Description

Note:  6x P/E multiple above asssumes TIPT Market Cap less Tiptree Capital at Book Value relative to TIPT's portion of Fortegra's LTM earnings.

This write-up provides an overview of the Tiptree (TIPT) thesis, which can be summarized as follows:

• Fortegra is a high-quality, ‘crown jewel’ business that is masked by a holding company structure
• Fortegra’s legitimacy was recently validated by a minority investment from Warburg Pincus
• Both Warburg Pincus and TIPT’s extremely aligned Insiders are incentivized to maximize value
• A Fortegra monetization event will likely occur and the market should better appreciate its value
• A conservative valuation approach implies TIPT’s fair value is $25/sh+, yet stock is $16/sh today

‘Crown Jewel’ Asset Masked by Holding Company Structure

TIPT is a holding company (“Holdco”). TIPT’s management seeks to find investment opportunities and support portfolio company executives with the mutual goal of maximizing shareholder value. Currently, TIPT reports (2) segments: 1) Insurance and 2) Tiptree Capital. Tiptree Capital consists of investments in a mortgage business, a senior housing business, and the remnants of a maritime shipping business.  Meanwhile, the Insurance business (“Fortegra”) is TIPT’s most valuable asset, but it is masked by TIPT’s Holdco structure. We think the market will eventually appreciate Fortegra and thus, TIPT’s intrinsic value.

Tiptree Capital Can Conservatively Be Valued At Book Value

At the start of 2022, Tiptree Capital owned several tankers and dry-bulk vessels. In LTM, TIPT capitalized on elevated valuations and sold all tanker & dry-bulk vessels for $117mm. TIPT’s timely exit resulted in a net gain of $35mm. The maritime divestitures highlight how TIPT’s book value may understate the fair value of Tiptree Capital’s assets. Yet for conservatism, we assume Tiptree Capital is only worth the stated book value of $214mm, or ~$6/sh to TIPT shareholders. Key components of current book value includes stakes in Reliance (loan origination/service firm), Invesque (senior housing business), and net cash.

Fortegra Is A High-Quality Firm With Competitive Advantages

~3/4 of Fortegra’s revenue stems from niche, specialty-insurances lines in the U.S., such as: professional liability, D&O liability, hotel-owner liability, and credit life. ~1/4 of Fortegra’s revenue comes from warranty products/services in both the U.S. & EU. These warranty products/services protect consumers from losses on cellphones, automobiles, appliances, furniture, etc. Simply put, large insurance firms avoid Fortegra’s niches. Meanwhile, Fortegra uses data/analytics/technology to underwrite policies and process claims more efficiently than small competitors. Fortegra also aligns agents’ pay with underwriting results, thereby: 1) increasing alignment, 2) increasing retention, and 3) attracting high-performing agents.

Fortegra’s Revenue & Profit Growth Has Been Exceptional

From 2017–2Q23 LTM, Fortegra had 21% organic CAGR in Written Premium, which led to 22% Revenue CAGR and 27% Adj Net Income CAGR during the same era. Fortegra’s comprehensive offering and proven track-record have combined with growth tailwinds and ‘hard’ pricing to drive robust revenue growth. Meanwhile, Fortegra prides itself on disciplined underwriting standards that result in consistent profitability. Fortegra’s growth should continue: TIPT’s Chair said (Aug 2023), “We anticipate the hard market environment will extend Fortegra's expansion as it has over the past several years.” Further, TIPT’s Fortegra Outlook (Aug 2023) is: “Expect continued growth and consistency of underwriting”

Prior Investment Provides Framework For Valuing Fortegra

To unlock Fortegra’s intrinsic value, TIPT pursued a Fortegra IPO in 2021. The IPO was pulled for a handful of non-relevant reasons. Later in 2021, Warburg Pincus bought ~24% of Fortegra at an implied valuation of ~$800mm. Warburg Pincus is a globally respected/successful PE firm, so their investment is notable. Warburg Pincus paid 13.5x Adj Net Income for their Fortegra investment. Since then, Fortegra’s Adj Net Income has increased remarkably from $47mm to $97mm. Simply applying a 13.5x multiple to LTM Adj Net Income implies Fortegra is worth ~$23/sh to TIPT shareholders. Notably, TIPT shares trade for just ~$16/sh today and obviously, Fortegra’s implied valuation will continue to grow with future profits.

Warburg Pincus Will Accelerate Fortegra’s Growth & Value Monetization

Per discussions with TIPT, Warburg Pincus is having a materially positive impact on Fortegra’s fundamentals (and thus, intrinsic value). For example, TIPT cited both revenue synergies (such as knowledge and volume benefits from other Warburg Pincus portfolio firms) and cost efficiencies (such as back-office technologies to minimize expenses) that stemmed from Warburg Pincus’ work with Fortegra. Ultimately, Warburg Pincus will seek to exit its Fortegra investment. We believe both Warburg Pincus and TIPT will seek a value-unlocking transaction, as soon as 2024. By 2026, Warburg may request a qualifying IPO of Fortegra. If no IPO occurs by 2028, Warburg may ‘drag’  Tiptree to a full sale of Fortegra.

Fortegra’s CEO Is Accomplished & Has Great Team Around Him

Fortegra CEO Richard Kahlbaugh is an insurance veteran. He was CEO of Volvo’s Global Insurance Group, then joined Fortegra as COO in 2003 and became CEO in 2007. Kahlbaugh is a self-proclaimed “curmudgeon” and his conservatism was evident during our conversations. Despite his conservatism, he has consistently/accurately predicted the sustainability of the ‘hard’ market. Therefore, it is conviction-building that Kahlbaugh still expects growth to continue in both Fortegra’s U.S. and EU geographies.  Highlighting the sustainability of the team, Chief Underwriting Officers (Mark Rattner & Sanjay Vara) both joined Fortegra in 2016. As stated previously, Fortegra’s Adj Net Income compounded at 27% since 2017.

TIPT’s Corporate Costs Declined After Shareholder Frustration

From 2019 to 2021, TIPT’s Corporate Costs (Employee Compensation Benefits + Other Expenses) grew from $16.9mm to $18.6mm. Then during TIPT’s 2Q22 Earnings Call, several Shareholders expressed significant frustration about TIPT’s growing Corporate Cost burden. Changes did not occur immediately, as TIPT’s Corporate Cost spiked to $20.0mm in 2022. But, TIPT promoted its Deputy CFO to CFO in 1Q23 and since then, LTM Corporate Costs have trended down to $17.0mm. While we still think TIPT can further streamline Corporate Costs, we are encouraged by the recent trend. We think it is prudent to capitalize Corporate Costs at a 10x multiple, resulting in a ~$170mm drag (~$4/sh) on TIPT’s sum-of-the-parts value.

Key Insiders Have A Significant Amount Of “Skin In The Game”

Per TIPT’s Proxy and inclusive of shares owned by Arif Inayatullah (who has a partner emeritus agreement with TIPT) – Insiders beneficially and collectively own 41% of TIPT. The largest shareholder and most important executive at TIPT is Executive Chair, Michael Barnes. Barnes was a founding partner at Tricadia Holdings (now Corvid Peak Holdings) and subsequently founded TIPT in 2007.  In addition to the 10.1mm shares beneficially owned today (which represents 162x his base salary of $1mm), Barnes also has 1.4mm PRSUs that vest upon TIPT achieving share price target milestones ranging from $20/sh to $60/sh. Clearly, Barnes has outstanding alignment and incentives. We believe this alignment will motivate Barnes to maximize his (and shareholders’) wealth by unlocking Fortegra’s intrinsic value via an IPO or full sale.

TIPT Offers Extremely Attractive Asymmetry At $16/Sh Today

In sum, we believe Fortegra is worth at least ~$23/sh to TIPT shareholders – based on today’s profits and the same profit multiple used by Warburg Pincus in its 2021 investment.  Further, we believe Tiptree Capital is worth ~$6/sh to TIPT shareholders, based on using today’s stated book value. Lastly, we ding TIPT by ~$4/sh for Corporate Cost burden. Obviously, our approach is conservative given Fortegra’s profits (and thus, valuation) are growing rapidly and Tiptree Capital just divested assets for a premium to book value. Despite the conservatism, the implied sum-of-the-parts value is ~$25/sh and TIPT currently trades for just ~$16/sh.

Catalyst

Continued earnings growth at Fortegra followed by a IPO or sale of Fortegra (believe in 2024)