Tiptree Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 4 speakers on the call.

Operator

Greetings, and welcome to the Tiptree Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Kinney, Chief Financial Officer, please go ahead.

Speaker 1

Good morning, and welcome to our Q2 2023 earnings call. Joining me today are Michael Barnes, our Executive Chairman and Jonathan Alani, CEO. A copy of our earnings release, Investor presentation and 10 Q are on our website, tiptreeinc.com. Some of our comments today will contain forward looking statements 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.

Speaker 1

During the call this morning, we will discuss non GAAP financial measures, which are described in more detail in our presentation. Reconciliations of these 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.

Speaker 2

Thanks, Scott, and good morning to everyone. Tifcreek completed a strong first half of 2023 led by our specialty insurance business for Tegra, which continued to build upon its history of exceptional growth by posting record results year to date. As we enter the second half of the year, Tifre's balance sheet remains well capitalized with no holding company debt and substantial cash for future deployment. Tiptree's revenues for the year increased to 786,000,000 up 18% from the prior year, while contributing adjusted net income of 41,000,000 As just mentioned, Protegra posted a record first half with gross written premiums and equivalents 1,600,000,000 up 34% from the prior year. Excess and surplus lines and services offerings were the largest contributors and the pipeline of future growth remains strong in those sectors of the insurance markets.

Speaker 2

For the year, the Protegra team delivered a combined ratio of 91% and an adjusted return on equity of 30%. These results are a testament to the company's strategy of disciplined specialty underwriting and maintaining a scalable cost structure Focused on improving the agent experience through technology. The markets for Specialty P and C risk remain favorable, Driven by years of capital shortfalls, inflationary pressures and a higher frequency of catastrophic events. Given this backdrop, we anticipate the hard market environment will extend Vertegra's expansion as it has over the past several years. Vertegra's investment portfolio grew 22%, ending the quarter with $1,200,000,000 of investable assets.

Speaker 2

We are continuing to invest the growing book of paid in premiums in high quality, shorter duration liquid securities to take advantage of the attractive returns. Portfolio duration was just under 2 years at quarter end, In Tiptree Capital, we have over $200,000,000 of capital deployed across our mortgage operations, cash And publicly traded equities for which we take a long term view. Our Mortgage Origination and Servicing business experienced a modest loss for the first half of the year, but the appreciation of our servicing book and management's proactive cost controls produced positive returns in the Q2 and kept the business near breakeven over the past 12 months. As mortgage rates appear to stabilize with monetary policy nearing an inflection point, we maintain a positive outlook for our mortgage business. At Tiptree, we continue to look for opportunities to generate long term absolute returns.

Speaker 2

Having no set holding period and the ability to take very long term views, we believe we have a distinct competitive advantage to others seeking to allocate capital. With a strong start in 2023, we are well positioned to continue our growth and we maintain a positive outlook for the company. With that, I'll let Scott take you through the financial update.

Speaker 1

Thank you, Michael. I'll just reiterate another strong quarter at Fortegra. Record revenues and income levels Excluding unrealized gains and losses, driven by growth in insurance underwriting and fee revenues. Consolidated income of $6,000,000 for the quarter was driven by growth in our insurance operations and positive contributions from our mortgage business, Partially offset by lower shipping revenues from the sale of our 5 vessels in 2022. Year over year comparisons were impacted by deferred tax charges of $3,500,000 in the current quarter compared to $25,500,000 in the prior year, both related to the deconsolidation of Fortegra for tax purposes.

Speaker 1

Adjusted net income for the quarter was $24,000,000 Representing an 18% annualized adjusted return on average equity. Our cash and capital position remains strong. We ended the quarter with over $370,000,000 of cash and equivalents with roughly 1 quarter of that figure outside the insurance company. Turning to Fortegra's results for the quarter. Premiums and equivalents increased 44% year over year to 855,000,000 Revenues grew by 31 percent to $385,000,000 and the combined ratio improved slightly to 90.5%.

Speaker 1

Adjusted return on equity for the quarter was approximately 32% annualized. We were pleased to see growth in all lines of business. Submission activity and the pipeline of new underwriting opportunities remains strong. The overall excess and surplus markets have seen significant growth, Nearly doubling in size from $35,000,000,000 in 20.18 to $76,000,000,000 in 2022. This is driven by many factors, Including favorable pricing trends as well as an increased number of specialty lines moving from admitted to non admitted markets.

Speaker 1

We, along with many of our competitors, believe these trends will continue through 2024 and potentially beyond. The warranty services side of the business grew top line in the quarter by 19%, yet face margin pressures as inflation impacted the cost of replacement parts and labor rates in our vehicle services lines. We have and will continue to steadily increase rates to offset this inflationary headwind. We include the next set of charts as a snapshot of Fortegra's trends over time. Gross written premiums and equivalents have increased 29% annually since 2019, with the vast majority coming from organic growth.

Speaker 1

Unearned premiums and deferred revenue on the balance sheet ended at $2,200,000,000 up 22% year over year. This unearned premium provides a solid base for future earnings growth. Many of Fortegra's products are multi year policies Where premiums earned over the life of the contract. As written premiums increase, earned premiums will likely lag and be recognized over future years. The combined ratio has been very consistent, moving from 93% to 91% over the past 5 years.

Speaker 1

The expense ratio has improved approximately 3 percentage points over that period, driven by efficiencies from leveraging technology, data driven insights and the overall scalability of the platform. Even with that improvement, we continue to invest in people and technologies to drive efficiencies, improve underwriting results and support our growth objectives at Fortegra. Turning to investments. The portfolio ended the quarter at $1,200,000,000 up 22% year over year. 91% of the portfolio is invested in a combination of high credit quality, liquid securities and cash with an average rating of AA plus Book yield was 3.1% At quarter end, up nearly 200 basis points from the prior year, driven by improving yields on money market funds and short duration fixed income securities.

Speaker 1

With money market funds and short dated treasuries offering yields above 5%, we held a higher than average cash and short term investment balance in the quarter. The duration of our fixed income portfolio sits at 1.9 years, which positions us well as maturities roll and the portfolio grows to invest at a higher yield, all while maintaining our high credit quality rating. In summary, over the last 12 months, Fortegra posted record premiums of $3,100,000,000 and record adjusted net income of $96,800,000 Its differentiated business model has delivered excellent returns from insurance lines alone at a 20% return on equity, And we continue to see a significant lift from the services side of the business, which contributed an additional 8 points to the ROE. Capital and liquidity remains well positioned for future growth. As we look ahead, we expect to continue to reinvest retained earnings and cash flow from operations into growing our specialty insurance lines.

Speaker 1

Flipping to Tiptree Capital. Pretax income for the quarter was $2,800,000 Driven by our mortgage business and income from investments in U. S. Treasuries and other equities. Reliance delivered $1,300,000 of pre tax income Despite mortgage volumes being down 26% in the 2nd quarter, our mortgage servicing portfolio And cost management measures provided stability in the quarter, and we expect origination volumes and margins to normalize as we look ahead.

Speaker 1

Each quarter, we highlight Tiptree's sum of the parts value, reflecting the impact of the investment in Fortegra. Based on the transaction multiple implicit in Warburg's investment, Tiptree's ownership of Fortegra represents over 23 dollars per diluted Tiptree share. Including our other holdings, we believe Tiptree's sum of the parts value to be $28.69 per diluted share or more than $1,000,000,000 of value. Now I will turn the call back to Michael to conclude our prepared remarks.

Speaker 2

Thanks, Scott. So to summarize, we are pleased with the first half of the year and are well positioned with dry powder and a strong balance as we move forward. Vertegra continues to produce record results, both from a growth and return perspective. Reliance returned to profitability in the Q2 and is now focusing on opportunities to grow its volume. At Tiptree, we come to work every day looking for opportunities to build long term value for our shareholders.

Speaker 2

But we will remain patient when allocating capital

Operator

Thank you. We will now be conducting a question and answer First question comes from Greg Peters with Raymond James. Please go ahead.

Speaker 3

Hey, good morning. This is Greg's associates, Sit on. I wanted to start with the top line results at Fortegra. It looks like growth in premium and premium Equivalents really accelerated in the Q2 compared to the first. So, curious what drove the acceleration there?

Speaker 3

And Maybe you could discuss what lines of business in the E and S market you're finding the most attractive growth opportunities right now?

Speaker 2

Thank you for the question. And yes, you're correct. We've continued to accelerate our growth. And I'd say that these are Some of what we're seeing here has been the result of seeds planted going back a few years ago. And based upon capital And our focus in certain areas of expansion, I agree, we've seen that acceleration really take off.

Speaker 2

Scott, do you want to drill into the questions in terms of what's driving the growth, etcetera. I'll hand it over to you.

Speaker 1

Yes, sure. Well, first, I'd just start off and say that The bread and butter of the business is really with doing E and S as well as admitted lines where the aggregate premium per year is less than 10,000,000 per line. About 80% of our agents are less than that $10,000,000 figure and we've continued to see strong submission flow there. E and S lines flashing back a couple of years ago really made up very little of our overall premium. And as we sit today Over the last 12 months, that's close to $780,000,000 So that's been where we've seen the largest amount of growth.

Speaker 1

Within that bucket, it's a wide variety of both Casualty driven products as well as certain property lines, professional liability, general liability, contractors, Various property lines as well are really, really all part of the growth drivers. Within the services side of the business, we continue to see Good growth in auto lines. We have seen a bit of softness on the consumer side, as you've probably seen elsewhere Across markets, but those are really the key drivers of what's bringing in business.

Speaker 3

Okay. Yes, got it. And then, when I look at the expense ratio at Fortegger, it's been pretty stable the last several quarters. And you Also discuss how we continue to make investments in the business. So I'm just curious your perspective on how Fortegra balances Investing for future growth while also maintaining the expense ratio and the strong returns you've seen there.

Speaker 2

Sure. Will you start, Scott? Oh, sorry. Scott, I'll just start and say, look, our management team has done an excellent job of focusing on Monitoring expenses, particularly in times of inflation. As I said a few minutes ago that we started planting seeds of expected growth a few years ago and we're seeing the benefit of that pay off, particularly in an environment that's been, I think, very beneficial to the areas that we've selected To allocate capital, both E and S business and European expansion has continued to really benefit, I think, as We've seen that growth really take off.

Speaker 2

We expect to see an environment like this continuing for the foreseeable future. So we're in a very beneficial environment. I Our timing was superb. And I'll just reiterate, our management team has done a superb job of managing expenses Through these last number of years. Scott, do you want to

Speaker 1

I didn't mean to interrupt, go ahead. Sure. I would just say it's a balance of investing for growth, investing In technology and hiring additional underwriters to continue to feed the top line, You've probably seen over the last 5 to 6 years, the combined ratio has averaged right at 91%, and that's really driven by a very consistent underwriting And loss ratio as well as the scalability of the expense ratio. And so we really balance investing in that technology and

Speaker 3

And Then sticking with the expense management, but pivoting to Reliance, just given how the macro environment has impacted top line over the last several quarters, Can you talk about how expenses have been managed in the business in order to keep it near breakeven? And maybe you could remind us the ROE profile of Reliance or if you target a specific ROE for the business? That's my last question. Thanks.

Speaker 2

Okay, great and very good question. And so Reliance, when we acquired Reliance a number of years ago, it was based upon an More than 3 decades, I think, on average, focusing on mortgage areas. So it's an area we know well. Anytime you're going to be involved in a business driven by rates predominantly and the overall credit markets, It's going to be volatile, but our objective, I think and I'd say this goes for all of our investments. Anytime we can allocate capital And see a good return on equity in a stable market environment, but with the ability on the downside to expenses to pull back quickly and have a management team who's experienced in doing that to protect downside.

Speaker 2

But more importantly, When the market opens up to have an embedded optionality that really untaps what we see as the hidden value in an asset like Reliance, We saw that extraordinary returns in the from 2020 2021 When rates then once again started going up. What we've seen our management team do through this most recent period of really for 27 years and unprecedented rate rise in the last year and a half year is actively control expenses by cutting back on personnel as needed as well as just cutting back expenses overall for operations. We also going back to when rates were low, We started a practice of retaining servicing as a master servicer and that helped us Go through this period as that appreciated in value as rates rose. So it served as natural hedge while producing ongoing cash flow for the business. So I think our management team Has executed extraordinarily well, but what I'm most excited about is with rates up where they are And with it likely nearing, I'd say, the expectation, you won't see the Fed taking a lot more action depending on where numbers come out in the foreseeable future here.

Speaker 2

So we see rates starting to peak, although we may see the curve continue to steepen a bit here. But we've reloaded the embedded option in that business. So with that business, I can't say we have a targeted return for that business, but in good times like 2020, We've seen that business produce near 100% return on capital. Now as the capital base has grown, as our servicing book has grown, that capital base has gotten larger. But we would see an embedded optionality that should produce extraordinary returns as the market continues to grow with respect to Home originations with respect to the refinancings.

Speaker 2

And one thing you can't ignore is that the one that has really grown through an inflationary period is housing. And as people need to tap savings, the house One place we're going to go to in spite of rates. If you need to send your kid to college, you may tap your house to do so. So we see that Continuing to benefit our business. So I look at our business returning to profitability in this last quarter as just tremendous and I can't give enough compliments to our management team, Hugh Miller and his team are doing an excellent job through these last 18 months of an unprecedented rate rise.

Speaker 2

So no targeted return, but we see it as producing exceptional return on equities when times are good and stable return on equities given their active management of

Speaker 3

Okay, Austin. Thanks for the answers and congrats on the first half. Thank you.

Operator

I would like to turn the floor over to Scott for closing remarks.

Speaker 1

Thank you, Stacy, and thanks everyone for joining us today. If

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines and thank you for your participation.

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Key Takeaways

  • Fortegra’s specialty insurance business delivered record first-half results with gross written premiums up 34% year-over-year, a combined ratio of 91%, and an adjusted return on equity of 30%, driven by disciplined underwriting in excess and surplus lines.
  • Tiptree’s balance sheet remains exceptionally well-capitalized with no holding company debt, over $370 million in cash and equivalents, and $1.2 billion in high-quality, short-duration investable assets yielding 3.1%.
  • The mortgage origination and servicing unit returned to breakeven profitability in Q2, supported by servicing portfolio appreciation and proactive cost management, positioning it to benefit as mortgage rates stabilize.
  • Fortegra’s expense ratio has improved by approximately 3 percentage points since 2019 through targeted investments in technology and scalable platforms, while continuing to add underwriting capacity to support growth.
  • Tiptree’s sum-of-the-parts valuation assigns its Fortegra stake over $23 per share and a total equity value of $28.69 per share, representing more than $1 billion in shareholder value.
A.I. generated. May contain errors.
Earnings Conference Call
Tiptree Q2 2023
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