Q2 2019 Earnings Call
Greetings and welcome to the Tiptrees second quarter 2019 earnings call at this time, all participants already in listen only mode. A brief 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 it is now my pleasure to introduce your host Sandra Bell. Please go ahead.
Good morning, and welcome to our second quarter 2019 earnings call.
We are joined today by our executive Chairman, Michael Barnes and our CEO Jonathan alone, we had posted the earnings release and presentation on our website at <unk> to treating dotcom.
Our remarks today are qualified in their entirety by the disclaimers on page one of the presentation.
This presentation supplements are as you see filing and as provided solely for information purposes.
Throughout the presentation, we make forward looking statements are businesses are subject to risks and uncertainties, which are outlined in our SEC filings and which could impact our expectation of future results.
Except as required by Securities law, we undertake no obligation to update any forward looking statement.
In addition, we use non-GAAP measures, which we believe provide supplemental information about our business and are useful to investors.
As these measures are not GAAP, they should not be used as a substitute for GAAP disclosures.
The appendix in the presentation provides a reconciliation to each of these measures to their GAAP equivalents.
With that we will turn the call over to Michael.
Thank you Sandra and good morning to everyone.
As we enter the second half of the year. We are pleased with our first half financial performance and overall execution against our strategic objectives.
We continue to grow our insurance business topline at double digit rates and continue to refine our investments in to accrete capital with the goal of long term value creation.
Our year to date return to shareholders with 7% measured by growth in book value per share and dividends paid.
As noted in our second quarter earnings release, we announced a four cents dividend for the second quarter, which represents a 14.3% increase from 2018 dividends.
At a macro level, we anticipate some slowing of the global economies over the next few years.
Although we remain long term positive on the stability and continued expansion of the use or the outlook for global trade.
With this as a backdrop, we believe our core businesses are well positioned to benefit from a stable economy at a relatively healthy consumer base.
Our focus on insurance and warranty origination efforts to grow is well positioned to grow.
We continue to look for acquisitions to expand our existing platform.
Away from insurance certain market sectors, such as shipping present attractive opportunities based on near term technicals and long term fundamentals.
However, other sectors such as high yield corporate credit present reason to be cautious as we near the potential shift of a decade long credit recovery cycle.
With this concern in mind, we've taken steps to reduce our exposure to corporate credit.
So feel well positioned to take advantage of what we believe will be increasing opportunities over the coming years in stressed and distressed corporate credit.
But to be clear, we are positive and our long term outlook and see tiptrees core businesses well positioned to continue to prosper.
With that I'll pass it to Sandra who will take you through the second quarter financial results in more detail.
Thank you Michael.
On page four we present, the Companys key metrics for the second quarter of 2019.
Net income was $12.2 million, an increase of 11.3 million over the prior year period.
The increase was primarily driven by two factors continued growth in insurance underwriting operation.
And $12.4 million of pre tax gains on investment versus $3.8 million of mark to market losses in the second quarter of 2018.
Included in the pre tax gain on investment is a 7.6 million gain recorded on the sale of our Telus COO asset management business in the second quarter.
Net income for the year to date period was $16.5 million down significantly given the prior year gain on sale of our senior living operation.
Excluding that gain and income from discontinued operations net income before non controlling interest was up $21.1 million.
The primary drivers of this increase can be attributed to similar factors as the quarter.
Operating EBITDA for the quarter was $12.7 million down from the prior year due primarily to the repositioning of our investment portfolio and the resulting buildup of cash still to be deployed.
Operating EBITDA for the year to date period was $25.3 million up 5.9% from the prior year period.
While both periods were impacted by the realignment of the insurance investment portfolio. The year to date results were more than offset by insurance underwriting growth and contributions from shipping operation.
On the bottom of the page we show walk from operating EBITDA to total pre tax income highlighting the key differences between the two metrics.
Book value per share increased to $11.47 up 68 cents from year end 2018.
Driven by improved earnings in addition to share buybacks over the past four quarters at an average 40% discount to book.
Turning to page five we highlight our capital allocated between insurance and Tiptree capital along with the respective returns to assist investors in understanding Tiptrees enterprise value.
When considering capital allocation decision, we look at total capital, which includes corporate debt held at the holding company and our insurance subsidiary.
We evaluate our return on capital using trailing 12 month operating EBITDA, which for the most recent period was $56.3 million.
Our total return of approximately 8.4% is composed of 13.9% return and specialty insurance and an 8.6% return into tree capital.
The key drivers of our returns for the period, where growth in insurance operating EBITDA across all product line.
Consistent and stable dividends from our invest shares.
Positive contributions from shipping operations in Tiptree capital and relatively stable corporate expenses.
Now, let's turn to our specialty insurance results.
On page seven we highlight our underwriting performance and then on the following page returns from the investment portfolio.
We continued to see positive topline growth across our product lines, including our European warranty program.
For the first half of 2019 gross written premiums grew $67 million year over year up 17% and net written premiums grew 34%.
We believe that there are number of fundamental factors, which provide support to continue this growth moving forward.
Within Morenci, our opportunities exists, partly because of the size and growth trajectory of the overall market.
We have made great strides penetrating this sector and believe it has a long runway for growth.
Second the nature of the claims we incurred on our product line do not change substantially through different economic cycles.
And typically consumers keep their cars and appliances longer in a slowing economy, which we believe may increase demand for extended service contract.
Underwriting margin was up 11% and our combined ratio held steady at 93.2% demonstrating our ability to continue to grow profitably in our insurance business.
This quarter I would also like to highlight that we have built a substantial balance of $726 million of unearned premiums and deferred revenues on our balance sheet.
23% from this time last year. This growth is key to our future earnings both from underwriting profits as well as contributions from the growing investment portfolio of paid in premium.
Turning to the investment portfolio on page eight our net investments grew by $79 million year over year up 19%.
Driven by our growth in net written premium.
Year to date net investment income was $7.7 million.
Down $1.4 million as we reduced our exposure to corporate loan.
Thus decreasing our interest income.
We ended the quarter with 124 million of cash in the insurance portfolio, which is available for investment.
Net portfolio income was $12.9 million of approximately $8.2 million versus the prior year.
The improved performance was driven by.
2019, unrealized gain versus losses in the prior year period, combined with lower asset base interest expense.
On page 10, we present the results of Tiptree capital, which primarily consists of our invest shares and shipping operations.
Overtime, we would expect that our investments could shift as we recognized returns in one asset class or business and reinvest in others.
Our senior living results are included in our 2018 resolve to facilitate period over period comparisons.
As of the end of the second quarter, our invest position represents a $119 million of which 99 million is held in temporary capital. The remainder is in our insurance portfolio.
The final transfer restrictions on our invest shares expired on August Onest 2019.
The remaining discount will accrete into income over the third quarter.
Year to date real asset operating EBITDA was $6.8 million, which includes dividends out our invest shares and the results from our shipping operations.
Specialty finance operating EBITDA was stable, while pre tax income declined due to a $1.6 million mark to market loss on our MSR portfolio as mortgage interest rates decline.
Now, we will turn the call back to Michael to conclude our prepared remarks.
Thanks, Andrew the first half was a solid start to the year.
Our book value increase dividends produced a return of 7% and operating EBITDA improved over the prior year.
Our announced dividend increase in share buybacks reflect our positive view of the cash flow that our business can generate.
For the remainder of 2019, we expect to see continued growth in our insurance business, both organically and selectively through acquisitions should we find the right one.
We will also look to grow our insurance investment portfolio in line with the business and to enhance its total return over the long term.
And within two pre capital we will continue to seek opportunistic capital allocation that present attractive long term returns with that we'll open the line for questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Hey, confirmation total indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up you had said before pressing the star keys, one moment. Please while we poll for questions.
Our first question comes from Walter Schenker with Mass partners. Please go ahead.
<unk>.
The strategic question trying to understand given your investment expertise and the values you maintain or in the business.
Why the stock buyback, which was a million and a half shares I will call it $10 million roughly a little bit more has not been substantially more aggressive I understand this liquidity issue, but will always be a liquidity issue you have a lot of cash and it would seem that the most accretive thing you can do and the return at six or $7 a share.
On buying back your stock is such that there isn't a lot in your portfolio that gives you a higher.
Long term return and the short term accretes value at a greater rate for shareholders.
Thank you Walter I think I think that's a that's a fair comment and in fact, we are always trying to balance the question of make allocating capital available to new investment that will further grow our platform to grow our business for that produce potentially attractive returns as opposed to buying back shares which had the discount at which we're training I would agree is <unk> has the potential to be very creative and and represent a good use of capital potentially so were always evaluating that and trying to balance that we do have investments earmarked that that we'd be remark capital for that we wanted to be very careful in terms of having that capital that goes out of the company when when buying back shares we have been fairly active I'd say over the last four years in buying back shares I'm going to purchase a substantial portion of our outstanding float back at a discount of approximately 40% to our GAAP book value. So I think we have been fairly aggressive in buying back shares we're going to continue to lie.
Look for opportunities to buy back shares to be Frank as legacy investors of Tiptree have exited the ability to buy back shares in a large amount at a substantial discount has has diminished.
And so some of the larger holders, although they may have interest in selling shares would only do so at a much higher price, which makes it less attractive.
So as Weve bought back shares a lot of it has been in the more liquid float which isn't always.
A great thing is very much our objective to grow the business and to create a larger enterprise value and so we're always trying to balance that but we take her comments.
Target and we are always looking to buy back shares at attractive prices with if we have available capital.
Okay. Thank you.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
There are no further questions I would like to turn the floor over to Sameer for closing comments.
[noise]. Thank you Stacy and thanks, everyone for joining us today, if you have any questions. Please feel free free to reach out to me directly. This include our second quarter 2019 conference call.
[laughter].
Got you on the call.
This concludes today's teleconference. Thank you for your participation.