Press Release

Tiptree Financial Inc. Reports Financial Results for the Nine Months Ended September 30, 2013

Company Release - 11/14/2013 9:17 AM ET

NEW YORK, Nov. 14, 2013 /PRNewswire/ -- Tiptree Financial Inc. ("Tiptree", "the Company" or "we") (NASDAQ: TIPT), today filed its Quarterly Report on Form 10-Q and announced its financial results for the nine months ended September 30, 2013.

Tiptree is a diversified holding company which conducts its operations through its operating subsidiary Tiptree Operating Company, LLC ("Operating Subsidiary"). We operate in four segments: insurance and insurance services, specialty finance (including corporate, consumer and tax-exempt credit), asset management and real estate. Tiptree is the sole managing member of, and owns approximately 25% of, Operating Subsidiary. As the sole managing member of Operating Subsidiary, Tiptree operates and controls all of the business and affairs of Operating Subsidiary and its subsidiaries and consolidates the financial results of Operating Subsidiary and its subsidiaries. Tiptree Financial Partners L.P's ("TFP") ownership of approximately 75% of Operating Subsidiary is reflected as a non-controlling interest in Tiptree's consolidated financial statements. Tiptree's Class A common stock is traded on Nasdaq and has both economic and voting rights; Tiptree's Class B common stock is held by TFP and has voting but no economic rights.

  • Economic Net Income of Operating Subsidiary for the nine months ended September 30, 2013 was $29.9 million. Economic Net Income available to Tiptree Class A stockholders for the nine months ended September 30, 2013 was $6.9 million, or $0.67 per diluted Class A share, compared with an Economic Net Income of $5.7 million, or $0.55 per diluted Class A share, for the nine months ended September 30, 2012. Economic Net Income for the nine months ended September 30, 2013 was primarily driven by strong results in corporate credit, real estate, insurance and insurance services and asset management. 
                     
  • Dilutive Tiptree Economic Book Value per Class A share was $9.98 at September 30, 2013, compared with Dilutive Tiptree Economic Book Value per Class A share of $9.30 at December 31, 2012.
                        
  • GAAP net income of Operating Subsidiary for the nine months ended September 30, 2013 was $29 million. GAAP net income available to Tiptree Class A stockholders for the nine months ended September 30, 2013 was $6.6 million, or $0.64 per diluted share, compared with GAAP net income available to Class A stockholders for the nine months ended September 30, 2012 of $6.5 million, or $0.63 per diluted share. A reconciliation of Economic Net Income and Economic Book Value to reported GAAP results is attached.

The nine months ended September 30, 2013 have been a transformative period for Tiptree.  The following highlights certain developments during this period, which are described in more detail in the Form 10-Q filed by Tiptree today.

  • Contribution Transactions. We completed a transaction we refer to as the Contribution Transactions, creating Tiptree's current capital and ownership structure on July 1, 2013. TFP and Care Investment Trust Inc. (prior to the Contribution Transactions, "Care Inc.") each contributed substantially all of their assets to Operating Subsidiary in exchange for ownership in Operating Subsidiary.
                 
  • Acquisitions and dispositions. We sold our membership interests in an entity that owned fourteen senior living facilities, which we refer to as the Bickford Portfolio, on June 28, 2013 for net cash of $44 million and a net gain of approximately $15.5 million. We purchased an aggregate of approximately 66.7% of the voting equity interests of Siena Capital Finance LLC ("Siena") for an aggregate of $10 million in two stages on April 2013 and July 2013. A capital contribution by another investor in Siena diluted our interest in Siena to approximately 62% in October 2013. We entered into a definitive agreement to make a $5 million loan to Luxury Mortgage Corp. ("Luxury") on April 2013. Half of the loan has been funded and the remainder will be funded upon regulatory approval and other closing conditions, whereupon we will receive approximately 67.5% of Luxury's common stock.
                   
  • Asset Management Activity. Telos CLO 2013-3, Ltd. ("Telos 3") and Telos CLO 2013-4, Ltd. ("Telos 4") became effective on June 5, 2013 and October 23, 2013, respectively. In anticipation of issuing CLO notes for Telos CLO 2013-5, Ltd. ("Telos 5"), Telos entered into a $100 million warehouse credit agreement on August 6, 2013, which was increased to $140 million on September 25, 2013.
                        
  • Debt Financing. Operating Subsidiary borrowed $50 million under a Credit Agreement entered into with Fortress Credit Corp. ("Fortress") on September 18, 2013. The Credit Agreement includes an option to borrow an additional $125 million, subject to satisfaction of certain customary conditions.
                  
  • Equity Activity. Our Class A common stock has been trading on the Nasdaq Capital Market under the symbol "TIPT" since August 9, 2013. A registration statement facilitating public resales of approximately 7.2 million shares of our Class A common stock owned by TFP prior to the Contribution Transactions and distributed to TFP limited partners in redemption of partnership interests in TFP became effective on October 18, 2013.

Tiptree's board of directors reviewed a variety of factors including the attractive risk adjusted yields available on investment opportunities that the Company is currently considering, and the relatively low year-to-date expected tax obligations of Operating Subsidiary's investors, and has unanimously decided not to declare a dividend at this time.

Cautionary Statement Regarding Forward-Looking Statements

This release contains "forward-looking statements" which involve risks, uncertainties and contingencies, many of which are beyond the Company's control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements. All statements contained in this release that are not clearly historical in nature are forward-looking, and the words "anticipate," "believe," "estimate," "expect," "plan," "target," and similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements include, but are not limited to, statements about the Company's plans, objectives, expectations and intentions. The forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecast in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to those described in the section entitled "Risk Factors" in the Company's Quarterly Report on Form 10-Q, and as described in the Company's other filings with the Securities and Exchange Commission ("SEC"). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date of this release. The factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements.  Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statements.

Economic Net Income

Economic Net Income ("ENI") is a non-GAAP financial measure of profitability which Tiptree uses to measure the performance of its core business.  Management believes that ENI reflects the nature and substance of the economic results of Tiptree's businesses. Management also uses ENI as a measurement for determining incentive compensation. In addition to the other adjustments indicated in the table below, ENI includes the following adjustments: (i) adjustment to results from real estate to eliminate non-cash items similar to adjusted funds from operations ("AFFO") which is a non-GAAP financial measure widely used in the real estate industry, (ii) in our insurance segment, adjustment for fair value on available for sale securities, which is a non-GAAP measure frequently used throughout the insurance industry, and (iii) in our specialty finance segment, Variable Interest Entities ("VIEs"), such as Collateralized Loan Obligations ("CLOs") are shown as if not consolidated. Reconciliation of ENI to the most comparable GAAP measure is presented below.

ENI as used by Tiptree may not be comparable to similar measures presented by other companies as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. ENI should be considered in addition to, not as a substitute for, financial measures determined in accordance with GAAP.

The following table details the individual revenue and expense components of the non-GAAP measure Economic Net Income for the periods indicated (unaudited in thousands):





Nine month period ended

September 30, 2013


Nine month period ended

September 30, 2012

Revenues:





Interest income


$

408



$

396


Dividend/distribution income


15,653



15,430


Realized gains (losses)


(1,015)



414


Unrealized gains


20,273



16,589


Management fee income


12,281



3,351


Total revenues


$

47,600



$

36,180


Expenses:





Compensation expense


9,839



3,096


Distribution expense (convertible preferred)


1,747



1,979


Interest expense


1,496



933


Professional fees and other


4,633



3,081


Total expense


$

17,715



$

9,089


Economic Net Income (loss) before management fee expenses and waivers and incentive allocation


$

29,885



$

27,091


Less: Management fee expenses (1)




1,996


Less: Management fee expenses waived (1)




(1,066)


Economic Net Income before incentive allocation


29,885



26,161


Less: Incentive allocation (1)




3,459


Economic Net Income of Operating Subsidiary


29,885



22,702


Less: Economic net income attributable to TFP


$

22,450



$

17,052


Economic Net Income of Tiptree before tax provision


7,435



5,650


Less:  Tax provision attributable to Tiptree


$

567



$


Economic Net Income of Tiptree


$

6,868



$

5,650




(1) Following TFP's acquisition of TAMCO in June 2012 described in Note 1 to the financial statements, TAMCO no longer pays management or incentive fees.


Reconciliation of GAAP Book Value to Economic Book Value

Economic Book Value ("EBV") is a non-GAAP financial measure which Tiptree uses to evaluate the performance of its core business. Management believes that EBV provides greater transparency and enhanced visibility into the underlying profitability drivers of our business and provides a useful, alternative view of the economic results of Tiptree's businesses. EBV includes the following adjustments: (i) reversal of GAAP value for TAMCO and CLO VIEs and replacement with fair value, (ii) addition of life to date AFFO adjustments for real estate operations, (iii) reclassification of convertible preferred distributions to expense and (iv), foreign exchange timing adjustment. Reconciliation of EBV to the most comparable GAAP measure is presented below.

EBV as used by Tiptree may not be comparable to similar measures presented by other companies as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. EBV should be considered in addition to, not as a substitute for, financial measures determined in accordance with GAAP. The following is a reconciliation of GAAP book value attributable to Tiptree to EBV as of September 30, 2013 and December 31, 2012 (in thousands except share data):





September 30, 2013


December 31, 2012

GAAP Net Assets to Tiptree Class A Stockholders


$

114,234



$

108,357


Less cash and cash equivalents held directly at Tiptree


3,884



4,089


Plus portion of NCI held by TFP


335,765



315,640


GAAP Net Assets of Operating Subsidiary


446,115



419,908


Reversal of consolidation of TAMCO (including VIEs)(1):


(146,373)



(120,513)


Fair values of CLOs (2)


63,173



30,737


Value of TAMCO (3)


57,661



56,353


Adjustments to results from real estate operations (4)


1,857



5,603


TFP convertible preferred reclass of distributions to expense (5)




(810)


Foreign exchange reserve (6)




(1,174)


Economic Operating Subsidiary Net Assets (before dilutive adjustments)


$

422,433



$

390,104


Dilutive adjustments (7)


25,894



25,894


Economic Operating Subsidiary Net Assets (after dilutive adjustments)


$

448,327



$

415,998


Basic Units outstanding (8)


41,229



41,049


Dilutive Unit adjustments (7)


3,690



3,685


Dilutive Economic Operating Subsidiary Units Outstanding


44,919



44,734


Basic Economic Book Value Per Unit (9)


$

10.25



$

9.50


Dilutive Economic Book Value Per Unit (9)


$

9.98



$

9.30


Tiptree Class A Economic Book Value





Tiptree Class A shares outstanding


10,260



10,226


Basic Economic Tiptree Book Value Per Class A Share


$

10.25



$

9.50


Dilutive Economic Tiptree Book Value Per Class A Share


$

9.98



$

9.30




(1) Under GAAP, Tiptree is required to consolidate all of the assets and liabilities of the VIEs managed by TAMCO on Tiptree's balance sheet regardless of Tiptree's economic interest. See Note 2(c) to the consolidated financial statements. Adjustment is reversal of consolidation of TAMCO and VIEs.


(2) Adjustment is to include the fair value of our ownership position in the VIEs which has been reversed as described in note (1) above.


(3) Adjustment to value TAMCO at the lower of cost and market. The December 31, 2012 amount reflects Tiptree's initial valuation of the purchase price based on the March 31, 2012 value of partnership units issued in consideration for TAMCO. The September 30, 2013 amount reflects Tiptree's final valuation of the purchase price based on the June 30, 2012 value of partnership units issued in consideration for TAMCO.


(4) Adjustments to results from real estate operations reverses the amounts, since inception, related to the effects of straight lining lease revenue, expenses associated with depreciation and amortization , certain transaction expenses, non-cash transactions expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustment for unconsolidated partnerships and joint ventures.


(5) Convertible preferred distribution was reclassified as expense for purposes of ENI. This adjustment conforms the reclassification for EBV purposes.


(6) A reserve was established for EBV purposes as of December 31, 2012 reflecting a timing difference relative to GAAP recognition of yen foreign exchange. Such reserve was subsequently reversed.


(7) Adjustments include the proceeds that would be received by Operating Subsidiary and the units issued assuming exercise of all outstanding warrants.


(8) Excludes 6,474 units issued in respect of shares of Class A common stock to directors of Tiptree as part of their annual retainer.


(9) As a result of the Contribution Transactions, Operating Subsidiary is owned approximately 25% by Tiptree and approximately 75% by TFP. Tiptree's ownership is equal to the number of shares of Class A common stock and pursuant to Operating Subsidiary's limited liability agreement this ratio will remain 1:1. TFP's ownership is equal to 2.798 times the number of TFP partnership units outstanding and this ratio is expected to remain 2.798:1. There were 11,068 and 11,016 partnership units outstanding as of September 30, 2013 and December 31, 2012, respectively. The basic EBV per partnership unit was $28.68 and $26.59 as of September 30, 2013 and December 31, 2012, respectively. The diluted EBV per partnership unit was $27.92 and $26.02 as of September 30, 2013 and December 31, 2012, respectively.


Reconciliation of GAAP Net Income to Economic Net Income

The following is a reconciliation of GAAP Net Income attributable to Tiptree to ENI for the nine month periods ended September 30, 2013 and 2012 (in thousands):



Nine month period

ended September

30, 2013

Nine month period

ended September

30, 2012

GAAP Net Income of Tiptree

$

6,563


$

6,508


Plus:  Tax provision attributable to Tiptree

567



Plus:  Portion of NCI held by TFP

21,589


19,611


GAAP net income of Operating Subsidiary

$

28,719


$

26,119





Adjustments:



Adjustments to results from real estate operations (1)

(3,758)


2,121


Effect of change in majority ownership of subsidiaries (2)

(1,673)


460


Fair value adjustments to carrying value (3)

939


6,385


Reversal of VIEs net losses (gains) attributable to TFP (4)

6,231


(3,726)


Reversal of TAMCO net gains for periods prior to acquisition of TAMCO (5)


(6,560)


TFP convertible preferred reclass of distributions to expense (6)

(1,747)


(1,978)


Foreign exchange reserve (7)

1,174



Amortization of start-up expenses (8)


(119)


Economic Net Income of Operating Subsidiary

29,885


22,702


Less: Economic net income attributable to TFP

22,450


17,052


Economic Net Income of Tiptree before tax provision

7,435


5,650


Less:  Tax provision attributable to Tiptree

567



Economic Net Income of Tiptree

$

6,868


$

5,650




(1) Adjustments to results from real estate operations includes the effects of straight lining lease revenue, expenses associated with depreciation and amortization, certain transaction expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustments for unconsolidated partnerships and joint ventures.


(2) Effect of change in majority ownership of subsidiaries is the dilutive effect of Care Inc.'s issuance of shares related to the Contribution Transactions and stock-based compensation, the effect of Tiptree's increased ownership of Philadelphia Financial due to accretion of preferred shares, and the increase in ownership of Siena.


(3) Adjustment is to account at fair value the CLO subordinated notes held by Tiptree and PFG's available-for-sale securities. Fair values are obtained from an independent third party pricing source.


(4) Reversal of VIEs net losses/(gains) attributable to Tiptree (see reconciliation table below in thousands):


 




Nine month period ended

September 30, 2013

 







Tiptree pro rata portion of

Net Income


Net Income (net of 1% NCI)


Tiptree's ownership %

Telos 1


$

(18,262)



$

(18,079)



7.11%

Telos 2



(5,977)



(5,917)


95.45%

Telos 3



1,441



1,427


19.79%

Telos 4



563



557


71.08%

Total


$

(22,235)



$

(22,012)













Nine month period ended

September 30, 2012

 







Tiptree pro rata portion of

Net Income


Net Income (net of 1% NCI)


Tiptree's ownership %

Telos 1


$

2,849



$

2,821



7.11%

Telos 2



3,731



3,694


95.45%

Total


$

6,580



$

6,515



















(5) The purchase of TAMCO on June 30, 2012 was accounted for as a combination of entities under common control. As a result, the assets and liabilities of TAMCO were presented as if TAMCO had been consolidated by Tiptree on January 1, 2010. For non-controlling interest, we are reversing the effect of this recasting of financial information for prior periods.


(6) Convertible preferred distribution reclassified as expense for purposes of ENI so as to reflect a cost of capital charge for outstanding convertible preferred. This class automatically converted to common shares effective July 1, 2013.


(7) Reflects the timing difference on the recognition of yen exposure GAAP versus ENI.


(8) Amortization of expenses associated with the start-up of Tiptree in 2007. The amortization period ended on June 30, 2012.


 



TIPTREE FINANCIAL INC.
AND SUBSIDIARIES

Consolidated Balance Sheet (Unaudited)

(in thousands, except share and per share data)




September 30, 2013


December 31, 2012




Assets





Cash and cash equivalents – unrestricted


$

123,721



$

88,563


Cash and cash equivalents – restricted


34,210



20,748


Due from separate accounts


2,467



2,128


Investments in trading securities, at fair value


39,333



59,982


Investments in available for sale securities, at fair value (amortized cost: $17,546 and $15,693 in 2013 and 2012, respectively)


17,721



16,303


Investments in loans, at fair value


128,467



20,423


Loans owned, at amortized cost – net of allowance


32,443



5,467


Investments in partially-owned entities


11,075



8,388


Derivative financial instruments, at fair value


2



834


Due from brokers, dealers, and trustees


247



8,539


Real estate


62,492



118,827


Reinsurance receivables


9,080



8,802


Management fee receivables


255



249


Policy loans


104,875



99,123


Insurance policies and contracts acquired


39,809



41,379


Deferred policy acquisition costs


4,543



3,878


Separate account assets


4,353,490



4,035,053


Deferred tax assets


4,834



5,342


Notes receivable


6,071




Accrued interest and dividends receivable


1,048



1,642


Intangible assets


115,286



121,033


Goodwill


4,243



3,088


Assets of consolidated CLOs


1,491,744



851,660


Other assets


16,777



12,351


Total assets


$

6,604,233



$

5,533,802


Liabilities and Stockholders' Equity





Liabilities:





Derivative financial instruments, at fair value


$



$

3,172


U.S. Treasuries, short position


18,945



20,175


Mortgage notes payable


33,254



95,232


Notes payable


146,500



100,416


Loans payable


58,749




Policy liabilities


114,930



108,868


Separate account liabilities


4,353,490



4,035,053


Due to brokers, dealers and trustees


47,120




Accrued interest payable


293



420


Liabilities of consolidated CLOs


1,250,931



620,310


Other liabilities and accrued expenses


24,243



14,568


Total liabilities


$

6,048,455



$

4,998,214


Commitments and contingencies










Stockholders' Equity:





Preferred stock: $0.001 par value, 100,000,000 shares authorized,

none issued or outstanding


$



$


Common stock - Class A: $0.001 par value, 200,000,000 shares

authorized, 10,260,379  and 10,226,250 shares issued and outstanding

respectively


11



11


Common stock - Class B: $0.001 par value, 50,000,000 shares

authorized, 30,968,877 and 0 shares issued and outstanding

respectively


31




Additional paid-in capital


97,250



96,144


Accumulated other comprehensive income


290



311


Retained earnings


16,652



11,892


Total stockholders' equity of Tiptree Financial Inc.


114,234



108,358


Non-controlling interest


354,667



324,595


Appropriated retained earnings of consolidated TAMCO


86,877



102,635


Total stockholders' equity


555,778



535,588


Total liabilities and stockholders' equity


$

6,604,233



$

5,533,802



 


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES

Summary Consolidated Statements of Operations (unaudited in thousands)




Three month

period ended

September 30,

2013


Three month

period ended

September 30,

2012


Nine month

period ended

September 30,

2013


Nine month

period ended

 September 30,

2012

Revenues:









Net realized (losses) gains and change in unrealized appreciation (depreciation) on investments:









Net realized gains (losses)


$

669



$

620



$

(770)



$

926


Change in unrealized appreciation


5,314



1,816



4,227



9,186


Net realized and unrealized gains


5,983



2,436



3,457



10,112


Investment income:









Interest income


3,916



2,317



11,131



7,498


Separate account and administrative service fees


18,286



15,372



53,192



25,119


Rental revenue


1,363



429



3,279



1,254


Income attributable to consolidated CLOs


11,256



23,804



33,475



50,420


Other income


325



734



701



2,289


Total investment income


35,146



42,656



101,778



86,580


Total net realized and unrealized gains and

      investment income


41,129



45,092



105,235



96,692


Expenses:









Interest expense


4,110



3,348



12,008



4,416


Payroll expense


8,741



7,448



26,277



12,746


Professional fees


2,252



4,755



6,204



9,179


Change in future policy benefits


1,189



1,047



3,502



3,042


Mortality expenses


2,633



2,542



7,885



7,338


Commission expense


631



496



1,805



1,489


Depreciation and amortization expenses


1,215



593



3,382



1,527


Expenses attributable to the consolidated CLOs


12,783



6,183



34,021



25,190


Other expenses


4,240



1,153



10,722



4,922


Total expenses


37,794



27,565



105,806



69,849


Income before taxes from continuing operations


3,335



17,527



(571)



26,843


Provision for income taxes


1,434



735



4,549



162


Income from continuing operations


1,901



16,792



(5,120)



26,681


Discontinued  operations:









Gain on sale of Bickford portfolio, net






15,463




Income from discontinued operations, net




721



1,647



2,294


Provision for income taxes









Discontinued Operations, net




721



17,110



2,294


Net income


1,901



17,513



11,990



28,975


Less net income attributable to the noncontrolling interest


7,008



9,485



21,185



19,652


Less net (loss) income attributable to the VIE subordinated noteholders


(6,937)



4,939



(15,758)



2,815


Net income available to common stockholders


$

1,830



$

3,089



$

6,563



$

6,508



















 

SOURCE Tiptree Financial Inc.