Q1 2022 Tiptree Inc Earnings Call
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Greetings and welcome to Tiptree, Inc. First quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
One 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 this conference over to your host Ms. Sandra Bell Chief Financial Officer. Thank you Ma'am you may begin your presentation.
Good morning, and welcome to our first quarter 2022 earnings call. We are joined today by our executive Chairman, Michael Barnes and CEO , Jonathan Alani U.
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 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 with that I will turn the call over to Michael.
Thanks Sandra.
Morning, and welcome to our earnings call.
In the first quarter, our operating businesses continued to produce excellent returns with revenues, increasing 10% to $325 million and adjusted net income improving 17% to $15 million.
<unk> posted another great quarter with premiums and equivalents of 601 million, 26% growth from the prior year led by strength in the admitted and E&S insurance line.
The business continues to experience hard markets for its specialty E&S lines.
Each contributed to the record quarterly adjusted net income of $21 million.
And return on equity of 28%.
In early April <unk> also added a bolt on acquisition in the U K, we're just over $15 million of net cash consideration further establishing its footprint in the European auto warranty sector.
The Warburg regulatory approval process remains on track and we expect to close within the second quarter we.
We anticipate using investment proceeds for additional growth capital and protect grid specialty lines and to repay tip trees corporate debt facility.
Like many of our peers are investments experienced negative mark to market for the quarter, both within our insurance investment portfolio and on our Investor shares.
We are likely to experience such volatility from quarter to quarter, I'm publicly traded bonds and stock and therefore, we tend to look at performance over a much longer time horizon.
Our fixed income portfolio remains conservatively positioned with a double a plus rating.
On a two five year weighted average duration.
We feel confident that the majority of the unrealized losses from this quarter will be recovered over the coming years as bonds mature.
As the portfolio grows and we reinvest maturing securities the rising interest rate environment as we observed in the first quarter could be a meaningful driver of income overtime.
As of the end of the quarter, our investment portfolio stood at nearly $900 million.
Despite this quarter's unrealized marks invest our largest publicly traded equity position continues to execute on its strategic initiatives to streamline its portfolio of senior care properties.
The recently announced three separate sales totaling $75 million that will allow the company to continue to reduce its overall debt profile.
We are confident that overtime, we will realize the value of this investment.
In our marine business, we had an active quarter with both drybulk and tanker investments producing solid returns.
Given the elevated pricing levels for dry bulk tonnage.
We signed a definitive agreement to sell one of our three vessels for $21 5 million, representing a 50% gain to first quarter carrying value.
We also took advantage of an opportunity to repay debt on our tankers at a 10% discount.
Level to the outstanding principal balance.
As we look forward, we believe there will be additional sale and purchase opportunities within the shipping sector.
Finally, our mortgage business produced positive returns in the first quarter, driven by mortgage servicing fees and value appreciation on our MSR asset.
While volumes and margins have compressed in the beginning of 2022.
Over the past two years the business has grown retain earnings substantially and we now hold an MSR asset worth approximately $38 million on our balance sheet.
In summary, we were pleased with our operating businesses for the first quarter of 2022 and believe there is a clear path for growth in future periods.
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, chief financial metrics for the first quarter 2022 compared to the prior year period.
We incurred a net loss just shy of a million dollars in the quarter, resulting from unrealized losses on investments.
This was partially offset by continued growth in the insurance business and positive performance at our shipping operations.
Excluding investment gains and losses revenues were up 25% for the quarter driven by organic growth in insurance operations and increases in vessel charter rate adjust.
Adjusted net income for the quarter was $15 5 million, representing a 15, 8% annualized adjusted return on average equity.
The value per share of $10 51 son.
Decreased by four 9% for the quarter, primarily a result of unrealized losses on our fixed income securities driven by higher interest rate environment.
Our businesses continued to produce strong operating cash flows which gives us the ability to hold these securities to maturity.
The higher interest rate environment allows us to invest new money and improve deals, which we expect will be a benefit over the long term.
Turning to page four we highlight tiptree sum of the parts values, reflecting the impact of Warburg's 200 million investment in for Tegra.
Based on the transaction multiple of trailing 12 months adjusted net income, which is implicit in warburg's investment Tiptree.
<unk> retained ownership and for Tegra on an as converted basis represents approximately 739 million or $20 for tiptree per diluted Tiptree sure.
140 million of proceeds will go to tip, the tiptree holding company to fully repay outstanding debt with.
With the remaining to be deployed as growth capital within for Tegra.
After the transaction closes when you include the book value of Tiptree capital and holding company assets.
We believe Tiptree is some of the parts value to be approximately $26 per diluted share.
On the next page, we highlight <unk> results for the quarter.
As Michael mentioned, we continue to see strong momentum and for Tigris performance.
For the first quarter 2020 to premiums and equivalents increased 26% year over year, driven by growth in all lines of business, including admitted excess and surplus and warranty lines.
The roughly 600 million referenced the roughly 600 million represented the largest single quarter of written premiums and four Tigers history.
Deferred revenues and unearned premium which represent future earnings potential.
Well $1 75 billion up 33% year over year.
Okay.
The combined ratio improved 100 basis points year over year to 95% as operating and technology efficiencies contribute to an improved expense ratio, while the underwriting ratio remained relatively consistent with prior periods.
For Tegra as Kent for Tegra continues to experience hard market conditions and specialty commercial lines, both from a pricing and terms and conditions perspective.
We are constantly monitoring inflation and loss costs trending and maintain a cautious approach to underwriting.
Thus far the impacts of inflation on the business have been minimal as we have generally been able to mitigate any rising costs with offsetting premium increases.
For Tegra is 12, 9% expense ratio for the quarter.
<unk> to benefit from economies of scale with underwriting and fee revenues growing faster than operating expenses.
Operating return on equity was approximately 28% on an annualized basis.
Where tegra as low expense ratio and scalable efficient platform.
<unk> is in a strong position to continue its growth and best in class returns going forward.
On page seven you can see the insurance company financial trends.
Gross written premiums that equivalent has increased 34% over this period with a 28% organic growth rate.
Specialty commercial lines have grown 61% through the addition of new agents and programs and the expansion of E&S offerings.
Personal lines have increased 7% and benefited from the bounce back in commercial spending in 2021 in early 2022.
And warranty lines have tripled through increased market penetration.
For Tegra is vertically integrated product offerings, two agents dealers and retailers has provided a strong platform for growth when combined with significant expansion in Europe .
The combined ratio is not only stable, but has shown consistent improvement over time moving from 94% in 2019, 295% in 2022.
Adjusted net income increased to $21 1 million for the first quarter, representing a 48% growth rate over the past three years.
Adjusted return on equity has improved from 10% to 28% over the respective periods.
Of note this puts for tegra adjust above $75 million of trailing 12 months adjusted net income.
Figure, we expect we will continue to grow in future periods.
Turning to the insurance investment portfolio on page eight.
Total investments and cash and cash equivalents ended the quarter at $892 million.
Up 23% year over year in line with the underlying premium growth.
86% of the portfolio is invested in high credit quality and liquid securities with an average rating of double a plus.
The fixed income portfolio has a relatively short duration.
As we mentioned earlier, well unrealized mark have impacted book value.
Generally we have the ability to hold these securities to maturity.
We view reinvestment as an opportunity for improvement in investment income with rising rates a positive four for attackers investment portfolio in the long run.
Protagoras capital and liquidity remains strong.
With 294 million of stockholders' equity.
Capacity of nearly 200 million and an ability to draw 60 million of capital upon the Warburg transaction closing all of which put the business in a solid position for future growth.
On page 10, we present the results of Tiptree capital, which.
Consist of our mortgage and shipping operations as well as our invest shares.
While pretax income was impacted by the unrealized marks on invest in quarter two.
2022, adjusted net income for.
For the first quarter was $1 million.
Our mortgage business has benefited from several tailwind over 'twenty, 2020 'twenty, one, including higher refinance volumes supported by both low rates and rising home prices as well as the growing servicing book.
As of March 31st 2022, the equity in our mortgage business was 58 million after distributing nearly $20 million of capital to tiptree over the past three quarters.
While origination volumes were down 16% from the prior year and margins compressed to pre COVID-19 levels, we believe our mortgage servicing portfolio and home price appreciation will offset some of the impact on originations as rates rise.
For the quarter, our shipping business contributed $2 5 million of adjusted net income as both Drybulk and tanker charter rates remained at robust levels.
Given elevated charter rates and a strong demand for shipping assets, we believe the fair value of our vessels to be well in excess of our first quarter net book carrying value of $83 million.
Now I will turn the call back to Michael to conclude our prepared remarks.
Thanks, Sandra the.
The diversification of our businesses supported the strong operational results in the first quarter.
<unk> posted record adjusted net income and return on equity.
The strong pipeline and favorable market conditions, we expect this profitable growth to continue.
Within the shipping sector, both volcker and tanker markets are performing well, which provides us the opportunity to drive near term returns.
And we remain focused on developed on deploying capital with the objective of long term shareholder value appreciation with that we will open the line for questions.
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First question comes from the line of Alex <unk> with Spirit as capital you May proceed with your question.
Hey, guys great job just one for me.
Really appreciate it.
Companies like Yours, where management is really aligned with shareholders.
Michael you and the rest of the team on a lot of stock.
And so that that really helps.
The compensation agreement that you guys had last year.
Have some great IRR targets and it's long term.
Again really aligns you guys with shareholders.
Question might have is just kind of going forward you know.
Do you guys have a framework.
How we should think about dilution or or grants kind of going forward and what they would look like and I'm asking that in light of.
The proposal to increase the the incentive share.
Sure.
In the proxy statement and so I'm kind of thinking how how we should think about.
What the cadence of grants looks like going forward. Thanks, guys.
Yes.
Thank you Alex and I. Appreciate your comments, we actually did try to take you know or put forth a thoughtful incentive plan as our businesses have changed as our stock price has appreciated we wanted to create an incentive that to your point.
Really aligned senior management with with shareholders already where the largest shareholders I'm going to continue to Oh, my shares and will likely be exercising.
An old warrants, that's coming up and coming due soon to increase my ownership. So I'm going to continue to be a strong owner and as it relates to the dilution I'm going to be the number one person wanting to avoid seeing our shareholders diluted particularly me I'll say in that regard.
One of the things we changed in our incentive plan a bit over a year ago was also changing the allocation of.
Of our shoes are restricted units too.
Two other officers, we gave them an option to elect to participate up to a percentage of a year end bonus with a matching if they agreed to walk in to not to not have those of that spur three year period. So so we look at that also adds a as opposed to forcing our issues upon the individuals.
We didn't like seeing those getting sold in the market. So we liked and alignment in our long term objective of our senior management and senior officers as it relates to our other.
Other types of allocations of shares we do have a liquidity conversion option on certain of our subs as they hit incentive targets too that into tiptree shares which will provide them.
Over time, some liquidity in what would otherwise be a private owner ownership of their of their subs.
But we don't want to see any material dilution to shareholders other than as a result of our businesses hitting their targets.
And so these are incentives units that are meant to be allocated based upon success in our businesses I think I think that answers the question, but I'll ask if you have any follow up to that.
Okay.
That's I think that.
This is a great high level, maybe I'll just be super blunt.
Do you guys envision.
Last year I think the the grant totaled something like 10% and they were definitely performance based in.
Sure.
Yeah.
There were high or IRR targets associated with it I think the.
Request for increasing the shares go out and now it's something like 10% again.
Do you see.
Do you envision kind of material grants in the next say three to five years.
Would you see more than 5% of shares being issued in any given year.
Yes, let's be clear let.
Let me just answer it standards and I'm happy for you to add to it let's be clear in creating the this sort of.
Stepped incentive plan that we put in place last year.
It's low allocate you're correct. It amounts ultimately if we were to achieve all of the targets over an extended period of time.
Would result in that amount of shares being issued I think you referenced around 10% depending on what other shares are outstanding as we go along.
But to be specific only.
Small amount was achieved in hitting the first target as we hit as we hit other targets at higher levels.
It is an incentive to hit those targets by allocating increasing amount of shares.
I wanted to see the bulk of the shares come in the last two or three targets.
Which are $45 60 at the higher end of those type of those last two targets.
Per share so hitting those targets would result over a 10 year period and about 19% IRR that was approximately the the the the IRR target.
Yes.
Proxy that just went out he is actually approving shares to allow for that incentive plan I wouldn't view it as duplicative.
And correct me, if I'm wrong, Sandra, but I'll, let Sandra why don't you go ahead and answer that.
Michael I, that's actually what I was just going to say Alex they are to support the grants that were given last year, we didn't have enough shares to cover that so.
That's the sole purpose of that $4 million.
Okay got it that is really helpful. Thank you guys. So much for the time and great work.
Sure. Thanks, Thanks, guys I appreciate it.
Our next question comes from the line of Walter Schenker with MAZ Partners. You May proceed with your question.
Your Speaker, Hi, Michael Hi, Sandra.
First congratulations on selling one of the oceangoing ships were a fifth of the way there Michael.
Okay.
It's an opportunistic environment for our dry bulk sector will always look at taking chips off the table and then be patient and reallocating.
I mean.
<unk> gone through enough of these calls and we've spoken to enough of US investors. It is still clear that the stock selling at half or less than half of what you reasonably put evaluation per share on that.
A major part of the disconnect is the diversity of the.
Capital.
Side of the business not the <unk> side of the business.
A question on mortgage side, which I am not very familiar with.
Yeah.
It was it is.
At least to me somewhat clearer if you listen to Paul it should be reasonably clear that the.
Interest rates are going to be moving higher mortgage rates have already started to move higher liquidity is going to not be pumped into the system and may even be drained due to the run off.
In that environment.
What changes from what we just saw in the mortgage business or we've seen the best of times and I understand servicing becomes more valuable as an asset but from an earnings standpoint again, you've done. This a long time in that environment, which I've laid out which may or may not come to pass what's the outlook.
The mortgage business over the next couple of years from an earnings standpoint.
Now for what is just the general way of looking at it yeah.
Yeah, we're certainly not going to give guidance, but I'll tell you how we look at it.
This is an area that I'd say amongst the senior.
Officers of Tiptree, it's an area that we have been deeply embedded in for all of our careers. So in the case of Jonathan Alani myself. Sandra. This is an area that we've been focused on for <unk>.
The 30% to 40 years for each of US. So it's an area. We know well we've got a great team at reliance I'd say one of the one of the most seasoned veteran teams out there in the mortgage origination business.
What we've been doing as we have anticipated that rates may be rising given all the liquidity being pumped in the system. These last few years was building out our servicing bulk servicing does two things it not only serves as a protection of the downside as rates rise and as refinancings become less common but.
When you do have refis that allows us a high percentage of recapture in origination.
Reliance's business is primarily in refinancing.
And as a result of that as you see home price appreciation.
We see that we anticipate that we're going to continue to see originations as people want to take money out of their home. So in spite of rates going up it doesn't mean the business comes to a dead stop it means that it's going to be more focused on refis, which is exactly how we're positioned.
Our servicing book will serve to protect us.
And it's done well and you'll see that in the first quarter here in terms of our results and when I look at the business other than our servicing book.
Which occupies more than half of our book value in terms of what reliance represents in our balance sheet. The remaining business doesn't need a huge amount of capital to operate and sells would it originates after a short term warehousing period. So it's a very clean business and a very good cash flowing business, we love that as well.
Long as the expenses are controlled and as long as we continue to operate under what I would characterize as normal conditions.
As rates start to hopefully stabilize and as the fed takes action because we may see a slowing of the economy.
Raul rates may stabilize or come down we'd expect that to be a normal operating business. This is a business mortgages had been around for all of our lifetime for well before many generations are going to continue to be around for a long time as long as we're returning a having a return on equity.
Consistent with what we view as equity.
Objectives.
Allocating our shareholder capital, which would be in my opinion in the high teens to 20 is on a net basis as long as we feel that that is a.
Achievable, we're going to continue to be in this business and that that embedded optionality that I often speak of in terms of allocating capital. We saw that these last two years. These last few years have been phenomenal and you don't just throw it out through the business out once you have that.
That optionality kind of come back in the line you adjust your.
Expenses, you build out your servicing to protect you you adjust to the new market environment of focusing on Refis and home price appreciation and I think we've got a great business I think that business is going to continue to be a great business for us going forward.
Okay, although just as a comment in passing the only person who didnt refi over the last three years is deaths because approximately every 15 minutes on the radio you'll hear an AD for somebody telling you you need to refi while rates are low need to refi before rates go up and so I would think refis.
<unk> will continue but at a fairly limited basis, but I haven't been doing this for 40 years I've been doing other stuff.
But one other thing I'll say is we're in a we're in a relatively healthy job environment and it's the job report. This morning, certainly showed there is there's there theres good employment in this country wages continue to step up we've got a relatively healthy consumer and there is going to continue to be new home formation, there is going to be.
<unk> to be move people that move there is going to continue to be people that want to send their kids to school put on in addition, et cetera, Youll see refis continue as they have in the history of this country. So we like our business, it's a capital light business relatively and so we want to continue in this business and <unk>.
Last question once the which is supposed to happen this quarter the transaction for the investment in <unk> CAGR. It takes place and a 100 plus million get go up to the parent.
I know historically the company has bought back a lot of stock.
The stock is under half of what you think the value is.
So you can speak to the board you can speak for yourself you may not want to what is your view about buying stock at under 50% of your.
Conservative or realistic value per share.
So I think half of the year I pick a timeframe.
I'm going to guess, we have been amongst one of the largest we've probably bought back more shares of tiptree over the last decade than most companies out there. So it's been an area of focus for us as we see are trading at a significant discount to intrinsic we've been fortunate that we bought back a lot of those shares at a discount even our GAAP book value.
And we felt our intrinsic was well in excess of our GAAP book value. So we are always going to evaluate where we're trading cash availability need for that cash in other in building our businesses through we're always going to look to optimize the use of cash on hand. It is hard to pass up when you see our shares trading at.
Half of intrinsic value. So we will consider that when looking at allocating capital, but we also want to make sure we maintain liquidity in that in that we're conservative and we have capital to allocate when we want to grow so we're going to always be monitoring that but it is always on our radar to consider buying back shares.
Thank you.
Okay.
Yes.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to MS. Sandra Bell for closing remarks.
Yeah.
Thank you Laura and thank you everyone for joining us today as always if you have any question. Please feel free to reach out to me directly. This concludes our first quarter 2022 conference call.
You may disconnect your lines at this time. Thank you for your participation during the rest of your day.
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