Tiptree Inc. Q2 FY2020 Earnings Call

Greetings and welcome to the Tiptree Inc. Second Quarter 2020 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 Sandra Bell. Thank you, Ms. Bell. You may begin.

Good morning and welcome to our second quarter 2020 earnings call. We are joined today by our Executive Chairman, Michael Barnes; and CEO, Jonathan Ilany. 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. Before I turn the call over to Michael, just a few additional housekeeping items. Today, 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.

Thank you, Sandra, and good morning to everyone. We are currently navigating an extraordinary period, as social distancing efforts to combat COVID-19 continue to have a major impact on global economies and financial markets. Despite the financial market volatility that has led to an 11.7% year-over-year decrease in our book value due to unrealized mark-to-market losses, we are optimistic about our core business fundamentals and believe we are well-positioned to advance the company during these uncertain times. Our operations remain quite strong. Excluding mark-to-market effects, first-half revenues were up 17%, and operating EBITDA reached $38 million, reflecting a 50% increase from the previous year. As Sandra will elaborate on, our capital and liquidity remain solid, and our teams have adapted effectively to the new circumstances while remaining committed to serving our customers and seeking new opportunities. In Tiptree insurance, gross written premiums and equivalents of $694 million rose 23% compared to the first half of the previous year, driven by growth in our warranty and specialty programs. As we anticipated, credit protection products saw a decline in the second quarter, influenced by COVID-19 stimulus payments and a corresponding decrease in consumer installment lending. This was balanced out by strong contributions from our warranty products, both from a recent acquisition and the recovery in volumes from their lows in April, as well as growth in specialty products due to our sustained market focus and the ongoing hardening cycle. Insurance margins have remained steady, with our year-to-date combined ratio holding at 92.6%, consistent with previous periods. Our insurance products have minimal exposure to business interruption and similar coverages affected by COVID-19, allowing for relative stability through various cycles. In our insurance investment portfolio, we maintain a long-term perspective, so fluctuations in the timing of investment gains and losses are anticipated. We continued to observe volatility in the debt and equity markets during the second quarter, reflecting the economic uncertainty linked to the COVID-19 pandemic. After significant declines in the fair value of our investments in the first quarter, we experienced some recovery during the second quarter. Our insurance portfolio concluded the quarter at $546 million, representing a 12% year-over-year increase, in line with our premium growth. We continue to keep over 80% of our portfolio in cash and high-quality, liquid investment-grade securities, with an average rating of AA. In Tiptree capital, operating EBITDA reached $17.9 million, significantly up from the previous year, driven by strong performance in our mortgage operations. First-half mortgage volumes increased by 72% year-over-year, with notable improvements in gain on sale margins due to the low-interest rate environment. Our shipping operations remained stable, providing consistent cash returns over the past year. However, a decrease in second-quarter demand affected charter rates for dry bulk commodities. Conversely, the short-term oversupply in oil markets led to increased demand for floating storage, thereby boosting charter rates for product tankers. Although operations were strong, profits in Tiptree capital were adversely affected by unrealized mark-to-market losses related to our investment in Invesque. Like many companies in skilled nursing, senior living, and medical office sectors, Invesque has taken steps to preserve liquidity, including suspending its dividend in April. In the second quarter, Invesque publicly reported that underlying rental revenue collections reached 90% of contractual amounts owed in April and 94% in May. Overall, we have seen only a modest impact on our business operations from the economic lockdown thus far. We believe our diverse range of businesses is well poised to capitalize on opportunities in the latter half of the year. The remainder of 2020 will undoubtedly present challenges, but our dedication to growing our insurance business, improving results in Tiptree Capital, and delivering strong long-term risk-adjusted returns for our shareholders will persist. With that, I'll hand it over to Sandra, who will provide further details on the financial results.

Thank you, Michael. On page 4, we present the company's key metrics for the second quarter 2020 compared to the prior year period. Net income before non-controlling interest for the quarter was $4.4 million, a decrease of $7.8 million over the prior year, which was primarily driven by unrealized losses on our investment in Invesque. Excluding investment gains and losses, revenues for the quarter were up 15%, driven by improvement in Tiptree Insurance top line results, including revenues from our warranty acquisition. Operating EBITDA for the quarter was $22.2 million, up 75% from the prior year due to growth in Tiptree Insurance operations as well as positive contributions from Tiptree Capital, driven primarily by growth in volumes and margins in our mortgage business. Operating EBITDA for the year-to-date period was $38 million, up 50% from the prior year period. On the bottom of the page, we show a walk from operating EBITDA to total pretax income highlighting the key differences between the two metrics. Book value per share decreased to $9.97 year-over-year, driven primarily by unrealized mark-to-market losses and dividends paid, partially offset by share repurchases. We are comfortable with our capital position and believe we have sufficient liquidity to support our businesses. At quarter end, cash and cash equivalents were $80.6 million, $70 million of which is held outside the statutory insurance entities. In addition, subsequent to quarter end, we refinanced our revolving credit facility in our insurance business, extending the maturity for three years and upsizing the amount to $200 million. We expect to use the added capacity to support continued organic growth as well as bolt-on acquisitions. On page 5, we have added a slide highlighting certain KPI trends. Operating EBITDA in the first half of 2020 was up 50% over the prior year, reflecting the stability of Tiptree Insurance and growth in volumes and margins in our mortgage operations in Tiptree Capital. First half 2020 premiums and premium equivalents, despite the second quarter softness in credit protection, were up 23% led by the acquisition of Smart AutoCare and the growth in light commercial and other specialty programs. And lastly, deferred revenues and unearned premiums, which represent future earnings potential, topped $1 billion for the first time in 2020. Turning to page 6. We highlight our capital allocated between Tiptree Insurance and Tiptree Capital along with their respective returns to assist investors in understanding Tiptree's enterprise value. When considering capital allocation decisions, we look at total capital which includes corporate debt held at both the holding company and at our insurance subsidiary. We evaluate our return on capital using operating EBITDA which for the latest 12-month period was $76.3 million, up 35.5% from the latest 12-month period ending Q2 2019. Our total return of approximately 11% is driven by a 12.9% return in Tiptree Insurance and an 18.6% return in Tiptree Capital. The key drivers for the period were growth in underwriting income and fee revenue in warranty service contracts and in light commercial specialty programs, including contributions from Smart AutoCare for the first half of 2020. Positive contributions from mortgage and shipping operations in Tiptree Capital and reduced corporate expenses driven primarily by lower incentive compensation. The most recent 12-month period included approximately $9 million of dividends from our holdings on Invesque. Our earnings from Tiptree Capital will lose the benefit of approximately $2.5 million per quarter while the Invesque dividend is suspended. For the first half, mortgage contributions more than offset the loss of the Invesque dividend, highlighting some of the benefits that diverse business operations can bring to Tiptree Capital. With that, let's turn to Tiptree Insurance's results for the second quarter.

Thanks Sandra. As Tiptree continues to navigate this challenging time, I want to thank our talented group of employees for their disciplined focus on serving our customers and keeping our operations running smoothly. While the economic disruption of the pandemic has impacted our financial performance in the first half of 2020, we believe we are well-positioned to weather the current challenges and continue our focus on the long term. With that, we will open the line for questions.

Thanks Sandra. As Tiptree navigates this challenging time, I want to express my gratitude to our talented employees for their disciplined focus on serving our customers and maintaining smooth operations. Although the economic impact of the pandemic has affected our financial performance in the first half of 2020, we believe we are well-prepared to endure the current challenges and remain focused on the long term. With that, we will open the line for questions.

Thank you, Victor, and thank you everyone for joining us today. Obviously, if you have any questions, please feel free to reach out to me directly. This concludes our conference call for the second quarter 2020.