Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TIPT > SEC Filings for TIPT > Form 10-Q on 5-Aug-2016All Recent SEC Filings

Show all filings for TIPTREE FINANCIAL INC.

Form 10-Q for TIPTREE FINANCIAL INC.


5-Aug-2016

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The following discussion is of Tiptree on a consolidated basis before non-controlling interests except where the discussion specifically notes that the amounts are attributable to the Class A common stockholders. For a discussion of non-controlling interests see Note-(1) Organization, in the accompanying consolidated financial statements.

Our Management's Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows:
Overview

Results of Operations

Non-GAAP Financial Measures

Liquidity and Capital Resources

Critical Accounting Policies and Estimates

Recently Adopted and Issued Accounting Standards

Tiptree is a diversified holding company engaged in a number of businesses through its consolidated subsidiaries and is an active acquirer of new businesses. The Company currently has five reporting segments: insurance and insurance services, specialty finance, real estate, asset management, and corporate and other. See Note-(5) Operating Segment Data, in the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following discussion is presented on both a consolidated and segment basis.

Since we acquired Reliance on July 1, 2015, the results of Reliance are not included in our specialty finance results for the three and six months ended June 30, 2015. The results of PFG, which was sold on June 30, 2015, are presented in discontinued operations for the three and six months ended June 30, 2015, and are not included in the comparable results for 2016.

The Company has identified internal control deficiencies that in the aggregate resulted in material weaknesses as of December 31, 2015 that have not been fully remediated and tested. See "Item 4. Controls and Procedures" below for more details.

Significant Events in the Quarter

Tiptree purchased 5,596,000 shares of Class A common stock for $36.4 million at a 29% discount to March 31, 2016 book value per Class A share.

Purchased an additional $10.7 million in NPLs, bringing the Company's total investment in NPLs to $62.3 million.

Launched seventh CLO with Tiptree investment of $26 million in subordinated notes.

In addition, on August 1, 2016, Care acquired an additional seniors housing community for $29.4 million.

Market Trends

Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions, market liquidity, consumer confidence, wage growth, business confidence and investment, GDP growth, home affordability, housing starts, market volatility, interest rates and spreads, impact of regulatory environment, and aging U.S. population demographics. The following current trends and market conditions specifically impacted our businesses in the six months ended June 30, 2016 and may impact our businesses in future periods. The impact on each segment is discussed in more detail in the individual segment results below.
In June 2016, the UK voted to leave the European Union in what has been referred to as "Brexit". As Tiptree's businesses are focused on the U.S., the primary potential impacts to the Company from Brexit are the effects that event has had and might be anticipated to have on interest rates, overall market sentiment and general market volatility, given the uncertainties regarding Brexit's effect on the global economy. Subsequent to the UK vote, safe haven capital flows have moved into U.S. Treasury securities further driving down long term interest rates and flattening the yield curve. Globally, central banks are easing, while the U.S. Federal Reserve is considering continued tightening. The resultant strengthening of the U.S. dollar and heightened volatility in stock markets has caused the U.S. Federal Reserve to pause its rate increases. The lower rate environment could impact the performance of our businesses as described in more detail below. In addition, as a significant portion of our assets are carried at fair value, credit and stock market volatility could potentially add volatility to unrealized gains and losses in our GAAP income statements.


Our businesses are impacted in various ways by changing interest rates. Most of our businesses have used asset based and other limited recourse financing to fund their business activities, much of which is floating rate debt. However, most of our variable rate facilities have LIBOR floors, which can result in a reduction in net interest margins in a declining interest rate environment, in particular, if earnings on our assets do not have similar floors or are based on different benchmarks than LIBOR, such as treasury rates or the prime rate. Demand for our specialty finance lending products can be impacted by interest rates, primarily mortgage rates and ten year U.S. Treasury rates. Certain of our subsidiaries have also entered into interest rate swap agreements to fix all or a portion of their interest rate exposure which are currently designated as hedging relationships for accounting purposes. Interest rates have dropped significantly year over year, with the U.S. 10 Year Treasury rate down significantly over the period. In addition, the yield curve has flattened by a similar amount, with the spread between the U.S. 2 Year and 10 Year Treasury securities near its narrowest point since 2007. We have seen volume in our mortgage business increase quarter over quarter as a result of higher refinance volume, driven by the significant drop in longer term rates. The interest rate decline has also resulted in additional interest expense in our real estate segment, due to the fair value effect of interest rate swaps not currently designated in hedging relationships.
Along with interest rates, home sales and home price appreciation impact our mortgage segment originations. According to Fannie Mae, home sales were up 3.2% year-over-year and 4.1% on a sequential quarter basis. Industry wide mortgage originations were flat in the second quarter on a year-over-year basis, but Fannie Mae projects originations to be up 15% in the third quarter from the prior year, driven primarily by the higher expected refinance volumes in the lower rate environment. Industry factors impacted our year-over-year mortgage origination comparison discussed in our Specialty Finance segment below. A significant portion of our assets, including our CLO subordinated notes and other principal investments, are held at fair value and changes in fair value of these assets are reported quarterly as unrealized gains and losses in revenues. The dealer price quotes that we receive for our CLO subordinated notes are a function of the trading levels for similar securities and the results of cash flow analysis that the dealers, buyers and sellers, perform to determine price along with seller-specific liquidity issues. Recently, leveraged loan price volatility has been driven primarily by default expectations in the energy, metals and mining sectors. While we saw credit spreads stabilize toward the end of the first quarter and into the second quarter, we expect volatility in the prices of leveraged loans and the valuation of CLO subordinated notes to continue throughout 2016. The ability to issue new CLOs is dependent, in part, on the amount of excess interest earned on a new CLO's investments over interest payable on its debt obligations. If the spread is not attractive to potential CLO equity investors, we may not be able to sponsor the issuance of new CLOs. During the fourth quarter of 2015 and first quarter of 2016, there was a dislocation in the credit markets that significantly impeded CLO formation and created downward pressure on CLO manager fees for new CLOs. While the market stabilized later in the first quarter of 2016, providing us with the opportunity to launch Telos 7, there remain continued pressure on terms and conditions. As a result, at the time of the issuance of Telos 7, we retained all of the subordinated notes and certain of the assets in the warehouse. We have sold the majority of such retained assets at a net gain, and continue to hold the subordinated notes as of the end of the second quarter.

RESULTS OF OPERATIONS
Summary Consolidated Statements of Operations
($ in thousands)                           Three Months Ended June 30,        Six Months Ended June 30,
                                                2016            2015             2016             2015
Total revenues                            $      133,752     $ 101,028     $     265,558       $ 190,091
Total expenses                                   127,618       102,675           255,554         197,287
Net income (loss) attributable to
consolidated CLOs                                  4,912            67             6,017            (244 )
Income (loss) before taxes from
continuing operations                             11,046        (1,580 )          16,021          (7,440 )
Less: provision (benefit) for income
taxes                                              4,025          (371 )           1,586          (1,867 )
Discontinued operations, net                           -        21,003                 -          23,348
Net income (loss) before non-controlling
interests                                          7,021        19,794            14,435          17,775
Less: net income (loss) attributable to
non-controlling interests - TFP                      669         4,735             3,298           3,875
Less: net income (loss) attributable to
non-controlling interests - Other                    219            97              (551 )           (83 )
Net income (loss) available to Class A
common stockholders                       $        6,133     $  14,962     $      11,688       $  13,983


Key Drivers of Results of Operations
Net Income Before Taxes from Continuing Operations

For the three months ended June 30, 2016 net income before taxes from continuing operations was $11.0 million which represented an increase of $12.6 million from the three months ended June 30, 2015. The Company earned income before taxes from continuing operations of $16.0 million for the six months ended June 30, 2016, which was an increase of $23.5 million from the six months ended June 30, 2015. The key drivers of pre-tax results from continuing operations were improved profitability in our insurance and insurance services segment driven by higher revenues and investment income, increased rental income in our senior housing real estate operations, increases in mortgage volume and margins with the addition of Reliance and improving market conditions, and increased revenue on principal investments partially offset by higher corporate expenses associated with our effort to improve our controls and financial reporting infrastructure. A discussion of the changes in revenues, expenses and net income is presented below and in more detail in our segment analysis.

Revenues

The Company reported revenues of $133.8 million for the three months ended June 30, 2016, which was an increase of $32.7 million or 32.4% from the prior year period. For the six months ended June 30, 2016, the Company reported revenues of $265.6 million, an increase of $75.5 million or 39.7% from the six months ended June 30, 2015. The primary drivers of the increase in revenues were improvements in earned premiums, service and administrative fees and investment income in our insurance and insurance services segment, increased mortgage volume and margins from the acquisition of Reliance in specialty finance, improvement in rental income attributable to acquisitions of senior housing properties at Care, and improvement in the performance of our principal investments.

Expenses

Total Company expenses were $127.6 million for the three months ended June 30, 2016, an increase of $24.9 million or 24.3% from the three months ended June 30, 2015. For the six months ended June 30, 2016, the Company incurred expenses of $255.6 million, an increase of $58.3 million or 29.5% from the prior year period. The primary drivers of the increase in expenses were commission expenses in insurance and insurance services as a result of the growth in written premiums, higher payroll and commission expense primarily related to the addition of Reliance volume and headcount in specialty finance, increased operating expenses and depreciation and amortization associated with additional investments in our real estate segment and increases in corporate payroll and professional expenses to improve our reporting and controls infrastructure.

Income Before Non-Controlling Interests

The Company reported net income before non-controlling interest of $7.0 million for the three months ended June 30, 2016, a decrease of $12.8 million from the three months ended June 30, 2015. The primary drivers of the year-over-year difference in net income before non-controlling interests were the same factors which impacted the positive year-over-year change in pre-tax income from continuing operations, and which were more than offset by $21.0 million of earnings from discontinued operations related to PFG reported in the second quarter of 2015 that did not repeat in 2016.

For the six months ended June 30, 2016, net income before non-controlling interests was $14.4 million, a decrease of $3.3 million, or 18.9% from the comparable prior year period. The primary drivers of the year-over-year difference in net income before non-controlling interests were the same factors which impacted the positive year-over-year change in pre-tax income from continuing operations, and which were more than offset by $23.3 million of earnings from discontinued operations in the six months ended June 30, 2015, which included the one-time net gain on the sale of PFG of $16.3 million. Additionally, a tax benefit of $2.4 million was recognized in the first quarter 2016, which was driven by discrete tax benefits of $4.0 million primarily from the tax reorganization effective January 1, 2016.

Net Income/(Loss) Available to Class A Common Stockholders

The Company reported net income available to Class A common shareholders of $6.1 million for the three months ended June 30, 2016 compared to $15.0 million for the three months ended June 30, 2015. For the six months ended June 30, 2016 net income available to Class A common shareholders was $11.7 million, a decrease of $2.3 million, or 16.4% from the prior year period. The key drivers of net income available to Class A common shareholders were consistent with those that contributed to the differences in income before non-controlling interests, partially benefiting from a reduction of non-controlling interests in the third quarter of 2015. As of June 30, 2016, the Class A common stockholders were entitled to approximately 81% of the net income of the Company, compared to approximately 77% as of June 30, 2015. For more information on the Company's structure, see Note-(1) Organization, in the accompanying consolidated financial statements.


One of the performance metrics management uses is EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. The Company believes that use of these financial measures on a consolidated basis and for each segment provides supplemental information useful to investors as they are frequently used by the financial community to analyze performance period to period, and to analyze a company's ability to service its debt and to facilitate comparison among companies. The Company believes segment EBITDA and Adjusted EBITDA provides additional supplemental information to compare results among our segments. Adjusted EBITDA is also used in determining incentive compensation for the Company's executive officers. These measures are not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for net income.

Summary Adjusted EBITDA(1)
($ in thousands, unaudited)                Three Months Ended June 30,       Six Months Ended June 30,
                                                2016            2015            2016            2015
Adjusted EBITDA from continuing
operations of the Company                 $       17,431     $   7,192     $      32,754     $  12,013
Adjusted EBITDA from discontinued
operations of the Company                              -        25,034                 -        33,232
Adjusted EBITDA of the Company            $       17,431     $  32,226     $      32,754     $  45,245

(1) For further information relating to the Company's Adjusted EBITDA, including a reconciliation to GAAP net income, see"-Non-GAAP Financial Measures" below.

Adjusted EBITDA from Continuing Operations

Adjusted EBITDA from continuing operations was $17.4 million for the three months ended June 30, 2016, an increase of $10.2 million or 142.4% from the three months ended June 30, 2015. For the six months ended June 30, 2016, the Company reported Adjusted EBITDA from continuing operations of $32.8 million, an increase of $20.7 million or 172.7% from the six months ended June 30, 2015. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our pre-tax income from continuing operations. The smaller increase in Adjusted EBITDA versus the amount reported for pre-tax income from continuing operations was primarily driven by the smaller period-over-period changes attributable to increased depreciation and amortization at our real estate segment and the lower purchase accounting impacts at our insurance and insurance services segment.

Total Adjusted EBITDA

Total Company Adjusted EBITDA was $17.4 million for the three months ended June 30, 2016, a decrease of $14.8 million from the three months ended June 30, 2015. Adjusted EBITDA for the six months ended June 30, 2016 was $32.8 million, a decrease of $12.5 million from the six months ended June 30, 2015. The largest driver of the decrease for both periods was the sale of PFG which contributed $25.0 million and $33.2 million in the three and six months ended June 30, 2015, respectively. The other drivers were the same factors that impacted Adjusted EBITDA from continuing operations.


Segment Results - Three Months Ended June 30, 2016 and June 30, 2015

                           Insurance and           Specialty finance                   Real estate                 Asset management        Corporate and other                  Total
($ in thousands)        insurance services
                        Three Months Ended      Three Months Ended June        Three Months Ended June 30,        Three Months Ended     Three Months Ended June     Three Months Ended June 30,
                             June 30,                     30,                                                          June 30,                    30,
                          2016       2015           2016          2015            2016              2015            2016       2015          2016          2015            2016          2015
Net realized and
unrealized gains
(losses)               $     872   $     5     $     (138 )    $    237     $          (51 )  $          369     $       -   $    -     $       5,295   $   (149 )   $        5,978   $    462
Net realized and
unrealized (losses) on
mortgage pipeline and
associated hedging
instruments                    -         -          1,403             -                  -                 -             -        -                 -          -              1,403          -
Interest income            1,336     1,194          2,931         1,822                 26                25             -        -             1,872        403              6,165      3,444
Service and
administrative fees       28,269    25,545              -             -                  -                 -             -        -                 -          -             28,269     25,545
Ceding commissions        10,545    10,148              -             -                  -                 -             -        -                 -          -             10,545     10,148
Earned premiums, net      46,292    39,707              -             -                  -                 -             -        -                 -          -             46,292     39,707
Gain on sale of loans
held for sale, net             -         -         14,852         3,941                  -                 -             -        -                 -          -             14,852      3,941
Loan fee income                -         -          3,047         1,882                  -                 -             -        -                 -          -              3,047      1,882
Rental revenue                 -         -              -             7             13,511            11,184             -        -                 -          -             13,511     11,191
Other income                 476     1,922            116            91              1,133               772         1,661    1,786               304        137              3,690      4,708
Total revenues            87,790    78,521         22,211         7,980             14,619            12,350         1,661    1,786             7,471        391            133,752    101,028

Interest expense           1,531     1,775          1,235           834              2,095             1,810             -        -             1,590      1,775              6,451      6,194
Payroll and employee
commissions                9,298     9,678         13,468         4,520              5,753             4,129         1,240    2,403             3,041      2,699             32,800     23,429
Commission expense        34,836    23,927              -             -                  -                 -             -        -                 -          -             34,836     23,927
Member benefit claims      5,617     8,240              -             -                  -                 -             -        -                 -          -              5,617      8,240
Net losses and loss
adjustment expense        17,240    12,926              -             -                  -                 -             -        -                 -          -             17,240     12,926
Depreciation and
amortization               3,399     7,258            214           124              3,410             3,945             -        -                62         32              7,085     11,359
Other expenses             7,791     8,417          4,982         1,934              4,516             4,435            89      175             6,211      1,639             23,589     16,600
Total expenses            79,712    72,221         19,899         7,412             15,774            14,319         1,329    2,578            10,904      6,145            127,618    102,675
Net income
attributable to
consolidated CLOs              -         -              -             -                  -                 -           746    1,004             4,166       (937 )            4,912         67
Pre-tax income/(loss)  $   8,078   $ 6,300     $    2,312      $    568     $       (1,155 )  $       (1,969 )   $   1,078   $  212     $         733   $ (6,691 )   $       11,046   $ (1,580 )


Segment Results - Six Months Ended June 30, 2016 and June 30, 2015
                         Insurance and insurance        Specialty finance                  Real estate                     Asset management                Corporate and other                      Totals
($ in thousands)                services
                          Six Months Ended June     Six Months Ended June 30,       Six Months Ended June 30,          Six Months Ended June 30,        Six Months Ended June 30,         Six Months Ended June 30,
                                   30,
                             2016        2015          2016          2015              2016            2015                 2016            2015            2016            2015             2016            2015
Net realized and
unrealized gains
(losses)                 $    2,980   $      -     $    (234 )   $       952     $         (51 )  $        (116 )   $            -        $     -     $       11,179    $     (472 )   $      13,874    $         364
Net realized and
unrealized (losses) on
mortgage pipeline and
associated hedging
instruments                       -          -          (316 )             -                 -                -                  -              -                  -             -              (316 )              -
Interest income               2,648      2,424         5,287           3,175                46               44                  -              -              5,869           684            13,850            6,327
Service and
administrative fees          58,579     47,472             -               -                 -                -                  -              -                  -             -            58,579           47,472
Ceding commissions           21,248     20,085             -               -                 -                -                  -              -                  -             -            21,248           20,085
Earned premiums, net         90,907     77,060             -               -                 -                -                  -              -                  -             -            90,907           77,060
Gain on sale of loans
held for sale, net                -          -        28,367           6,672                 -                -                  -              -                  -             -            28,367            6,672
Loan fee income                   -          -         5,381           3,281                 -                -                  -              -                  -             -             5,381            3,281
Rental revenue                    -          -             -              24            26,235           20,536                  -              -                  -             -            26,235           20,560
Other income                    740      3,859           292             131             2,279            1,310              3,667          2,833                455           137             7,433            8,270
Total revenues              177,102    150,900        38,777          14,235            28,509           21,774              3,667          2,833             17,503           349           265,558          190,091

Interest expense              2,686      3,514         2,420           1,345             3,949            3,140                  -              -              3,876         3,324            12,931           11,323
Payroll and employee
commissions                  18,885     20,083        24,936           8,244            11,391            8,052              2,481          3,251              5,715         4,140            63,408           43,770
Commission expense           67,874     40,455             -               -                 -                -                  -              -                  -             -            67,874           40,455
Member benefit claims        11,367     15,819             -               -                 -                -                  -              -                  -             -            11,367           15,819
Net losses and loss
adjustment expense           35,188     25,376             -               -                 -                -                  -              -                  -             -            35,188           25,376
Depreciation and
. . .
  Add TIPT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TIPT - All Recent SEC Filings
Copyright © 2017 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.