TIPT - Tiptree: Worth Cutting Through The Noise

2023-03-17 07:00:00 ET

Summary

• Q4 and Full Year '22 earnings were negatively impacted by a non-cash tax charge related to Warburg's investment in Fortegra.
• The deferred tax liability might never be actually paid.
• Fortegra continues to shine, growing over 20% with excellent operating ratios.
• TIPT stock remains at a 40% discount to the Sum of the Parts.

Tiptree Q4 Update:

Apologies for the late update on Tiptree ( TIPT ). It has been a hectic week since they reported last Wednesday night. I was initially very confused by the quarter as it was reported. Operating results at Fortegra, the company's main asset at this point, were exceptional once again. Gross Written Premiums and Equivalents, Unearned premiums, and Underwriting/fee revenues grew, 26%, 21% and 30% respectively. That's just phenomenal growth for any company, much less an insurer. Profitability was also fantastic with a combined ratio at 89.8% for Q4. If the company maintains that growth rate at those margins, this business will easily double in 2-3 years. That's insane for an insurer. For those who doubt that growth ability, check out the bar chart on the bottom right below. Fortegra has about doubled its cash profits each 2-year period since 2019.

I'll get back to the cash profits issue in a bit as that's an important part of the Tiptree story. Before I do, in my previous article on the company "Tiptree: Solid Quarter and Goodbye Ships" , I highlighted that while the pop in interest rates would cause some mark to market losses in the investment portfolio given ~2 year duration (notice nowhere near SIVB's), ultimately higher rates would benefit the company. Well, we saw that this quarter in the investment portfolio.

The yield is more than double last year's (and going higher) and profits are turning in the portfolio.

Another component of my last write up was the sale of the ships. I'm still giddy over that. The company reported a $13.3 million gain from the closing of the sale of the ships in Q4. That brings gains for shipping to close to $50mm for the year. As much as I malign the ship business, the company had near perfect timing selling the ships at the top of the market and created about $1.50/share of value. Pretty impressive.

Unfortunately, the mortgage business basically stopped with originations down 29% for the year and even worse in Q4. The business actually lost money in Q4. Some of the operating losses were made up by gains in the MSR portfolio but not for Q4.

Lastly, Invesque just remains a pebble in the shoe. There's another $.50/share of value or potential loss there. Becoming irrelevant.

Complicated Taxes:

The investment in Fortegra triggered non-cash tax expenses related to reducing the company's cost basis in Fortegra. Again, I stress these are non-cash. They run through the income statement and become deferred tax liabilities, but they are not paid unless the company actually sells Fortegra. There was close to $19 million of this non-cash tax expense in Q4 and ~$50 million for the year, leading to only $.02 of GAAP earnings for Q4 and a loss of $.23 for the year.

However, if you back out those tax lines items, the company earned ~$19.7 million in Q4 and about $42.2million for the year 2022, about $1.25 share. Now some of this was gains in ships that will not be repeated, but it also includes losses in the investment portfolio that could and should flip to gains this year. Between the growth rate at Fortegra and a higher interest rate environment, we could see easily similar if not higher earnings in 2023 ex this tax issue.

The only big complaint I hear about company is overhead. That was down this year but remains too high for a company this size. No doubt management has created a ton of value here and there should be operating leverage as profits grow. Still, ~$30mm of corporate overhead is high for a company of this size. At even only 12x p/e, every $1 million of overhead takes $12.5 million off the market cap.

Tiptree Sum of the Parts:

With the stock trading at $15, it's ~12x that $1.25 number. Given the growth rate at Fortegra, which is now driving almost all of the company's earnings, I just think that's way too low. Even though the sale of the ships greatly simplifies the company's structure, there are still two pockets of value, the company's stake in Fortegra and the assets at the holdco. The company likes to use Sum of the Parts, to illustrate the value of these two pieces, which I think is appropriate as well.

Note the Fortegra piece is based on Warburg's investment in Fortegra at a multiple of 13.5x earnings. That's hardly a stretch.

Risk:

Now that the ships are sold, the balance sheet is net cash, and the mortgage business is moribund, the only real downside to the company is a slowdown at Fortegra. In my mind, that primarily happens in a major economic slowdown. I think that's entirely possible, but the stock is not trading at a particularly high multiple of its true cash earnings. Another risk would be money flowing out of small caps, particularly the Russell 2000. Liquidity has improved in the company's shares but remains relatively low. If money flows out of the small caps ETF's they might become forced sellers of the stock. That would impact the share price.

Conclusion:

I continue to just adore the Fortegra business. It's an absolute gem. Major kudos to Michael Barnes and Jonathan Ilany for buying that business and helping to steer it. Major props to them for making a ton of money on the ships. Said simply, these guys are good. I also think the company upgraded its CFO with the appointment of Scott McKinney. He communicates the story extremely well. There is so much value embedded within Fortegra, management just needs to figure out a way for it to be either a standalone entity or convert Tiptree to a pure play on Fortegra.

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