Q3 2021 Tiptree Inc Earnings Call
Greetings and welcome to Tiptree, Inc. Third quarter 2021 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.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Central Bell Chief Financial Officer.
Good morning, and welcome to our third quarter 2021 earnings call. We are joined today by our executive Chairman, Michael Barnes and CEO Jonathan Alani.
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 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.
In addition, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's presentation.
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.
That I will turn the call over to Michael.
Good morning, everyone.
Thank you all for your time and welcome to our third quarter earnings call.
Our performance for the quarter and throughout all of 2021 reflects the strength and diversification of our underlying operating businesses.
Year to date revenues of $881 million and net income of $38 6 million were both up substantially from 2020, driven by the particularly strong performance of our specialty insurance business reliance our mortgage business and our dry bulk shipping investments.
After removing the impact of investment gains and losses year to date revenue grew 34% and adjusted net income of $47 million increased 33% from the prior year. We are pleased with the strength in our businesses demonstrated by the growth in these financial metrics.
In early October, we announced a $200 million strategic investment in <unk> from Warburg Pincus.
Leading global private equity firm focused on gross investment.
As we have stated before this capital investment represents a significant step forward for Tegra and Tiptree and will provide many strategic benefits and advancing <unk> position as a global specialty insurer.
Our primary objectives in this transaction where to source growth capital for protect gras to refine and recapitalize, our balance sheet and to create greater transparency for tankers value for investors and thereby seek to close the gap between between Tiptree stock price and intrinsic value.
This transaction goes a long way in accomplishing these goals and we believe it will provide a solid runway to continue for <unk> growth over the next two to three years.
Before transitioning to the quarterly performance I would like to thank both the <unk> and <unk> teams for their efforts in getting this transaction across the finish line.
It was a true team effort and example of how <unk> ownership can benefit our subsidiaries and one we believe will offer many opportunities for growth and shareholder value over the long term.
This year for CAGR has continued to deliver on its growth objectives, while maintaining focus on the underwriting discipline that has contributed to such consistent results over the past several years.
For the year to date period, <unk> revenues have grown 50% and adjusted net income was $46 million up 56% driven by revenue growth and an improved combined ratio. The adjusted return on average equity was 21% improving from 14% in <unk>.
20.
Gross written premiums and premium equivalents were $1 7 billion up 44% versus the prior year driven by strong organic growth across all business lines.
As we look forward. We expect this performance to continue led by a growing top line and consistent combined ratio.
Outside of the insurance business, our two primary investments in mortgage origination and maritime shipping generated positive net income year to date and it is worth noting that the tiptree capital the Tiptree capital on a standalone basis, now has $175 million of book value.
Adjusted net income within Tiptree capital was $24 million for the year up slightly from the prior year driven by strong performance in our mortgage and shipping operations.
The mortgage business continued to deliver as home price appreciation and the mortgage rate environment.
Provide positive tailwind.
And over the past two years, we have built our servicing portfolio, which has become a large contributor to our results through a combination of higher servicing fees.
Our higher margin recapture volume and acting as a potential hedge during rising interest rate environments.
Within our maritime operation.
We are experiencing cyclical highs in shipping charter rates on our three drybulk vessels. This serves as a great example of the embedded optionality that we often speak of when allocating capital whereby we look to source investments to generate solid cash returns during ordinary times and also have the potential.
So for outsized returns when the option comes in the months overall, we are very pleased with year to date performance and believe Tiptree is well positioned for the fourth quarter of 2021 and going forward 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 tip trees key financial metrics for the third quarter 2021 compared to the prior year period.
Net income for the quarter was $2 million driven by continued growth in the insurance business and positive performance in our mortgage and shipping operations.
Set by Mark to market equity losses, primarily from Linzess.
Excluding investment gains and losses revenues were up 31% for the quarter driven by organic growth and insurance operation.
<unk> strength in mortgage volumes and margin.
Increases in dry bulk charter rate.
Adjusted net income for the quarter was $20 7 million, representing a 25% annualized adjusted return on average equity.
The year to date period, adjusted net income was 47 million up 33% versus the prior year.
These strong operating results were driven by the growth in revenues as well as the consistent combined ratio at for Tegra.
Book value per share of $11.37 increased by 11, 3% versus the prior year.
Compared to the second quarter 2021 book value per share declined by 22 said.
Primarily driven by the exchange of certain dilutive securities.
And our third quarter dividend.
Combination of which offset the impact of positive earnings and book value per share for the quarter.
Turning to page four we highlight tiptree sum of the parts value.
Reflecting the impact of Warburg $200 million in vaccine and for Tegra.
As we discussed on the transaction announcement call in October.
$140 million of investment will occur once regulatory approvals are received.
But the next $60 million to be drawn as for Tegra <unk>.
Once the full $200 million invested.
The ownership of for Tegra will be divided between 17 points defend.
Attributable to their common stock and six 6% attributable to the convertible preferred shares.
On an as converted basis.
Based on the investment transaction multiple of trailing 12 month adjusted net income chip.
<unk> retained ownership of for Tegra represents approximately $644 million or $19 per outstanding Tiptree sure.
The $140 million of proceeds will be used to fully pay down the $116 million of holding company debt and the tiptree level with the remaining proceeds to be used for general corporate purposes.
When you include the book value of Tiptree capital and holding company assets. After the transaction closes we believe tiptree sum of the parts value to be $26.16 per share well above yesterdays closing price.
With that let's turn to <unk> results on page six.
As Michael mentioned, we continued to see strong momentum in both for integrity topline and Bottomline results.
For the third quarter 2021 premiums that equivalents increased 32% year over year.
Driven by growth in all lines of business, including admitted excess and surplus and warranty line.
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 contract.
Deferred revenues and unearned premium, which represent the future earnings potential stood at one 6 billion up 36% year over year.
For the quarter underwriting and fee margin increased to 66 million up $22 million or 50%.
And the combined ratio improved by 100 basis points to 89, 6% for the third quarter and the operating and technology efficiencies contributed to an improved expense ratio and the underwriting ratio improved given the changing business mix.
On page seven we highlight the kpis trends over the past three years.
Gross written premiums and equivalents have increased 34% over this period with a 24% organic growth rate.
Importantly, the combined ratio is not only stable, but has shown consistent improvement over time.
Moving from 92, 8% in the 2019 period.
91% and then 2021 year to date period.
Our Tegra business model maintained strong economic alignment with its distribution network, which is important and delivering consistency in the combined ratio.
Several of the underwritten program have variable retrospective commission structures.
It's a book of business is profitable Ortega will share that underwriting profitability with this agent.
If it is not profitable for tegra reduces their condition and the economics are rationalized.
We evaluate the performance of the business using adjusted net income.
Which removes realized and unrealized gains and losses.
Purchase accounting amortization stock based compensation and nonrecurring items.
This metric improved to $46 4 million in the first three quarters of 2021, representing a 35% growth rate over the past two years.
Adjusted return on equity has improved from 10% to 21% over the respective periods.
Turning to the insurance investment portfolio on page eight.
Total investments and cash and cash equivalents ended the quarter at $832 million up 28% year over year in line with the underlying premium growth.
82% of the portfolio is invested in high credit quality and liquid securities with an average rating of double a.
Year to date <unk>.
<unk> net income was $9 3 million up slightly as the overall portfolio increased in line with premium.
Net realized and unrealized gains were $5 million for the first three quarters driven by unrealized gains on equities.
The capital and liquidity position remains strong at four tegra with $295 million.
Holders' equity debt capacity of $200 million and an ability to draw of $60 million of capital upon the transaction closing olive Lynch put the business in a solid position for future growth.
On page 10, we present the results of Tiptree capital, which as Michael mentioned earlier consists of our mortgage and shipping operations as well as our invest shares.
Year to date 2021, adjusted net income in Tiptree capital increased to $23 6 million, primarily driven by sustained mortgage volume and improvements over the prior year period in our shipping business due to increased dry bulk charter rate.
Our mortgage business has benefited from several tailwind, including higher refinance volumes supported by both low rate and rising home prices as well as a growing servicing book.
As of September 30th 2021, the fair value of the MSR asset was $26 million.
Our shifting business contributed $8 1 million of adjusted net income in 2021 and supply and demand imbalances in global trade have driven dry bulk shipping rate to cyclical high.
Now, we will turn the call back to Michael to conclude our prepared remarks.
Thanks Sandra.
With the company's performance, thus far in 2021, and the recently announced investment in for Tegra. We believe our businesses are well positioned to drive continued growth and value for Cree shareholders.
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.
Within shipping the demand supply imbalance in the bulker market continues to play out and it's benefited our business and global economies reopen.
For Tegra is a model of consistency with topline growth at 24% over the past four years, while delivering best in class combined ratio of 91%.
We believe these trends will continue and place a premium value on the consistency.
Business generates year end year out.
With our new partner Warburg Pincus for Tegra enters its next phase of growth that we believe will lead to long term value accretion for tiptree shareholders.
With that we will open the line for questions.
Thank you.
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Please while we poll for questions.
Our first question comes from Andrew Cohen from Brian. Please proceed.
Hey, everyone.
Really great quarter congratulations.
Thanks, Andrew for your question two.
Two questions.
So obviously we're booked.
There's an amazing investor to have.
And congratulations on that deal and the valuation.
So is there anything that they are looking to do in terms of accelerating growth with it.
For Tegra that you could discuss.
So good question, Andrew and thanks for that and look I think I think I can't speak for Warburg, specifically, but what I can certainly say that one of the things that through our discussion since they were doing their due diligence and deciding to make the investment one of the things that that certainly we all talked about was what they bring as a strategic partner.
And they're experienced financial services sector and insurance and other related businesses that may have some synergies.
So we see this certainly as adding more than just the capital we see this as them, helping us be a true partner in the growth for tegra, possibly bringing into play other sectors. As they are involved in that may relate and certainly as we do consider going forward to an IPO again their experience.
Our relationships I think we're going to go a long way.
Okay fair enough.
And also on the shipping business.
Do you do.
Do you have any idea like what kind of obviously ships are very volatile in terms of valuation in their cash flows do you have any idea what kind of gains you might have on just sort of general what those ships are worth now and is there a price where you consider selling them.
Yes.
So we're in this business for a very long term view, Andrew I'll say and it was our objective and we continue to execute on the objective of building out to be larger than we currently are to continue to add to the fleet opportunistically, both with regard to dry bulk and to product tanker.
I'll say that to your point, we're enjoying.
And environment in the in the dry bulk that is about a 12 year high in terms of rates.
Certainly as that has been sustained it does I think us analysts continue to model this being sustained for an extended period that does have an impact on the S&P market in terms of where ships are trading and where we would value our own ships.
I think that there is.
That valuation always lags in terms of rates, but right now we do believe we have a material appreciation in our investment value.
Certainly relative toward depreciated value and I'll, just say that we are going to continue to look to source opportunities to expand the fleet.
Again.
<unk> when we see that there is that theres value. There are our objectives have always been to invest where we see solid return on capital invested but where we feel that the rate environment will lead to upside Optionality and we're seeing that in the dry bulk we saw that in the tanker space in early 2020, we think we'll see that return.
The tanker space going forward.
Okay.
That's it thanks, congratulations again.
Thanks, Andrew.
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Yes.
Ladies and gentlemen, there are no further questions at this time I would like to turn the call back to Sandra Bell for any closing remarks.
Thank you Joe and thanks, everyone for joining us today as always if you have any questions. Please feel free to reach out to me directly. This includes our third quarter 2021 conference call have a great day.
Okay.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.