01/06/2021 - Tiptree Inc.: The Wall Street Transcript Interview with Sandra Bell, Tiptree CFO and Rick Kahlbaugh, Fortegra CEO

SECTOR - INSURANCE

TWST: Do you want to give an overview of the company? And then we can talk about the insurance operations.

Ms. Bell: Tiptree is a holding company that combines specialty insurance operations with capital allocation and investment expertise. And the core of our success is our primary subsidiary, Fortegra. Fortegra focuses on small-premium-per-risk specialty insurance and warranty products. And what that means is, it gives us consistent growing cash flow, significant fee revenues, and very low aggregation and catastrophic risk. That combination of Fortegra's business model provides us, Tiptree, the opportunity to make longer-term investments across a broad spectrum of opportunities which we call Tiptree Capital.

TWST: And what about some of the different products that the insurance operation offers?

Mr. Kahlbaugh: I think the best way to think about Fortegra is that we're a program underwriter. We tend to focus on admitted programs, surplus lines programs, and we have a complete complement of balance sheet-light programs. The programs range from generally light

commercial, which would include professional liability, D&O - directors and officers - to niche personal lines, but largely focused, as Sandra said, around the small premium per risk, modest aggregations - all with a goal toward predictable underwriting results, both from a growth and combined ratio perspective.

TWST: How has the company responded in the last year, especially with the COVID situation? And where does it stand now?

Mr. Kahlbaugh: Well, we've grown significantly in the last year. So COVID really wasn't a challenge for us because we don't do any meaningful personal lines, standard personal lines, like auto or home. We really didn't experience a slowdown at all in our growth. In fact, over the last five years, we've had a 20% compounded annual growth rate and that continued in the past year. We didn't see any meaningful change in loss ratio like some of the personal lines carriers did, because autos were off the road, but generally speaking, for our niche program business, it was business as usual.

TWST: And as it stands now, are there some challenges ahead for the company?

Mr. Kahlbaugh: When you're talking about social inflation and verdicts, I think the entire industry has that as a challenge. What offsets that, certainly for the foreseeable future, is the very hard market. So both pricing and terms and conditions are extremely favorable for underwriters today. We don't see meaningful change in the market conditions over the next 24 to 36 months.

This hard market was largely driven by a confluence of events. One is the restructuring of Lloyds and their risk appetite, which created quite a few orphans, smaller programs. And that restructuring of their risk appetite also left the market without a meaningful underwriter for the types of programs that we target. Then, of course, you have COVID. And then you have the traditional annual cat - catastrophe - exposures that most carriers are exposed to.

I don't want to miss the fact that the interest rate environment has been so modest for so long. The confluence of all those factors has really led to what we believe is a sustained hard market, like I said, for the next 24 to 36 months. I can see that being maintained.

So, for us right now, I don't think social inflation is necessarily going to be a negative. I think it's being addressed in the terms and conditions of every policy that's being issued today. So yes, it does happen, but I don't think that's a meaningful problem.

TWST: And looking beyond the next three years, is the sector going to have to address challenges of greater automation or of more Internet of Things-type operations?

Mr. Kahlbaugh: Yes, let's break that down into two specific groups. One is the personalized carriers. Clearly, the move is with insur-tech, the Internet of Things, the ability to capture data that is relevant to the underwriting process. I do think you will see that continue to evolve. Where that ends up is anybody's guess. But I do think you'll see that technology pressure brought to bear first on

We want people to have the ability to interface with us any way they choose. If that's on the internet, fine. If that's through an agent, fine. If that's direct with a company, that's fine with us as well. So we have the ability, given the technology investments we've made, to address any desire that a consumer may have.

We don't do much personal lines, but if the light commercial industry migrates in that direction, we'll certainly be prepared to address it. And I think most carriers have. It would be very hard to be competitive today if you didn't have that type of approach in the works. So I think the industry is moving. But as you know, this industry moves pretty slowly.

TWST: And do you want to discuss the stock - where it is now and where it might be going?

Ms. Bell: One of the things that we have been working on is engaging with investors and getting investors more knowledge around the underlying intrinsic value of Tiptree. And with Fortegra being our core for our success, getting knowledge about Fortegra into investors' hands, and how to think about the valuation of Fortegra has certainly been an important component of that.

We really have two pieces, as I mentioned earlier. We have Fortegra, which is valued on an earnings' metric. We carried them at book at a little under $300 million. But that earnings metric - and leveraging that versus their peers - would be something more like 15 times to 20 times their earnings multiple. And that earnings was roughly $50 million over the last 12 months. So that would give you a valuation significantly in excess of where we carry them from a book perspective.

Our investment arm is really more of a fair value on our books, and it's just under $200 million. And that would be more of a book value type of play. So we tend to talk to people about the sum of the parts, but if you go through that exercise, while we're currently trading near our book value, our intrinsic value is really a multiple of book.

personal lines. In the commercial sector, because the risks are so much larger, because the policy limit structure is larger, because the underwriting issues are more complex, I think that will follow in terms of technology support.

We, at Fortegra, use artificial intelligence and predictive analytics as an underwriting tool to help us in the risk selection and risk pricing process. So we've gone down that path already and have invested in that infrastructure to help support our growth, so that we get a little better risk selection over time. And I think you'll see most of our peers doing the same thing. It will be a tool at first, but it could ultimately end up being robotic underwriting.

TWST: And are you seeing more people and businesses moving to online options to choose their insurance coverage? Or is it just a limited number who are using that?

Mr. Kahlbaugh: Well, Progressive and Geico have been doing this a long, long time - the whole notion of online purchasing. And again, for personal lines, auto, home, traditional life type of structure, life insurance and structures, I think that's certainly a very viable tool for those who wish to purchase their coverages using that medium.

TWST: And a lot of investors might be looking for an alternative to these extremely large, global companies in financial services or insurance. Does your company provide an alternative that allows investors to get exposure to the sector with small to midsize companies? What would be a benefit from that?

Mr. Kahlbaugh: One of the benefits for shareholders of the Fortegra platform is that we complement underwriting with a large component of fees. Roughly 30% of our revenue base is from fees. What that does is it lends itself to more predictable underwriting results and enhanced shareholder returns. So, for someone who's looking to explore the insurance sector, this is a very safe bet, but yet a bet that is positioned and poised to continue the growth we've experienced over the last five to seven years.

It's our ability to complement underwriting revenue with fee revenue that changes the dynamic of the investment for shareholders - little safer, little outsized-return environment. So that's what makes us meaningfully different from perhaps jumping into an AIG or a Chubb, or pick another one.

It does really matter. We would probably be in terms of size, a nice mid-sized company that has very consistent returns on equity, that

are a handful of points superior to our peers. And that's really what you see: the overlay of fees and how those fees enhance the overall return for shareholders. And that's been our strategy since I walked in the door in 2003. Certainly, we've just continued to execute that strategy over the last 17, 18 years.

TWST: It sounds like for the company as a whole, technology and using technology wisely has been a priority. Do you want to talk about that?

Mr. Kahlbaugh: I can't speak to the other operations. But certainly, we're doing it here at Fortegra.

Ms. Bell: Our mortgage business is also a technology-enabled platform. And I'll step back and talk about how we think about our investments. And we look at three things. One, strong and experienced management. Rick is a perfect example of that. Number two, consistent cash flow and scalability of the platforms. Those things are very important. And then lastly, we're a value-oriented investor. And so, we tend to look at things that align and can grow with the economy and scale with the economy. And technology, given where the world is going, certainly is an important component of that scalability.

TWST: And looking ahead, are there some interesting things in the pipeline or on the drawing board for the company?

Mr. Kahlbaugh: When we talk about Fortegra, we launched our European operation where we are writing warranty and service contract business. We have operations in London and Prague and Malta. We are a pan-European underwriter of warranty products. And that's growing very nicely for us. We made acquisitions of Smart AutoCare and Sky Auto in the past year, which certainly grew our commitment to the warranty and service contract environment in the United States. We remain committed to those markets; we like the economics, whether that's auto, whether that's consumer products, cellular, electronics, appliances or home - we participate in all those.

So, I think the company is properly positioned and poised to take advantage of whatever changes are forthcoming in the marketplace. From an insurance perspective, and as we look to the future, I think you'll see Fortegra expand its global operation into the Pacific Rim. We just initiated a new program with a very large electronics manufacturer in Korea. And we're excited about that partnership and we expect that to expand well beyond Korea, as we're looking at other countries in the Pacific Rim.

Like I said before, for those who are looking for a nice safe investment that has a lot of runway for growth, Tiptree is certainly a wonderful place to invest their money.

Ms. Bell: I'll just add two points. Number one, as I said earlier, the core of our success, and why we can make the other longer-term investments is because of the growth trajectory and growth opportunities that Rick just laid out. And it allows us to let the other investments that we have percolate and take their time to meet our targeted returns over the long term and to grow with the global economy.

TWST: You've mentioned interest rates. Are there any other economic factors that could impact your company that you're watching carefully?

Mr. Kahlbaugh: As far as Fortegra, we tend to focus on the market conditions and the price per risk. That is affected by the interest rate environment, there's no doubt about that. Relative to the warranty business, we pay a lot of attention to the auto space. We certainly pay attention to furniture and consumer electronics and cellular. And when we see underlying growth there and a macro environment that's

supportive of growth, including interest rate environment and GDP growth - those are all very positive environments today and signals are that the economy, especially in the U.S., is poised for a pretty significant growth over the next, 12 to 18 months.

We're always looking at reinsurance pricing and that's usually a leading indicator of the market in terms of whether the pricing is hard or soft. Right now, those leading indicators tend to leave one to conclude that the market will remain hard through the next renewal period, certainly this year and into the first renewal period of next year. So those are things we focus on at Fortegra. Our financial planning and analysis team - we're always looking at those key elements to the macro environment.

Ms. Bell: Two things. We tend to focus on companies that drive consistent cash flow over multiple cycles, and have long-term scalable opportunities. We think the businesses that we have today are complementary. For example, the mortgage business did very, very well during the COVID cycle. Fortegra's business - it tends to do well regardless of the economic cycle, because of its flexibility and platform. And certain of our other businesses are positioned for demand/supply imbalances - such as our shipping business - that are expected to occur over the next few years. So we tend to focus very heavily on global trends and like to have our investments balance each other, with the ability to drive consistent growth over the longer-term economic cycles.

TWST: And anything we haven't brought up you care to

mention?

Mr. Kahlbaugh: Sandra made a point. I don't want it to be lost. It's interesting when you think about Fortegra. We have these three pillars. You talked about economic trends. Sandra did mention it in regard to flexibility. But I just want to give you a little color. Because we have a bit of surplus lines programs, and then what we call balance sheet life, where they're unregulated, and that's largely the warranty type product.

It doesn't really matter to us if the market is hard or soft. We can still grow and still maintain our profitability levels because the warranty business is a natural hedge. So if we start to see a soft market coming, we would increase our reinsurance and we would allocate more assets and resources to warranty and service contracts globally - and you would probably see return on equity go up.

And that's what Sandra was talking about. We're built to grow. We're built to last because of these three pillars and that natural hedge that exists in the three areas that we focus on at Fortegra. So it was a great point that Sandra made.

TWST: Thank you. (ES)

SANDRA BELL

Chief Financial Officer Tiptree Inc.

RICK KAHLBAUGH Chief Executive Officer Fortegra, a Tiptree subsidiary 299 Park Avenue, 13th Floor New York, NY 10171

1. 446-1400www.tiptreeinc.com email: ir@tiptreeinc.com