Tiptree Financial Q4 2023 Earnings Call Transcript

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February 29, 2024

Key Takeaways

  • Full-Year Revenue and Dividend Increase: Tiptree’s 2023 revenues rose 18% to $1.6 billion, with an adjusted return on equity of 15%, and the company boosted its quarterly dividend by 20% to $0.06 per share.
  • Record Specialty Insurance Results: Vertegra Group achieved 21% premium and premium equivalent growth, a combined ratio of 90%, and a 29% adjusted return on equity driven by disciplined underwriting and technology scalability.
  • Strong Q4 Financial Performance: Fourth-quarter revenues increased 24% (ex-unrealized gains/losses), net income reached $6.9 million, and adjusted net income rose 43% year-over-year to $13.9 million.
  • Mortgage Origination Headwinds: Elevated mortgage rates led to a 23% decline in 2023 origination volumes and a $2.1 million pre-tax loss in Tiptree Capital, though the servicing book remained stable and a rate downturn could improve future results.
  • Robust Investment Portfolio: Net investment income jumped to $38 million from $15 million, with a $1.3 billion portfolio rated AA and an embedded yield of 3.3%, positioning Tiptree to reinvest at higher rates as maturities occur.
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Earnings Conference Call
Tiptree Financial Q4 2023
00:00 / 00:00

There are 3 speakers on the call.

Operator

Greetings. Welcome to Tiptree Inc. 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the conference over to Scott McKitty, Chief Financial Officer. Thank you. You may begin.

Speaker 1

Good morning, and welcome to our Q4 2023 earnings call. Joining me today are Michael Barnes, our Executive Chairman and Jonathan Alani, CEO. Some of our comments today will contain forward looking statements 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. In today's call, we will discuss non GAAP financial metrics, which are described in more detail in our presentation.

Speaker 1

Reconciliations of these metrics and additional disclosures can be found in our SEC filings, the appendix to our presentation and on our website. With that, I will turn the call over to Michael.

Speaker 2

Thanks, Scott, and good morning to everyone. 2023 proved to be a year of exceptional performance for Tiptree. Our operating businesses continued to build upon their track record of growth and profitability, resulting in an 18% increase in revenues to $1,600,000,000 for the year, alongside an adjusted return on equity of 15%. In light of our continuing positive performance, we are pleased to have increased our quarterly dividend by 20% to $0.06 per share. The Vertegra Group, our specialty insurance business achieved record results for the year with premium and premium equivalent growth of 21% and an adjusted return on equity of 29%.

Speaker 2

Underwriting results remain consistent, posting a combined ratio of 90%, underscoring company's tradition of disciplined specialized underwriting. Although the recent market environment has been unconducive for public offering, we firmly believe Fortegra is strategically well positioned to maintain the trajectory of consistent growth and sustained underwriting profitability over the long term. Giftree Capital finished the year with $178,000,000 of capital deployed across our mortgage origination and servicing business, our liquid investment portfolio and cash. At Reliance, continued high mortgage rates kept origination volumes muted, although the income and sustained market value of our retained servicing book allowed the business to remain stable for the year. This result significantly outperforms the broader mortgage industry for 2023.

Speaker 2

We maintain a positive outlook for the business with greater potential for future profit as mortgage rates stabilize. For Tiptree, we remain focused on seeking opportunities to achieve long term absolute returns. Our balance sheet remains well capitalized with no holding company debt and cash for future deployment. With strong performance in 2023, we are well positioned for growth and we maintain a positive outlook for the company. With that, I'll turn the call over to Scott to discuss our financial results.

Speaker 1

Thank you, Michael. For the quarter, Tiptree's revenues were up 24%, excluding unrealized gains and losses, driven by growth in insurance underwriting and fee based service revenues. Consolidated net income of $6,900,000 was driven by growth insurance operations and unrealized investment gains, partially offset by the sale of our 5 vessels in 2022. Impacting the 4th quarters of 20232022 was a $9,000,000 deferred tax expense related to the deconsolidation of Fortegra for tax purposes. This deferred tax liability is only crystallized on a sale of Fortegra.

Speaker 1

Adjusted net income for the quarter was 13,900,000 dollars representing an increase of 43% compared to the prior year period. As Michael mentioned, our balance sheet remains well positioned. We ended the quarter with a highly rated liquid investment portfolio, substantial cash balances and we continue to maintain a conservative position with respect to our loss reserves at the insurance company. Turning to our insurance results for the quarter. Gross written premiums and equivalents increased 38 percent year over year to $724,000,000 driven by robust growth in specialty E and S and admitted insurance lines, along with the benefits from a book roll transaction with 1 of our commercial MGA partners.

Speaker 1

Operationally, there continues to be robust submission activity and a healthy pipeline of new underwriting opportunities across our specialty lines. Net written premiums were $384,000,000 for the quarter, an increase of 50 7% in line with the growth in gross written premiums, along with increased retention on our whole account quota share agreement from 30% to 40%, which went effective April 1, 2023. Revenues grew by 25% to 433,000,000 dollars and the combined ratio remained consistent at 89.8%. Underwriting improvements were offset by an increased expense ratio as we continue to invest in data science initiatives, bolster our excess and surplus lines capabilities and continue to expand in Europe. Adjusted return on equity for the year was 29% driven by growth, profitable underwriting and the scalability of our technology enabled platform.

Speaker 2

Flipping to

Speaker 1

the investment results. For the year, net investment income when combined with interest on cash and cash equivalents yielded $38,000,000 compared to $15,000,000 in the prior year. With the decline in rates, we also experienced a $19,000,000 recovery that impacted comprehensive income in 2023. The portfolio ended the year at 1,300,000,000 with 90% invested in a combination of high credit quality, liquid securities and cash with an average S and P rating of AA. Our embedded book yield was 3.3% at year end, up nearly 60 basis points from the prior year, driven by improving yields on short duration fixed income securities and money market funds.

Speaker 1

The duration of our fixed income portfolio was approximately 2.5 years, which positions us well as maturities roll and the portfolio grows to reinvest at higher yields. Each quarter, we include the next set of charts to display a snapshot of Ortega's results over time. Gross written premium and equivalents have grown 20 6% annually since 2019, primarily driven by organic growth. For the year, the team delivered $2,700,000,000 of premiums, an increase of 21 percent over prior year. Excess and surplus lines represented 30% or just over $800,000,000 of our 2023 written premiums and equivalents.

Speaker 1

The combined ratio remains consistent in the low 90s, improving 2 points over the past 5 years. As the business mix increasingly trends toward specialty P and C lines, you'll notice a rise in the loss ratio, which is more than compensated for by decreases in our acquisition expenses and operational efficiencies. Adjusted net income crossed the $100,000,000 mark this year, ultimately delivering $116,000,000 or 38% growth year over year. Looking ahead, we anticipate the continued hard market environment in tandem with adding new agents and distribution partners will continue to extend Fortegra's growth profile. Turning to Tiptree Capital, the pre tax loss for the quarter was $2,100,000 driven primarily by losses on Invesque and our mortgage servicing asset, partially offset by gains on other investments.

Speaker 1

Mortgage originations for the year were 877,000,000 down 23% from the prior year as elevated mortgage rates impacted volumes across the industry. As Michael mentioned, with expectations of lower mortgage rates ahead, we expect origination volumes and margins to normalize throughout 2024. Tiptree Capital ended the quarter with $178,000,000 of book value with 2 thirds allocated to highly liquid investments. Now I'll pass the call back to Michael to wrap up our prepared remarks.

Speaker 2

Thanks, Scott. Our Q4 was a great finish to the year and a true testament to the hard work and expertise of Tiptree's team of professionals and those of our related companies. We began 2024 well positioned financially and we could not be more excited about Tiptree's future. Ortegra once again posted record results. The pipeline of new opportunities continues to build and specialty market conditions remain favorable.

Speaker 2

We at Tiptree will continue to look for opportunities to allocate capital for long term value creation. I'd now like to turn the call back over to the operator for Q and A. Operator?

Operator

Thank There are no questions at this time. We will conclude today's conference. Thank you for your participation. You may now disconnect.

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