TIPT - Tiptree: Fortegra IPO Coming

2023-11-02 16:14:33 ET

Summary

• Tiptree reported strong Q3 earnings, with adjusted net earnings of $24 million.
• Fortegra continues to be the main driver of Tiptree's success, with earnings of $30 million and a 31.2% ROAE.
• Tiptree plans to IPO Fortegra, potentially valuing the company at around $2 billion and unlocking potentially 100% upside for shareholders.

Tiptree Q3 Update:

Tiptree ( TIPT ) reported another sensational operating quarter last night (11/1). GAAP earnings came in at $2.1 million or $0.04 per share. GAAP net income, as I've discussed in previous write ups, is weighed down by accounting treatment of amortization related to Warburg's minority interest investment in Fortegra and unrealized losses in the regulatory float (which I'll discuss below). Excluding these non-cash purely accounting charges adjusted net earnings were $24 million, $0.64/share.

Fortegra continues to be the engine at this company and really the only thing that matters at this point. Earnings there were $30 million, representing a whopping 31.2% ROAE thanks to a 90.2% combined ratio and revenue growth exceeding 20%.

These are just amazing performance numbers and trends. Management called out excess and surplus business lines as stand outs.

This revenue growth has brought the float above $1.2 billion. The duration of the portfolio is 2.4 years and average AA rated. Higher interest rates have led to unrealized losses in this portfolio. These losses should come back in short order as this short duration matures and the company can reinvest proceeds at higher rates.

Fortegra IPO

The major news of the release is the announced IPO of Fortegra. Recall, the company tried to IPO Fortegra in winter/spring 2021 and pulled it in difficult market conditions. The company has not filed an S-1 yet, so it is limited as to what it can say about the process. It cited that lack of filing as a reason to not take questions during the conference call. I will try to posit some potential outcomes and implications of a Fortegra IPO based on the information in the earnings presentation and public filings.

As you can see above, Fortegra earned $83.1 million through nine months before non-controlling interests (Warburg's 24% ownership). Given the steadiness of the results, I think it's fair and even conservative to extrapolate them to Q4 and say that Fortegra will earn ~$110 million this year. Assuming just 15% earnings growth (significantly below what the company has done in recent years gets you to ~$125 million of earnings next year. Specialty insurance names trade at 13-19x earnings. Given the top line and bottom line growth rates here, a mid-range valuation of 16x of forward earnings is also fair and even conservative. Using a conservative earnings forward earnings number of $125 million and a conservative multiple at 16x gets you a valuation of ~$2 billion.

I think Tiptree management knows that a larger IPO/more liquid float will trade best. A $2 billion valuation allows them to do that, particularly a primary offering, which is what the company is planning according to the earnings filing.

If the IPO resulted in just 15% of the float owned by shareholders other than Tiptree and Warburg, it would mean at least a $300 million IPO (15% of $2 billion). I believe this is likely close to the low end of the range of any possible deal. Tiptree's 76% of the balance of $1.7 billion is about $1.3 billion, implying the company's stake in the insurer is worth over $34/share, more than double the share price.

In the past, the company has listed about $5/share of value in the assets outside of Fortegra. Adding the two up gets you pretty close to $40/share. Even if there is a holdco discount (which there definitely will be) I can't imagine it would be over 50% when the bulk of the value will be public shares.

Of course, all of this is conjecture on my part. We will see what the numbers look like when the S-1 is filed, which I imagine comes shortly. I don't think I'm being wildly off base or overly optimistic on my estimates here though.

Risk

The main risk here is the IPO gets pulled like it was over two years ago. I think management learned from that process in selecting its underwriters and Fortegra is much larger than it was two years ago. The main obstacle therefore is likely more market related than structure/underwriter of the proposed offering.

Conclusion

Fortegra is a gem of a business that Tiptree management has managed beautifully. The value embedded within Tiptree stock is significant and a Fortegra IPO is a big step towards unlocking it. I continue to love the shares here.

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