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TIPTREE INC. - Quarter Report: 2017 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended March 31, 2017
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ¨     No  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   ¨     No   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer x
Non-accelerated filer ¨                    Smaller reporting company ¨
Emerging growth company ¨
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
As of June 5, 2017, there were 35,003,004 shares, par value $0.001, of the registrant’s Class A common stock outstanding (including 4,985,543 shares of Class A common stock held by subsidiaries of the registrant) and 8,049,029 shares, par value $0.001, of the registrant’s Class B common stock outstanding.




Tiptree Inc.
Quarterly Report on Form 10-Q
March 31, 2017
Table of Contents
ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Forward-Looking Statements

Except for the historical information included and incorporated by reference in this Quarterly Report on Form 10-Q, the information included and incorporated by reference herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “may,” “might,” “plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend to identify forward-looking statements.

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 forecasted 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in our other public filings with the SEC.
 
The factors described herein 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 applicable law, we undertake no obligation to update any forward-looking statements.

Market and Industry Data

Certain market data and industry data included in this Quarterly Report on Form 10-Q were obtained from reports of governmental agencies and industry publications and surveys. We believe the data from third-party sources to be reliable based upon our management’s knowledge of the industry, but have not independently verified such data and as such, make no guarantees as to its accuracy, completeness or timeliness.

Note to Reader

In reading this Quarterly Report on Form 10-Q, references to:

“Administrative Services Agreement” means the Administrative Services Agreement between Operating Company (as assignee of TFP) and BackOffice Services Group, Inc., dated as of June 12, 2007.
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CLOs” means collateralized loan obligations.
“consolidated CLOs” means Telos 6 and Telos 7.
“Contribution Transactions” means the closing on July 1, 2013 of the transactions pursuant to the Contribution Agreement by and between the Company, Operating Company and TFP, dated as of December 31, 2012.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“Luxury” means Luxury Mortgage Corp.
“Mariner” means Mariner Investment Group LLC.
“MFCA” means Muni Funding Company of America LLC.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.

F-1



“Siena” means Siena Capital Finance LLC.
“TAMCO” means Tiptree Asset Management Company, LLC.
“Telos” means Telos Asset Management, LLC.
“Telos 1” means Telos CLO 2006-1, Ltd.
“Telos 2” means Telos CLO 2007-2, Ltd.
“Telos 3” means Telos CLO 2013-3, Ltd.
“Telos 4” means Telos CLO 2013-4, Ltd.
“Telos 5” means Telos CLO 2014-5, Ltd.
“Telos 6” means Telos CLO 2014-6, Ltd.
“Telos 7” means Telos CLO 2016-7, Ltd.
“TFP” means Tiptree Financial Partners, L.P.
“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means, unless otherwise indicated by the context, Operating Company and its consolidated subsidiaries, together with the standalone net assets held by Tiptree Inc. (formerly known as Tiptree Financial Inc.)
“Transition Services Agreement” means the Transition Services Agreement among TAMCO, Tricadia and Operating Company (as assignee of TFP), dated as of June 30, 2012.
“Tricadia” means Tricadia Holdings, L.P.


F-2

TIPTREE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)

Item 1. Financial Statements (Unaudited)
 
As of
 
March 31, 2017

December 31, 2016
Assets
(Unaudited)
 

Investments:
 
 
 
Available for sale securities, at fair value
$
152,529

 
$
146,171

Loans, at fair value
327,393

 
373,089

Loans at amortized cost, net
94,414

 
113,838

Equity securities, trading, at fair value
46,872

 
48,612

Real estate, net
329,014

 
309,423

Other investments
25,687

 
25,467

Total investments
975,909

 
1,016,600

Cash and cash equivalents
67,190

 
63,010

Restricted cash
27,470

 
24,472

Notes and accounts receivable, net
172,647

 
157,500

Reinsurance receivables
311,774

 
296,234

Deferred acquisition costs
121,712

 
126,608

Goodwill and intangible assets, net
177,591

 
178,245

Other assets
36,753

 
37,886

Assets of consolidated CLOs
575,918

 
989,495

Total assets
$
2,466,964

 
$
2,890,050


 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Debt, net
$
751,885

 
$
793,009

Unearned premiums
418,106

 
414,960

Policy liabilities and unpaid claims
104,623

 
103,391

Deferred revenue
51,337

 
52,254

Reinsurance payable
89,736

 
70,588

Other liabilities and accrued expenses
122,182

 
133,735

Liabilities of consolidated CLOs
535,257

 
931,969

Total liabilities
$
2,073,126

 
$
2,499,906

Commitments and contingencies (see Note 22)

 


 
 
 
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, 34,988,864 and 34,983,616 shares issued and outstanding, respectively
35

 
35

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 8,049,029 and 8,049,029 shares issued and outstanding, respectively
8

 
8

Additional paid-in capital
297,268

 
297,391

Accumulated other comprehensive income (loss), net of tax
1,062

 
555

Retained earnings
38,220

 
37,974

Class A common stock held by subsidiaries, 6,496,463 and 6,596,000 shares, respectively
(41,877
)
 
(42,524
)
Class B common stock held by subsidiaries, 8,049,029 and 8,049,029 shares, respectively
(8
)
 
(8
)
Total Tiptree Inc. stockholders’ equity
294,708

 
293,431

Non-controlling interests (including $76,160 and $76,077 attributable to Tiptree Financial Partners, L.P., respectively)
99,130

 
96,713

Total stockholders’ equity
393,838

 
390,144

Total liabilities and stockholders’ equity
$
2,466,964

 
$
2,890,050

See accompanying notes to consolidated financial statements.

F-3

TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except share data)



Three Months Ended March 31,

2017
 
2016
Revenues:
 
 
 
Earned premiums, net
$
89,231

 
$
44,615

Service and administrative fees
23,776

 
30,310

Ceding commissions
2,271

 
10,703

Net investment income
4,505

 
2,405

Net realized and unrealized gains (losses)
16,212

 
18,760

Rental and related revenue
17,403

 
13,605

Other income
10,510

 
10,340

Total revenues
163,908

 
130,738


 
 
 
Expenses:
 
 
 
Policy and contract benefits
32,992

 
23,698

Commission expense
56,793

 
33,038

Employee compensation and benefits
36,109

 
30,608

Interest expense
8,779

 
6,480

Depreciation and amortization
7,809

 
8,377

Other expenses
22,833

 
24,667

Total expenses
165,315

 
126,868


 
 
 
Results of consolidated CLOs:
 
 
 
Income attributable to consolidated CLOs
8,867

 
7,677

Expenses attributable to consolidated CLOs
4,952

 
6,572

Net income (loss) attributable to consolidated CLOs
3,915

 
1,105

Income (loss) before taxes
2,508

 
4,975

Less: provision (benefit) for income taxes
1,166

 
(2,439
)
Net income (loss) before non-controlling interests
1,342

 
7,414

Less: net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
208

 
2,629

Less: net income (loss) attributable to non-controlling interests - Other
34

 
(770
)
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
$
1,100

 
$
5,555

 
 
 
 
Net income (loss) per Class A common share:
 
 
 
Basic earnings per share
$
0.04

 
$
0.16

Diluted earnings per share
$
0.03

 
$
0.16


 
 
 
Weighted average number of Class A common shares:
 
 
 
Basic
28,424,824

 
34,976,485

Diluted
36,749,956

 
35,084,505













See accompanying notes to consolidated financial statements.

F-4

TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)



 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net income (loss) before non-controlling interests
$
1,342

 
$
7,414

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
Unrealized holding gains (losses) arising during the period
678

 
2,659

Related tax (expense) benefit
(243
)
 
(938
)
Reclassification of (gains) losses included in net income
47

 
(57
)
Related tax expense (benefit)
(16
)
 
20

Unrealized gains (losses) on available-for-sale securities, net of tax
466

 
1,684

 
 
 
 
Interest rate swaps (cash flow hedges):
 
 
 
Unrealized gains (losses) on interest rate swaps
132

 
(136
)
Related tax (expense) benefit
(48
)
 
47

Reclassification of (gains) losses included in net income
144

 
(319
)
Related tax expense (benefit)
(45
)
 
112

Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
183

 
(296
)
 
 
 
 
Other comprehensive income (loss), net of tax
649

 
1,388

Comprehensive income (loss)
1,991

 
8,802

Less: Comprehensive income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
324

 
2,629

Less: Comprehensive income (loss) attributable to non-controlling interests - Other
60

 
(770
)
Comprehensive income (loss) attributable to Tiptree Inc. Class A common stockholders
$
1,607

 
$
6,943






















See accompanying notes to consolidated financial statements.

F-5

TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except shares)

 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Common Stock held by subsidiaries
 
Total stockholders’ equity to Tiptree Inc.
 
Non-controlling
interests - Tiptree Financial Partners, L.P.
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
Class A Shares
 
Class A Amount
 
Class B Shares
 
Class B Amount
 
 
 
 
Balance at December 31, 2016
34,983,616

 
8,049,029

 
$
35

 
$
8

 
$
297,391

 
$
555

 
$
37,974

 
(6,596,000
)
 
$
(42,524
)
 
(8,049,029
)
 
$
(8
)

$
293,431


$
76,077


$
20,636


$
390,144

Amortization of share-based incentive compensation
—

 
—

 
—

 
—

 
398

 
—

 
—

 
—

 
—

 
—

 
—

 
398

 
—

 
—

 
398

Vesting of share-based incentive compensation
5,248

 
—

 
—

 
—

 
(614
)
 
—

 
—

 
99,537

 
647

 
—

 
—

 
33

 
—

 
—

 
33

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
507

 
—

 
—

 
—

 
—

 
—

 
507

 
116

 
26

 
649

Non-controlling interest contributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,318

 
1,318

Non-controlling interest distributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(241
)
 
(286
)
 
(527
)
Net changes in non-controlling interest
—

 
—

 
—

 
—

 
93

 
—

 
—

 
—

 
—

 
—

 
—

 
93

 
—

 
1,242

 
1,335

Dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(854
)
 
—

 
—

 
—

 
—

 
(854
)
 
—

 
—

 
(854
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
1,100

 
—

 
—

 
—

 
—

 
1,100

 
208

 
34

 
1,342

Balance at March 31, 2017
34,988,864

 
8,049,029

 
$
35

 
$
8

 
$
297,268

 
$
1,062

 
$
38,220

 
(6,496,463
)
 
$
(41,877
)
 
(8,049,029
)
 
$
(8
)
 
$
294,708

 
$
76,160

 
$
22,970

 
$
393,838











See accompanying notes to consolidated financial statements.

F-6

TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)


 
Three months ended March 31,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss) available to common stockholders
$
1,100

 
$
5,555

Net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
208

 
2,629

Net income (loss) attributable to non-controlling interests - Other
34

 
(770
)
Net income (loss)
1,342

 
7,414

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net realized and unrealized (gains) losses
(16,212
)
 
(18,760
)
Net unrealized loss (gain) on interest rate swaps
(343
)
 
1,416

Change in fair value of contingent consideration
554

 
(161
)
Non cash compensation expense
1,798

 
388

Amortization/accretion of premiums and discounts
345

 
332

Depreciation and amortization expense
7,921

 
8,377

Provision for doubtful accounts
129

 
504

Amortization of deferred financing costs
665

 
445

Deferred tax expense (benefit)
1,166

 
(3,642
)
Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(347,601
)
 
(317,808
)
Proceeds from the sale of mortgage loans originated for sale
405,637

 
357,439

(Increase) decrease in notes and accounts receivable
(10,253
)
 
(28,750
)
(Increase) decrease in reinsurance receivables
(15,540
)
 
(20,928
)
(Increase) decrease in deferred acquisition costs
4,896

 
1,673

(Increase) decrease in other assets
4,027

 
(1,076
)
Increase (decrease) in unearned premiums
3,146

 
14,401

Increase (decrease) in policy liabilities and unpaid claims
1,232

 
9,264

Increase (decrease) in deferred revenue
(1,213
)
 
(4,696
)
Increase (decrease) in reinsurance payable
19,148

 
6,092

Increase (decrease) in other liabilities and accrued expenses
(10,347
)
 
(1,222
)
Operating activities from consolidated CLOs
(1,333
)
 
2,831

Net cash provided by (used in) operating activities
49,164

 
13,533

 
 
 
 
Investing Activities:
 
 
 
Purchases of investments
(43,024
)
 
(58,904
)
Proceeds from sales and maturities of investments
51,108

 
36,561

(Increase) decrease in loans owned, at amortized cost, net
19,393

 
(6,406
)
Purchases of real estate capital expenditures
(500
)
 
(519
)
Proceeds from the sale of real estate
2,028

 
207

Purchases of corporate fixed assets
(780
)
 
(155
)
Proceeds from notes receivable
13,682

 
7,951

Issuance of notes receivable
(18,701
)
 
(8,251
)
(Increase) decrease in restricted cash
(2,998
)
 
(3,173
)
Business and asset acquisitions, net of cash and deposits
(16,601
)
 
(52,729
)
Investing activities from consolidated CLOs
21,618

 
(481
)
Net cash provided by (used in) investing activities
25,225

 
(85,899
)
 
 
 
 
Financing Activities:
 
 
 
Non-controlling interest contributions
1,318

 
1,914

Non-controlling interest distributions
(527
)
 
(465
)
Change in non-controlling interest
—

 
41

Payment of debt issuance costs
(88
)
 
(433
)
Proceeds from borrowings and mortgage notes payable
384,933

 
406,357


F-7

TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(in thousands)


 
Three months ended March 31,
 
2017
 
2016
Principal paydowns of borrowings and mortgage notes payable
(434,435
)
 
(360,112
)
Repurchases of common stock
—

 
(851
)
Financing activities from consolidated CLOs
(21,410
)
 
(260
)
Net cash provided by (used in) financing activities
(70,209
)
 
46,191

Net increase (decrease) in cash and cash equivalents
4,180

 
(26,175
)
Cash and cash equivalents – beginning of period
63,010

 
69,400

Cash and cash equivalents – end of period
$
67,190

 
$
43,225

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
$
2,968

 
$
1,667

Real estate acquired through asset acquisition
$
8,178

 
$
—

Intangible assets related to in-place leases acquired through asset acquisition
$
2,049

 
$
—

Assets of consolidated CLOs deconsolidated due to sale
$
405,263

 
$
—

Liabilities of consolidated CLOs deconsolidated due to sale
$
387,273

 
$
—

Debt assumed through asset acquisition
$
7,586

 
$
—






















See accompanying notes to consolidated financial statements.

F-8


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



(1) Organization

Tiptree Inc. (formally known as Tiptree Financial Inc., together with its consolidated subsidiaries, collectively, Tiptree or the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree is a diversified holding company with four reporting segments: specialty insurance, asset management, senior living and specialty finance. Tiptree’s Class A common stock is traded on the NASDAQ Capital Market under the symbol “TIPT”. Tiptree’s primary asset is its ownership of Tiptree Financial Partners, L.P. (TFP) an intermediate holding company through which Tiptree operates its businesses. Tiptree reports a non-controlling interest representing the economic interest in TFP held by other limited partners of TFP.

As of January 1, 2016, Tiptree directly owned approximately 81% of TFP. The remaining 19% is reported as non-controlling interest. All of Tiptree’s Class B common stock is owned by TFP and is accounted for as treasury stock. Tiptree’s Class B common stock has voting but no economic rights. The limited partners of TFP (other than Tiptree itself) have the ability to exchange TFP partnership units for Tiptree Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit equal to the number of shares of Class B common stock outstanding. For every share of Class A common stock exchanged in this manner, a share of Class B common stock is canceled. The percentage of TFP owned by Tiptree may increase in the future to the extent TFP’s limited partners exchange their limited partnership units of TFP for Class A common stock of Tiptree. Changes in Tiptree’s ownership of TFP, as a result of such exchanges, will be accounted for as equity transactions, which increase Tiptree’s ownership of TFP and reduce non-controlling interest in TFP without changing total stockholders’ equity of Tiptree.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its controlled subsidiaries. The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2017.

Tiptree consolidates those entities in which it has an investment of 50% or more of voting rights or has control over significant operating, financial and investing decisions of the entity as well as variable interest entities (VIEs) in which Tiptree is determined to be the primary beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support from other parties.

A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Generally, Tiptree’s consolidated VIEs are entities which Tiptree is considered the primary beneficiary through its controlling financial interests.

Non-controlling interests on the Consolidated Statements of Operations represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Tiptree. Accounts and transactions between consolidated entities have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Management makes estimates and assumptions that include but are not limited to the determination of the following significant items:

•
Fair value of financial assets and liabilities, including, but not limited to, securities, loans and derivatives

F-9

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


•
Value of acquired assets and liabilities
•
Carrying value of goodwill and other intangibles, including estimated amortization period and useful lives
•
Reserves for unpaid losses and loss adjustment expenses, estimated future claims and losses, potential litigation and other claims
•
Valuation of contingent share issuances for compensation and purchase consideration, including estimates of number of shares and vesting schedules
•
Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service, administration fees, and loan origination fees and
•
Other matters that affect the reported amounts and disclosure of contingencies in the consolidated financial statements

Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.

Business Combination Accounting

The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other income in the Consolidated Statements of Operations. Acquisition and transaction costs are related primarily to completed and potential business combinations and include advisory, legal, accounting, valuation and other professional or consulting fees which are expensed as incurred.

In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a preliminary estimate of fair value, which may be adjusted during the measurement period based upon the results of a valuation study applicable to the business combination.

Acquisitions that do not meet the criteria for the acquisition method of accounting are accounted for as acquisitions of assets.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:

•Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:

a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in nonactive markets;
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability;
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

•Level 3 – Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data and assumptions that are used in pricing the asset or liability.

F-10

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



Fair Value Option

In addition to the financial instruments the Company is required to measure at fair value, the Company has elected to make an irrevocable election to utilize fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized and unrealized gains (losses) within the Consolidated Statements of Operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are reported separately in our Consolidated Balance Sheets from those instruments using another accounting method.

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments -Equity Method and Joint Ventures (Topic 323), which eliminates the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties that Are Under Common Control, which amends the consolidation guidance on how a reporting entity, that is the single decision maker of a VIE, evaluates whether it is the primary beneficiary of a VIE. This new guidance is effective for fiscal years beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. Reporting entities may choose to adopt the standard

F-11

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the recognition, measurement, presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial instruments. Among its provisions for public business entities, ASU 2016-01 eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires the separate presentation in other comprehensive income of the change in fair value of a liability due to instrument-specific credit risk for a liability for which the reporting entity has elected the fair value option, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) and clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for a limited number of provisions. The Company is currently evaluating the effect on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the effect on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarify the implementation guidance on principal versus net considerations. The effective date and transition requirements for this standard are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the effect on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. The Update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which  rescinds SEC paragraphs pursuant to the SEC Staff Announcement, “Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606,” and the SEC Staff Announcement, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity,” announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting.  The Company believes that that the adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides guidance on collectability, noncash consideration, and completed contracts at transition.  Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an

F-12

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the effect on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, including the adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the effect on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 does not change the qualitative assessment; however, it removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Therefore, as the FASB notes in the ASU’s Basis for Conclusions, the goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units. The Company is currently evaluating the effect on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The new guidance clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial

F-13

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


asset” and defines the term, “in-substance nonfinancial asset.” The ASU also adds guidance for partial sales of nonfinancial assets. The Company is currently evaluating the effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2017. The guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The Company is currently evaluating the effect on its consolidated financial statements.

(3) Acquisitions

Acquisitions during the three months ended March 31, 2017
Senior Living
Managed Properties
During the three months ended March 31, 2017, subsidiaries in our senior living business and their partners entered into an agreement to acquire and operate one senior housing community for total consideration of $14,960, of which $2,992 was financed by contributions from partners of our subsidiaries and the remainder was paid with cash on hand. Affiliates of the partners provide management services to the communities under management contracts.

The Company provided an advance to the partners of our subsidiary at closing for $1,036, which was part of their cash contribution for the property. Subsequent to the closing of this transaction, the property was financed with mortgage debt of $10,000. Our partner repaid the advance to the Company with proceeds from this financing, which was split based on the ownership of the property.

The primary reason for the Company’s acquisition of the senior housing community is to expand its real estate operations. For the period from acquisition until March 31, 2017, revenue and the net loss in the aggregate for the one managed property acquired were $1,016 and $363, respectively.

The following table summarizes the consideration paid and the amounts of the provisional determination, as described above, for the transaction completed during the three months ended March 31, 2017:
 
2017 Acquisitions
 
Senior Living
Consideration:
 
Cash
$
14,960

Fair value of total consideration
$
14,960

 
 
Acquisition costs
$
237

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Cash and cash equivalents
$
578

Real estate, net
12,450

Intangible assets, net
2,200

Other assets
37

 
 
Liabilities:
 
Deferred revenue
(296
)
Other liabilities and accrued expenses
(9
)
Total identifiable net assets assumed
$
14,960


F-14

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Senior Living
In-place lease
1.17
 
$
2,200



The amounts allocated to real estate, net and intangible assets are still provisional as we continue our review and also await the final appraisal report. Supplemental pro forma results of operations have not been presented for the above 2017 business acquisition as they are not material in relation to the Company’s reported results.

Acquisitions during the three months ended March 31, 2016
Senior Living
Managed Properties
During the three months ended March 31, 2016, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate two senior housing communities for total consideration of $55,074 (which includes deposits of $125 paid in the fourth quarter of 2015), of which $39,217 was financed through mortgage debt issued in connection with the acquisitions, $3,885 was financed by contributions from partners of our subsidiary, and the remainder was paid with cash on hand. Affiliates of the partners provide management services to the communities under management contracts.

The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations. For the period from acquisition until March 31, 2016, revenue and the net loss in the aggregate for the two managed properties acquired were $1,580 and $1,065, respectively.

The following table summarizes the consideration paid and the amounts of the final determination, as described above, for transactions completed during the three months ended March 31, 2016:
 
2016 Acquisitions
 
Senior Living
Consideration:
 
Cash
$
52,854

Non-cash non-controlling interests contributions
2,220

Fair value of total consideration
$
55,074

 
 
Acquisition costs
$
383

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Real estate, net
$
51,285

Intangible assets, net
3,940

Other assets
117

 
 
Liabilities:
 
Deferred revenue
(261
)
Other liabilities and accrued expenses
(7
)
Total identifiable net assets assumed
$
55,074



F-15

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Senior Living
In-place lease
1.30
 
$
3,940


Supplemental pro forma results of operations have not been presented for the above 2016 business acquisitions as they are not material in relation to the Company’s reported results.

(4) Operating Segment Data

The Company has four reportable operating segments, which are: (i) specialty insurance (formally known as insurance and insurance services), (ii) asset management, (iii) senior living (formally known as real estate), and (iv) specialty finance. The Company’s operating segments are organized in a manner that reflects how the chief operating decision maker, (CODM) views these strategic business units.

Each reportable segment’s income (loss) is reported before income taxes, discontinued operations and non-controlling interests.

Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.

In the fourth quarter of 2016, the Company made certain segment realignments in order to conform to the way the CODM internally evaluates segment performance. These realignments primarily consisted of the transfer of principal investments from corporate and other to the specialty insurance and asset management operating segments. As a result, corporate and other is no longer deemed to be an operating segment of the Company. For the three months ended March 31, 2016, $4,250 of pretax income (loss) previously reported in corporate and other was allocated $3,206 and $1,044 to the specialty insurance and asset management operating segments, respectively. For the three months ended March 31, 2016, inclusive of what was allocated to the asset management operating segment was $105 of net income (loss) attributable to consolidated CLOs. The Company has reclassified prior period amounts to provide visibility and comparability. This reclassification had no impact on the allocation of goodwill to reporting units. None of these changes impacts the Company’s previously reported consolidated net income or earnings per share.

Descriptions of each of the reportable segments are as follows:

Specialty Insurance operations are conducted through Fortegra Financial Corporation (Fortegra), an insurance holding company. Fortegra underwrites and provides specialty insurance products, primarily in the United States, and is a leading provider of credit insurance and asset protection products. Fortegra’s diverse range of products and services include products such as mobile protection, extended warranty and service, debt protection and credit insurance and select niche personal and commercial lines insurance. The specialty insurance segment also includes results related to our corporate loans and non-performing residential mortgage loans.
Asset Management operations are primarily conducted through Telos Asset Management LLC’s (Telos) management of CLOs. Telos is a subsidiary of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. Results include net income (loss) from consolidated CLOs.
Senior Living operations are conducted through Care Investment Trust LLC (Care), a wholly-owned subsidiary of Tiptree, which has a geographically diverse portfolio of seniors housing properties including senior apartments, assisted living, independent living, memory care and skilled nursing facilities in the U.S.
Specialty Finance operations are conducted through Siena Capital Finance LLC (Siena), which commenced operations in April 2013, and the Company’s mortgage businesses, which consist of Luxury, which was acquired in January 2014, and Reliance, which was acquired in July 2015. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs and FHA/VA. Siena’s business consists of structuring asset-based loan facilities across diversified industries.
The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following periods:
 
 
 
 
 
 
 
 
 
 
 
 

F-16

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Total revenue
$
121,846

 
$
2,973

 
$
17,719

 
$
21,453

 
$
(83
)
 
$
163,908

Total expense
117,045

 
1,307

 
19,249

 
20,985

 
6,729

 
165,315

Net income (loss) attributable to consolidated CLOs
—

 
3,915

 
—

 
—

 
—

 
3,915

Income (loss) before taxes
$
4,801

 
$
5,581

 
$
(1,530
)
 
$
468

 
$
(6,812
)
 
$
2,508

Less: provision for income taxes
 
 
 
 
 
 
 
 
 
 
1,166

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
1,342

Less: net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
242

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
1,100

 
Three Months Ended March 31, 2016
 
Specialty insurance(1)
 
Asset management(1)
 
Senior living
 
Specialty finance
 
Corporate and other(1)
 
Total
Total revenue
$
93,106

 
$
3,780

 
$
13,890

 
$
16,566

 
$
3,396

 
$
130,738

Total expense
80,903

 
2,181

 
17,749

 
17,549

 
8,486

 
126,868

Net income (loss) attributable to consolidated CLOs
—

 
1,105

 
—

 
—

 
—

 
1,105

Income (loss) before taxes
$
12,203

 
$
2,704

 
$
(3,859
)
 
$
(983
)
 
$
(5,090
)
 
$
4,975

Less: (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(2,439
)
Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
7,414

Less: net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
1,859

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
5,555

(1) Reclassified to conform to current period presentation
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents the segment assets for the following periods:
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Segment Assets as of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
1,291,744

 
$
19,226

 
$
346,449

 
$
209,538

 
$
24,089

 
$
1,891,046

Assets of consolidated CLOs
—

 
575,918

 
—

 
—

 
—

 
575,918

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,466,964

 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
1,268,152

 
$
17,427

 
$
323,169

 
$
271,795

 
$
20,012

 
$
1,900,555

Assets of consolidated CLOs
—

 
989,495

 
—

 
—

 
—

 
989,495

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,890,050



F-17

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


(5) Investments

Available for Sale Securities, at fair value

All of the Company’s investments in available for sale securities as of March 31, 2017 and December 31, 2016 are held by a subsidiary in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
 
As of March 31, 2017
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
28,315

 
$
61

 
$
(278
)
 
$
28,098

Obligations of state and political subdivisions
57,353

 
311

 
(417
)
 
57,247

Corporate securities
63,362

 
290

 
(326
)
 
63,326

Asset backed securities
1,407

 
7

 
—

 
1,414

Certificates of deposit
899

 
—

 
—

 
899

Equity securities
817

 
11

 
(15
)
 
813

Obligations of foreign governments
729

 
4

 
(1
)
 
732

Total
$
152,882

 
$
684

 
$
(1,037
)
 
$
152,529

 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
27,149

 
$
27

 
$
(377
)
 
$
26,799

Obligations of state and political subdivisions
57,425

 
107

 
(598
)
 
56,934

Corporate securities
58,769

 
204

 
(402
)
 
58,571

Asset backed securities
1,459

 
1

 
—

 
1,460

Certificates of deposit
895

 
—

 
—

 
895

Equity securities
818

 
3

 
(37
)
 
784

Obligations of foreign governments
733

 
3

 
(8
)
 
728

Total
$
147,248

 
$
345

 
$
(1,422
)
 
$
146,171



F-18

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following tables summarize the gross unrealized losses on available for sale securities in an unrealized loss position:
 
As of March 31, 2017
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
18,431

 
$
(277
)
 
95

 
$
14

 
$
(1
)
 
3

Obligations of state and political subdivisions
25,605

 
(416
)
 
118

 
1,661

 
(1
)
 
3

Corporate securities
26,640

 
(325
)
 
252

 
19

 
(1
)
 
1

Asset-backed securities
—

 
—

 
—

 
—

 
—

 
—

Equity securities
564

 
(13
)
 
4

 
19

 
(2
)
 
2

Obligations of foreign governments
155

 
(1
)
 
1

 
—

 
—

 
—

Total
$
71,395

 
$
(1,032
)
 
470

 
$
1,713

 
$
(5
)
 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
20,979

 
$
(376
)
 
115

 
$
16

 
$
(1
)
 
5

Obligations of state and political subdivisions
41,639

 
(597
)
 
170

 
1,334

 
(1
)
 
3

Corporate securities
29,856

 
(400
)
 
279

 
253

 
(2
)
 
3

Asset-backed securities
706

 
—

 
1

 
—

 
—

 
—

Equity securities
736

 
(35
)
 
5

 
19

 
(2
)
 
2

Obligations of foreign governments
338

 
(8
)
 
4

 
—

 
—

 
—

Total
$
94,254

 
$
(1,416
)
 
574

 
$
1,622

 
$
(6
)
 
13

The Company does not intend to sell the investments that were in an unrealized loss position at March 31, 2017, and management believes that it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. The unrealized losses were attributable to changes in interest rates and not credit-related issues. As of March 31, 2017 and March 31, 2016, based on the Company's review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the Company's analysis of the securities and its intent to hold the securities until recovery.

The amortized cost and fair values of investments in debt securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Excluded from this table are equity securities since they have no contractual maturity.
 
As of
 
March 31, 2017
 
December 31, 2016
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
27,242

 
$
27,224

 
$
22,846

 
$
22,833

Due after one year through five years
64,491

 
64,562

 
66,063

 
65,841

Due after five years through ten years
51,465

 
51,165

 
49,036

 
48,381

Due after ten years
7,460

 
7,350

 
7,026

 
6,872

Asset backed securities
1,407

 
1,415

 
1,459

 
1,460

Total
$
152,065

 
$
151,716

 
$
146,430

 
$
145,387



F-19

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company cannot remove invested assets from these accounts without prior approval of the contractual party or regulatory authority, as applicable. The following table presents the Company's restricted investments included in the Company's available for sale securities:
 
As of
 
March 31, 2017
 
December 31, 2016
Fair value of restricted investments for special deposits required by state insurance departments
$
10,024

 
$
10,111

Fair value of restricted investments in trust pursuant to reinsurance agreements
7,889

 
7,573

Total fair value of restricted investments
$
17,913

 
$
17,684


The following table presents additional information on the Company’s available for sale securities:
 
Three Months Ended March 31,
 
2017
 
2016
Purchases of available for sale securities
$
23,909

 
$
7,898

 
 
 
 
Proceeds from maturities, calls and prepayments of available for sale securities
$
4,223

 
$
9,535

 
 
 
 
Gains (losses) realized on maturities, calls and prepayments of available for sale securities
$
(3
)
 
$
57

 
 
 
 
Gross proceeds from sales of available for sale securities
$
13,494

 
$
—

 
 
 
 
Gains (losses) realized on sales of available for sale securities
$
(44
)
 
$
—


Investment in Loans

The following table presents the Company’s investments in loans, measured at fair value and amortized cost:
 
As of
 
March 31, 2017
 
December 31, 2016
Loans, at fair value
 
 
 
Corporate loans
$
173,076

 
$
175,558

Mortgage loans held for sale
79,867

 
121,439

Non-performing loans
73,281

 
74,923

Other loans receivable
1,169

 
1,169

Total loans, at fair value
$
327,393

 
$
373,089

 
 
 
 
Loans at amortized cost, net
 
 
 
Asset backed loans and other loans, net
95,609

 
115,033

Less: Allowance for loan losses
1,195

 
1,195

Total loans at amortized cost, net
$
94,414

 
$
113,838

 
 
 
 
Net deferred loan origination fees included in asset backed loans
$
4,789

 
$
5,244


Loans, at fair value

Corporate Loans

Corporate loans that have been pledged as collateral totaled $172,921 at March 31, 2017 and $175,365 at December 31, 2016. Corporate loans primarily include syndicated leveraged loans held by the Company, which consist of $173,076 and $175,558 in loans as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, the unpaid principal balance on these loans was $173,726 and $176,808, respectively.

F-20

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



As of March 31, 2017 and December 31, 2016, the difference between fair value of the Corporate loans and the unpaid principal balance was $650 and $1,250, respectively.

Mortgage Loans Held for Sale

Mortgage loans held for sale that have been pledged as collateral totaled $76,189 at March 31, 2017 and $117,734 at December 31, 2016. As of March 31, 2017, the fair value of mortgage loans exceeded the unpaid principal balance of $76,739 by $3,128. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $66, respectively, as of March 31, 2017. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $66, respectively, as of December 31, 2016. The Company discontinues accruing interest on all loans that are 90 days or more past due.

Non-Performing Loans (NPLs)

Non-performing loans that have been pledged as collateral totaled $59,239 and $60,409 at March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, the Company’s investments included $73,281 and $74,923, respectively, of non-performing loans collateralized by real estate of which the unpaid principal balance was $107,040 and $113,892, respectively. As of March 31, 2017 and December 31, 2016, the difference between the fair value of the NPLs and the unpaid principal balance was $(33,758) and $(38,969), respectively. Included in real estate, net as of March 31, 2017 and December 31, 2016 are $14,250 and $13,366, respectively, of foreclosed residential real estate property resulting from the conversion of an NPL to REO.

Loans at amortized cost, net

Asset Backed Loans

Asset backed loans that have been pledged as collateral totaled $99,699 at March 31, 2017 and $119,558 at December 31, 2016. As of March 31, 2017 and December 31, 2016, the Company held $93,714 and $113,138, respectively, of loans receivable, net, attributable to a subsidiary in our specialty finance business. Our subsidiary structures asset-based loan facilities in the $1,000 to $25,000 range for small to mid-sized companies. Collateral for asset-backed loan receivables, as of March 31, 2017 and December 31, 2016, consisted primarily of inventory, equipment and accounts receivable. Management reviews collateral for these loans on at least a monthly basis or more frequently if a draw is requested and management has determined that no impairment existed as of March 31, 2017. As of March 31, 2017, there were no delinquencies in the portfolio and all loans were classified as performing.

Real Estate, net

The following table contains information regarding the Company’s investment in real estate as of the following periods:
 
As of March 31, 2017
 
Land
 
Buildings and equipment
 
Accumulated depreciation
 
Total
Managed properties
$
18,267

 
$
200,444

 
$
(12,848
)
 
$
205,863

Triple net lease properties
15,396

 
100,900

 
(7,395
)
 
108,901

Foreclosed residential real estate property
—

 
14,250

 
—

 
14,250

Total
$
33,663

 
$
315,594

 
$
(20,243
)
 
$
329,014

 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
Land
 
Buildings and equipment
 
Accumulated depreciation
 
Total
Managed properties
$
16,347

 
$
189,463

 
$
(11,212
)
 
$
194,598

Triple net lease properties
13,778

 
94,291

 
(6,610
)
 
101,459

Foreclosed residential real estate property
—

 
13,366

 
—

 
13,366

Total
$
30,125

 
$
297,120

 
$
(17,822
)
 
$
309,423


F-21

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


For the three months ended March 31, 2017, the Company acquired one senior living facility accounted for as an asset acquisition, with $8,178 of real estate acquired, and $2,049 of identifiable intangible assets related to in-place leases which will be amortized over approximately 12 years. This one property is in addition to the one acquisition disclosed in Note—(3) Acquisitions, which was accounted for as business combinations.

Depreciation expense related to the Company’s real estate investments was $2,421 and $1,693 for the three months ended March 31, 2017 and 2016, respectively.

Future Minimum Rental Revenue

The following table presents the future minimum rental revenue under the noncancelable terms of all operating leases as of:
 
March 31, 2017
Remainder of 2017
$
6,967

2018
9,289

2019
9,289

2020
9,289

2021
9,289

Thereafter
42,016

Total
$
86,139


The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenues from residential leases were $13,659 and $10,880 for the three months ended March 31, 2017 and 2016, respectively.

Net Investment Income

Net investment income represents income primarily from the following sources:

•
Interest income, and dividends related to available for sale securities, at fair value;
•
Interest income related to loans, at fair value;
•
Dividend income from equity securities, trading, at fair value;
•
Rental and related revenue from real estate, net; and
•
Earnings from other investments.

The following table presents the components of net investment income related to our specialty insurance business recorded on the Consolidated Statements of Operations:
 
Three Months Ended March 31,
Net investment income
2017
 
2016
Available for sale securities, at fair value
$
818

 
$
847

Loans, at fair value
2,905

 
1,491

Equity securities, trading, at fair value
725

 
222

Real estate, net
175

 
—

Other investments
69

 
74

Total investment income
4,692

 
2,634

Less: investment expenses
187

 
229

Net investment income
$
4,505

 
$
2,405


F-22



The following table presents the components of net realized and unrealized gains (losses) recorded on the Consolidated Statements of Operations:
 
Three Months Ended March 31,
Net realized and unrealized gains (losses)
2017
 
2016
Net realized gains (losses)
10,878

 
6,271

Net unrealized gains (losses)
5,334

 
12,489

Net realized and unrealized gains (losses)
$
16,212

 
$
18,760


Included in net realized gains (losses) is net gain on sale of loans held for sale of $14,881 and $13,515 for the three months ended March 31, 2017 and 2016, respectively, related to our specialty finance business.

Net unrealized gains (losses) recognized during the three months ended March 31, 2017 and 2016 on equity securities, trading, at fair value still held at March 31, 2017 and 2016 was $(661) and $8,329, respectively.

(6) Notes and Accounts Receivable, net

The following table summarizes the total Notes and Accounts receivable, net:
 
As of
 
March 31, 2017
 
December 31, 2016
Notes receivable, net
$
29,669

 
$
24,775

Accounts and premiums receivable, net
57,760

 
45,041

Retrospective commissions receivable
61,011

 
59,175

Other receivables
24,207

 
28,509

Total
$
172,647

 
$
157,500


Notes Receivable, net

Specialty insurance

As of March 31, 2017 and December 31, 2016, the Company’s specialty insurance business held $25,807 and $20,913 in notes receivable, net, respectively. The majority of these notes totaling $25,613 and $20,615 at March 31, 2017 and December 31, 2016, respectively, consist of receivables from specialty insurance business’s premium financing program. At March 31, 2017 and December 31, 2016, respectively, a total of $194 and $298 was for notes receivable under its Pay us Later Program, which allows customers to finance the purchase of electronic mobile devices and/ or the costs of the protection programs on these devices. The Company has established an allowance for uncollectible amounts against its notes receivable of $1,496 and $1,444 as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, there were $1,929 and $2,188 in balances classified as 90 days plus past due, respectively.

Senior living

The Company’s senior living business owns a 75% interest in a managed property. In connection therewith, subsidiaries of the senior living business received notes from affiliates of the 25% partner. The cost basis of these notes at March 31, 2017 and December 31, 2016 was approximately $3,862 and $3,862, respectively. As of March 31, 2017, all of these notes were performing.

Accounts and premiums receivable, net, Retrospective commissions receivable and Other receivables
Accounts and premiums receivable, net, retrospective commissions receivable and other receivables are primarily trade receivables from the specialty insurance segment that are carried at their approximate fair value. The Company has established a valuation allowance against its accounts and premiums receivable of $195 and $225 as of March 31, 2017 and December 31, 2016, respectively.

F-23


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


(7) Reinsurance Receivables

The following table presents the effect of reinsurance on premiums written and earned by our specialty insurance business for the following periods:
 
Direct Amount
 
Ceded to Other Companies
 
Assumed from Other Companies
 
Net Amount
 
Percentage of Amount - Assumed to Net
For the Three Months ended March 31, 2017
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
12,296

 
$
5,730

 
$
437

 
$
7,003

 
6.2
%
Accident and health insurance   
25,170

 
16,306

 
710

 
9,574

 
7.4
%
Property and liability insurance
121,757

 
56,968

 
4,982

 
69,771

 
7.1
%
Total premiums written            
159,223

 
79,004

 
6,129

 
86,348

 
7.1
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
15,188

 
7,412

 
493

 
8,269

 
6.0
%
Accident and health insurance   
27,369

 
19,058

 
775

 
9,086

 
8.5
%
Property and liability insurance
114,064

 
46,506

 
4,318

 
71,876

 
6.0
%
Total premiums earned
$
156,621

 
$
72,976

 
$
5,586

 
$
89,231

 
6.3
%
 
 
 
 
 
 
 
 
 
 
For the Three Months ended March 31, 2016
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
13,262

 
$
6,530

 
$
639

 
$
7,371

 
8.7
%
Accident and health insurance   
26,008

 
17,522

 
779

 
9,265

 
8.4
%
Property and liability insurance
139,202

 
111,057

 
2,610

 
30,755

 
8.5
%
Total premiums written            
178,472

 
135,109

 
4,028

 
47,391

 
8.5
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
15,086

 
7,158

 
747

 
8,675

 
8.6
%
Accident and health insurance   
28,949

 
20,598

 
814

 
9,165

 
8.9
%
Property and liability insurance
121,505

 
95,728

 
998

 
26,775

 
3.7
%
Total premiums earned
$
165,540

 
$
123,484

 
$
2,559

 
$
44,615

 
5.7
%

F-24

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and loss adjustment expenses ("LAE") incurred:
 
Direct Amount
 
Ceded to Other Companies
 
Assumed from Other Companies
 
Net Amount
 
Percentage of Amount - Assumed to Net
For the Three Months ended March 31, 2017
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
8,202

 
$
4,418

 
$
295

 
$
4,079

 
7.2
%
Accident and health insurance   
3,832

 
3,377

 
256

 
711

 
36.0
%
Property and liability insurance
47,608

 
24,108

 
865

 
24,365

 
3.6
%
Total losses incurred
59,642

 
31,903

 
1,416

 
29,155

 
4.9
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
3,837

 
 
 
Total policy and contract benefits
 
$
32,992

 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months ended March 31, 2016
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
7,906

 
$
3,981

 
$
463

 
$
4,388

 
10.6
%
Accident and health insurance   
4,128

 
3,244

 
284

 
1,168

 
24.3
%
Property and liability insurance
51,033

 
38,876

 
235

 
12,392

 
1.9
%
Total losses incurred
63,067

 
46,101

 
982

 
17,948

 
5.5
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
5,750

 
 
 
Total policy and contract benefits
 
$
23,698

 
 
(1) - Member benefit claims are not covered by reinsurance.

The following table presents the components of the reinsurance receivables:
 
As of
 
March 31, 2017
 
December 31, 2016
Prepaid reinsurance premiums:
 
 
 
Life (1)
$
62,583

 
$
64,621

Accident and health (1)
51,247

 
53,999

Property (2)
104,554

 
94,091

Total
218,384

 
212,711

 
 
 
 
Ceded claim reserves:
 
 
 
Life
2,707

 
2,929

Accident and health
9,965

 
10,435

Property
51,197

 
49,917

Total ceded claim reserves recoverable
63,869

 
63,281

Other reinsurance settlements recoverable
29,521

 
20,242

Reinsurance receivables
$
311,774

 
$
296,234


(1)
Including policyholder account balances ceded.
(2)
The December 31, 2016 amount includes a non-cash transaction, as part of a reinsurance contract cancellation, that resulted in a reduction of $92,854 in reinsurance receivable, offset by an increase of $88,857 in assets and a decrease of $3,997 in liabilities.


F-25

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from unrelated reinsurers:
 
As of
 
March 31, 2017
Total of the three largest receivable balances from unrelated reinsurers
$
73,800


At March 31, 2017, the three unrelated reinsurers from whom our specialty insurance business has the largest receivable balances were: London Life Reinsurance Corporation (A. M. Best Rating: A rated); MFI Insurance Company, LTD (A. M. Best Rating: Not rated) and Frandicso Property and Casualty Insurance Corporation (A. M. Best Rating: Not rated). The related receivables of these reinsurers are collateralized by, assets on hand, assets held in trust accounts and letters of credit. At March 31, 2017, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the collateralization.

(8) Goodwill and Intangible Assets, net

The following table presents identifiable finite- and indefinite-lived intangible assets, accumulated amortization, and goodwill by segment:
 
As of March 31, 2017
 
As of December 31, 2016
 
Specialty insurance
 
Senior living
 
Specialty finance
 
Total
 
Specialty insurance
 
Senior living
 
Specialty finance
 
Total
Customer relationships
$
50,500

 
$
—

 
$
—

 
$
50,500

 
$
50,500

 
$
—

 
$
—

 
$
50,500

Accumulated amortization
(6,481
)
 
—

 
—

 
(6,481
)
 
(4,614
)
 
—

 
—

 
(4,614
)
Trade names
6,500

 
—

 
800

 
7,300

 
6,500

 
—

 
800

 
7,300

Accumulated amortization
(1,662
)
 
—

 
(140
)
 
(1,802
)
 
(1,484
)
 
—

 
(120
)
 
(1,604
)
Software licensing
8,500

 
—

 
640

 
9,140

 
8,500

 
—

 
640

 
9,140

Accumulated amortization
(3,967
)
 
—

 
(160
)
 
(4,127
)
 
(3,542
)
 
—

 
(137
)
 
(3,679
)
Insurance policies and contracts acquired
36,500

 
—

 
—

 
36,500

 
36,500

 
—

 
—

 
36,500

Accumulated amortization
(34,641
)
 
—

 
—

 
(34,641
)
 
(34,184
)
 
—

 
—

 
(34,184
)
Insurance licensing agreements(1)
13,000

 
—

 
—

 
13,000

 
13,000

 
—

 
—

 
13,000

Leases in place
1,317

 
36,482

 
—

 
37,799

 
1,317

 
32,233

 
—

 
33,550

Accumulated amortization
(45
)
 
(22,319
)
 
—

 
(22,364
)
 
(18
)
 
(20,413
)
 
—

 
(20,431
)
Intangible assets, net
69,521

 
14,163

 
1,140

 
84,824

 
72,475

 
11,820

 
1,183

 
85,478

Goodwill
89,854

 
—

 
2,913

 
92,767

 
89,854

 
—

 
2,913

 
92,767

Total goodwill and intangible assets, net
$
159,375

 
$
14,163

 
$
4,053

 
$
177,591

 
$
162,329

 
$
11,820

 
$
4,096

 
$
178,245

(1)
Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.

Goodwill

The following table presents the activity in goodwill, by segment, and includes the adjustments made to the balance of goodwill to reflect the effect of the final valuation adjustments made for acquisitions, as well as the reduction to any goodwill attributable to discontinued operations or impairment related charges:
 
Specialty insurance
 
Specialty finance
 
Total
Balance at December 31, 2016
$
89,854

 
$
2,913

 
$
92,767

Balance at March 31, 2017
$
89,854

 
$
2,913

 
$
92,767


The Company conducts annual impairment tests of its goodwill as of October 1. For the three months ended March 31, 2017 and 2016, no impairment was recorded on the Company’s goodwill or intangibles.

F-26

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



Intangible Assets, Net

The following table presents the activity, by segment, in finite and indefinite-lived other intangible assets and includes the adjustments made to the balance to reflect the effect of any final valuation adjustments made for acquisitions, as well as any reduction attributable to discontinued operations or impairment-related charges:
 
Specialty insurance
 
Senior living
 
Specialty finance
 
Total
Balance at December 31, 2016
$
72,475

 
$
11,820

 
$
1,183

 
$
85,478

Intangible assets acquired in 2017
—

 
4,249

 
—

 
4,249

Less: amortization expense
(2,954
)
 
(1,906
)
 
(43
)
 
(4,903
)
Balance at March 31, 2017
$
69,521

 
$
14,163

 
$
1,140

 
$
84,824


The following table present the amortization expense on finite-lived intangible assets for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
Amortization expense on intangible assets
$
4,903

 
$
6,026


The following table presents the amortization expense on finite-lived intangible assets for the next five years by segment:
 
As of March 31, 2017
 
Specialty insurance (VOBA)
 
Specialty insurance (other)
 
Senior living
 
Specialty finance
 
Total
Remainder of 2017
$
793

 
$
7,478

 
$
4,361

 
$
128

 
$
12,760

2018
465

 
9,187

 
1,621

 
171

 
11,444

2019
217

 
7,619

 
959

 
171

 
8,966

2020
123

 
5,137

 
959

 
171

 
6,390

2021
82

 
4,361

 
959

 
171

 
5,573

2022 and thereafter
179

 
20,880

 
5,304

 
328

 
26,691

Total
$
1,859

 
$
54,662

 
$
14,163

 
$
1,140

 
$
71,824


(9) Derivative Financial Instruments and Hedging

The Company utilizes derivative financial instruments as part of its overall investment and hedging activities. Derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are located within trading assets at fair value and are reported in other investments. Trading liabilities are reported within other liabilities and accrued expenses.

Derivatives, at fair value
Credit Derivatives
Credit derivatives are generally defined as over‑the‑counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity.
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. At inception of the investment into the CDX position, the Company was required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side subject to increase based on additional maintenance margin as a result of decreases in value. As of March 31, 2017, the required collateral balance was $6,668. Within the terms of the investment, the cash collateral was returned over time as the

F-27


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


margin within the CDX basket was deemed to be sufficient collateral. As of March 31, 2017, there is a cash collateral balance of $1,632 due to the broker of the investment, which is netted against the overall investment position.
Foreign Currency Forward Contracts

Foreign currency forward contracts are used as a foreign currency hedge where the Company has an obligation to either make or take a foreign currency payment at a future date. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched, the Company has in effect “locked in” the exchange rate payment amount. The Company, through its subsidiary Siena, has entered into a foreign exchange forward contract hedge on its foreign loans receivable. The Company has not elected hedge accounting on such transactions.

Interest Rate Lock Commitments

The Company enters into interest rate lock commitments (IRLCs) in connection with its mortgage banking activities to fund residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain when the Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan commitment will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from the fair value of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this risk, the Company utilizes forward delivery contracts and TBA mortgage backed securities to economically hedge the risk of potential changes in the value of the loans that would result from the commitments.

Forward Delivery Contracts
 
The Company enters into forward delivery contracts with investors to manage the interest rate risk associated with IRLCs and loans held for sale.

TBA Mortgage Backed Securities

The Company enters into to be announced (TBA) mortgage backed securities which facilitate hedging and funding by allowing the Company to prearrange prices for mortgages that are in the process of originating. The Company utilizes these hedging instruments for Agency (Fannie Mae and Freddie Mac) and FHA/VA (Ginnie Mae) eligible IRLCs and typically commit them to investors at prices higher than otherwise available.

Interest Rate Swaps
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included in other assets in the Consolidated Balance Sheets.
The Company uses interest rate swaps to hedge the variability of floating rate borrowings. Cash flow hedge accounting was applied to the floating rate borrowings in its specialty insurance business, and during the second quarter of 2016, the Company elected to apply cash flow hedge accounting to such transactions in its senior living business. 

F-28

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table summarizes the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying risk:
 
As of March 31, 2017
 
As of December 31, 2016
 
Notional
Values
 
Asset
Derivatives
 
Liability
Derivatives
 
Notional
Values
 
Asset
Derivatives
 
Liability
Derivatives
Credit risk:
 
 
 
 
 
 
 
 
 
 
 
Credit derivatives sold protection
$
295,973

 
$
25,369

 
$
—

 
$
297,612

 
$
28,731

 
$
—

Credit derivatives bought protection
296,921

 
—

 
10,786

 
298,173

 
—

 
14,501

Sub-total
592,894

 
25,369

 
10,786

 
595,785

 
28,731

 
14,501

 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency risk:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
973

 
—

 
6

 
965

 
—

 
3

 
 
 
 
 
 
 
 
 
 
 
 
Interest rate risk:
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
194,285

 
4,989

 
—

 
203,815

 
4,872

 
—

Forward delivery contracts
52,873

 
—

 
15

 
66,731

 
—

 
84

TBA mortgage backed securities
194,500

 
121

 
831

 
249,750

 
1,678

 
269

Interest rate swaps
139,343

 
1,590

 
677

 
134,343

 
1,388

 
1,042

Sub-total
581,001


6,700


1,523

 
654,639

 
7,938


1,395

Total
$
1,174,868


$
32,069


$
12,315

 
$
1,251,389

 
$
36,669


$
15,899

The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. The following table presents derivative instruments that are subject to offset by a master netting agreement:
 
As of
 
March 31, 2017
 
December 31, 2016
Derivatives subject to netting arrangements:
 
 
 
Credit default swap indices sold protection
$
25,369

 
$
28,731

Credit default swap indices bought protection
(10,786
)
 
(14,501
)
Gross assets recognized
14,583

 
14,230

Cash collateral
(1,632
)
 
(1,632
)
Net assets recognized (included in other investments)
$
12,951

 
$
12,598


Derivatives designated as cash flow hedging instruments

A subsidiary in our specialty insurance business has an IRS with a counterparty, pursuant to which the subsidiary swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This IRS is designated as a cash flow hedge and expires in June 2017. As of the December 4, 2014 acquisition date, the IRS was considered a new hedging relationship, and was redesignated as a hedge.

Subsidiaries in our senior living business have IRSs with the same counterparty as the respective lenders, pursuant to which our subsidiary swapped the floating rate portion of its outstanding debt to a fixed rate. These IRSs are designated as cash flow hedges and expire between November 30, 2017 and August 1, 2023.


F-29

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the fair value and the related outstanding notional amounts of the Company's cash flow hedging derivative instruments and indicates where the Company records each amount in its Consolidated Balance Sheets:
 
 
 
As of
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
Notional value
 
 
$
139,343

 
$
134,343

Fair value of interest rate swaps
Other investments
 
$
1,590

 
$
1,388

Fair value of interest rate swaps
Other liabilities and accrued expenses
 
$
677

 
$
1,042

Unrealized gain (loss), net of tax, on the fair value of interest rate swaps
AOCI
 
$
1,942

 
$
1,759

 
 
 
 
 
 
Range of variable rates on interest rate swaps
 
 
0.77% to 1.13%
 
0.67% to 0.96%
 
 
 

 
 
Range of fixed rates on interest rate swaps
 
 
1.31% to 4.99%
 
1.31% to 4.99%

The following table presents the pretax impact of the cash flow hedging derivative instruments on the Consolidated Financial Statements for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
Gain (loss) recognized in AOCI on the derivative-effective portion
$
(229
)
 
$
(136
)
 
 
 
 
(Gain) loss reclassified from AOCI into income-effective portion
$
144

 
$
(319
)
 
 
 
 
Gain (loss) recognized in income on the derivative-ineffective portion
$
(1
)
 
$
—


The following table presents the estimated amount to be reclassified to earnings from AOCI during the next 12 months. These net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.
 
As of
 
March 31, 2017
Estimated (gains) losses to be reclassified to earnings from AOCI during the next 12 months
$
(22
)

(10) Assets and Liabilities of Consolidated CLOs

The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s indenture and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. The CLOs are considered variable interest entities (VIE).

The assets of each of the CLOs, including cash and cash equivalents, are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. The Company consolidates entities when it is determined to be the primary beneficiary under current VIE accounting guidance.

F-30

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


On January 18, 2017, the Company sold its ownership in the subordinated notes of a CLO. As a result of the sale, the Company determined that it no longer had the controlling interest in such entity. The Company, therefore, deconsolidated its ownership in the subordinated notes of the CLO and is no longer reporting the assets and liabilities of the CLO in its Consolidated Balance Sheet as of March 31, 2017, or the revenue and expenses of the CLO in its Consolidated Statement of Operations for the three months ended March 31, 2017.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s Consolidated Balance Sheets as of the dates indicated:
 
As of
 
March 31, 2017
 
December 31, 2016
Assets:
 
 
 
Cash and cash equivalents
$
40,461

 
$
45,589

Loans, at fair value (1)
524,399

 
928,240

Other assets
11,058

 
15,666

Total assets of consolidated CLOs
$
575,918

 
$
989,495

Liabilities:
 
 
 
Debt
$
512,533

 
$
912,034

Other liabilities and accrued expenses
22,724

 
19,935

Total liabilities of consolidated CLOs
$
535,257

 
$
931,969

 
 
 
 
Net
$
40,661

 
$
57,526


(1)
The unpaid principal balance for these loans is $534,769 and $952,225 and the difference between their fair value and UPB is $10,370 and $23,985 at March 31, 2017 and December 31, 2016, respectively.

The Company’s beneficial interests and maximum exposure to loss related to the consolidated CLOs are limited to (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative results in the net amount of the CLOs shown above to be equivalent to the beneficial interests retained by the Company as illustrated in the below table:
Beneficial interests:
As of
 
March 31, 2017
 
December 31, 2016
Subordinated notes and related participations in management fees
$
40,294

 
$
56,820

Accrued management fees
367

 
706

Total beneficial interests
$
40,661

 
$
57,526

 
 
 
 
 
 
 
 
The following table represents revenue and expenses of the consolidated CLOs included in the Company’s Consolidated Statements of Operations for the periods indicated:
 
Three Months Ended March 31,
 
2017
 
2016
Income:
 
 
 
Net realized and unrealized gains (losses)
$
1,253

 
$
(2,765
)
Interest income
7,614

 
10,442

Total revenue
8,867

 
7,677

Expenses:
 
 
 
Interest expense
4,775

 
6,338

Other expense
177

 
234

Total expense
4,952

 
6,572

 
 
 
 
Net income (loss) attributable to consolidated CLOs
$
3,915

 
$
1,105



F-31

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


As summarized in the table below, the application of the measurement alternative results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the CLOs which are eliminated upon consolidation:
Economic interests:
Three Months Ended March 31,
 
2017
 
2016
Distributions received and realized and unrealized gains (losses) on the subordinated notes held by the Company, net
$
3,548

 
$
436

Management fee income
367

 
669

Total economic interests
$
3,915

 
$
1,105


(11) Debt, net

The following table summarizes the balance of the Company’s debt holdings, net of discounts and deferred financing costs, excluding notes payable of consolidated CLOs. See Note—(10) Assets and Liabilities of Consolidated CLOs:
 
 
 
 
 
 
Maximum Borrowing Capacity as of
 
As of
Debt Type
 
Stated Maturity Date
 
Stated Interest Rate or Range of Rates
 
March 31, 2017
 
March 31, 2017
 
December 31, 2016
Secured corporate credit agreements
 
September 2018 - December 2019
 
LIBOR + 2.75% to 6.50%
 
$
253,750

 
$
161,322

 
$
164,000

Asset based revolving financing (1) (2)
 
April 2017 - July 2021
 
LIBOR + 2.25% to 5.75%
 
330,000

 
235,817

 
250,557

Residential mortgage warehouse borrowings (3)
 
April 2017 - March 2018
 
LIBOR + 2.63% to 2.88%
 
178,000

 
60,078

 
101,402

Real estate commercial mortgage borrowings:
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
August 2019 - May 2040
 
3.08% to 5.12%
 
89,251

 
89,251

 
82,133

Variable rate (LIBOR based)
 
October 2019 - January 2023
 
LIBOR + 2.05% to 3.75%
 
169,193

 
168,598

 
158,618

Subordinated debt
 
April 2020
 
12.50%
 
20,000

 
8,500

 
8,500

Preferred trust securities
 
June 2037
 
LIBOR + 4.10%
 
35,000

 
35,000

 
35,000

Preferred notes payable
 
January 2021
 
12.00%
 
 
 
1,386

 
1,232

Total debt, face value
 
 
 
 
 
 
 
759,952

 
801,442

Unamortized discount, net
 
 
 
 
 
 
 
(315
)
 
(382
)
Unamortized deferred financing costs
 
 
 
 
 
 
 
(7,752
)
 
(8,051
)
Total debt, net
 
 
 
 
 
 
 
$
751,885

 
$
793,009


(1) Asset based revolving financing is generally recourse only to specific assets and related cash flows.
(2) The weighted average coupon rate for asset based revolving financing was 3.73% and 3.53% at March 31, 2017 and December 31, 2016, respectively.
(3) The weighted average coupon rate for residential mortgage warehouse borrowings was 3.70% and 3.51% at March 31, 2017 and December 31, 2016, respectively. Includes debt having a maximum borrowing capacity of $103,000 with a stated interest rate of LIBOR +2.75% and a floor of 3.00%.

The table below presents the amount of interest expense the Company incurred on its debt for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
Interest expense
$
8,724

 
$
6,389



F-32

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the future maturities of the unpaid principal balance on the Company’s long-term debt as of:
 
March 31, 2017
Remainder of 2017
$
39,012

2018
132,083

2019
197,260

2020
77,616

2021
147,049

Thereafter
166,932

Total
$
759,952


The following narrative is a summary of certain of the terms of our debt agreements for the periods ended March 31, 2017:
Residential Mortgage Warehouse Borrowings

The maximum borrowing amount for one of the three warehouse lines of credit, through a subsidiary in our specialty finance business, decreased by $10,000, from $35,000 as of December 31, 2016 to $25,000 as of March 31, 2017.

The maturity date for one of the three warehouse lines of credit, through a subsidiary in our specialty finance business, was extended from June 2017 to March 2018.

Real Estate Commercial Mortgage Borrowings

On February 3, 2017, in connection with an acquisition in the senior living business, the Company along with our partners entered into a $10,000, five year mortgage borrowing, which includes 12 months of interest only payments. The loan carries a variable rate of LIBOR plus 3.75%. If on or after February 3, 2019 the facility has achieved certain Occupancy and Minimum Debt Service Coverage Ratio’s, then the interest rate will be reduced to a rate of LIBOR plus 2.75% as of such date. This note matures on February 1, 2022.

On February 9, 2017, in connection with assets acquired in the senior living business, a pre-existing Housing and Urban Development (HUD) loan was assumed by a subsidiary in our senior living business. The 35 year loan was originally dated June 1, 2013 for $8,072. The loan carries a fixed interest rate of 3.08% per annum, and matures on July 1, 2048. As of the acquisition date, this debt had a balance of $7,586. All terms of the note assumed remain consistent with the original note.

(12) Fair Value of Financial Instruments

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note—(2) Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy.

The Company’s fair value measurement is based primarily on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include third-party pricing services, independent broker quotations and pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to

F-33

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. In addition, the Company utilizes an income approach to measure the fair value of NPLs, as discussed below.

The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs may include: benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. Broker quotes are obtained from sources recognized to be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand considerations and market volatility.

Available for Sale Securities

Available for sale securities are generally classified within either Level 1 or Level 2 of the fair value hierarchy and are based on prices provided by an independent pricing service and a third party investment manager who provide a single price or quote per security.

The following details the methods and assumptions used to estimate the fair value of each class of available for sale securities and the applicable level each security falls within the fair value hierarchy:

U.S Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Obligations of State and Political Subdivisions, Corporate Securities, Asset-Backed Securities, and Obligations of Foreign Governments: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 of the fair value hierarchy.

Certificates of Deposit: The estimated fair value of certificates of deposit approximate carrying value and fall under Level 1 of the fair value hierarchy.

Equity Securities: The fair values of publicly traded common and preferred stocks were obtained from market value quotations provided by an independent pricing service and fall under Level 1 of the fair value hierarchy. The fair values of non-publicly traded common and preferred stocks were based on prices obtained from an independent pricing service using unobservable inputs and fall under Level 3 of the fair value hierarchy.

Loans, at fair value

Corporate Loans (including those of consolidated CLOs): These loans are comprised of a diversified portfolio of middle market and broadly syndicated leveraged loans and are generally classified within either Level 2 or Level 3 in the fair value hierarchy. The Company has evaluated each loan’s respective liquidity and have additionally performed valuation benchmarking. The key characteristics which were evaluated as part of this determination were liquidity ratings, price changes to index benchmarks, depth of quotes, credit ratings and industry trends.

Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified as Level 2 in the fair value hierarchy and fair value is based upon forward sales contracts with third party investors, including estimated loan costs, and reserves. For non-performing mortgage loans held for sale, fair value is based upon estimated selling prices from third party investors of such types of loans.

Nonperforming loans and REO: The Company determines the purchase price for NPLs at the time of acquisition and for each subsequent valuation by using a discounted cash flow valuation model and considering alternate loan resolution probabilities, including modification, liquidation, or conversion to REO. The significant unobservable inputs used in the fair value measurement of our NPLs are discount rates, loan resolution timeline, and the value of underlying properties. The fair values of NPLs which are making payments (generally based on a modification or a workout plan) are primarily based upon secondary market transaction prices, which are expressed as a percentage of unpaid principal balance (UPB). Observable inputs to the model include loan amounts, payment history, and property types. Our NPLs are on nonaccrual status at the time of purchase as it is probable that principal or interest is not fully collectible. NPLs are included in loans, at fair value and fall under Level 3 of the fair value hierarchy.

NPLs that have become REOs were measured at fair value on a non-recurring basis during the three months ended March 31, 2017 and year ended December 31, 2016. The carrying value of REOs at March 31, 2017 and December 31, 2016 was

F-34


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


$14,250 and $13,366, respectively. Upon conversion to REO, the fair value is estimated using broker price opinion (BPO). BPOs are subject to judgments of a particular broker formed by visiting a property, assessing general home values in an area, reviewing comparable listings, and reviewing comparable completed sales. These judgments may vary among brokers and may fluctuate over time based on housing market activities and the influx of additional comparable listings and sales. REO is included in real estate, net.

Trading Assets and Liabilities: Trading assets and liabilities consist primarily of privately held equity securities, exchange-traded equity securities, CLOs, collateralized debt obligations (CDOs), derivative assets and liabilities, tax exempt securities, and U.S. Treasury short positions. The fair value of privately held equity securities are based on quotes obtained from dealers or internally developed valuation models. Because significant inputs used to determine the dealer quotes or model values are not observable, such as projected future earnings and price volatility, the Company has classified them within Level 3 of the fair value hierarchy. The Company’s U.S. Treasury short position is priced through dealer indicative quotes and as such is classified as Level 2. Trading assets are presented in the consolidated balance sheets within equity securities, trading, at fair value and other investments. Trading liabilities are included within other liabilities and accrued expenses.

Positions in securitized products such as CLOs and CDOs are based on quotes obtained from dealers and valuation models. When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in an active or inactive market, the Company has classified them within Level 2 of the fair value hierarchy. If these quotes are based on valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand considerations, and market volatility, the Company has classified them within Level 3 of the fair value hierarchy.

The fair value of tax exempt securities is determined by obtaining quotes from independent pricing services. In most cases, quotes are obtained from two pricing services and the average of both quotes is used. The independent pricing services determine their quotes using observable inputs such as current interest rates, specific issuer information and other market data for such securities. Therefore, the estimate of fair value is subject to a high degree of variability based upon market conditions, the availability of issuer information and the assumptions made. The valuation inputs used to arrive at fair value for such debt obligations are generally classified within Level 2 or Level 3 of the fair value hierarchy.

Derivative Assets and Liabilities: Derivatives are comprised of credit default swaps (CDS), index credit default swaps (CDX), interest rate lock commitments (IRLC), to be announced mortgage backed securities (TBA) and interest rate swaps (IRS). The fair value of these instruments is based upon valuation pricing models, which represent the amount the Company would expect to receive or pay at the balance sheet date to exit the position. In general, the fair value of CDSs and CDXs are based on dealer quotes. Because significant inputs, other than unadjusted quoted prices in active markets are used to determine the dealer quotes, such as price volatility, the Company classifies them as Level 2 in the fair value hierarchy. The fair value of IRS is based upon either valuation pricing models, which represent the amount the Company would expect to pay at the balance sheet date if the contracts were exited, or by obtaining broker or counterparty quotes. Because there are observable inputs used to arrive at these prices, the Company has classified IRS within Level 2 of the fair value hierarchy. Our mortgage origination subsidiaries issue IRLCs to its customers, which are carried at estimated fair value on the Company’s Consolidated Balance Sheet. The estimated fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the IRLC net of costs to produce and an expected fall out assumption. The fair values of these commitments generally result in a Level 3 classification. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors. For loans not locked with investors under a forward delivery commitment, the Company enters into hedge instruments, primarily TBAs, to protect against movements in interest rates. The fair values of TBA mortgage backed securities generally result in a Level 2 classification.


The following tables present the Company’s fair value hierarchies for financial assets and liabilities, including the balances associated with the consolidated CLOs, measured on a recurring basis:
 
As of March 31, 2017
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Assets:
 
 
 
 
 
 
 
Available for sale securities, at fair value:
 
 
 
 
 
 
 
Equity securities
$
765

 
$
—

 
$
48

 
$
813


F-35


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


 
As of March 31, 2017
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
—

 
28,098

 
—

 
28,098

Obligations of state and political subdivisions
—

 
57,247

 
—

 
57,247

Obligations of foreign governments
—

 
732

 
—

 
732

Certificates of deposit
899

 
—

 
—

 
899

Asset backed securities
—

 
1,414

 
—

 
1,414

Corporate securities
—

 
63,326

 
—

 
63,326

 Total available for sale securities
1,664

 
150,817

 
48

 
152,529

 
 
 
 
 
 
 
 
Loans, at fair value:

 


 


 


Corporate loans
—

 
47,173

 
125,903

 
173,076

Mortgage loans held for sale
—

 
79,867

 
—

 
79,867

Non-performing loans
—

 
—

 
73,281

 
73,281

Other loans receivable
—

 
—

 
1,169

 
1,169

 Total loans, at fair value
—


127,040


200,353


327,393

 
 
 
 
 
 
 
 
Equity securities, trading, at fair value
46,872

 
—

 
—

 
46,872

 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
Interest rate swaps
—

 
1,590

 
—

 
1,590

Interest rate lock commitments
—

 
—

 
4,989

 
4,989

TBA mortgage backed securities
—

 
121

 
—

 
121

Credit derivatives
—

 
12,951

 
—

 
12,951

Total derivative assets
—

 
14,662

 
4,989

 
19,651

CLOs
—

 
—

 
2,000

 
2,000

Debentures
—

 
4,036

 
—

 
4,036

Total other investments
—

 
18,698

 
6,989

 
25,687

 
 
 
 
 
 
 
 
Total financial instruments attributable to non-CLOs included in consolidated assets
48,536


296,555


207,390


552,481

 
 
 
 
 
 
 
 
Financial instruments included in assets of consolidated CLOs:
 
 
 
 
 
 
 
Loans, at fair value
—

 
231,733

 
292,666

 
524,399

Total financial instruments included in assets of consolidated CLOs
—

 
231,733

 
292,666

 
524,399

 Total
$
48,536


$
528,288


$
500,056


$
1,076,880

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Trading liabilities:
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
677

 
$
—

 
$
677

Forward delivery contracts
—

 
15

 
—

 
15

TBA mortgage backed securities
—

 
831

 
—

 
831

Foreign currency forward contracts
—

 
6

 
—

 
6

Total derivative liabilities
—

 
1,529

 
—

 
1,529

Total trading liabilities (included in other liabilities and accrued expenses)
—


1,529


—


1,529

Contingent consideration payable
—

 
—

 
2,252

 
2,252

Preferred notes payable
—

 
—

 
1,386

 
1,386

Total financial instruments attributable to Non-CLOs included in consolidated liabilities
—


1,529


3,638

 
5,167

 
 
 
 
 
 
 
 
Financial instruments included in liabilities of consolidated CLOs:
 
 
 
 
 
 
 

F-36


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


 
As of March 31, 2017
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Notes payable of CLOs
—

 
—

 
512,533

 
512,533

Total financial instruments included in liabilities of consolidated CLOs
—

 
—

 
512,533

 
512,533

 Total
$
—


$
1,529


$
516,171


$
517,700

 
As of December 31, 2016
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Assets:
 
 
 
 
 
 
 
Available for sale securities, at fair value:
 
 
 
 
 
 
 
Equity securities
$
736

 
$
—

 
$
48

 
$
784

U.S. Treasury securities and obligations of U.S. government authorities and agencies
—

 
26,799

 
—

 
26,799

Obligations of state and political subdivisions
—

 
56,934

 
—

 
56,934

Obligations of foreign governments
—

 
728

 
—

 
728

Certificates of deposit
895

 
—

 
—

 
895

Asset backed securities
—

 
1,460

 
—

 
1,460

Corporate bonds
—

 
58,571

 
—

 
58,571

 Total available for sale securities, at fair value
1,631


144,492


48


146,171

 
 
 
 
 
 
 
 
Loans, at fair value
 
 
 
 
 
 
 
Corporate loans
—

 
46,352

 
129,206

 
175,558

Mortgage loans held for sale
—

 
121,439

 
—

 
121,439

Non-performing loans
—

 
—

 
74,923

 
74,923

Other loans receivable
—

 
—

 
1,169

 
1,169

 Total loans, at fair value
—


167,791


205,298


373,089

 
 
 
 
 
 
 
 
Equity securities, trading, at fair value
48,612

 
—

 
—

 
48,612

 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
Derivative assets:

 
 
 
 
 
 
Interest rate swaps
—

 
1,388

 
—

 
1,388

Interest rate lock commitments
—

 
—

 
4,872

 
4,872

TBA mortgage backed securities
—

 
1,678

 
—

 
1,678

Credit derivatives
—

 
12,598

 
—

 
12,598

Total derivative assets
—

 
15,664

 
4,872

 
20,536

CLOs
—

 
—

 
974

 
974

Debentures
—

 
3,957

 
—

 
3,957

Total other investments
—

 
19,621

 
5,846

 
25,467

 
 
 
 
 
 
 
 
Total financial instruments attributable to non-CLOs included in consolidated assets
50,243


331,904


211,192


593,339

 
 
 
 
 
 
 
 
Financial instruments included in assets of consolidated CLOs:
 
 
 
 
 
 
 
Loans, at fair value
—

 
342,370

 
585,870

 
928,240

Total financial instruments included in assets of consolidated CLOs
—


342,370


585,870


928,240

Total
$
50,243


$
674,274


$
797,062


$
1,521,579

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Trading liabilities:
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 

F-37


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


 
As of December 31, 2016
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Interest rate swaps
$
—

 
$
1,042

 
$
—

 
$
1,042

Forward delivery contracts
—

 
84

 
—

 
84

TBA mortgage backed securities
—

 
269

 
—

 
269

Foreign currency forward contracts
—

 
3

 
—

 
3

Total derivative liabilities
—


1,398


—


1,398

Total trading liabilities (included in other liabilities and accrued expenses)
—


1,398


—


1,398

Contingent consideration payable
—

 
—

 
1,852

 
1,852

Preferred notes payable
—

 
—

 
1,232

 
1,232

Total financial instruments attributable to Non-CLOs included in consolidated liabilities
—


1,398


3,084


4,482

 
 
 
 
 
 
 
 
Financial instruments included in liabilities of consolidated CLOs:
 
 
 
 
 
 
 
Notes payable of CLOs
—

 
—

 
912,034

 
912,034

Total financial instruments included in liabilities of consolidated CLOs
—


—


912,034


912,034

 
 
 
 
 
 
 
 
Total
$
—


$
1,398


$
915,118


$
916,516

The following table represents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:    
 
Three Months Ended March 31,
 
2017
2016 (2)
 
Non-CLO assets
 
CLO assets
 
Non-CLO assets
 
CLO assets
Balance at January 1,
$
211,192

 
$
585,870

 
$
239,944

 
$
520,892

Net realized gains (losses)
850

 
(332
)
 
(5,696
)
 
34

Net unrealized gains (losses)
1,802

 
1,427

 
9,280

 
(5,079
)
Origination of IRLC
14,478

 
—

 
10,141

 
—

Purchases
10,514

 
30,896

 
54,413

 
27,083

Sales
(14,377
)
 
(37,037
)
 
(13,421
)
 
(9,998
)
Issuances
219

 
272

 
339

 
396

Transfer into Level 3 (1)
9,960

 
26,990

 
18,676

 
54,672

Transfer adjustments (out of) Level 3 (1)
(11,229
)
 
(64,120
)
 
(11,023
)
 
(36,721
)
Deconsolidation of CLO due to sale
1,342

 
(251,300
)
 
—

 
—

Conversion to real estate owned
(2,968
)
 
—

 
(1,667
)
 
—

Conversion to mortgage held for sale
(14,361
)
 
—

 
(10,036
)
 
—

Other
(32
)
 
—

 
—

 
—

Balance at March 31,
$
207,390

 
$
292,666

 
$
290,950

 
$
551,279

 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) included in earnings related to assets still held at period end
$
1,727

 
$
1,366

 
$
4,241

 
$
(5,184
)

(1)
All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third-party pricing on both CLO and Non-CLO assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.
(2)
Items within the Level 3 rollforward have been restated to reflect assets purchased during a period as purchases rather than transfers. The presentation of gross origination of IRLC’s and gross conversion to mortgage held for sale have also been restated to show the break out from net realized and unrealized gains and losses, conversion to real estate owned, and transfers out of level 3 assets. These changes have no impact on the total amount of level 3 assets.



F-38


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table represents additional information about liabilities that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
 
Non-CLO Liabilities
 
CLO Liabilities
 
Non-CLO Liabilities
 
CLO Liabilities
Balance at January 1,
$
3,084

 
$
912,034

 
$
2,498

 
$
683,827

Net unrealized gains (losses)
—

 
(48
)
 
(149
)
 
120

Dispositions
—

 
(21,410
)
 
—

 
—

FV adjustment
554

 
—

 
—

 
—

Deconsolidation of CLO due to sale
—

 
(378,043
)
 
—

 
—

Balance at March 31,
$
3,638

 
$
512,533

 
$
2,349

 
$
683,947

 
 
 
 
 
 
 
 
Changes in unrealized (losses) gains included in earnings related to liabilities still held at period end
$
—

 
$
(48
)
 
$
(149
)
 
$
120


The following is quantitative information about Level 3 significant unobservable inputs used in fair valuation. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not readily available to the Company.
 
Fair Value as of
 
 
 
 
 
Actual or Range
(Weighted average)
Assets (1)
March 31, 2017
 
December 31, 2016
 
Valuation Technique
 
Unobservable input(s)
 
March 31, 2017
 
December 31, 2016
Interest rate lock commitments
4,989

 
4,872

 
Internal model
 
Pull through rate
 
45% - 95%
 
45% - 95%
NPLs
73,281

 
74,923

 
Discounted cash flow
 
See table below (2)
 
See table below
 
See table below
Total
$
78,270

 
$
79,795

 
 
 
 
 
 
 
 

(1)
Financial assets classified as Level 3 and fair valued using significant unobservable inputs classified as Level 3 have not been provided as these are not readily available to the Company (including servicing release premium for interest rate lock commitments and forward delivery contracts).
(2)
Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics, such as location and value of underlying collateral, affect the loan resolution timeline. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.

The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our NPLs. For NPLs that are not making payments, discount rate, loan resolution time-line, value of underlying properties, holdings costs and liquidation costs are the primary inputs used to measure fair value. For NPLs that are making payments, note rate and secondary market transaction prices/UPB are the primary inputs used to measure fair value.
 
 
As of March 31, 2017
 
As of December 31, 2016
Unobservable inputs
 
High
 
Low
 
Average(1)
 
High
 
Low
 
Average(1)
Discount rate
 
30.0%
 
16.0%
 
22.9%
 
30.0%
 
16.0%
 
22.9%
Loan resolution time-line (Years)
 
2.6
 
0.5
 
1.3
 
2.3
 
0.5
 
1.2
Value of underlying properties
 
$2,400
 
$18
 
$252
 
$1,800
 
$32
 
$234
Holding costs
 
36.0%
 
5.6%
 
8.2%
 
24.1%
 
5.4%
 
8.3%
Liquidation costs
 
43.8%
 
8.1%
 
9.6%
 
25.0%
 
8.5%
 
9.6%
Note rate
 
6.0%
 
3.0%
 
4.8%
 
6.0%
 
3.0%
 
4.8%
Secondary market transaction prices/UPB
 
88.5%
 
75.5%
 
83.4%
 
88.5%
 
75.5%
 
83.7%

(1)
Weighted based on value of underlying properties (excluding the value of underlying properties line item).


F-39


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


 
Fair Value as of
 
 
 
 
 
Actual or Range (Weighted average)
Liabilities (1)
March 31, 2017
 
December 31, 2016
 
Valuation Technique
 
Unobservable input(s)
 
March 31, 2017
 
December 31, 2016
Contingent consideration payable - Reliance
$
2,200

 
$
1,800

 
Cash Flow model (2)
 
Forecast EBITDA
 
$1,000 - $7,000
 
$951 - $6,005
 
 
 
Book value growth rate
 
N/A
 
5.0%
 
 
 
Asset volatility
 
N/A
 
1.4% - 23.7%
Contingent consideration payable - Luxury
52

 
52

 
Cash Flow model
 
Projected cash available for distribution
 
$1,059 - $1,316
 
$1,059 - $1,316
Preferred notes payable
1,386

 
1,232

 
Cash Flow model
 
Discount rate
 
12.0%
 
12.0%
Total
$
3,638


$
3,084

 
 
 
 
 
 
 
 
 
(1)
Not included in this table are the debt obligations of consolidated CLOs, measured and leveled on the basis of the fair value of the (more observable) financial assets of the consolidated CLOs. See Note—(10) Assets and Liabilities of Consolidated CLOs.
(2) For annual periods a Monte Carlo simulation is run.

The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value and their respective levels within the fair value hierarchy:
 
As of March 31, 2017
 
As of December 31, 2016
 
 Level within
Fair Value
Hierarchy
 
Fair Value
 
Carrying Value
 
 Level within
Fair Value
Hierarchy
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Notes and accounts receivable, net
2
 
$
33,343

 
$
33,705

 
2
 
$
28,293

 
$
28,732

Total Assets
 
 
$
33,343

 
$
33,705

 
 
 
$
28,293

 
$
28,732

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Debt, net
3
 
$
757,695

 
$
758,253

 
3
 
$
798,806

 
$
799,828

Total Liabilities
 
 
$
757,695

 
$
758,253

 
 
 
$
798,806

 
$
799,828

 
 
 
 
 
 
Notes and accounts receivable: To the extent that carrying amounts differ from fair value, fair value is determined based on contractual cash flows discounted at market rates for similar credits. Categorized as Level 2 of the fair value hierarchy.

Debt: The fair value of notes payable is determined based on contractual cash flows discounted at market rates for mortgage notes payable and either dealer quotes or contractual cash flows discounted at market rates for other notes payable. Categorized as Level 3 of the fair value hierarchy.

Additionally, the following financial assets and liabilities on the Consolidated Balance Sheets are not carried at fair value, but whose carrying amounts approximate their fair value:

Loans Owned, at Amortized Cost: The fair value of loans owned, at amortized cost approximates its carrying value because the interest rates on the loans are based on a variable market interest rate. Categorized as Level 3 of the fair value hierarchy.

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair value. Categorized as Level 1 of the fair value hierarchy.

Accounts and premiums receivable, net, retrospective commissions receivable and other receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized as Level 2 of the fair value hierarchy. See Note—(6) Notes and Accounts Receivable, net.

Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts are included in other assets and other liabilities and accrued expenses and approximate their fair value due to their short‑term nature. Categorized as Level 2 of the fair value hierarchy.

F-40


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



(13) Liability for Unpaid Claims and Claim Adjustment Expenses

Roll forward of Claim Liability
The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short-duration contracts for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
Policy liabilities and unpaid claims balance as of January 1
$
103,391

 
$
80,663

     Less : liabilities of policy-holder accounts balances, gross
(17,417
)
 
(19,037
)
     Less : non-insurance warranty benefit claim liabilities
(91
)
 
(116
)
Gross liabilities for unpaid losses and loss adjustment expenses
85,883

 
61,510

     Less : reinsurance recoverable on unpaid losses - short duration
(63,112
)
 
(42,341
)
     Less : other lines, gross
(208
)
 
(163
)
Net balance as of January 1, short duration
22,563

 
19,006

 
 
 
 
Incurred (short duration) related to:
 
 
 
     Current year
26,004

 
20,355

     Prior years
2,684

 
(2,829
)
Total incurred
28,688

 
17,526

 
 
 
 
Paid (short duration) related to:
 
 
 
     Current year
14,035

 
5,926

     Prior years
13,546

 
9,014

Total paid
27,581

 
14,940

Net balance as of March 31, short duration
23,670

 
21,592

     Plus : reinsurance recoverable on unpaid losses - short duration
63,708

 
49,453

     Plus : other lines, gross
199

 
141

Gross liabilities for unpaid losses and loss adjustment expenses
87,577

 
71,186

     Plus : liabilities of policy-holder accounts balances, gross
16,928

 
18,650

     Plus : non-insurance warranty benefit claim liabilities
118

 
91

Policy liabilities and unpaid claims balance as of March 31
$
104,623

 
$
89,927


The following schedule reconciles the total on short duration contracts per the table above to the amount of total losses incurred as presented in the consolidated statement of operations, excluding the amount for member benefit claims:
 
Three Months Ended March 31,
 
2017
 
2016
Total incurred
$
28,688

 
$
17,526

Other lines incurred
(2
)
 
25

Unallocated loss adjustment expense
469

 
397

Total losses incurred
$
29,155

 
$
17,948

For the three months ended March 31, 2017, the Company’s specialty insurance business experienced an increase in prior year case development of $2,684. This included $707 in its non-standard auto business with the remaining change primarily in warranty and credit lines of business. The warranty and credit lines of business are primarily in retrospective commission arrangements that minimally impacts the operating income of the company.
For the three months ended March 31, 2016, the Company’s specialty insurance business experienced a decrease in prior year case development of $2,829. This included favorable development in its credit lines of business partially offset by $1,246 in non-standard auto with the remainder in warranty. The warranty and credit lines of business are primarily in retrospective commission arrangements that minimally impacts the operating income of the company.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-41


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


(14) Other Assets

The following table presents the components of other assets as reported in the Consolidated Balance Sheets:
 
As of
 
March 31, 2017
 
December 31, 2016
Due from brokers
$
4,037

 
$
2,027

Furnitures, fixtures and equipment, net
6,119

 
5,936

Prepaid expenses
5,910

 
5,020

Accrued interest receivable
2,109

 
2,052

Management fee receivable
4,591

 
4,308

Other fee receivable
4,657

 
5,022

Income tax receivable
1,072

 
4,842

Other
8,258

 
8,679

Total other assets
$
36,753


$
37,886


Depreciation expense related to furniture, fixtures and equipment was $597 and $658 for the three months ended ended March 31, 2017 and 2016, respectively.

(15) Other Liabilities and Accrued Expenses

The following table presents the components of other liabilities and accrued expenses as reported in the Consolidated Balance Sheets:
 
As of
 
March 31, 2017
 
December 31, 2016
Accounts payable and accrued expenses
$
55,349

 
$
67,837

Deferred tax liabilities, net
33,482

 
32,296

Due to brokers
4,698

 
8,457

Commissions payable
7,105

 
7,466

Accrued interest payable
1,632

 
1,729

Trading liabilities, at fair value
1,529

 
1,398

Other liabilities
18,387

 
14,552

 Total other liabilities and accrued expenses
$
122,182

 
$
133,735


(16) Other Income and Other Expenses

The following table presents the components of other income as reported in the Consolidated Statement of Operations, primarily comprised of interest income and loan fee income related to both loans at fair value and loans at amortized costs, net in our specialty finance business, and management fees from our asset management business:
 
Three Months Ended March 31,
 
2017
 
2016
Interest income
$
4,727

 
$
5,367

Loan fee income
3,216

 
2,334

Management fee income
1,707

 
1,997

Other
860

 
642

Total other income
$
10,510

 
$
10,340



F-42

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the components of other expenses as reported in the Consolidated Statement of Operations:
 
Three Months Ended March 31,
 
2017
 
2016
Professional fees
$
3,997

 
$
6,325

Acquisition and transaction costs
241

 
383

General and administrative
3,880

 
3,943

Premium taxes
3,147

 
2,186

Mortgage origination expenses
2,035

 
1,795

Property operating expenses
2,542

 
1,753

Rent and related
2,948

 
3,172

Other
4,043

 
5,110

Total other expense
$
22,833

 
$
24,667


(17) Stockholders’ Equity

As of March 31, 2017 and December 31, 2016, there were 34,988,864 and 34,983,616 shares of Class A common stock issued and outstanding, respectively, including 6,496,463 and 6,596,000 shares of Class A common stock held by subsidiaries of Tiptree, respectively. As of March 31, 2017 and December 31, 2016, there were 8,049,029 shares of Class B common stock issued and outstanding, respectively, all of which are owned by TFP as a fiduciary for the limited partners of TFP. As a result of the tax reorganization on January 1, 2016, these shares of Class B common stock are accounted for as treasury stock in Tiptree’s financial statements.

All shares of our Class A common stock have equal rights as to earnings, assets, dividends and voting. Shares of Class B common stock have equal voting rights but no economic rights (including no right to receive dividends or other distributions upon liquidation, dissolution or otherwise). Distributions may be paid to holders of Class A common stock when duly authorized by our board of directors and declared out of legally available assets.

TFP owns a warrant to purchase 652,500 shares of Class A common stock at $11.33 per share which is immediately exercisable and expires on September 30, 2018. Such an exercise would be accounted for as treasury stock held at TFP and would have no impact on Tiptree’s financial statements.

Tricadia Capital Management LLC owns an option to purchase 540,000 TFP common units at $15.00 per common unit which is immediately exercisable and expires on June 12, 2017 (Tricadia Option). The Tricadia Option was amended as of January 31, 2017 solely so that TFP can, at its option, deliver shares of the Company’s Class A common stock on an as exchanged basis of 2.798 shares for each TFP common unit. Such contract is equivalent to an option on 1,510,920 shares of Class A common stock at a strike price of $5.36.

The company declared cash dividends per share during the following periods presented below:

 
 
 
 
 
Dividends per share for
 
Three Months Ended March 31,
 
2017
 
2016
First Quarter
$
0.030

 
$
0.025

Total cash dividends declared
$
0.030

 
$
0.025


Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions

The Company's insurance company subsidiaries may pay dividends to the Company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior approval of the insurance department of the applicable state of domicile. The Company eliminated all dividends from its subsidiaries in the consolidated financial statements. For the three months ended March 31, 2017 and 2016, respectively, the Company’s insurance company subsidiaries did not pay any ordinary or extraordinary dividends.
 
 
 
 
 
 

F-43

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the combined statutory capital and surplus of the Company's insurance company subsidiaries, the required minimum statutory capital and surplus, as required by the laws of the states in which they are domiciled, and the combined amount available for ordinary dividends of the Company's insurance company subsidiaries for the following periods:
 
As of
 
March 31, 2017
 
December 31, 2016
Combined statutory capital and surplus of the Company's insurance company subsidiaries
$
104,060

 
$
100,920

 
 
 
 
Required minimum statutory capital and surplus
$
17,200

 
$
17,200

 
 
 
 
Amount available for ordinary dividends of the Company's insurance company subsidiaries
$
9,049

 
$
9,049


At March 31, 2017, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $9,049. The Company may seek regulatory approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company would receive regulatory approval if sought.

Under the National Association of Insurance Commissioners (NAIC) Risk-Based Capital Act of 1995, a company's Risk-Based Capital (RBC) is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The Company's insurance company subsidiaries' RBC levels, as calculated in accordance with the NAIC’s RBC instructions, exceeded all RBC thresholds as of March 31, 2017

The following table presents the net income of the Company’s statutory insurance companies for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
Net income of statutory insurance companies
$
3,047

 
$
1,109


(18) Accumulated Other Comprehensive Income (Loss)

The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following periods:
 
Unrealized gains (losses) on
 
 
 
Amount Attributable to Noncontrolling Interests
 
 
 
Available for sale securities
 
Interest rate swaps
 
Total AOCI
 
TFP
 
Other
 
Total AOCI to Tiptree Inc.
Balance at December 31, 2016
$
(700
)
 
$
1,759

 
$
1,059

 
$
(128
)
 
$
(376
)
 
$
555

Other comprehensive income (losses) before reclassifications
435

 
84

 
519

 
(116
)
 
(26
)
 
377

Amounts reclassified from AOCI
31

 
99

 
130

 
—

 
—

 
130

Period change
466

 
183

 
649

 
(116
)
 
(26
)
 
507

Balance at March 31, 2017
$
(234
)
 
$
1,942

 
$
1,708

 
$
(244
)
 
$
(402
)
 
$
1,062


F-44

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the Consolidated Statement of Operations for the following periods:
 
Three Months Ended March 31,
Affected line item in Consolidated Statement of Operations
Components of AOCI
March 31, 2017
 
March 31, 2016
Unrealized gains (losses) on available for sale securities
$
(47
)
 
$
57

Net realized and unrealized gains (losses)
Related tax (expense) benefit
16

 
(20
)
Provision for income tax
Net of tax
$
(31
)
 
$
37


 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
$
(144
)
 
$
319

Interest expense
Related tax (expense) benefit
45

 
(112
)
Provision for income tax
Net of tax
$
(99
)
 
$
207



(19) Stock Based Compensation

Equity Plans

2007 Manager Equity Plan
The Care Investment Trust Inc. Manager Equity Plan was adopted in June 2007 and will automatically expire on June 21, 2017. As of March 31, 2017, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.

2013 Omnibus Incentive Plan
The Company adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013, which permits the grant of stock units, stock, and stock options up to a maximum of 2,000,000 shares of Class A common stock. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees and directors for the Company, to provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders. Unless otherwise extended, the 2013 Equity Plan terminates automatically on the tenth anniversary of its adoption.

The table below summarizes changes to the issuances under the Company’s 2013 Equity Plan for the periods indicated:
 
Number of shares (1)
Available for issuance as of December 31, 2016
961,650

Shares granted
(943,363
)
Available for issuance as of March 31, 2017
18,287

(1) Excludes shares granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Class A common stock.
Restricted stock units and restricted stock
A holder of the restricted stock units (RSUs) receive distributions. Generally, the RSUs shall vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the first, second and third anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period. The restricted stock is subject to forfeiture as set forth in the agreement governing the award and receives distributions and has the right to vote.
The following table summarizes changes to the issuances of Class A common stock, restricted stock, and RSUs under the 2013 Equity Plan for the periods indicated:
 
 
Number of shares issuable
 
Weighted Average Grant Date Fair Value
Unvested units as of December 31, 2016
 
299,817

 
$
6.27

Granted
 
372,736

 
6.64

Vested
 
(114,364
)
 
6.27

Unvested units as of March 31, 2017
 
558,189

 
6.52


F-45

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The Company values RSUs at their grant-date fair value as measured by Tiptree’s common stock price. Included in vested shares for 2017 are 9,579 shares surrendered to pay taxes on behalf of the employees with shares vesting. During the three months ended March 31, 2017, the Company granted 367,488 RSUs to employees of the Company. 142,175 shares vest ratably over a period of three years that began in April 2017 and the remaining 225,313 shares will vest in April 2020. In addition to those grants, the Company also granted 60,000 RSUs vesting in February 2020 which the Company currently expects to settle in cash and, as such, are accounted for as liability awards.

Subsidiary Incentive Plans

Certain of Tiptree’s subsidiaries have established RSU programs under which they are authorized to issue RSUs or their equivalents, representing equity of such subsidiaries to certain of their employees. Such awards are accounted for as a liability. These RSUs are subject to performance-vesting criteria based on the performance of the subsidiary (performance vesting RSUs) and time-vesting subject to continued employment (time vesting RSUs). Following the service period, such vested RSUs may be exchanged at fair market value, at the option of the holder, for Tiptree Class A common stock under the 2013 Omnibus Incentive Plan. The Company has the option, but not the obligation to settle the exchange right in shares or cash.
The following table summarizes changes to the issuances of subsidiary RSU’s under the subsidiary incentive plans for the periods indicated:
 
 
Grant date fair value of equity shares issuable
Unvested balance as of December 31, 2016
 
$
8,089

Vested
 
(2,055
)
Fair value adjustment
 
116

Unvested balance as of March 31, 2017
 
$
6,150


Stock Options

Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our common stock on the date of grant; those option awards have a 10-year term and are subject the recipient’s continuous service, a market requirement, and generally vest over five years beginning on the 3rd anniversary of the grant date. Options granted during the year ended December 31, 2016 contained a market requirement that, at any time during the option term, the 20-day volume weighted average stock price must exceed the December 31, 2015 book value per share. Options granted in 2017 contained a market requirement that, at any time during the option term, the 20-day volume weighted average stock price plus the sum of actual cash dividends paid must exceed the December 31, 2016 as exchanged book value per share. The market requirement may be met any time before the option expires and it only needs to be met once for the option to remain exercisable for the remainder of its term. If the service condition is met, the full amount of the compensation expense will be recognized over the appropriate vesting period whether the market requirement is met or not.

The fair value option grants are estimated on the date of grant using a Black-Scholes-Merton option pricing formula embedded within a Monte Carlo model used to simulate the future stock prices of the Company, which assumes that the market requirement is achieved. Historical volatility was computed based on historical daily returns of the Company’s stock between the grant date and July 1, 2013, the date of the business combination through which Tiptree became a public company. The valuation is done under a risk-neutral framework using the 10-year zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the grant date. The current quarterly dividend rates in effect as of the date of the grant are used to calculate a spot dividend yield as of the date of grant for use in the model.


F-46

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table presents the assumptions used to estimate the fair values of the stock options granted for the following period:
Valuation Input
 
Three Months Ended March 31, 2017
 
 
 
 
Weighted
 
 
Assumption
 
Average
Historical Volatility
 
47.20
%
 
N/A
Risk-free Rate
 
2.44
%
 
N/A
Dividend Yield
 
1.80
%
 
N/A
Expected term (years)
 
 
 
6.5

The following table presents the Company's stock option activity for the current period:
 
Options Outstanding
 
Weighted Average Exercise Price (in dollars per stock option)
 
Weighted Average Grant Date Value (in dollars per stock option)
 
Options Exercisable
Balance, December 31, 2016
251,237

 
$
5.69

 
$
2.62

 
—

Granted
570,627

 
6.65

 
2.91

 
—

Balance, March 31, 2017
821,864

 
$
6.36

 
$
2.82

 
—

 
 
 
 
 
 
 
 
Weighted average remaining contractual term at March 31, 2017 (in years)
9.6

 
 
 
 
 
 

Stock-based Compensation Expense

The following table presents the total time-based and performance-based stock-based compensation expense and the related income tax benefit recognized on the Consolidated Statements of Operations:
 
Three Months Ended March 31,
 
2017
 
2016
Payroll and employee commissions
$
1,798

 
$
353

Professional fees (1)
—

 
35

Income tax benefit
(634
)
 
(137
)
Net stock-based compensation expense
$
1,164

 
$
251


(1)
Professional fees consist of the value of restricted stock units and options granted to persons providing services to the Company.

Additional information on total non-vested stock-based compensation is as follows:
 
As of
 
March 31, 2017
 
Stock Options
 
Restricted Stock Awards and RSUs
Unrecognized compensation cost related to non-vested awards
$
2,107

 
$
8,414

Weighted - average recognition period (in years)
3.8

 
2.6


(20) Related Party Transactions

On June 30, 2012, TAMCO, TFP and Tricadia Holdings LP (Tricadia) entered into the Transition Services Agreement (TSA) in connection with the internalization of the management of Tiptree which was assigned to the Company in connection with the Contribution Transactions. Pursuant to the TSA, Tricadia provides the Company with the services of its Executive Chairman and office space and in 2016, information technology services. Payments to Tricadia for the services of our Executive Chairman are included in employee compensation and benefits.

F-47

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



TFP and Back Office Services Group, Inc. (BOSG) entered into an administrative services agreement on June 12, 2007 (Administrative Services Agreement), which was assigned to Tiptree on July 1, 2013 in connection with the Contribution Transactions, under which BOSG provided certain back office, administrative and accounting services to the Company and it’s subsidiaries. BOSG is an affiliate of Mariner Investment Group (Mariner). As of June 30, 2016, the Company has concluded that Mariner no longer meets the definition of a related party. This agreement was terminated on December 31, 2016.
 
 
 
 
Payments under the TSA and Administrative Services Agreement in the three months ended March 31, 2017 and 2016 were not material.

(21) Income Taxes

The total income tax expense (benefit) of $1,166 and $(2,439) for the three months ended March 31, 2017 and 2016, respectively, is reflected as a component of income. For the three months ended March 31, 2017, the Company’s effective tax rate (ETR) was equal to 46.5% which does not bear a customary relationship to the statutory income tax rates. The tax rate for the three months ending March 31, 2017 is higher than the federal and state statutory income tax rates, primarily due to the effect of valuation allowances on net operating losses at certain subsidiaries and the impact of certain gains and losses treated discretely for the period, partially offset by non-controlling interests at certain subsidiaries. The ETR on income for the three months ended March 31, 2017 excluding the effect of discrete items was 30.0%, which is lower than the federal and state statutory income tax rates, primarily driven by non-controlling interests at certain subsidiaries.

For the three months ended March 31, 2016, the Company’s ETR was equal to approximately (49.0)%. The rate was negative and lower than statutory rates due to the impact of tax restructuring to create a consolidated group. The ETR for the three months ended March 31, 2016 excluding the tax restructuring benefit was 32.3%, which is also lower than statutory rates. The difference was driven by (i) the release of valuation allowances on net operating losses earned by certain subsidiaries, offset by (ii) valuation allowances on net operating losses at certain subsidiaries and (iii) the impact of certain gains and losses treated discretely for the period.

(22) Commitments and Contingencies

Contractual Obligations

The table below summarizes the Company’s contractual obligations by period that payments are due:
 
As of March 31, 2017
 
Less than one year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total
Operating lease obligations (1)
$
5,007

 
$
7,407

 
$
4,012

 
$
127

 
$
16,553

Total
$
5,007

 
$
7,407

 
$
4,012

 
$
127

 
$
16,553

(1)
Minimum rental obligations for Tiptree, Care, Siena, Luxury, Reliance and Fortegra office leases. For the three months ended March 31, 2017 and 2016 rent expense for the Company’s office leases were $1,707 and $1,691, respectively.

In addition, Tiptree’s subsidiary Siena issues standby letters of credit for credit enhancements that are required by its borrower’s respective businesses. As of March 31, 2017, there was $911 outstanding relating to these letters of credit.

Litigation
Fortegra is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability insurance policies but has not yet ruled on such motion with respect to the life insurance policies at issue. No trial or additional hearings are currently scheduled.


F-48

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The Company considers such litigation customary in the insurance industry. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of the Company. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.

The Company and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the Company’s financial position.

(23) Earnings Per Share

The Company calculates basic net income per Class A common share based on the weighted average number of Class A common shares outstanding (inclusive of vested restricted share units). The unvested restricted share units have the non-forfeitable right to participate in dividends declared and paid on the Company’s common stock on an as vested basis and are therefore considered a participating security. The Company calculates basic earnings per share using the “two-class” method, and for the three months ended ended March 31, 2017 and March 31, 2016, the income available to common stockholders was allocated to the unvested restricted stock units.

Diluted net income per Class A common shares for the period includes the effect of potential equity of subsidiaries as well as potential Class A common stock, if dilutive.

The following table presents a reconciliation of basic and diluted net income per common share for the following periods:
 
Three Months Ended March 31,
 
2017
 
2016
Net income (loss)
$
1,342

 
$
7,414

Less:
 
 
 
Net income (loss) attributable to non-controlling interests
242

 
1,859

Net income allocated to participating securities
16

 
34

Net income (loss) attributable to Tiptree Inc. Class A common shares - basic
$
1,084

 
$
5,521

Effect of Dilutive Securities:
 
 
 
Securities of subsidiaries
(17
)
 
—

Adjustments to income relating to exchangeable interests, net of tax
205

 
—

Net income (loss) attributable to Tiptree Inc. Class A common shares - diluted
$
1,272

 
$
5,521

 
 
 
 
Weighted average number of shares of Tiptree Inc. Class A common stock outstanding - basic
28,424,824

 
34,976,485

Weighted average number of incremental shares of Tiptree Inc. Class A common stock issuable from exchangeable interests and contingent considerations
8,325,132

 
108,020

Weighted average number of shares of Tiptree Inc. Class A common stock outstanding - diluted
36,749,956

 
35,084,505

 
 
 
 
Basic:
 
 
 
Net income (loss) available to Tiptree Inc. Class A common shares
$
0.04

 
$
0.16

Diluted:
 
 
 
Net income (loss) attributable to Tiptree Inc. Class A common shares
$
0.03

 
$
0.16

(24) Subsequent Events

On April 18, 2017, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate a seniors housing community for total consideration of $11,000, of which $7,000 was financed.

On May 4, 2017, the Company’s board of directors declared a quarterly cash dividend of $0.03 per share to Class A stockholders with a record date of May 22, 2017, and a payment date of May 29, 2017.

F-49

TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)




On May 31, 2017, subsidiaries in our senior living business and their partners entered into an agreement to acquire seven skilled nursing facilities for total consideration of $32,000, of which $28,800 was financed.

On June 5, 2017, in settlement of the Tricadia Option, TFP delivered 1,510,920 shares of the Company’s Class A common stock, which were held by a subsidiary of the company, to Tricadia for total consideration of approximately $8,100 in a transaction that was exempt from registration under the Securities Act of 1933.


F-50



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows:
•
Overview
•
Results of Operations
•
Non-GAAP Reconciliations
•
Liquidity and Capital Resources
•
Critical Accounting Policies and Estimates
•
Off-Balance Sheet Arrangements

OVERVIEW

Tiptree is a holding company focused on enhancing shareholder value by generating consistent and growing earnings at our operating companies. Our consolidated subsidiaries are currently engaged in the following businesses - specialty insurance, asset management, senior living and specialty finance. We selectively manage our specialty insurance segment investments across multiple asset classes, sectors and geographies, which we believe distinguishes us from many other insurance companies. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital, as measured by Adjusted EBITDA and growth in book value per share plus dividends paid.

We currently have four reporting segments: specialty insurance, asset management, senior living, and specialty finance. Corporate and other primarily contains corporate expenses not allocated to the operating businesses. See Note—(4) Operating Segment Data, in the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following discussion is presented on both a consolidated and segment basis.

Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions and GDP growth, market liquidity and volatility, consumer confidence, U.S. demographics, employment and wage growth, business confidence and investment, inflation, interest rates and spreads, the impact of the regulatory environment, and the other factors set forth in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Generally, our businesses are positively affected by a healthy U.S. consumer, stable to gradually rising interest rates, stable markets and business conditions and the aging U.S. population. Conversely, rising unemployment, volatile markets, rapidly rising interest rates and slowing business conditions can have a material adverse effect on our results of operations or financial condition.

Our specialty insurance results primarily depend on the appropriateness of our pricing, underwriting, risk retention and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, the returns on and values of invested assets, and our ability to estimate contract renewals and run-off. While our insurance operations have historically maintained a high percentage of fees to total revenue and a relatively stable combined ratio which support steady earnings, changing business and economic factors could generate different results than we have historically seen. In our senior living operations, the ability to raise rents and charge for additional services along with the potential impact that inflation may have on the costs of operations could impact margins and the value of the real estate. In our asset management segment, improving business conditions and growing corporate loan demand, especially from small to medium sized businesses has generally supported growth in AUM. Slowing economic growth and/or economic uncertainty could reduce business investment and loan demand, slowing the growth in AUM and associated fees. While economic conditions are generally expected to continue on a positive trend, with interest rates gradually rising as inflation is expected to pick up modestly, and unemployment remaining relatively low, any downward trend or increased volatility and uncertainty in these economic factors could impact our results negatively.

Our profitability is affected by investment income and investment gains and losses. Our invested assets are invested principally in fixed maturity securities, equity securities, loans, CLOs, credit investment funds, and senior living related assets. Many of our investments are held at fair value. Changes in fair value of these assets are reported quarterly as unrealized gains or losses in revenues and can be impacted by changes in both interest rates and credit risk. Credit risk can impact our financial results in a number of ways, including the performance of our corporate loans, mortgage loans, holdings in CLO subordinated notes and other investments. When credit markets are performing well, loans held in our CLOs and credit fund investments may prepay, subjecting those investments to reinvestment risk. In deteriorating credit environments, default risk can impact the performance of our investments, as well as flowing through income as unrealized losses. Disruption in the credit markets can also impact our ability to raise third party funds to invest and grow our asset management fees.

Our business is also impacted in various ways by changes in interest rates. In addition to the impact interest rates can have on the fair value of the assets, interest rates can also impact the volume and revenues in our specialty finance business. In addition, most of our subsidiaries use debt financing to fund their business activities, much of which is floating rate debt, and the majority of which have LIBOR floors, LIBOR floors can result in a reduction in net interest margins in a declining interest rate environment, if earnings on

1



our assets do not have similar floors or are based on different benchmarks than LIBOR, such as treasury rates or the prime rate. Certain of our subsidiaries have also entered into interest rate swap agreements to fix all or a portion of their interest rate exposure which are currently designated as hedging relationships for accounting purposes.


RESULTS OF OPERATIONS
The following is a summary of consolidated financial results for the three months ended March 31, 2017 and 2016. Management uses Adjusted EBITDA, on a consolidated and segment basis, and book value per share, as exchanged, as measurements of operating performance which are non-GAAP measures. Management believes the use of Adjusted EBITDA provides supplemental information useful to investors as it is frequently used by the financial community to analyze financial performance, and to analyze a company’s ability to service its debt and to facilitate comparison among companies. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides supplemental information useful to investors as it is frequently used by the financial community to analyze company growth on a relative per share basis.

Summary Consolidated Statements of Operations
($ in thousands)
Three Months Ended March 31,
GAAP:
2017
 
2016
Total revenues
$
163,908

 
$
130,738

Net income before non-controlling interests
1,342

 
7,414

Net income attributable to Tiptree Inc. Class A common stockholders
1,100

 
5,555

Diluted earnings per share
0.03

 
0.16

Cash dividends paid per common share
—


—

 
 
 
 
Non-GAAP: (1)
 
 
 
Adjusted EBITDA
$
11,786


$
15,323

Book Value per share, as exchanged
10.15


9.10

(1)
For further information relating to the Company’s Adjusted EBITDA and book value per share, as exchanged, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

Consolidated Results of Operations

Revenues

For the three months ended March 31, 2017, the Company reported revenues of $163.9 million, an increase of $33.2 million or 25.4% from the three months ended March 31, 2016. The primary drivers of the increase in revenues were growth in earned premiums and net investment income in our specialty insurance segment, increases in rental income attributable to acquisitions of senior housing properties and improved specialty finance originations volume, partially offset by reduced service and administrative fees, ceding commissions and unrealized gains in our specialty insurance segment and reduced gains on legacy investments previously held at corporate.

Net Income before non-controlling interests

For the three months ended March 31, 2017, net income was $1.3 million compared to $7.4 million in the 2016 period, a decrease of $6.1 million. The primary driver of the decrease was a year-over-year increase in the tax provision. In the three months ended March 31, 2016 period, the tax provision benefited from a $4.0 million tax benefit which was driven by the tax reorganization effective January 1, 2016. Pre-tax income was $2.5 million for the three months ended March 31, 2017 compared to $5.0 million for the same period in 2016. The decline was primarily a result of unrealized losses in our specialty insurance investment portfolio in the three months ended March 31, 2017 compared to unrealized gains in the prior period combined with increased stock-based compensation expense, which were partially offset by increased earnings on CLOs in our asset management segment and improved revenues and margins in our senior living and specialty finance segments. A discussion of the changes in revenues, expenses and net income is presented below and in more detail in our segment analysis.

Net Income (Loss) Available to Class A Common Stockholders


2



For the three months ended March 31, 2017, net income available to Class A common stockholders was $1.1 million, a decrease of $4.5 million, or 80.2%, from the prior year period. The key drivers of net income available to Class A common stockholders were the same factors which impacted the net income before non-controlling interests.

Adjusted EBITDA

Total Adjusted EBITDA for the three months ended March 31, 2017 was $11.8 million compared to $15.3 million for the 2016 period, a decrease of $3.5 million, or 23.1%. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our net income, excluding the year-over-year change in the tax provision. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

Book Value per share, as exchanged

As exchanged book value per share for the period ended March 31, 2017 was $10.15, up from $9.10 as of March 31, 2016. The key drivers of the year-over-year increase were diluted earnings per share over the trailing twelve months, re-purchases of 6.7 million shares throughout the last three quarters of 2016 at an average 33% discount to book value, partially offset by employee share issuances and cumulative dividends paid of $0.10 over the last twelve months. As of March 31, 2017, the Tricadia Option (issued in 2007) was in the money and expires June 30, 2017. Given the strike price of the option, if exercised, the impact to book value per share would be a reduction of up to $0.19 per share. For additional information on the Tricadia Option, see Note—(17) Stockholders Equity in the notes to the consolidated financial statements.

Results by Segment
Effective December 31, 2016, Tiptree realigned the principal investments formerly reported in the corporate and other segment into their new reportable segments to align with the Company’s operating strategy. The table below reflects the credit and equity investments contributed to our insurance subsidiary in the specialty insurance segment and the CLO subordinated notes and related warehouse income in the asset management segment for the three months ended March 31, 2017 and 2016.
 
Three Months Ended March 31,
($ in thousands)
Revenues

Pre-tax income (loss)

2017

2016

2017

2016
Specialty insurance
$
121,846


$
93,106


$
4,801


$
12,203

Asset management
2,973


3,780


5,581


2,704

Senior living
17,719


13,890


(1,530
)

(3,859
)
Specialty finance
21,453


16,566


468


(983
)
Corporate and other
(83
)

3,396


(6,812
)

(5,090
)
Total
$
163,908


$
130,738


$
2,508


$
4,975


Adjusted EBITDA by Segment - Non-GAAP (1) 
($ in thousands, unaudited)
Three Months Ended March 31,

2017

2016
Specialty insurance
$
9,379


$
15,211

Asset management
5,581


2,704

Senior living
2,966


2,070

Specialty finance
1,066


(730
)
Corporate and other
(7,206
)

(3,932
)
Adjusted EBITDA
$
11,786


$
15,323

(1)  
For further information relating to the Company’s Adjusted EBITDA, including a reconciliation of the Company’s segments’ Adjusted EBITDA to GAAP pre-tax income, see “—Non-GAAP Reconciliations.”

Specialty Insurance

Fortegra is a specialty insurance company that offers asset protection products through niche commercial and personal lines of insurance. We also offer administration and fronting services for our self-insured clients who own captive producer owned reinsurance companies (“PORCs”). Our specialty insurance business generates revenues primarily from net earned premiums, service and administrative fees, ceding commissions and investment portfolio income.

Net earned premiums

3



Net earned premiums are the earned portion of net written premiums during a certain period. These consist of premiums directly written by us and premiums assumed by us as a result of reinsurance agreements. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Our net earned premiums are partially offset by commission expenses and policy and contract benefits. The principal factors affecting net earned premiums are: the proportion of the risk assumed by our partners and reinsurers as defined in the applicable reinsurance treaty; increases and decreases in written premiums; the pattern of losses by type of business; increases and decreases in policy cancellation rates; the average duration of the policies written; and changes in regulation that would modify the earning patterns for the policies underwritten and administered. We generally limit the underwriting risk we assume through the use of both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid adjusted based on the actual underlying loss incurred), which manage and mitigate our risk.

Service and administrative fees
We earn service and administrative fees for administering specialty insurance and asset protection programs on behalf of our clients. Service fee revenue is recognized as the services are performed and the administrative fees are recognized consistent with the earnings recognition pattern of the underlying policies. Our asset protection products are sold as complementary products to consumer retail and credit transactions and are thus subject to the volatility of the volume of consumer purchase and credit activities.

Ceding commissions
We also earn ceding commissions on our debt protection products through risk sharing agreements. We elect to cede to reinsurers under reinsurance arrangements a significant portion of the credit insurance that we distribute on behalf of our clients. Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. 

Investment portfolio income
We generate net investment income and net realized and unrealized gains (losses) from our investment portfolio.

Operating Results
($ in thousands)
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Net earned premiums
$
89,231


$
44,615

Service and administrative fees
23,776


30,310

Ceding commissions
2,271


10,703

Net investment income
4,505


2,405

Net realized and unrealized gains
998


4,419

Other income
1,065


654

Total revenues
$
121,846


$
93,106

Expenses:



Policy and contract benefits
32,992


23,698

Commission expense
56,793


33,038

Employee compensation and benefits
11,009


9,587

Interest expense
3,445


1,639

Depreciation and amortization expenses
3,294


3,983

Other expenses
9,512


8,958

Total expenses
$
117,045


$
80,903

Pre-tax income (loss)
$
4,801


$
12,203


Results

Pre-tax income was $4.8 million for the three months ended March 31, 2017, a decrease of $7.4 million or 60.7% over the prior year operating results. The primary drivers of the decline in period-over-period results were reduced realized and unrealized gains of $3.4 million, increases in interest expense of $1.8 million, increases in stock-based compensation expense of $1.4 million and reduced underwriting margin of $2.9 million, partially offset by increases in net investment income of $2.1 million.

Value of Business Acquired (“VOBA”)


4



The acquisition of Fortegra resulted in purchase price accounting adjustments in the segment giving effect to push-down accounting treatment of the acquisition. The application of push-down accounting creates a modest impact to net income, but impacts individual assets, liabilities, revenues, and expenses. Due to acquisition accounting, revenue and expenses related to acquired contracts are recognized differently from those related to newly originated contracts.

VOBA impacts
($ in thousands)
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Variance
Total revenues (1)
 
$
(303
)
 
$
(2,387
)
 
$
2,084

Commission expense (1)
 
(724
)
 
(4,263
)
 
3,539

Depreciation and amortization expense (2)
 
112

 
1,487

 
(1,375
)
Other expenses (1)
 
(43
)
 
(153
)
 
110

(1)
Represents service fee and ceding commission revenues, and additional commissions, premium tax and other expenses that would have been recognized had purchase accounting effects not been recorded. Deferred service fee and ceding commission liabilities and deferred commission assets and deferred acquisitions costs at the acquisition date were reduced to reflect the purchase accounting fair value.
(2)
Represents net additional depreciation and amortization expense that would not have been recorded without purchase accounting; fixed assets and amortizing intangible assets were adjusted in purchase accounting based on fair value analyses.

Revenues

Revenues are generated by the sale of the following insurance products: credit protection, warranty, programs, services and other. Credit protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include mobile device protection, furniture and appliance service contracts and auto service contracts. Programs are primarily personal and commercial lines and other property-casualty products. Services and other revenues principally represent investment income, unrealized and realized gains and losses, fees for insurance sales and business process outsourcing services, and interest for premium financing, and also include the impact to fee income, ceding commissions, and commissions expense from the purchase accounting effect of VOBA related to the insurance contracts.

Total revenues were $121.8 million for the three months ended March 31, 2017, up $28.7 million, or 30.9% over the prior year period. The increase was primarily driven by an increase in earned premiums of $44.6 million, or 100.0%, and other income of $0.4 million, which were partially offset by decreases in service and administrative fees of $6.5 million, or 21.6%, and ceding commissions of $8.4 million. The revenues on the investment portfolio, including net investment income and realized and unrealized gains, were $5.5 million for the three months ended March 31, 2017 compared to $6.8 million in the 2016 period, a decrease of $1.3 million.

The increase in earned premiums was driven by growth in our credit protection, warranty and program products. Substantially all of the increase was the result of our captive reinsurance subsidiary replacing a third party as reinsurer of certain credit protection products in the fourth quarter of 2016, thus avoiding reinsurance costs and gaining additional investment flexibility. This transaction was consistent with our strategy to grow underwriting and investment profits at our specialty insurance subsidiaries. As a result, several income statement line items increased for the three months ended March 31, 2017 when compared to prior periods including earned premiums, commission expense and policy and contract benefits. Ceding commissions declines are consistent with the strategy to retain a higher portion of written business which results in less revenues from experience refunds. Service and administrative fees are lower year-over-year primarily from a reduction in fee-related revenues on our mobile protection products.


Expenses

Total expenses include policy and contract benefits, commissions expense and operating expenses. For the three months ended March 31, 2017, total expenses were $117.0 million compared to $80.9 million in the 2016 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2016 period.

There are two types of expenses for claims payments under insurance and warranty service contracts which are included in policy and contract benefits: member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in car club and warranty protection service contracts. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering claims for credit life and other insurance lines, such as non-standard auto. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements. For three months ended March 31, 2017,

5



policy and contract benefits were $33.0 million, up $9.3 million from the prior year primarily as a result of increased retention in our credit protection and program products.

Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to distributors and retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions and retention levels. Total commission expense for three months ended March 31, 2017 was $56.8 million compared to $33.0 million in 2016. The primary drivers of the increase were the commission expense associated with the higher retention rate on our credit protection products along with VOBA purchase accounting impacts, as highlighted in the table above.

Operating expenses are composed of employee compensation and benefits, interest expense, depreciation and amortization expenses and other expenses. Total employee compensation and benefits were $11.0 million for 2017, up $1.4 million from 2016 as a result of increased stock based compensation expense. Interest expense of $3.4 million in 2017 increased by $1.8 million versus the prior year, primarily from increased asset based borrowings on certain investments within the investment portfolio. Other expenses for the three months ended March 31, 2017 were $9.5 million, up $0.6 million from 2016 primarily as a result of increased premium taxes as written and earned premiums grew. Depreciation and amortization expense was lower year-over-year as a result of the decline in VOBA purchase accounting impact from the amortization of the fair value attributed to the insurance policies and contracts acquired, which was $0.1 million for the three months ended March 31, 2017 versus $1.5 million for the three months ended March 31, 2016. This was partially offset by amortization of other intangibles including customer relationships and trade names.

Gross & Net Written Premiums

Gross written premiums represents total premiums from insurance policies that we write during a reporting period based on the effective date of the individual policy. Net written premiums are gross written premiums less that portion of premiums that we cede to third party reinsurers or the PORCs under reinsurance agreements. The amount ceded to each reinsurer is based on the contractual formula contained in the individual reinsurance agreements. Net earned premiums are the earned portion of our net written premiums. We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy.

Written Premiums

Three Months Ended March 31,
($ in thousands, unaudited)
Credit Protection

Warranty

Programs

Services and Other

Insurance Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
Gross written premiums
$
101,786

$
107,182


$
21,770

$
12,045


$
41,789

$
63,264


$
8

$
9


$
165,353

$
182,500

Net written premiums
65,010

27,809


12,521

9,901


8,817

9,681


—

—


86,348

47,391


Total gross written premiums for the three months ended March 31, 2017 were $165.4 million, which represented a decrease of $17.1 million or 9.4% from the prior year period. The amount of business retained was 52.2%, up from 26.0% in the prior year period as the Company retained more risk in 2017 than 2016. Total net premiums written for the three months ended March 31, 2017 were $86.3 million, up $39.0 million or 82.2%. Credit protection net premiums written for the three months ended March 31, 2017 were $65.0 million, higher than the prior year period by $37.2 million. The increase in retention and net written premiums was consistent with the Company’s strategy and was largely driven by our captive reinsurer retaining credit protection products as discussed above. For 2016, warranty product net written premiums were $12.5 million, up $2.6 million from 2016 and program products were $8.8 million, down $0.9 million from 2016. Warranty premium growth is primarily driven by increased policies written for furniture, appliances and auto products. Programs written premiums declined as we continue to run-off non-core specialty programs that did not meet underwriting performance standards. We believe there are additional opportunities to expand our warranty and programs insurance business model to other niche products and markets.

Operating Results - Non-GAAP

Product Underwriting Margin

The following table presents product specific revenue and expenses within the specialty insurance segment for the three months ended March 31, 2017 and 2016. As mentioned above, we generally limit the underwriting risk we assume through the use of both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid adjust based on the actual underlying losses incurred), which manage and mitigate our risk. Period-over-period comparisons of revenues are often impacted by the PORCs and clients’ choice as to whether to retain risk, specifically with respect to the relationship between service and administration expenses and ceding commissions, both components of revenue, and the offsetting policy and contract benefits and commissions paid to our partners and reinsurers. Generally, when losses are incurred, the risk which is retained by our partners

6



and reinsurers is reflected in a reduction in commissions paid. In order to better explain to investors the net financial impact of the risk retained by the Company of the insurance contracts written and the impact on profitability, we use the Non-GAAP metric - As Adjusted Underwriting Margin. For the same reasons that we adjust our combined ratio for the effects of purchase accounting, VOBA impacts can also mask the actual relationship between revenues earned and the offsetting reductions in commissions paid, and thus the period over period net financial impact of the risk retained by the Company. As such, we believe that presenting underwriting margin provides useful information to investors and aligns more closely to how management measures the underwriting performance of the business.

As Adjusted Underwriting Margin - Non-GAAP

Three Months Ended March 31,
($ in thousands, unaudited)
Credit Protection

Warranty

Programs

Services and Other

Insurance Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
As Adjusted Revenues:














Net earned premiums
$
71,950

$
29,294


$
9,951

$
9,149


$
7,330

$
6,172


$
—

$
—


$
89,231

$
44,615

Service and administrative fees
10,369

11,438


9,355

15,678


2,749

3,147


1,585

2,243


24,058

32,506

Ceding commissions
2,292

10,893


—

1


—

—



—


2,292

10,894

Other income
98

55


—

93


—

30


967

476


1,065

654

Less product specific expenses:














Policy and contract benefits
16,908

7,228


9,794

10,510


6,243

5,953


47

7


32,992

23,698

Commission expense
52,840

28,559


3,213

7,628


1,262

1,026


202

88


57,517

37,301

As Adjusted underwriting margin (1)
$
14,961

$
15,893


$
6,299

$
6,783


$
2,574

$
2,370


$
2,303

$
2,624


$
26,137

$
27,670

(1) For further information relating to the Company’s adjusted underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

As Adjusted Underwriting Margin

As adjusted underwriting margin for the three months ended March 31, 2017 was $26.1 million, down from $27.7 million in 2016. Credit protection as adjusted underwriting margin was $15.0 million, a decrease from 2016 results by $0.9 million or 5.9%. Credit protection products were down primarily due to lower service and administrative fees, as volumes were lower than the first quarter of 2016. As adjusted underwriting margin for warranty products was $6.3 million for 2017, down $0.5 million or 7.1% from 2016. We continue to experience dampening effects from our mobile protection products given competitive pressures. Programs as adjusted underwriting margin for 2017 was $2.6 million, up 8.6% from 2016, due to increased earned premiums. We believe our programs continue to provide opportunity for growth through expanded product offerings, new clients and geographic expansion. Services and other contributed $2.3 million in 2017, down $0.3 million from 2016 as certain business processing services are in run-off.

Policy and contract benefits, which include net losses, loss adjustments and member benefit claims, were $33.0 million for the three months ended March 31, 2017, up $9.3 million period-over-period. The increase in net losses over the prior year period was a function of growth in earned premiums in credit and program products, partially offset by lower claims in mobile devices consistent with the decline in written premiums.

Commission expense, excluding the impacts of VOBA, was $57.5 million for the three months ended March 31, 2017, up $20.2 million, driven by the increase in policies issued in the credit life and specialty auto warranty and insurance products. The increase was driven by growth in earned premiums in credit and specialty products. Additionally, warranty commissions were down $4.4 million as a result of declines in the mobile protection product.

Insurance Operating Ratios

We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and other income. Investors use this ratio to evaluate our ability to profitably underwrite the risks we assume over time and manage our operating costs. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Since VOBA purchase accounting adjustments impact revenues and expenses related to acquired contracts differently from newly originated, we also show the combined ratio on an as adjusted basis, eliminating the accounting effects of VOBA. Management believes showing an as adjusted combined ratio provides useful information to investors to compare period over period operating results. Following is a summary of these performance metrics for the three months ended March 31, 2017 and 2016.


7



Operating Ratios
 
 
Three Months Ended March 31,
Insurance operating ratios:
 
2017
 
2016
Combined ratio
 
94.7
%

85.4
%
As adjusted Combined ratio - Non-GAAP (1)
 
95.1
%

88.5
%
(1) For further information relating to the Company’s as adjusted combined ratio, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

The combined ratio for 2017 was 94.7% which was an increase from 85.4% in 2016. The as adjusted combined ratio, which excludes these purchase accounting impacts, was 95.1% for 2017, compared to 88.5% for 2016 with the increase driven primarily by the reduction in underwriting margins and increased stock based compensation mentioned above. The combined impact of these drivers caused the combined ratio to deteriorate.

Specialty Insurance Investment Portfolio

The investment portfolio consists of assets contributed by Tiptree, cash generated from operations, and from insurance premiums written. The investment portfolio of our regulated insurance companies, captive reinsurance company and warranty business are subject to different regulatory considerations, including with respect to types of assets, concentration limits, affiliate transactions and the use of leverage. Our investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations.

In managing our investment portfolio we analyze net investments and net portfolio income, which are non-GAAP measures. Our presentation of net investments equals total investments plus cash and cash equivalents minus asset based financing of investments. Our presentation of net portfolio income equals net investment income plus realized and unrealized gains and losses and minus interest expense associated with asset based financing of investments. Net investments and net portfolio income are used to calculate average annualized yield, which management uses to analyze the profitability of our investment portfolio. Management believes this information is useful since it allows investors to evaluate the performance of our investment portfolio based on the capital at risk and on a non-consolidated basis. Our calculation of net investments and net portfolio income may differ from similarly titled non-GAAP financial measures used by other companies. Net investments and net portfolio income are not measures of financial performance or liquidity under GAAP and should not be considered a substitute for total investments or net investment income. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP total investments and investment income.
Specialty Insurance Investment Portfolio - Non-GAAP
($ in thousands)
Three Months Ended March 31,

2017

2016
Cash and cash equivalents
$
22,467


$
8,166

Available for sale securities, at fair value
152,529

 
185,092

Equity securities, trading, at fair value
46,872

 
21,259

Loans, at fair value (1)
96,801

 
71,077

Real estate, net
24,379

 
3,677

Other investments
4,036

 
4,134

Net investments
$
347,084

 
$
293,405

 
 
 
 
Net investment income
4,505


2,405

Realized gains (losses)
1,076


(241
)
Unrealized gains (losses)
(78
)

4,660

Interest expense
(1,701
)

(485
)
Net portfolio income
$
3,802


$
6,339

Average Annualized Yield % (2)
4.4
%

9.0
%
(1) Loans, at fair value, net of asset based debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
(2) Average Annualized Yield % represents the ratio of annualized net investment income, realized and unrealized gains (losses) less investment portfolio interest expense to the average of the prior five quarters total investments less investment portfolio debt plus cash.

Net investments of $347.1 million have grown 18.3% from March 31, 2016 through a combination of internal growth, increased retention of premiums written, and assets contributed by the Company to further capitalize Fortegra.

Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their

8



costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We report net unrealized gains (losses) on securities classified as available-for-sale separately within accumulated other comprehensive income on our balance sheet. For loans, at fair value, and equity securities classified as trading securities, we report unrealized gains (losses) within net realized gains (losses) on investment on the consolidated statement of income.

For the three months ended March 31, 2017 net investment portfolio income was $3.8 million compared to $6.3 million in the comparable 2016 period. The average annualized yield declined from 9.0% in 2016 to 4.4% in 2017 as a result of lower unrealized gains of $4.7 million, which was related to fair market valuation of equities and loans, and an increase in asset based interest expense of $1.2 million. Those factors were partially offset by increases in net investment income of $2.1 million, as interest and dividend payments improved year-over-year, and realized gains improved by $1.3 million, as we began to realize gains on sales of our non-performing residential loans.

Adjusted EBITDA

Adjusted EBITDA was $9.4 million and $15.2 million for the three months ended March 31, 2017 and 2016 respectively. The key drivers were similar to those that impacted pre-tax results. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Asset Management

The Company’s asset management segment earns revenues from CLOs under management, including management fees, distributions and realized and unrealized gains on the Company’s holdings of subordinated notes. Also included in the segment are the management fees, investment earnings and costs associated with our legacy tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. As of March 31, 2017, total fee earning AUM was $1.75 billion, which was down $137.8 million from March 31, 2016 as the run-off in our older CLOs (Telos 1 & 2) have not been replaced with new AUM. Total investment in CLO subordinated notes and management fee participation rights, at fair market value, as of March 31, 2017 was $40.6 million, down from $57.3 million as of December 31, 2016. On January 23, 2017 the Company sold its investment in Telos 5 for consideration of $15.9 million resulting in deconsolidation for the 2017 period.

Operating Results
($ in thousands)
Three Months Ended March 31,

2017

2016
Revenues:



Net realized and unrealized gains (losses)
$
853


$
(692
)
Management fee income
1,707


1,997

Other income
413


2,475

Total revenue
$
2,973


$
3,780





Expenses:



Employee compensation and benefits
1,151


1,295

Interest expense
—


706

Other expenses
156


180

Total expenses
$
1,307


$
2,181

Net income attributable to consolidated CLOs
3,915


1,105

Pre-tax income (loss)
$
5,581


$
2,704


Results

Pre-tax income was $5.6 million for the three months ended March 31, 2017 compared to $2.7 million for the 2016 period, an increase of $2.9 million. The primary driver of the increase was favorable fair value marks on our CLO subordinated notes and other investments, up $5.2 million versus the first quarter of 2016. Revenues, comprised primarily of asset management fees, including incentive fees on unconsolidated CLOs, and warehouse interest income and realized gains, totaled $3.0 million in the three months ended March 31, 2017, compared to $3.8 million for the prior year period. The decrease was driven by reduced other income related to the Telos 7 warehouse and tax exempt security interest income in 2016 whereas neither of which were contributors to revenue in the three months ended March 31, 2017. Additionally, management fee income declined as our older vintage CLOs are in run-off, which was partially offset by a realized gain from the sale of Telos 5 subordinated note and unrealized gains from credit hedging instruments of $0.9 million in the three months ended March 31, 2017 compared to a loss of $0.7 million in the 2016 period.


9



Expenses for the 2017 period were $1.3 million compared to $2.2 million for the 2016 period, primarily driven by decreases in interest expense associated with the Telos 7 warehouse and declines in employee incentive compensation as management and incentive fees reduced period over period. Net income attributable to consolidated CLOs was up $2.8 million primarily due to favorable fair value marks on our CLO subordinated notes in the 2017 period as compared to the 2016 period.

Operating Results - Non-GAAP

As Adjusted Revenues

Asset management as adjusted revenues include revenues from CLOs, legacy tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. The Company earns revenues from CLOs under management, whether consolidated or deconsolidated, which include fees earned for managing the CLOs, distributions received from the Company’s holdings of subordinated notes issued by the CLOs and realized and unrealized gains and losses from the Company’s holdings of subordinated notes. The revenue associated with the management fees and distributions earned and gains and losses on the subordinated notes attributable to the consolidated CLOs are reported as “net income (loss) attributable to the consolidated CLOs” in the Company’s financial statements. The table below shows the Company’s share of the results attributable to the CLOs, which were consolidated, on a deconsolidated basis. This presentation is a non-GAAP measure. Management believes this information is helpful for period-over-period comparative purposes as certain of our CLOs were consolidated for only some of the periods presented below. In addition, the Non-GAAP presentation allows investors the ability to calculate management fees as a percent of AUM, a common measure used by investors to evaluate asset managers, and which is one of the performance measures upon which management is compensated. While consolidation versus deconsolidation impacts the presentation of revenues, it does not impact expenses or pre-tax income. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP revenues.

As Adjusted Revenues (1) 
($ in thousands)
Three Months Ended March 31,

2017

2016
Assets Under Management:
 
 
 
Fee earning AUM
$
1,753,736

 
$
1,891,536

Non fee earning AUM
170,922

 
255,225

 
 
 
 
As Adjusted Revenues:



Management fees
$
2,075


$
2,666

Distributions
2,567


2,821

Realized and unrealized gains (losses)
2,233


(3,005
)
Other income
13


2,403

Total as adjusted revenues
$
6,888


$
4,885

(1)  
For further information relating to the Asset Management as adjusted revenues, including a reconciliation to GAAP revenues, see “Non-GAAP Reconciliations”.

For the three months ended March 31, 2017, as adjusted revenues were $6.9 million compared to $4.9 million for the same period in 2016. The increase was driven primarily by favorable realized and unrealized gains on CLO subordinated notes and other investments of $5.2 million, partially offset by reductions in management and incentive fees of $0.6 million, distributions of $0.2 million, and other income of $2.4 million.

Fee earning AUM has declined as older CLO vintages run-off, which has resulted in reduced management and incentive fees. Additionally, our investments in subordinated notes of the CLOs have also declined, which resulted in lower distributions period over period. Realized and unrealized gains were favorable as a result of the $0.7 million gain on sale of Telos 5 and $1.5 million of unrealized mark to market gains on our remaining CLO subordinated notes and other investments in the 2017 period as compared to an unrealized loss of $3.0 million in the 2016 period. Other income includes legacy tax-exempt securities, CLO warehouse facilities and our credit hedging strategies which declined year-over-year as those products were in place in the 2016 period and not in the 2017 period.

Adjusted EBITDA

Adjusted EBITDA was $5.6 million for the three months ended March 31, 2017, compared to $2.7 million for the comparable prior year period. The increase was driven by the same factors discussed above under “Results.” See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.



10



Senior Living

We operate our senior living segment through Care which is focused on investing in seniors housing properties including senior apartments, independent living, assisted living, memory care and, to a lesser extent, skilled nursing facilities. As of March 31, 2017, Care’s portfolio consists of 31 properties across 11 states primarily in the Mid-Atlantic and Southern United States comprised of 13 Triple Net Lease (“NNN”) Properties and 18 Managed Properties.
 
 
 
 
In Triple Net Lease Properties, we own the real estate and enter into a long term lease with an operator who is typically responsible for bearing operating costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements. The operations of the Triple Net Lease Properties are not consolidated since we do not manage or own the underlying operations. For Triple Net Lease Properties’ operations, we recognize primarily rental income from the lease since substantially all expenses are passed through to the tenant. In Managed Properties, we generally own between 65-90% of the real estate and the operations with affiliates of the management company owning the remainder. We therefore consolidate all of the assets, liabilities, income and expense of the Managed Properties operations in segment reporting. For the three months ended March 31, 2017 and 2016, operating results present revenues and expenses, which include amounts attributable to non-controlling interests.

Operating Results
($ in thousands)
Three Months Ended March 31,
 
2017

2016
Revenues:
 
 
 
Rental and related revenue
17,403

 
13,605

Other income
316

 
285

Total revenue
$
17,719

 
$
13,890

 

 

Expenses:

 

Employee compensation and benefits
7,079

 
5,638

Interest expense
2,701

 
1,854

Depreciation and amortization expenses
4,255

 
4,130

Other expenses
5,214

 
6,127

Total expenses
$
19,249

 
$
17,749

Pre-tax income (loss)
$
(1,530
)
 
$
(3,859
)

Results

For the three months ended March 31, 2017, we incurred a pre-tax loss of $1.5 million compared with a pre-tax loss of $3.9 million for the same period in 2016. The properties acquired in the 2017 period and the 2016 period have generated higher rental and related revenue in the 2017 period compared to the 2016 period. However the Company also incurred additional depreciation, amortization and interest expenses as a consequence of the acquisition of these properties. As a result, the lower loss was driven by greater growth in rental income, due to both improvements in the operating performance of the underlying properties and the addition of new properties, relative to the growth in operating expenses, including the depreciation and amortization and interest expense related to the acquired properties.

Revenues

Revenues were $17.7 million for the three months ended March 31, 2017, compared with $13.9 million for the comparable 2016 period, an increase of $3.8 million or 27.6%. The increase in rental and related revenue was primarily due to the facilities acquired since the first quarter of 2016, including two properties acquired in 2017 and four properties acquired in 2016.

Expenses

Expenses are comprised of interest expenses on borrowings, payroll expenses (including employees of the managers at each of Care’s Managed Properties), professional fees, depreciation and amortization of properties and leases acquired and other expenses.

Expenses for the three months ended March 31, 2017 were $19.2 million, compared with $17.7 million for 2016, an increase of $1.5 million or 8.5%. The primary increases period-over-period include property operating expenses of $2.4 million (including employee compensation and benefits and other expenses), interest expense of $0.7 million and depreciation and amortization expenses of $0.1 million, which were partially offset by a reduction in payroll and other costs of $1.7 million. The increase in property operating

11



expenses was primarily attributable to consolidation of the expenses of the two Managed Properties acquired in the first quarter of 2016, one acquired in the third quarter of 2016 and one acquired in the first quarter of 2017.

The Company is party to interest rate swaps in order to hedge interest rate exposure associated with its real estate holdings. These instruments swap fixed to floating rate cash streams in order to maintain the economics on the mortgage debt. As a result of movements in interest rates in the three months ended March 31, 2016, an unrealized loss was recorded in other expenses for $1.4 million for swaps that had not been previously designated as hedging relationships, which is the primary reason for the reduction in other expenses.

Operating Results - Non-GAAP

Segment NOI

In addition to Adjusted EBITDA, we also evaluate performance of our senior living segment based on net operating income (“NOI”), which is a non-GAAP measure. NOI is a common non-GAAP measure in the real estate industry used to evaluate property level operations. We consider NOI an important supplemental measure to evaluate the operating performance of our senior living segment because it allows investors, analysts and our management to assess our unlevered property-level operating results and to compare our operating results between periods and to the operating results of other senior living companies on a consistent basis. Agreements with our operators are structured such that they are incentivized to grow NOI, and it is a significant component in determining the compensation paid to Care’s management team. We define NOI as rental and related revenue less property operating expense. Property operating expenses and resident fees and services are not relevant to Triple Net Lease Properties since we do not manage the underlying operations and substantially all expenses are passed through to the tenant. Our calculation of NOI may differ from similarly titled non-GAAP financial measures used by other companies. NOI is not a measure of financial performance or liquidity under GAAP and should not be considered a substitute for pre-tax income.

Product NOI - Non-GAAP (1) 
($ in thousands)
Three Months Ended March 31,
 
2017

2016
Triple Net Leases
$
2,189

 
$
1,844

Managed Properties
4,132

 
3,057

Segment NOI
$
6,321

 
$
4,901

 
 
 
 
Managed Property NOI Margin % (2)
27.2
%
 
26.0
%

(1)  
For further information relating to the Senior Living NOI, including a reconciliation to GAAP pre-tax income, see “—Non-GAAP Reconciliations.”
(2)
NOI Margin % is the relationship between Managed Property segment NOI and Rental and related revenue.

NOI was $6.3 million for the three months ended March 31, 2017, compared with $4.9 million in the prior year period, an increase of $1.4 million or 29.0%. The primary drivers of improvement in NOI in both periods was an increase in rental revenue partially offset by increased property operating expenses. Several of our recent acquisitions included properties that the Company and its operating partners are enhancing through renovation projects and other capital upgrades in an effort to grow revenue and to allow them to operate more efficiently. As indicated in the table above, NOI margins on Managed Properties improved from 26.0% in the three months ended March 31, 2016 to 27.2% for three months ended March 31, 2017. As the more recently acquired facilities ramp up and stabilize, we expect our results to reflect additional NOI margin improvements.

Adjusted EBITDA

Adjusted EBITDA was $3.0 million for the three months ended March 31, 2017, compared to $2.1 million in the three months ended March 31, 2016, driven primarily increases in NOI partially offset by increased interest expense on new acquisitions. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.


Specialty Finance

The specialty finance segment is comprised of our mortgage origination business, including, Reliance, which is 100% owned and Luxury, which is 67.5% owned by us and the lending operations of Siena, a commercial finance company, which is 62% owned by us.

12




Operating Results
($ in thousands)
 
Three Months Ended March 31,


2017

2016
Revenues:
 

 
 
Net realized and unrealized gains (losses)
 
14,456

 
11,700

Other income
 
6,997

 
4,866

Total revenue
 
$
21,453

 
$
16,566


 
 
 
 
Expenses:
 
 
 
 
Employee compensation and benefits
 
13,669

 
11,468

Interest expense
 
1,353

 
1,185

Depreciation and amortization expenses
 
198

 
202

Other expenses
 
5,765

 
4,694

Total expenses
 
$
20,985

 
$
17,549

Pre-tax income (loss)
 
$
468

 
$
(983
)

Results

For the three months ended March 31, 2017, pre-tax income was $0.5 million compared with a loss of $1.0 million for the comparable 2016 period. Revenues were $21.5 million for the three months ended March 31, 2017, compared with $16.6 million for 2016, an increase of $4.9 million or 29.5%. Expenses were $21.0 million for the three months ended March 31, 2017, compared with $17.5 million in 2016, an increase of $3.5 million or 19.6%. The increases were primarily driven by increased mortgage originations volume and higher earning assets in the commercial lending businesses.
 
 
 
 
 
 
Revenues

Revenues are comprised of gain on sale of mortgages originated and sold to investors, gains and losses on the mortgage pipeline of interest rate lock commitments and mortgage loans held for sale and their associated hedges, and net interest income and fees associated with our commercial lending products and the mortgage origination business.

Revenues increased from $16.6 million in three months ended March 31, 2016 to $21.5 million in the 2017 period, primarily driven by higher mortgage and lending originations volume. Mortgage origination volume improved 14.6% from $332.8 million for the three months ended March 31, 2016 to $381.4 million for three months ended March 31, 2017 while realizing 41.2 basis points improvement in net revenue margins year-over-year. This was primarily a result of the change in product mix towards higher margin government and agency products. In addition, commercial lending grew with average earning assets of $103.9 million in the three months ended March 31, 2017, compared with $57.0 million in the three months ended March 31, 2016, an increase of 82.3%. The improvement was driven by increased loan originations and higher utilization rates of facilities by borrowers which increased interest income and loan fees, reported in other income.

Expenses

Increased revenues were partially offset by higher expenses, which increased from $17.5 million for the three months ended March 31, 2016 to $21.0 million for three months ended March 31, 2017. Expenses are composed of payroll and employee commissions, interest expense, professional fees and other expenses. The primary driver of increased expenses in 2017 was higher payroll and employee commissions as the Company increased the number of loan officers, plus higher marketing costs to support the higher volume and sales personnel. From March 31, 2016 to March 31, 2017, the specialty finance headcount increased from 502 to 544, or by 8.4%. In addition to the increase in headcount and marketing expenses, the change in the fair value of the contingent earn-out liability at Reliance represented an increase in expense year-over-year of $0.4 million. Since the contingent earn-out is payable in Tiptree stock, the fair value increases as Tiptree’s stock price increases.

Operating Results - Non GAAP

Adjusted EBITDA

Adjusted EBITDA was $1.1 million for the three months ended March 31, 2017 compared to a loss of $0.7 million in the three months ended March 31, 2016. The increases were driven by the same factors that impacted pre-tax income explained above. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

13





Corporate and Other

Corporate and other incorporates revenues from non-core legacy principal investments and expenses including interest expense on the holding company credit facility and employee compensation and benefits, professional fees and other expenses.

Operating Results
($ in thousands)
Three Months Ended March 31,

2017

2016
Revenues:



Net realized and unrealized gains (losses)
(95
)

3,333

Other income
12


63

Total revenue
$
(83
)

$
3,396





Expenses:



Employee compensation and benefits
3,201


2,620

Interest expense
1,280


1,096

Depreciation and amortization expenses
62


62

Other expenses
2,186


4,708

Total expenses
$
6,729


$
8,486

Pre-tax income (loss)
$
(6,812
)

$
(5,090
)

Results

For the three months ended March 31, 2017, the Company recorded a loss of $6.8 million compared with a loss of $5.1 million for the 2016 period, a decrease in pre-tax income of $1.7 million. The key drivers of year-over-year decline were $3.5 million of revenues in the 2016 period from realized gains on the sale of certain legacy principal investments which did not repeat in 2017, partially offset by decreases in total corporate expenses of $1.8 million primarily related to professional services.

Expenses include holding company interest expense, employee compensation and benefits, professional fees and other expenses. Corporate employee compensation and benefits expense includes the expense of management, legal and accounting staff. Other expenses primarily consisted of audit and professional fees, insurance, office rent and other expenses.

Employee compensation and benefits were $3.2 million in the three months ended March 31, 2017, compared to $2.6 million in the three months ended March 31, 2016 as the Company expanded its staff as a result of our efforts to improve our reporting and controls infrastructure. For the three months ended March 31, 2017, 53% of employee compensation was related to increased stock based compensation and current year business performance.

Interest expense was $1.3 million in the three months ended March 31, 2017, compared to $1.1 million in the three months ended March 31, 2016. Other expenses were $2.2 million in the three months ended March 31, 2017 as compared to $4.7 million in 2015. The year-over-year decrease of $2.5 million was driven by reduced external consulting spend as a result of our improved reporting and controls infrastructure.

Operating Results - Non-GAAP

Adjusted EBITDA

Adjusted EBITDA was a loss of $7.2 million for the three months ended March 31, 2017 compared to a loss of $3.9 million in the prior year period. The decrease in Adjusted EBITDA was driven by the same factors that impacted pre-tax income, combined with EBITDA adjustments in the 2017 period to reflect the cash payment to a former executive. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.


Provision for income taxes

The total income tax expense of $1.2 million and benefit of $2.4 million for the three months ended March 31, 2017 and 2016, respectively, is reflected as a component of net income. Below is a table that breaks down the components of the Company’s effective tax rate (“ETR”).

14





 
Three Months Ended March 31,
 
2017

2016
Statutory rate
35.0
 %
 
35.0
 %
Impact of state tax and permanent items
(1.5
)
 
(0.4
)
Impact of NCI
(3.5
)
 
(2.8
)
Impact of restructuring
—

 
(81.3
)
Impact of other discrete
16.5

 
0.5

ETR
46.5
 %
 
(49.0
)%

For the three months ended March 31, 2017, the Company’s ETR was equal to 46.5% which does not bear a customary relationship to the statutory income tax rates. The ETR for the three months ending March 31, 2017 is higher than the federal and state statutory income tax rates, primarily due to the effect of valuation allowances on net operating losses at certain subsidiaries and the impact of certain gains and losses treated discretely for the period, partially offset by non-controlling interests at certain subsidiaries. The ETR for the three months ended March 31, 2017 excluding the effect of discrete items was 30.0%, which is lower than the federal and state statutory income tax rates, primarily driven by non-controlling interests at certain subsidiaries.

For the three months ended March 31, 2016, the Company’s ETR was equal to approximately (49.0)%. The rate was negative and lower than statutory rates due to the impact of tax restructuring to create the consolidated group. The ETR for the three months ended March 31, 2016 excluding the tax restructuring benefit was 32.3%, which is also lower than statutory rates. The difference was driven by (i) the release of valuation allowances on net operating losses earned by on certain subsidiaries offset by (ii) valuation allowances on net operating losses earned by other subsidiaries, and (iii) the impact of certain gains and losses treated discretely for the period.

Balance Sheet Information - as of March 31, 2017 compared to the year ended December 31, 2016

Tiptree’s total assets were $2.5 billion as of March 31, 2017, compared to $2.9 billion as of December 31, 2016. The $423.0 million decrease in assets is primarily attributable to decreases in assets of consolidated CLOs, due to the deconsolidation of one CLO during the three months ended March 31, 2017 as a result of selling the subordinated notes. Additionally, loans at fair value and loans at amortized cost decreased, partially offset by increases in real estate from acquisitions in our senior living segment, notes and accounts receivable and reinsurance receivable in our specialty insurance segment. Total stockholders’ equity of Tiptree was $294.7 million as of March 31, 2017 compared to $293.4 million as of December 31, 2016. As of March 31, 2017 there were 28,492,401 shares of Tiptree Class A common stock outstanding, net of Treasury shares held at subsidiaries.

NON-GAAP RECONCILIATIONS

EBITDA and Adjusted EBITDA

The Company defines EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated income taxes and consolidated depreciation and amortization expense as presented in its financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of its subsidiaries’ business operations, (ii) adjust for the effect of purchase accounting, (iii) add back significant acquisition related costs, (iv) adjust for significant relocation costs and (v) any significant one-time expenses.
Reconciliation from GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
($ in thousands, unaudited)
Three Months Ended March 31,

2017

2016
Net income (loss) available to Class A common stockholders
$
1,100


$
5,555

Add: net (loss) income attributable to noncontrolling interests
242


1,859

Income (loss)
$
1,342


$
7,414

Consolidated interest expense
8,779


6,480

Consolidated income taxes
1,166


(2,439
)
Consolidated depreciation and amortization expense
7,809


8,377

EBITDA
$
19,096


$
19,832

Consolidated non-corporate and non-acquisition related interest expense(1)
(5,864
)

(4,278
)
Effects of Purchase Accounting (2)
(464
)

(2,030
)
Non-cash fair value adjustments (3)
513


1,416

Significant acquisition expenses (4)
241


383

Separation expense adjustments (5)
(1,736
)

—

Adjusted EBITDA of the Company
$
11,786


$
15,323


15



(1)
The consolidated non-corporate and non-acquisition related interest expense is subtracted from EBITDA to arrive at Adjusted EBITDA. This includes interest expense associated with asset-specific debt at subsidiaries in the specialty insurance, asset management, senior living and specialty finance segments.
(2)
Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues were less favorably stated. Thus, the purchase accounting effect related to Fortegra increased EBITDA above what the historical basis of accounting would have generated. The impact of this purchase accounting adjustments have been reversed to reflect an adjusted EBITDA without such purchase accounting effect. The impact for the three months ended March 31, 2017 and 2016 was an effective increase to pre-tax earnings of $352 thousand and $542 thousand, respectively.
(3)
For our senior living segment, Adjusted EBITDA excludes the impact of the change of fair value of interest rate swaps hedging the debt at the property level. For Reliance, within our specialty finance segment, Adjusted EBITDA excludes the impact of changes in contingent earn-outs. For our specialty insurance segment, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA.
(4)
Acquisition costs include legal, taxes, banker fees and other costs associated with senior living acquisitions in 2017 and 2016.
(5)
Consists of payments pursuant to a separation agreement, dated as of November 10, 2015.


















Segment EBITDA and Adjusted EBITDA

The table below presents EBITDA and Adjusted EBITDA by our four reporting segments specialty insurance, asset management, senior living and specialty finance. Corporate and other contains corporate expenses no allocated to the operating business.
 
Three Months Ended March 31,
($ in thousands)
Specialty insurance

Asset management

Senior living

Specialty finance

Corporate and other

Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
Pre-tax income/(loss)
4,801

12,203


5,581

2,704


(1,530
)
(3,859
)

468

(983
)

(6,812
)
(5,090
)

2,508

4,975

Add back:

















Interest expense
3,445

1,639


—

706


2,701

1,854


1,353

1,185


1,280

1,096


8,779

6,480

Depreciation and amortization expenses
3,294

3,983


—

—


4,255

4,130


198

202


62

62


7,809

8,377

Segment EBITDA
11,540

17,825

 
5,581

3,410

 
5,426

2,125

 
2,019

404

 
(5,470
)
(3,932
)
 
19,096

19,832



















EBITDA adjustments:

















Asset-specific debt interest
(1,810
)
(584
)

—

(706
)

(2,701
)
(1,854
)

(1,353
)
(1,134
)

—

—


(5,864
)
(4,278
)
Effects of purchase accounting
(464
)
(2,030
)

—

—


—

—


—

—


—

—


(464
)
(2,030
)
Non-cash fair value adjustments
113

—


—

—


—

1,416


400

—


—

—


513

1,416

Significant acquisition expenses
—

—


—

—


241

383


—

—


—

—


241

383

Separation expenses
—

—


—

—


—

—


—

—


(1,736
)
—


(1,736
)
—

Segment Adjusted EBITDA
9,379

15,211


5,581

2,704


2,966

2,070


1,066

(730
)

(7,206
)
(3,932
)

11,786

15,323


Book Value per share, as exchanged - Non-GAAP

Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides supplemental information useful to investors as book value is frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares, as of March 31, 2017 and March 31, 2016.
 ($ in thousands, unaudited, except per share information)
Three Months Ended March 31,

2017

2016
Total stockholders’ equity
$
393,838


$
409,718

Less non-controlling interest - other
22,970


18,624

Total stockholders’ equity, net of non-controlling interests - other
$
370,868


$
391,094

Total Class A shares outstanding (1)
28,492


34,915

Total Class B shares outstanding
8,049


8,049

Total shares outstanding
36,541


42,964

Book value per share, as exchanged
$
10.15


$
9.10

(1) As of March 31, 2017, excludes 6,496,463 shares of Class A common stock held by consolidated subsidiaries of the Company. See Note 23—Earnings per Share, for further discussion of potential dilution from warrants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 















Specialty Insurance - As Adjusted Underwriting Margin - Non-GAAP

Underwriting margin is a measure of the underwriting profitability of our specialty insurance segment. It represents net earned premiums, service and administrative fees, ceding commissions and other income less policy and contract benefits and commission expense. We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and other income. The following table provides a reconciliation between as adjusted underwriting margin and pre-tax income for the three months ended March 31, 2017 and 2016.

16




Three Months Ended March 31,
($ in thousands, unaudited)
GAAP

Non-GAAP adjustments

Non-GAAP - As Adjusted
Revenues:
2017

2016

2017

2016

2017

2016
Net earned premiums
$
89,231


$
44,615


$
—


$
—


$
89,231


$
44,615

Service and administrative fees
23,776


30,310


282


2,196


24,058


32,506

Ceding commissions
2,271


10,703


21


191


2,292


10,894

Other income
1,065


654


—


—


1,065


654

Less underwriting expenses:











Policy and contract benefits
32,992


23,698


—


—


32,992


23,698

Commission expense
56,793


33,038


724


4,263


57,517


37,301

Underwriting Margin - Non-GAAP
$
26,558


$
29,546


$
(421
)

$
(1,876
)

$
26,137


$
27,670

Less operating expenses:











Employee compensation and benefits
11,009


9,587


—


—


11,009


9,587

Other expenses
9,512


8,958


43


153


9,555


9,111

Combined Ratio
94.7
%

85.4
%

—


—


95.1
%

88.5
%
Plus investment revenues:











Net investment income
4,505


2,405


—


—


4,505


2,405

Net realized and unrealized gains
998


4,419


—


—


998


4,419

Less other expenses:











Interest expense
3,445


1,639


—


—


3,445


1,639

Depreciation and amortization expenses
3,294


3,983


(112
)

(1,487
)

3,182


2,496

Pre-tax income (loss)
$
4,801


$
12,203


$
(352
)

$
(542
)

$
4,449


$
11,661


Specialty Insurance Investment Portfolio - Non-GAAP

The following table provides a reconciliation between segment total investments and net investments for the three months ended March 31, 2017 and 2016.
($ in thousands, unaudited)
Three Months Ended March 31,
 
2017
 
2016
Total Investments
$
474,174


$
346,295

Investment portfolio debt (1)
(149,557
)

(61,056
)
Cash and cash equivalents
22,467


8,166

Net investments - Non-GAAP
$
347,084


$
293,405

(1) Consists of asset-based financing on loans, at fair value including certain credit investments and NPLs, net of deferred financing costs, see Note 11 - Debt, net for further details.

Senior Living Product NOI - Non-GAAP

The following table provides a reconciliation between segment NOI and pre-tax income (loss) for the three months ended March 31, 2017 and 2016.
($ in thousands, unaudited)
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
NNN Operations
 
Managed Properties
 
Senior Living Total
 
NNN Operations
 
Managed Properties
 
Senior Living Total
Rental and related revenue
$
2,189

 
$
15,214

 
$
17,403

 
$
1,844

 
$
11,762

 
$
13,606

Less: Property operating expenses
—

 
11,082

 
11,082

 
—

 
8,705

 
8,705

Segment NOI
$
2,189

 
$
4,132

 
$
6,321

 
$
1,844

 
$
3,057

 
$
4,901

Segment NOI Margin % (1)
 
 
27.2
%
 
 
 
 
 
26.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income
 
 
 
 
$
348

 
 
 
 
 
$
284

Less: Expenses
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
2,571

 
 
 
 
 
1,854

Payroll and employee commissions
 
 
 
 
782

 
 
 
 
 
658

Depreciation and amortization
 
 
 
 
4,255

 
 
 
 
 
4,130

Other expenses
 
 
 
 
559

 
 
 
 
 
2,402

Pre-tax income (loss)
 
 
 
 
$
(1,498
)
 
 
 
 
 
$
(3,859
)
(1) NOI Margin % is the relationship between segment NOI and rental and related revenue.

Asset Management As Adjusted Revenues

The following table provides a reconciliation between asset management segment revenues and non-GAAP, as adjusted revenues for the three months ended March 31, 2017 and 2016.

17




Three Months Ended March 31,
($ in thousands, unaudited)
GAAP

Non-GAAP adjustments

Non-GAAP - As Adjusted
Revenues:
2017

2016

2017

2016

2017

2016
Management fee income
$
1,707


$
1,997


$
368


$
669


$
2,075


$
2,666

Distributions
—


—


2,567


2,821


2,567


2,821

Net realized and unrealized gains (losses)
853


(692
)

1,380


(2,313
)

2,233


(3,005
)
Other income
413


2,475


(400
)

(72
)

13


2,403

Total revenues
$
2,973


$
3,780


$
3,915


$
1,105


$
6,888


$
4,885

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are our holdings of unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including subordinated notes of CLOs, income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to grow our businesses. We may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs.

Our subsidiaries’ ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings. We expect our cash and cash equivalents and distributions from operating subsidiaries and our subsidiaries’ access to financing to be adequate to fund our operations for at least the next 12 months.

As of March 31, 2017, we had cash and cash equivalents, excluding restricted cash, of $67.2 million, compared to $63.0 million at December 31, 2016, an increase of $4.2 million.

Our approach to debt is generally to use non-recourse (other than customary carveouts, including fraud and environmental liability), asset specific debt where possible that is amortized by cash flows from the underlying business or assets financed. Our mortgage businesses rely on short term uncommitted sources of financing as a part of their normal course of operations.  To date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw on other sources of liquidity to fund our mortgage business. See Note—(11) Debt, net for additional information regarding our mortgage warehouse borrowings.

For purposes of determining enterprise value and Adjusted EBITDA, we consider secured corporate credit agreements and preferred trust securities, which we refer to as corporate debt, as corporate financing and associated interest expense is added back. The below table outlines this amount by debt outstanding and interest expense by segment.

Corporate Debt
($ in thousands)
 
Debt outstanding as of
 
Interest expense for the three months ended
 
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
Specialty insurance
 
$
146,202

 
$
153,386

 
$
1,635

 
$
1,055

Corporate and other
 
57,236

 
43,945

 
1,280

 
1,003

Total
 
$
203,438

 
$
197,331

 
$
2,915

 
$
2,058


Our intermediate holding company has a credit facility with Fortress to provide working capital. Loans under the Fortress credit agreement bear interest at LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 6.50% per annum. We are required to make quarterly principal payments of $0.5 million, subject to adjustment based on the Net Leverage Ratio (as defined in the Fortress credit agreement) at the end of each fiscal quarter. All remaining principal, and any unpaid interest, under the Fortress credit agreement is payable on maturity at September 18, 2018. The outstanding debt under the Fortress credit agreement was $58.0 million as of March 31, 2017 compared to $58.5 million as of December 31, 2016. See Note—(11) Debt, net for additional information of our debt and that of our subsidiaries.


18



Consolidated Comparison of Cash Flows

Summary Consolidated Statements of Cash Flows - Three Months Ended March 31, 2017 and March 31, 2016
($ in thousands)
Three months ended March 31,
 
2017
 
2016
Net cash (used in) provided by:
 
 
 
Operating activities
 
 
 
Operating activities - (excluding VIEs)
$
50,497


$
10,702

Operating activities - VIEs
(1,333
)
 
2,831

Total cash provided by (used in) operating activities
49,164

 
13,533

 
 
 
 
Investing activities
 
 
 
Investing activities - (excluding VIEs)
3,607


(85,418
)
Investing activities - VIEs
21,618

 
(481
)
Total cash provided by (used in) investing activities
25,225

 
(85,899
)
 
 
 
 
Financing activities
 
 
 
Financing activities - (excluding VIEs)
(48,799
)

46,451

Financing activities - VIEs
(21,410
)
 
(260
)
Total cash provided by (used in) financing activities
(70,209
)
 
46,191

 
 
 
 
Net increase (decrease) in cash
$
4,180

 
$
(26,175
)
Three Months Ended March 31, 2017
Operating Activities
Cash provided by operating activities (excluding VIEs) was $50.5 million for the three months ended March 31, 2017. The primary sources of cash from operating activities included mortgage sales outpacing originations, increases in unearned premiums and policy liabilities in our specialty insurance segment. The primary uses of cash from operating activities including an increase in reinsurance receivables in our specialty insurance segment as written policies increased significantly, and a decrease in deferred revenue in our specialty insurance segment.

Cash used in operating activities - VIEs was $1.3 million for the three months ended March 31, 2017.

Investing Activities

Cash used in investing activities (excluding VIEs) was $3.6 million for the three months ended March 31, 2017. The primary drivers of this increase were investments in senior living real estate properties, net increases in notes receivable in our specialty insurance segment, and increases in loans in our specialty finance segment, partially offset by a net decrease in asset backed loans.

Cash provided by investing activities - VIEs was $21.6 million for the three months ended March 31, 2017. The primary driver of the cash from investing activities - VIEs was loan payments and sales in Telos 7.

Financing Activities

Cash used in financing activities (excluding VIEs) was $48.8 million for the three months ended March 31, 2017. The primary uses of cash were from principal payments on mortgage warehouse facilities exceeding new borrowings in our specialty finance segment. This use was partially offset by new borrowings in our senior living segment to fund our investments in real estate.

Cash used in financing activities - VIEs was $21.4 million for the three months ended March 31, 2017 driven primarily by principal payments on debt in Telos 7.


19



Three Months Ended March 31, 2016

Operating Activities

Cash provided by operating activities (excluding VIEs) was $10.7 million for the three months ended March 31, 2016. The primary sources of cash from operating activities included increases in unearned premiums from our specialty insurance business as a result of the credit protection and specialty products, and mortgage sales outpacing originations. The primary uses of cash for operating activities included increases in reinsurance and premiums receivables at our specialty insurance business as written policies increased significantly, and an increase in corporate expenses due to our investment in our controls and reporting infrastructure.

Cash provided by operating activities - VIEs was $2.8 million for the three months ended March 31, 2016. The primary source of cash from operating activities - VIEs were the net gain on the sale of loans within the CLOs and retained cash from the CLO subordinated note investments.

Investing Activities

Cash used in investing activities (excluding VIEs) was $85.4 million for the three months ended March 31, 2016. The primary drivers of these investments were our investments in NPLs and other investments, investments in real estate properties in our senior living business and increase in loans in our specialty finance business.

Cash provided by investing activities - VIEs was $0.5 million for the three months ended March 31, 2016. The primary driver of the use of cash in investing activities - VIEs was investments in new loans in the CLOs, more than offset by repayments and sales.

Financing Activities

Cash provided by financing activities (excluding VIEs) was $46.5 million for the three months ended March 31, 2016. The primary drivers of the cash provided were borrowings in our senior living business to fund investments in real estate and an increase in debt in our specialty insurance business for operations.

Cash provided by financing activities - VIEs was $0.3 million for the three months ended March 31, 2016.

Contractual Obligations

The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of March 31, 2017:
($ in thousands)
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total 
Notes payable CLOs (1)
$
—

 
$
—

 
$
—

 
$
515,874

 
$
515,874

Credit agreement/Revolving line of credit
49,974

 
208,202

 
207,542

 
—

 
465,718

Mortgage notes payable and related interest (2)
14,027

 
90,280

 
76,894

 
111,245

 
292,446

Trust Preferred Securities
—

 
—

 
—

 
35,000

 
35,000

Operating lease obligations (3)
5,007

 
7,407

 
4,012

 
127

 
16,553

Total
$
69,008

 
$
305,889

 
$
288,448

 
$
662,246

 
$
1,325,591

(1)
Non-recourse CLO notes payable principal is payable at stated maturity, 2027 for Telos 6 and 2025 for Telos 7.
(2)
See Note —(11) Debt, net, in the accompanying consolidated financial statements for additional information.
(3)
Minimum rental obligation for Tiptree, Care, MFCA, Siena, Reliance, Luxury and Fortegra office leases. The total rent expense for the Company for the three months ended March 31, 2017 and 2016 was $1.7 million and $1.7 million, respectively.
 
Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. There have been no material changes to the critical accounting policies and estimates as discussed in our 2016 Annual Report on Form 10-K.

Recently Adopted and Issued Accounting Standards

For a discussion of recently adopted and issued accounting standards see the section “Recent Accounting Standards” in Note (2)—Summary of Significant Accounting Policies of the notes to the accompanying consolidated financial statements.


20



OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, we enter into various off-balance sheet arrangements including entering into derivative financial instruments and hedging transactions, operating leases and sponsoring and owning interests in consolidated and non-consolidated variable interest entities.

Further disclosure on our off-balance sheet arrangements as of March 31, 2017 is presented in the “Notes to Consolidated Financial Statements” in “Part I. Item 1. Financial Statements (Unaudited)” of this filing as follows:

•
Note —(9) Derivative Financial Instruments and Hedging
•
Note —(10) Assets and Liabilities of Consolidated CLOs
•
Note —(22) Commitments and Contingencies

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our 2016 Annual Report on Form 10-K described our Quantitative and Qualitative Disclosures About Market Risk. There were no material changes to the assumptions or risks during the three months ended March 31, 2017.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability insurance policies but has not yet ruled on such motion with respect to the life insurance policies at issue. No trial or additional hearings are currently scheduled.

In management’s opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot reasonably estimate a range of loss.

Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position or results of operations.


21



Item 1A. Risk Factors

For information regarding factors that could affect our Company, results of operations and financial condition, see the risk factors discussed under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material change in those risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Form 10-Q:
 
 
 
Financial Statements (Unaudited):
 
Consolidated Balance Sheets for March 31, 2017 and December 31, 2016
Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016
Consolidated Statement of Changes in Stockholders’ Equity for the period ended March 31, 2017
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016
 
 
Exhibits:
 
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page, is incorporated herein by reference and is filed as part of this Form 10-Q.
 

22



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Tiptree Inc. has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 
 
Tiptree Inc.
 
 
 
 
Date:
June 6, 2017
 
By:/s/ Michael Barnes
 
 
 
Michael Barnes
 
 
 
Executive Chairman
 
 
 
 
Date:
June 6, 2017
 
By:/s/ Jonathan Ilany
 
 
 
Jonathan Ilany
 
 
 
Chief Executive Officer
 
 
 
 
Date:
June 6, 2017
 
By:/s/ Sandra Bell
 
 
 
Sandra Bell
 
 
 
Chief Financial Officer



23



EXHIBIT INDEX
Exhibit No.
Description
31.1
Certification of Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.3
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1
Certification of Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.3
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*

*
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets for March 31, 2017 and December 31, 2016, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the period ended March 31, 2017, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 and (vi) the Notes to the Consolidated Financial Statements.







24