2023-10-25 11:33:17 ET
Summary
- Tiptree, a specialty insurance company, has a minority interest from Warburg Pincus that values it higher than its current market value.
- The company is benefiting from higher insurance pricing and experiencing meaningful premium and profit growth, with the exception of limited profit growth in auto lines due to inflation.
- Tiptree's valuation is reasonable, especially considering the current market conditions and its growth in specialty markets.
- In a rate hike environment, they also benefit by being an insurance company that gets positive backflow from higher capital costs.
Tiptree (TIPT) is a growing specialty insurance company whose valuation case is made interesting by a minority interest from Warburg Pincus, which values it substantially higher than its current value, but from a previous market paradigm. Structurally, they are benefiting as an insurance company from higher rates. On the insurance side, premium growth is meaningful and they are getting good contributions from their mortgage business. The only slight pressure is coming from limited profit growth in auto lines due to the inflation of auto parts. On a P/B basis, they look pretty reasonably valued. Considering a reasonable inclination for bond exposures right now, their case looks even better.
Q2 Breakdown
It's difficult to deny the premium growth. In Fortegra, their flagship business that focuses on Excess and Surplus (E&S) insurance, growth has been splendid at 34% in premiums . Adjusted ROEs are really high at 30% thanks to constructive pricing in specialty markets. E&S markets have doubled since 2018 and pricing and volumes remain constructive also as new lines appear in the market. As of Q2, E&S continues to drive growth with both constructive pricing and volumes across all lines, including professional liability, general liability, contractors and property lines. Ultimately, revenue growth ends up at 18% and adjusted net income growth is up by 70%.
The only somewhat weak segment was auto line in the warranty side of the business, which grew nicely in revenues at 19% but saw pressure with claims getting higher on auto parts inflation. This will be easy to pass on but the margin gain from this segment is likely to lag.
The premium growth has also meant a burgeoning investment portfolio growing by 22%. Losses are higher this year as equity markets and bond markets both continue to take a dive, but the future looks good as the duration of the portfolio, substantially in fixed income instruments, is lower than two years now meaning pretty soon issues will rollover at higher prevailing rates, benefiting from the rate hiking that has been underway since the beginning of the year.
Bottom Line
The valuation case isn't bad. P/B is around 1.5x, which is consistent with a growing profile and constructive pricing in specialty markets. For context, RLI Corp. (RLI), another specialty player, is at more than a 4x P/B. What's more, is that Warburg Pincus has a minority stake in TIPT that valued it then at over $800 million where it currently trades just below $600 million in market cap.
Insurance is generally pretty attractive right now, especially where duration is explicitly pretty low as in TIPT's case. Bonds had recently sold off, but the bottoming out of the market as further rate hikes and a higher for longer curve become digested help make a case for stocks that get some positive backflow from higher costs of capital. TIPT accomplishes this as well as demonstrating growth in a specialty market. It's worth some consideration.
For further details see:
Tiptree: Healthy Premium Remains On Extraordinary Growth