TIPTREE INC. Q2 FY2023 earnings call

Management Statement and Operational Highlights

• Fortegra completed strong first half 2023, with record results, driven by specialty premiums, especially excess and surplus lines. Markets for specialty P&C risk favorable due to capital shortfalls, inflation, and catastrophic events.
• Tiptree's balance sheet well capitalized, no holding company debt, substantial cash. Tiptree Capital's mortgage business had modest loss first half but positive returns in Q2, expected to normalize.
• Tiptree's sum of the parts value: Ownership of Fortegra represents over $23 per diluted Tiptree share, total sum of parts value ~$28.69 per diluted share or more than $1 billion of value.

Segment Performance

• Fortegra:
  • First half 2023: Gross written premiums and equivalents $1.6 billion, up 34% y-o-y. Excess and surplus lines and services offerings were major contributors. For the year, revenues increased to $786 million, up 18% from prior year. Combined ratio 91% for the year, adjusted return on equity 30%. Second quarter: Premiums and equivalents $855 million, up 44% y-o-y; revenues $385 million, up 31% y-o-y; combined ratio 90.5%. Investment portfolio $1.2 billion, up 22% y-o-y, 91% in high credit quality liquid securities. Over last 12 months: Record premiums $3.1 billion, record adjusted net income $96.8 million.
• Tiptree Capital: Pretax income $2.8 million for the quarter, driven by mortgage business and investments. Reliance had pretax income $1.3 million despite mortgage volumes down 26% in Q2; mortgage servicing portfolio and cost management provided stability, expected origination volumes and margins to normalize.

Guidance

• Anticipate hard market environment to extend Fortegra's expansion.
• Expect to reinvest retained earnings and cash flow from operations into growing specialty insurance lines.
• Tiptree Capital expects mortgage origination volumes and margins to normalize as rates stabilize.

Risks

• Market volatility affecting Tiptree Capital's mortgage business.
• Inflationary pressures impacting Fortegra's services margin.
• Uncertainties in interest rate movements affecting investment portfolio duration.

Question and Answer

• Q: What drove acceleration in Fortegra's premium growth and attractive E&S lines?

A: The bread and butter is E&S and admitted lines with aggregate premium <$10 million per line. 80% of agents are <$10 million. E&S lines have grown from little to ~$780 million last 12 months, driven by casualty, property, professional liability, general liability, contractors, and auto lines in services.

• Q: How Fortegra balances investing for growth and expense ratio?

A: Management focuses on monitoring expenses, especially in inflation. Invests in technology, data insights, scalable platform to drive efficiencies, improve underwriting, and support growth while maintaining expense ratio.

• Q: Reliance's expense management and ROE?

A: Reliance's management proactively controlled expenses by cutting personnel and operations during rate volatility. Historical high ROE in good times, e.g., near 100% return on capital in 2020-2021; no targeted ROE but expects exceptional returns as market conditions improve.