profitability.

In addition for Tigers warranty product offerings benefit from being capital light due to a combination of unregulated earnings and predictable loss ratios.

For the quarter underwriting and fee margin increased 12 million or 29%.

The combined ratio improved by 210 basis points to 91.5% as compared to 93, 6% in the first quarter of 2020.

This was driven by shifting mix toward more profitable commercial and lorente programs, improving the underwriting ratio along with the continued scalability of the technology and shared services platform improving the expense ratio.

We maintain strong economic alignment with our distribution network, which is important and delivering a consistent combined ratio.

Several of the programs for Tegra underwrite have variable retrospective commission structures.

Meaning of the book of business is profitable, we will share that underwriting profitability with our agents. If it is not profitable we will reduce the condition and the economics of rationalized.

Importantly for Tegra has averaged a 91, 6% combined ratio for the last five years with very little variants.

While growing premiums and equivalents at approximately 20% per year.

We are extremely proud of this performance and expect for tegra to be able to sustain the stability and it's combined ratio in the future.

Turning to the next page we believed the hallmarks of for <unk> business model underlie the opportunity for consistent growth and consistent underwriting profitability, combining underwriting and unregulated fee revenues, which leads to more consistent and predictable cash flows.

And the enhanced returns.

This is done by having three legs of of the stool. The first two legs are number one admitted programs and number two surplus line programs both in the US insurance and the third leg is the balance sheet light programs, which is warranty solutions.

We believe it is the combination of these three and the complementary nature of these revenue streams that allows for tegra to grow and to grow profitably, regardless of where pricing is in the P&C market cycle.

On page nine we've highlighted the key growth consideration first for Tegra has a high persistency right with this agents, which generates of large volume of recurring revenue.

Over the past five years revenues have grown out of 13% compounded annual growth rate and 11% organically.

Second we right multiyear contracts that generates significant upfront cash flow to the balance sheet and provides great visibility into the upcoming years revenue day.

<unk> new programs are added for both existing agents and for new agents.

Our technology gives us the ability to identify opportunities to expand participation by our agents clients in the programs we offer.

To underwrite new programs profitably given the amount of data available to us to analyze the risks and to scale volumes efficiently when we add new agent relationships.

Lastly, the business continues to expand geographically, we're very pleased with the opportunities in Europe, where we can leverage are brought experienced in the warranty space. We have a strong presence in central and eastern Europe and are growing into western Europe, and even the Pacific rim.

As you can see by the size of these addressable markets. We believe for Tegra has the opportunity to substantially expanded volume an agent relationships to maintain strong growth and consistent underwriting profitably profitability.

Turning to the insurance investment portfolio on page 10, total investments in cash and cash equivalents ended the quarter at 723 million of 23% year over year in line with underlying premium growth.

We continue to maintain 77% of the portfolio and high credit quality and liquid securities with an average rating of double way.

For the quarter net investment income was 2.8 million down from the prior year driven by the reduced interest rate environment.

Realized and unrealized gains where the.

Nine 7 million for the quarter driven by unrealized gains on equities.

On page 12.

Present, the results of Tiptree capital, which is Michael mentioned earlier consists of our invest chairs shipping and mortgage operations.

For the quarter. The pretax income was driven by unrealized gains are investment and invest which is mark to market based on its share price. In addition to higher volume and margins and a mortgage business.

First quarter of 2021, adjusted net income and Tiptree capital increased to 8 million, primarily driven by improvement in mortgage volumes of margins versus the first quarter of 2020.

As Michael mentioned, our mortgage business has benefited from several tailwind, including higher refinanced refinanced volume supported by the flow rates and rising home prices and.

And lastly, we've been able to retain mortgage servicing rights at relatively low valuations providing opportunity for value of appreciation in the future with rising interest rate environment.

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

Thanks Sandra.

Our first quarter of 2021 was a great start to the year.

Two of true total return as measured by changing book value per share for the dividends paid was 21, 2% of over the past year.

As I mentioned, the my earlier remarks, we have a fantastic business and for Taylor.

For the collective management team that has energized to execute the growth plan and the continue looking at alternatives to accelerate the.

The capital late fee generating warranty program complement for Tigers niche specialty insurance programs.

And with the addition of particular specialty in late 2020.

There are substantial capacity in excess of surplus volume to complement growth and admitted programs.

The earnings strength of of mortgage business and the low interest free environment terms of the Great example of of the embedded upside optionality and diversity of our capital of allocation.

We continue to believe the tip trees overall intrinsic value has increased significantly.

And as materially grieder with our current stock price would suggest.

As we look forward, we believe to for you as well positioned to continue executing on a long term growth objectives with that we will open the line for questions.

At this time, we will be conducting the question and answer the question you would like to ask the question.

One on your telephone keypad the confirmation Tom will indicate your line of in the question queue. You may price the star queue. If you would like to remove your question from the queue for participants in the speaker of equipment. It may be necessary and cup of your handset before pressing the stocky.

One moment, please while we pull for the question.

My first question is from Alex and her of Dechy of Morgan Stanley.

The state of your question.

Good morning, and thank you for the presentation could you talk a little bit about your marathon the transportation business of dry bulk sector and just elaborate on your positioning of the business.

Sure I'd be happy doing thanks for the question of Alex. So we started looking at this business probably about four years ago.

And it was.

Long term view that we had in terms of the anticipated growing of global economies Uhm and how we liked the embedded optionality and shipping while producing current attractive cash on cash returned with the ability to expand and a lot of different directions, and the very scalable model.

I'll tell you that the the pandemic certainly set the back somewhat however, it also created some anomalies in terms of the supply and demand, particularly in dry bulk.

As certain as the became more challenging to change cruise of certain as the.

China, certainly started keeping certain chips of.

Sure and as the other kind of anomalies hit the ship the shipping sector. There were fewer ships available and what we've seen over the course of the last for the call.

Six six months, maybe the 12 months is an increase in rates as a result of the supply demand shift so part of our outlook from the beginning with Dr. Just of growth and global economies, but also what we viewed as of.

A shift in terms of the supply demand of ship available of build available.

Availability versus demand.

The growing economies, so what we're seeing now as economies of reopening.

And.

Is exactly that we're seeing that optionality that we felt was embedded in the sector start to be untapped, we'll see how far goes but right now we're enjoying the environment, particularly the to the Drybulk sector.

With respect to range will also in the tanker sector.

The poverty tankers Tinker sector, we entered the.

Few years ago as an expansion of.

Expansion to our focus and shipping.

There. We also saw some anomalies as of the pandemic hit.

Also.

Saudi Arabian Russia gone through of tips, we saw.

Oil and related products plummet.

But that actually created a storage.

Neat and we saw public tankers suddenly come in the demand from.

From the storage demand and now more recently with the the recovery taking place we're seeing a normal resumption of shipping.

Sector. So this was an area that we have taken a very long term view I think we've got great leadership, and we're continuing to expand in the sector.

Uhm.

A lot of bumps still on of just was going to say, how many ships for you having the dry bulk stricter.

Right now we have three ships in the Drybulk sector.

Okay and are the are the the.

Sixth grade currently or the open to the spot market.

We have one combination of being participants in the pool as well as doing long term charters and so the answer is that we tend to do longer term charters and not expose ourselves to the volatility of day rates.

Okay. Thank you very much.

Sure. Thank you for the question.

As a reminder, if you would like to ask a question. Please press the star one on your telephone keypad confirmation total indicate your line of in the question queue.

And the speaker of equipment, it may be necessary to pick up the handset before pressing the snarky.

One moment, please while the call for additional questions.

Yeah, no more questions at this time and we have reached the end of the question and answer sessions I will now turn the call back to Andrew Bell for closing remarks.

Thank you Hillary and thanks, everyone for joining us today, if you have any additional questions. Please feel free to reach out to me directly. This concludes our first quarter of 2021 conference call. Thank you.

This concludes today's conference and you may disconnect. Your lines of this time. Thank you for your participation and have a great day.

Yeah.