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EX-32.2 - EXHIBIT 32.2 - TIPTREE INC.exhibit3223q-2014.htm
EX-31.1 - EXHIBIT 31.1 - TIPTREE INC.exhibit3113q-2014.htm
EX-32.1 - EXHIBIT 32.1 - TIPTREE INC.exhibit3213q-2014.htm
EX-10.1 - EXHIBIT 10.1 STOCK PURCHASE AGREEMENT - TIPTREE INC.exhibit1013q-2014pfgstockp.htm
E

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 September 30, 2014
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 Financial 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   x     No  ¨
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   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November [12], 2014, there were 31,829,633 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 9,770,367 shares, par value $0.001, of the registrant’s Class B common stock outstanding.





Tiptree Financial Inc.
INDEX






PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Financial Statements Introductory Note

Tiptree Financial Inc. (“Tiptree”) is a holding company that is the sole managing member, and owns approximately 25%, of Tiptree Operating Company, LLC (“Operating Company”). As the sole managing member of Operating Company, Tiptree operates and controls all of the business and affairs of Operating Company and its subsidiaries and consolidates the financial results of Operating Company and its subsidiaries. Tiptree Financial Partners, L.P. (“TFP”) owns approximately 75% of Operating Company. As of September 30, 2014, Tiptree owned approximately 37% of TFP, with the remainder owned by the existing limited partners of TFP. As a result Tiptree’s combined direct and indirect ownership of Operating Company was approximately 53% as of September 30, 2014. The remainder is reflected as a non-controlling interest in Tiptree’s consolidated financial statements. See “Overview” section of Management’s Discussion and Analysis and Notes 1, 14 and 20 to the consolidated financial statements for further discussion of Tiptree’s capital and ownership structure.


1

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Balance Sheets

(in thousands, except share and per share data)

 
(Unaudited)
 
 

September 30, 2014

December 31, 2013
Assets



 
 
 
 
Cash and cash equivalents – unrestricted
$
179,892


$
120,557

Cash and cash equivalents – restricted
23,785


26,395

Trading investments, at fair value
38,837


35,991

Investments in available for sale securities, at fair value
(amortized cost: $16,889 and $17,708 in 2014 and 2013, respectively)
17,064


17,763

Loans held for sale, at fair value ($31,737 pledged as collateral at September 30, 2014 )
32,109

 

Investments in loans, at fair value
222,020


171,087

Loans owned, at amortized cost – net of allowance
32,714


40,260

Investments in partially-owned entities
2,832


9,972

Real estate
104,833


105,061

Policy loans
94,779


102,147

Deferred tax assets
7,487


3,310

Intangible assets
152,070


154,695

Goodwill
4,617


4,294

Other assets
46,202


49,201

Separate account assets
4,461,601


4,625,099

Assets of consolidated CLOs
1,627,680


1,414,616

Total assets
$
7,048,522


$
6,880,448

Liabilities and Stockholders’ Equity



Liabilities:



Derivative financial instruments, at fair value
$
460


$
598

U.S. Treasuries, short position
19,234


18,493

Debt
425,349


360,609

Policy liabilities
105,956

 
112,358

Due to brokers, dealers and trustees
18,390

 
8,193

Other liabilities and accrued expenses
52,627

 
13,636

Separate account liabilities
4,461,601

 
4,625,099

Liabilities of consolidated CLOs
1,417,141

 
1,175,606

Total liabilities
6,500,758

 
6,314,592

Commitment and contingent liabilities
 
 
 
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, 21,955,877 and 10,556,390 shares issued and outstanding, respectively
22


11

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 19,636,823 and 30,968,877 shares issued and outstanding, respectively
20


31

Additional paid-in capital
225,813


100,903

Accumulated other comprehensive income
107


33

Retained earnings
21,301


18,933

Total stockholders’ equity of Tiptree Financial Inc.
247,263


119,911


2


Non-controlling interest
235,951


361,354

Appropriated retained earnings of consolidated TAMCO
64,550


84,591

Total stockholders’ equity
547,764


565,856

Total liabilities and stockholders’ equity
$
7,048,522


$
6,880,448


See accompanying notes to consolidated financial statements.



3


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)




Three months ended September 30,

Nine months ended September 30,


2014

2013

2014

2013
Realized and unrealized gains:









Net realized gain (loss) on investments

$
7,909


$
669


$
7,007


$
(770
)
Change in unrealized (depreciation) appreciation on investments

(1,819
)

3,514


(1,530
)

1,014

Income from investments in partially owned entities

2,204


1,800


2,884


3,213

Net realized and unrealized gain

8,294


5,983


8,361


3,457

Investment income:








Interest income

7,363


3,916


17,664


11,131

Separate account fees

5,931


5,526


16,943


16,336

Administrative service fees

12,845


12,760


37,786


36,856

Rental revenue

4,469


1,363


13,308


3,279

Gain on sale of loans held for sale, net

2,383




5,117



Other income

1,537


325


3,404


701

Total investment income

34,528


23,890


94,222


68,303

Total net realized and unrealized gains and investment income

$
42,822


$
29,873


$
102,583


$
71,760


4


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)




Three months ended September 30,

Nine months ended September 30,


2014

2013

2014

2013
Expenses:









Interest expense

$
8,500


$
4,110


$
20,721


$
12,008

Payroll expense

12,559


8,753


35,642


26,277

Professional fees

3,420


2,252


7,334


6,204

Change in future policy benefits

1,063


1,189


3,260


3,502

Mortality expenses

2,667


2,633


7,892


7,885

Commission expense

679


631


1,837


1,805

Depreciation and amortization expenses

2,290


1,216


5,656


3,382

Other expenses

5,505


4,227


15,562


10,722

Total expenses

36,683


25,011


97,904


71,785

Net income (loss) before taxes and income attributable to consolidated CLOs from continuing operations

6,139


4,862


4,679


(25
)
Results of consolidated CLOs:








(Loss) income attributable to consolidated CLOs

(4,093
)

11,256


20,742


33,475

Expenses attributable to consolidated CLOs

15,552


12,783


44,541


34,021

Net loss attributable to consolidated CLOs

(19,645
)

(1,527
)

(23,799
)

(546
)
(Loss) income before taxes from continuing operations

(13,506
)

3,335


(19,120
)

(571
)
Provision for income taxes

(20
)

1,434


906


4,549

(Loss) income from continuing operations

(13,486
)

1,901


(20,026
)

(5,120
)
Discontinued operations:








Gain on sale of Bickford portfolio, net







15,463

Income from discontinued operations, net







1,647

Provision for income taxes








Discontinued operations, net







17,110

Net (loss) income

(13,486
)

1,901


(20,026
)

11,990

Less: Net (loss) income attributable to noncontrolling interest

(1,904
)

7,008


(2,353
)

21,185

Less: Net (loss) income attributable to VIE subordinated noteholders

(11,854
)

(6,937
)

(20,041
)

(15,758
)
Net income available to common stockholders

$
272


$
1,830


$
2,368


$
6,563


5


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)




Three months ended September 30,

Nine months ended September 30,


2014

2013

2014

2013
Net income (loss) per Class A common share:








Basic, continuing operations, net

$
0.02


$
0.18


$
0.18


$
(1.03
)
Basic, discontinued operations, net







1.67

Net income basic

0.02


0.18


0.18


0.64

Diluted, continuing operations, net

0.01


0.18


0.18


(1.03
)
Diluted, discontinued operations, net







1.67

Net income dilutive

$
0.01


$
0.18


$
0.18


$
0.64

Weighted average number of Class A common shares:








Basic

17,449,974


10,246,176


12,909,949


10,243,893

Diluted

17,449,974


10,271,537


12,909,949


10,266,164

See accompanying notes to consolidated financial statements.

6


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands, except share and per share data)
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net (loss) income
 
$
(13,486
)

$
1,901


$
(20,026
)

$
11,990

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized holding (losses)/gains on securities available for sale net of tax (benefit)/ expense of $(41), $(144), $29 and $(15)
 
(76
)

(267
)
 
54

 
(27
)
Less: reclassification adjustment for net gains included in net income net of tax expense of $6, $1, $11 and $26
 
11


3

 
20

 
48

Total comprehensive (loss) income
 
(13,573
)
 
1,631

 
(19,992
)
 
11,915

Less: comprehensive (loss) income attributable to non-controlling interests and VIE subordinated noteholders
 
(13,758
)

71

 
(22,394
)

5,427

Total comprehensive income available to Class A common stockholders
 
$
185

 
$
1,560

 
$
2,402

 
$
6,488


See accompanying notes to consolidated financial statements.


7


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders’ Equity
(in thousands, except share and per share data)
(Unaudited)
 
Class A Common Stock
 
Class B Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
shares
 
Common stock
 
Number of
shares
 
Common stock
 
Additional paid-in capital
 
Accumulated
other
comprehensive
income
 
Appropriated
retained earnings
of consolidated
TAMCO
 
Retained
earnings
 
Non-controlling
interest
 
Total
Balance at December 31, 2013
10,556,390

 
$
11

 
30,968.877

 
$
31

 
$
100,903

 
$
33

 
$
84,591

 
$
18,933

 
$
361,354

 
$
565,856

Stock-based compensation to directors for services rendered
19,988

 

 

 

 
151

 

 

 

 

 
151

Stock-based compensation to employees and other
47,445

 

 

 

 
488

 

 

 

 

 
488

Class A shares issued due to TFP unit redemptions
11,332,054

 
11

 

 

 
123,760

 

 

 

 

 
123,771

Class B shares redeemed due to TFP unit redemptions

 

 
(11,332.054
)
 
(11
)
 

 

 

 

 

 
(11
)
Contribution

 

 

 

 

 

 

 

 
44

 
44

Net unrealized gains and losses on available for sale securities (net of tax of $40)

 

 

 

 

 
74

 

 

 
5

 
79

Dividends paid

 

 

 

 

 

 

 

 
(192
)
 
(192
)
Purchase of majority ownership of subsidiary

 

 

 

 

 

 

 

 
1,276

 
1,276

Net changes in non-controlling interest

 

 

 

 
511

 

 

 

 
(124,183
)
 
(123,672
)
Net (loss) income

 

 

 

 

 

 
(20,041
)
 
2,368

 
(2,353
)
 
(20,026
)
Balance at September 30, 2014
21,955,877

 
$
22

 
19,636.823

 
$
20

 
$
225,813

 
$
107

 
$
64,550

 
$
21,301

 
$
235,951

 
$
547,764


See accompanying notes to consolidated financial statements.

8

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


 
Nine months ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
2,368

 
$
6,563

Net (loss) income attributable to non-controlling interest
(2,353
)
 
21,185

Net loss attributable to VIE subordinated note holders
(20,041
)
 
(15,758
)
Net (loss) income
(20,026
)
 
11,990

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Net realized (gain) loss – investments
(7,007
)
 
770

Net realized gain on sale of properties, net

 
(15,463
)
Increase in other liabilities and accrued expenses
39,397

 
9,859

Increase in due to brokers, dealers and trustees
10,197

 
55,412

Change in unrealized depreciation (appreciation) – investments
1,530

 
(1,014
)
Net change in loans originated for sale
(10,516
)
 

Income from investments in partially-owned entities, net
(2,884
)
 
(3,213
)
Deferred tax (benefit) expense
(2,499
)
 
508

Decrease/ (increase) in other assets
3,084

 
(15,787
)
Non cash compensation expense
49

 
169

Non cash interest from investments in loans
358

 
(189
)
Accretion of discounts and depreciation expense
4,689

 
5,223

Amortization and write off of deferred financing costs
221

 
26

Accretion of mortgage note discount
(127
)
 
35

(Decrease)/increase in policy liabilities
(6,402
)
 
6,062

Operating activities from VIEs
55,634

 
(13,272
)
Net cash provided by operating activities
65,698

 
41,116

Cash flows from investing activities:
 
 
 
Purchases of trading securities and loans carried at fair value
(297,991
)
 
(129,719
)
Purchases of available for sale securities
(5,437
)
 
(7,790
)
Purchases of derivatives
(7,221
)
 
(1,996
)
Purchases of real estate
(4,607
)
 
(21,347
)
Purchases of loans
(17,443
)
 
(27,040
)
Purchases of fixed assets
(125
)
 
(47
)
Proceeds from sales of real estate

 
44,038

Decrease/(Increase) in restricted cash
2,609

 
(13,462
)
Acquisitions, net cash
7,213

 
2,138

Proceeds from loan repayments
33,713

 
799

Proceeds from sales of trading securities
251,659

 
45,572

Proceeds from foreign exchange

 
45

Proceeds from sales/maturities of available for sale securities
6,194

 
5,881

Proceeds from distributions paid by partially owned entities
7,058

 
221

Decrease/(Increase) in policy loans
7,368

 
(5,752
)
Change due to consolidation of trusts
(34
)
 
(41
)
Investing activities from VIEs
(225,837
)
 
(593,362
)
Net cash (used in)/provided by investing activities
(242,881
)
 
(701,862
)

9


Cash flows from financing activities:
 
 
 
Capital distributions paid by subsidiaries

 
(2,824
)
Dividends paid

 
(366
)
Proceeds from loan
184,438

 
108,612

Principal payments under mortgage notes payable
(1,230
)
 
(740
)
Partial paydown of borrowings
(140,382
)
 
(3,917
)
Payment of placement costs
(153
)
 
(38
)
Proceeds from issuance of common units of subsidiaries
467

 
2,755

Financing activities from VIEs
193,378

 
592,422

Net cash provided by financing activities
236,518

 
695,904

Net increase in cash
59,335

 
35,158

Cash and cash equivalents – unrestricted – beginning of period
120,557

 
88,563

Cash and cash equivalents – unrestricted – end of period
$
179,892

 
$
123,721

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
52,431

 
$
29,171

Cash paid for taxes
3,673

 
1,931

Non-cash investing and financing activities:
 
 
 
Capital change due to equity compensation
$
594

 
$
30

     Net assets related to acquisitions
(3,275
)
 
(378
)

See accompanying notes to consolidated financial statements.

10

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)


Basis of Presentation
The consolidated financial statements of Tiptree Financial Inc. and subsidiaries (the Company) were compiled in accordance with generally accepted accounting principles (GAAP). In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2013.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had no significant impact on the Company's consolidated financial position, results of operations or net change in cash or cash equivalents.

(1) Organization
Tiptree Financial Inc. (Tiptree and, together with its consolidated subsidiaries, collectively, the Company) is a Maryland Corporation that was incorporated on March 19, 2007. Until July 1, 2013, Tiptree operated under the name Care Investment Trust Inc. (which, for the period prior to July 1, 2013, we refer to as Care Inc.). Tiptree is a diversified holding company which conducts its operations through its Operating Company, Tiptree Operating Company, LLC (Operating Company). Tiptree’s primary focus is on four sectors: insurance and insurance services, specialty finance (including corporate, consumer and tax-exempt credit), asset management and real estate. Tiptree’s Class A Common Stock is traded on the NASDAQ capital market under the symbol “TIPT”.
(2) Acquisitions

The following discussion summarizes completed acquisition of businesses by Tiptree subsequent to December 31, 2013.
Luxury Mortgage Corp.

Tiptree completed the acquisition of 67.5% of Luxury in January 2014; therefore, Luxury is consolidated within Tiptree’s financial statements beginning with the first quarter of 2014 and reported in Tiptree’s specialty finance segment. Luxury’s operations include the origination, packaging and sale of agency, prime jumbo and super jumbo mortgage loans into the secondary market through whole loan sales. The loans are typically sold shortly after origination into a liquid secondary market.

Management has completed a preliminary assessment of the allocation of the fair value of the assets acquired and liabilities assumed from the Luxury acquisition in accordance with ASC 805 Business Combinations. The allocation of the purchase price is preliminary pending receipt of information necessary to identify and measure the assets acquired and the liabilities assumed. The Company anticipates finalizing the purchase price allocation as soon as practicable.
Fortegra Acquisition

On August 11, 2014, Operating Company and its subsidiaries Caroline Holdings LLC and Caroline Merger Sub, Inc. entered into an Agreement and Plan of Merger to acquire Fortegra Financial Corporation (Fortegra) (NYSE:FRF) for approximately $218,000 in cash. Fortegra is a publicly traded insurance services company. Closing of the merger is subject to the satisfaction of customary conditions including, among other things, insurance regulatory approvals.

(3) Summary of Significant Accounting Policies
The consolidated financial statements of Tiptree Financial Inc. were compiled in accordance with generally accepted accounting principles (GAAP) using the accounting policies set forth in Note 2 of Notes to Financial Statements included in the 2013 Annual Report on Form 10-K.

11

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

Below are the significant accounting policies associated with the Company’s subsidiary Luxury acquired in January 2014:
Accounting Policies

Substantially all loans originated by the Company are held for sale to permanent investors. The Company has elected to record all mortgage loans held for sale at fair value. The fair value of loans held for sale is determined using quoted prices for similar assets (level 2 inputs) and is determined on a loan by loan basis.

Luxury issues interest rate lock commitments (IRLC) 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 quoted prices in secondary markets for commitments to sell certain government sponsored agency securities. The fair values of these commitments generally result in a Level 2 classification.

Luxury’s revenues include interest income earned for the period associated with loans on Luxury’s balance sheet, gain on sale income representing the difference between the fair value and the selling price of the related loan sold as well as any fee income earned at origination.

The following recently issued accounting standards are applicable to the Company and have not yet been implemented:

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)-Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company, and the Company is evaluating the effect upon its financial statements.

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. This standard is effective for the Company January 1, 2017 and the Company is evaluating the effect upon its financial statements.

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in ASU 2014-10 affect reporting entities that have interests in entities that are development stage entities as there will be an elimination of the exception to the sufficiency-of-equity-at-risk criterion, allowing the reporting entities to apply consistent guidance for transactions that are economically similar. The guidance applied will be the same for determining whether an entity is a variable interest entity and whether the variable interest entity should be consolidated. ASU 2014-10 is effective for the first quarter of 2015 for the Company, and the Company is evaluating the effect upon its financial statements.

In August 2014, the FASB issued ASU 2014- 13, Consolidation (Topic 810)-Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity. The update allows a reporting entity that consolidates a collateralized financing entity (whose financial assets and liabilities are measured at fair value) to measure both the financial assets and the financial liabilities of that collateralized financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets or the fair value of the financial liabilities. Entities are permitted to apply the guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. Early adoption is permitted as of the beginning of an annual period. A reporting entity also may apply the amendments retrospectively to all relevant prior periods beginning with the annual

12

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

period in which the amendment was initially adopted. The amendments of ASU 2014-13 are effective for the Company for the first quarter of 2015, and the Company is evaluating the effect upon its financial statements.


(4) CLOs and Consolidated Variable Interest Entities
The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated debt obligations 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 assets of each of the CLOs 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 them 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. For this reason the difference between the fair value of the assets and liabilities at initial consolidation and subsequent results attributable to the Variable Interest Entities (“VIE”) subordinated noteholders is reflected as appropriated retained earnings.
The table below represents the assets and liabilities of these consolidated CLOs that are included in the Company’s consolidated balance sheet as of the dates indicated. Subordinated debt obligations owned by Tiptree are not included in these tables as these amounts are eliminated in consolidation.
 
September 30, 2014
 
December 31, 2013
Assets:
 
 
 
Restricted cash
$
60,995

 
$
67,604

Investment in loans
1,516,054

 
1,298,155

Investment in trading securities
22,650

 
19,366

Due from brokers
12,408

 
15,945

Accrued interest receivable
3,835

 
4,108

Deferred debt issuance costs
11,551

 
9,261

Other assets
187

 
177

Total assets of consolidated CLOs
$
1,627,680

 
$
1,414,616

 
 
 
 
Liabilities:
 
 
 
Notes payable
$
1,386,212

 
$
1,154,097

Due to brokers
20,901

 
11,479

Accrued interest payable
9,446

 
9,745

Other liabilities
582

 
285

Total liabilities of consolidated CLOs
$
1,417,141

 
$
1,175,606

Net assets of consolidated CLOs
$
210,539

 
$
239,010


13

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Income:
 
 
 
 
 
 
 
Realized loss
$
(9,661
)
 
$
(10,385
)
 
$
(21,993
)
 
$
(16,550
)
Unrealized (loss) gain loans
(14,949
)
 
1,499

 
(16,426
)
 
(2,071
)
Interest income
20,517

 
20,142

 
59,161

 
52,096

Total (loss) income attributable to consolidated CLOs
$
(4,093
)
 
$
11,256

 
$
20,742

 
$
33,475

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Interest expense
$
15,119

 
$
12,386

 
$
43,463

 
$
33,106

Other expense
433

 
397

 
1,078

 
915

Total expenses attributable to consolidated CLOs
$
15,552

 
$
12,783

 
$
44,541

 
$
34,021


The tables below summarize the debt obligations of the CLOs consolidated by the Company as of September 30, 2014 and December 31, 2013. Subordinated debt obligations owned by Tiptree are not included in these tables as these amounts are eliminated in consolidation:
 
September 30, 2014
 
Aggregate
principal amount
 
Spread over three months LIBOR
 
Unamortized
discount
 
Carrying amount
Description
 
 
 
 
 
 
 
Telos 5 (maturity April 2025)
 
 
 
 
 
 

Class A
$
252,000

 
1.55
%
 
$
246

 
$
251,754

Class B-1
39,000

 
N/A

(1) 
342

 
38,658

Class B-2
7,500

 
2.15
%
 
68

 
7,432

Class C
32,750

 
3.00
%
 
521

 
32,229

Class D
19,750

 
3.65
%
 
1,077

 
18,673

Class E
18,000

 
5.00
%
 
1,664

 
16,336

Class F
7,750

 
5.50
%
 
1,050

 
6,700

Subordinated
10,500

 
N/A

 
995

 
9,505

 
 
 
 
 
 
 
 
Telos 4 (maturity July 2024)
 
 
 
 
 
 

Class A
$
214,000

 
1.30
%
 
$
897

 
$
213,103

Class B
46,500

 
1.80
%
 
1,930

 
44,570

Class C
29,000

 
2.75
%
 
1,313

 
27,687

Class D
19,250

 
3.50
%
 
1,470

 
17,780

Class E
16,000

 
5.00
%
 
1,871

 
14,129

Class X
2,100

 
0.95
%
 

 
2,100

Subordinated
10,700

 
N/A

 
481

 
10,219


14

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
 
 
 
 
 
 
 
Telos 3 (maturity October 2024)
 
 
 
 
 
 
 
Class A
$
225,000

 
1.42
%
 
$

 
$
225,000

Class B
36,500

 
2.25
%
 

 
36,500

Class C
26,500

 
3.00
%
 
534

 
25,966

Class D
18,000

 
4.25
%
 
774

 
17,226

Class E
15,000

 
5.50
%
 
1,433

 
13,567

Class F
6,000

 
5.50
%
 
705

 
5,295

Subordinated
34,350

 
N/A

 
1,451

 
32,899

 
 
 
 
 
 
 
 
Telos 2 (maturity April 2022)
 
 
 
 
 
 
 
Class A-1
$
110,249

 
0.26
%
 
$
12,812

 
$
97,437

Class A-2
40,000

 
0.40
%
 
8,034

 
31,966

Class B
27,500

 
0.55
%
 
6,967

 
20,533

Class C
22,000

 
0.95
%
 
8,861

 
13,139

Class D
22,000

 
2.20
%
 
11,275

 
10,725

Class E
16,000

 
5.00
%
 
12,956

 
3,044

Subordinated
2,000

 
N/A

 
1,594

 
406

 
 
 
 
 
 
 
 
Telos 1 (maturity October 2021)
 
 
 
 
 
 
 
Class A-1D
$
12,097

 
0.27
%
 
$
1,357

 
$
10,740

Class A-1R
4,536

 
0.29
%
 
509

 
4,027

Class A-1T
16,634

 
0.27
%
 
1,867

 
14,767

Class A-2
60,000

 
0.40
%
 
11,707

 
48,293

Class B
27,200

 
0.49
%
 
6,689

 
20,511

Class C
22,000

 
0.85
%
 
8,610

 
13,390

Class D
22,000

 
1.70
%
 
10,857

 
11,143

Class E
16,000

 
4.25
%
 
12,571

 
3,429

Subordinated
40,223

 
N/A

 
24,889

 
15,334

 
$
1,546,589

 
 
 
$
160,377

 
$
1,386,212


(1) Tranche B-1 Notes in Telos 5 have a fixed rate of 4.45% over the life of the CLO.

15

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)


December 31, 2013

Aggregate
principal amount

Spread over three months LIBOR

Unamortized
discount

Carrying amount
Description







Telos 4 (maturity July 2024)







Class A
$
214,000


1.30
%

$
962


$
213,038

Class B
46,500


1.80
%

2,066


44,434

Class C
29,000


2.75
%

1,401


27,599

Class D
19,250


3.50
%

1,562


17,688

Class E
16,000


5.00
%

1,976


14,024

Class X
3,500


0.95
%



3,500

Subordinated
10,700


N/A


516


10,184









Telos 3 (maturity October 2024)







Class A
$
225,000


1.42
%

$


$
225,000

Class B
36,500


2.25
%



36,500

Class C
26,500


3.00
%

570


25,930

Class D
18,000


4.25
%

822


17,178

Class E
15,000


5.50
%

1,512


13,488

Class F
6,000


5.50
%

743


5,257

Subordinated
29,000


N/A


1,322


27,678









Telos 2 (maturity April 2022)







Class A-1
$
221,836


0.26
%

$
28,216


$
193,620

Class A-2
40,000


0.40
%

8,717


31,283

Class B
27,500


0.55
%

7,532


19,968

Class C
22,000


0.95
%

9,473


12,527

Class D
22,000


2.20
%

11,900


10,100

Class E
16,000


5.00
%

13,155


2,845

Subordinated
2,000


N/A


1,654


346









Telos 1 (maturity October 2021)







Class A-1D
$
39,270


0.27
%

$
4,867


$
34,403

Class A-1R
14,726


0.29
%

1,826


12,900

Class A-1T
53,996


0.27
%

6,693


47,303

Class A-2
60,000


0.40
%

12,781


47,219

Class B
27,200


0.49
%

7,277


19,923

Class C
22,000


0.85
%

9,261


12,739

Class D
22,000


1.70
%

11,548


10,452

Class E
16,000


4.25
%

12,861


3,139

Subordinated
40,223


N/A


26,391


13,832


$
1,341,701




$
187,604


$
1,154,097



16

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

Warehouse Facility
As of September 30, 2014 and December 31, 2013, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $60,846 and $42,674, respectively, as well as the management fees receivable of $2,975 and $3,616 as of September 30, 2014 and December 31, 2013, respectively. Both the carrying values (including accrued distributions) of the Company’s investment in the CLOs and management fees receivable are eliminated upon consolidation.
On May 21, 2014, Telos entered into a $100,000 warehouse agreement in anticipation of formation of Telos 2014-6, Ltd. (Telos 6). The Company contributed an initial $25,000 to the warehouse facility, with incremental contributions of $10,000 both in July and August 2014, at which time the warehouse borrowing increased to $180,000. As of September 30, 2014, the warehouse has investments in loans at fair value of $218,885, debt of $158,984, and an amount of $18,390 payable to brokers which are included in the Company’s consolidated balance sheet. The Company’s exposure in Telos 6 is limited to its investment of $45,000 as of September 30, 2014.
(5) Operating Segment Data
The Company has four reportable operating segments which are organized in a manner that reflects how management views its strategic business units. A description of each of the reportable segments follows:
Insurance and Insurance Services operations are currently conducted by PFG, a majority owned subsidiary of Tiptree. PFG’s operating subsidiaries consist of Philadelphia Financial Life Assurance Company (PFLAC), Philadelphia Financial Life Assurance Company of New York (PFLACNY), Philadelphia Financial Distribution Company (PFDC), Philadelphia Financial Administrative Services Company (PFASC), and Philadelphia Financial Agency, Inc. (PFA). Philadelphia Financial’s principal insurance activity is the structuring, underwriting, marketing and administration of variable life insurance and variable annuity products to the high net worth market. Total separate account assets for policies written by PFG are $4,461,601. PFASC administers approximately $37.6 billion in COLI and BOLI policies.

Specialty Finance activities are primarily conducted through the Company’s majority-controlled subsidiaries, MFCA, Luxury and Siena. MFCA is a specialty finance company that owns and manages a portfolio of non-investment grade and non-rated direct and indirect debt obligations of middle-market tax-exempt borrowers. Luxury is a residential mortgage lender that originates loans conforming FHA, prime jumbo and super jumbo mortgages for sale to institutional investors. Siena’s business consists of structuring asset-based loan facilities across diversified industries which include manufacturing, distribution, wholesale, and service companies. In addition to MFCA, Luxury, and Siena, Tiptree’s other specialty finance investments include principal investment holdings of CLO subordinated notes and a structured corporate loan portfolio.

Asset Management activities are conducted through TAMCO, an SEC-registered investment advisor. TAMCO’s operating subsidiaries include: (1) Telos Asset Management LLC (Telos), an asset management company that specializes in investing in middle market corporate credit through managed accounts and structured investment vehicles, such as CLOs; (2) Muni Capital Management, LLC (MCM) which in addition to managing its own portfolio of tax-exempt securities, manages Non-Profit Preferred Funding Trust I (NPPF I), a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of unaffiliated investors; (3) Tiptree Capital Management, LLC, which provides services to Operating Company; and (4) TREIT Management, LLC (TREIT), a real estate focused service provider.

Real Estate primarily relates to the activities of (1) Care LLC, a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of senior housing assets including senior apartments, assisted-living, independent-living and memory care and (2) Star Asia, which consists of various entities which are all Japan based real estate holding companies formed to invest in Asian properties and real estate debt instruments. Care LLC operates the business operated by Care Inc. prior to the Contribution Transactions (this business as operated by Care Inc. and Care LLC is collectively referred to as Care). (See Note 14—Stockholder’s Equity—Contribution Transactions for further detail).

The tabular information that follows shows components of revenue, expense, and profit or loss, for each of the operating segments for the periods ended September 30, 2014 and 2013 and total assets as of September 30, 2014 and December 31, 2013.

17

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

Revenue is derived from the main income components of each segment. For Insurance and Insurance Services, the main drivers of revenue are fees on separate account assets, and administration service fees. For Specialty Finance, the main sources of revenue are investment interest and realized and unrealized gains/losses on investment securities. For Asset Management, revenue is derived from management fees based on assets under management and, in some cases, incentive fees based on the profits generated. For Real Estate, revenue includes rental revenue and investment interest.
Intersegment revenues refers to those items of revenue which will be eliminated upon consolidation. Included in revenue, expense, interest revenue, interest expense, segment profit/(loss), and segment assets are items which are eliminated upon consolidation as well as adjustments for discontinued operations, reclassifications, assets of consolidated CLOs and non-controlling interest. These items are classified as corporate eliminations and other in the tables below.
Each reportable segment’s measure of profit/(loss) is reported before income taxes and includes discontinued operations and non-controlling interest as this is how management views its segments.

Three months ended September 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
18,776

(1) 
$


$


$


$


$
18,776

Rental revenue


16




4,453




4,469

Interest income
1,131


9,988




139


(3,895
)

7,363

Other revenue
18


1,538


(313
)
(2) 
10,518


453


12,214

Intersegment revenues


114


5,089

(2) 


(5,203
)


Total revenue
$
19,925


$
11,656


$
4,776


$
15,110


$
(8,645
)

$
42,822














Interest expense
$
2,873


$
4,921


$


$
974


$
(268
)

$
8,500

Payroll expense
4,890


3,162


2,734


1,773

 


12,559

Professional fee expense
419


2,303

 
474

 
392

 
(168
)

3,420

Other expense
8,593

 
1,383

 
172

 
3,562

 
(1,506
)

12,204

Total expense
16,775

 
11,769

 
3,380

 
6,701

 
(1,942
)

36,683

Segment profit/(loss)
$
3,150

 
$
(113
)
 
$
1,396

 
$
8,409

 
$
(6,703
)

$
6,139

Net loss attributable to consolidated CLOs

 

 

 

 


(19,645
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










(13,758
)
Discontinued operations











Income taxes










(20
)
Net income available to common stockholders










$
272

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees which is a component of other income in the Company’s Consolidated Statements of Operations.


18

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)


Three months ended September 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
18,286

(1) 
$


$


$


$


$
18,286

Rental revenue






1,363




1,363

Interest income
1,251


5,923




589


(3,847
)

3,916

Other revenue
5


4,353


85

(2
)
1,862


3


6,308

Intersegment revenues


(83
)

3,902

(2
)


(3,819
)


Total revenue
$
19,542


$
10,193

 
$
3,987

 
$
3,814

 
$
(7,663
)

$
29,873













Interest expense
$
3,121


$
596


$


$
393


$


$
4,110

Payroll expense
4,447


1,006


2,918


382




8,753

Professional fee expense
804


521


591


336




2,252

Other expense
8,064


827


346


1,181


(522
)

9,896

Total expense
16,436


2,950


3,855


2,292


(522
)

25,011

Segment profit/(loss)
$
3,106


$
7,243


$
132


$
1,522


$
(7,141
)

$
4,862

Net loss attributable to consolidated CLOs










(1,527
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










71

Discontinued operations











Income taxes










1,434

Net income available to common stockholders










$
1,830

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees which is a component of other income in the Company’s Consolidated Statements of Operations.


19

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)


Nine months ended September 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
54,729

(1) 
$


$


$


$


$
54,729

Rental revenue


34




13,274




13,308

Interest income
3,464


23,947




1,504


(11,251
)

17,664

Other revenue
32


5,908


224

(2) 
10,860


(142
)

16,882

Intersegment revenues


301


11,400

(2) 


(11,701
)


Total revenue
$
58,225


$
30,190


$
11,624


$
25,638


$
(23,094
)

$
102,583



















Interest expense
$
8,683


$
9,408


$


$
2,930


$
(300
)

$
20,721

Payroll expense
14,960


7,577


7,818


5,287




35,642

Professional fee expense
1,344


4,485


941


564




7,334

Other expense
23,954


4,058


875


7,633


(2,313
)

34,207

Total expense
48,941


25,528


9,634


16,414


(2,613
)

97,904

Segment profit/(loss)
$
9,284


$
4,662


$
1,990

 
$
9,224


$
(20,481
)

$
4,679

Net loss attributable to consolidated CLOs















(23,799
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders















(22,394
)
Discontinued operations
















Income taxes















906

Net income available to common stockholders















$
2,368

Segment assets as of September 30, 2014
$
4,811,378


$
495,659


$
15,593

(3) 
$
153,231


$
1,572,661


$
7,048,522

(1)    Includes separate account and administrative servicing fees.
(2)    Includes management fees, which is a component of other income in the Company’s Consolidated Statements of Operations.
(3)    Refer to Management’s Discussion and Analysis—Economic Net Income Components for information on assets under management.



20

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)


Nine months ended September 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
53,192

(1) 
$


$


$


$


$
53,192

Rental revenue






9,199


(5,920
)

3,279

Interest income
3,658


16,651




1,500


(10,678
)

11,131

Other revenue
77


517


296

(2) 
19,470


(16,202
)

4,158

Intersegment revenues


81


12,776

(2) 


(12,857
)


Total revenue
$
56,927


$
17,249


$
13,072


$
30,169


$
(45,657
)

$
71,760



















Interest expense
$
9,383


$
1,660


$


$
3,755


$
(2,790
)

$
12,008

Payroll expense
14,059


1,281


9,587


1,350




26,277

Professional fee expense
1,463


2,194


1,022


1,525




6,204

Other expense
22,922


2,073


684


6,887


(5,270
)

27,296

Total expense
47,827


7,208


11,293


13,517


(8,060
)

71,785

Segment profit/(loss)
$
9,100


$
10,041


$
1,779


$
16,652


$
(37,597
)

$
(25
)
Net income attributable to consolidated CLOs















(546
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders















5,427

Discontinued operations















17,110

Income taxes















4,549

Net income available to common stockholders















$
6,563

Segment assets as of December 31, 2013
$
4,949,262


$
385,987


$
7,896

(3) 
$
170,683


$
1,366,620


$
6,880,448

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees, which is a component of other income in the Company’s Consolidated Statements of Operations.
(3) Refer to Management’s Discussion and Analysis—Economic Net Income Components for information on assets under management.



21

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

(6) Available for Sale Securities
The amortized cost and fair values of available for sale securities held as of September 30, 2014 and December 31, 2013 are as follows:
 
September 30, 2014
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
10,352

 
$
140

 
$
(37
)
 
$
10,455

Corporate securities
6,375

 
84

 
(15
)
 
6,444

Certificates of deposit
100

 

 

 
100

Asset-backed securities
62

 
3

 

 
65

 
$
16,889

 
$
227

 
$
(52
)
 
$
17,064

 
December 31, 2013
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
11,965

 
$
140

 
$
(116
)
 
$
11,989

Corporate securities
5,567

 
71

 
(42
)
 
5,596

Certificates of deposit
100

 

 

 
100

Asset-backed securities
76

 
2

 

 
78

 
$
17,708

 
$
213

 
$
(158
)
 
$
17,763


22

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

The following table summarizes the gross unrealized losses on available for sale securities in an unrealized loss position as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
Less than or equal to one year
 
More than one year
 
Fair value
 
Gross
unrealized losses
 
Fair value
 
Gross unrealized losses
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
1,409

 
$
(5
)
 
$
2,805

 
$
(32
)
Corporate securities
1,895

 
(11
)
 
631

 
(4
)
Asset-backed securities

 

 
2

 

Total
$
3,304

 
$
(16
)
 
$
3,438

 
$
(36
)
 
December 31, 2013
 
Less than or equal to one year
 
More than one year
 
Fair value
 
Gross
unrealized losses
 
Fair value
 
Gross unrealized losses
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
5,543

 
$
(102
)
 
$
854

 
$
(14
)
Corporate securities
2,253

 
(42
)
 
67

 

Asset-backed securities

 

 
2

 

Total
$
7,796

 
$
(144
)
 
$
923

 
$
(14
)
At September 30, 2014, the Company held thirty securities which were in an unrealized loss position for more than one year. The total unrealized losses on these securities were $36 and the fair value was $3,438. At December 31, 2013, the Company held five securities that were in an unrealized loss position for more than one year. The total unrealized loss on these securities was $14 and the fair value was $923. The unrealized losses were attributable to changes in interest rates and not credit-related issues. There have been no other-than-temporary impairments recorded by the Company for the periods ended September 30, 2014 or December 31, 2013.
The amortized cost and fair values of investments of these debt securities at September 30, 2014, 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.
 
Amortized cost
 
Fair value
Due in one year or less
$
1,361

 
$
1,362

Due after one year through five years
10,503

 
10,626

Due after five years through ten years
4,424

 
4,440

Due after ten years through twenty years
539

 
571

Asset-backed securities
62

 
65

 
$
16,889

 
$
17,064

Purchases of available for sale debt securities were $5,437 and $7,790 for the nine month periods ended September 30, 2014 and 2013, respectively. There were no proceeds from maturities of available for sale debt securities for the nine months period ended September 30, 2014. For the same period in 2013, proceeds from maturities of available for sale debt securities were $470. Proceeds from sales of available for sale securities for the period ended September 30, 2014 were $6,194 with

23

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

associated gains of $31. For the same period in 2013, proceeds from sales of available for sale debt securities were $5,411 with associated gains of $74.

24

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

(7) Fair Value of Financial Instruments
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities measured on a recurring basis and the associated fair value hierarchy amounts as of September 30, 2014 and December 31, 2013. Included are balances associated with the consolidated CLOs:
 
 
 
September 30, 2014
 
 
Assets:
Quoted prices in
active markets
Level 1
 
 Other significant
observable inputs
Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
 
Carrying value
Trading investments:
 
 
 
 
 
 
 
 
 
Privately held equity securities
$

 
$

 
$
4,171

 
$
4,171

 
$
4,171

Privately held equity securities (1)

 
2,786

 
1,374

 
4,160

 
4,160

Tax exempt securities

 
24,740

 
3,520

 
28,260

 
28,260

CDO

 

 
230

 
230

 
230

CLO

 

 
1,005

 
1,005

 
1,005

Corporate bonds (1)

 

 
18,490

 
18,490

 
18,490

Total trading investments

 
27,526

 
28,790

 
56,316

 
56,316

Derivative assets:
 
 
 
 
 
 
 
 
 
IRLC

 
326

 

 
326

 
326

Credit derivatives

 
4,845

 

 
4,845

 
4,845

Total derivative assets

 
5,171

 

 
5,171

 
5,171

 Total trading securities

 
32,697

 
28,790

 
61,487

 
61,487

Loans held for sale

 
32,109

 

 
32,109

 
32,109

          Investment in loans 

 
160,137

 
61,883

 
222,020

 
222,020

          Investment in loans (1)

 
1,128,011

 
388,043

 
1,516,054

 
1,516,054

Available for sale securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
7,210

 

 

 
7,210

 
7,210

Obligations of state and political subdivisions

 
3,245

 

 
3,245

 
3,245

Certificates of deposit

 
100

 

 
100

 
100

Corporate bonds

 
6,444

 

 
6,444

 
6,444

Asset-backed securities

 
65

 

 
65

 
65

 Total available for sale securities
7,210

 
9,854

 

 
17,064

 
17,064


25

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
 
 
September 30, 2014
 
 
 
 Quoted prices in
active markets
Level 1
 
 Other significant
Level 2
 
 Significant
unobservable inputs
Level 3
 
 Fair value
 
 Carrying value
 
 
 
 
 
 
 
 
 
 
Separate Account Assets:
 
 
 
 
 
 
 
 
 
Cash
$
7,435

 
$

 
$

 
$
7,435

 
$
7,435

Short-term investments
149,642

 

 

 
149,642

 
149,642

Debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
3,015

 

 

 
3,015

 
3,015

U.S. government agencies

 
1,185

 

 
1,185

 
1,185

Municipal bonds

 
6,754

 

 
6,754

 
6,754

Asset-backed securities

 
108

 

 
108

 
108

Corporate bonds

 
8,599

 

 
8,599

 
8,599

Preferred stocks
4,060

 

 

 
4,060

 
4,060

Common stocks
109,370

 

 

 
109,370

 
109,370

Mutual funds
85,775

 
148,139

 

 
233,914

 
233,914

Real estate funds

 

 
2,380,324

 
2,380,324

 
2,380,324

Private equity

 

 
64

 
64

 
64

Hedge funds:
 
 
 
 
 
 
 
 
 
Multi-strategy

 
67,831

 
754,315

 
822,146

 
822,146

Long/short

 
23,190

 
78,760

 
101,950

 
101,950

Fund of funds

 
3,117

 
187,938

 
191,055

 
191,055

Event driven

 

 
85,825

 
85,825

 
85,825

Long only

 
34,118

 
20,536

 
54,654

 
54,654

Global macro

 
13,158

 
6,800

 
19,958

 
19,958

Fixed income arbitrage

 

 
7,011

 
7,011

 
7,011

Master limited partnerships

 
215,525

 
54,037

 
269,562

 
269,562

Fixed income (non-arbitrage)

 
4,010

 
761

 
4,771

 
4,771

Other

 

 
61

 
61

 
61

Other

 
138

 

 
138

 
138

Subtotal - separate account assets
359,297

 
525,872

 
3,576,432

 
4,461,601

 
4,461,601

 Total
$
366,507

 
$
1,888,680

 
$
4,055,148

 
$
6,310,335

 
$
6,310,335

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
19,234

 
$

 
$

 
$
19,234

 
$
19,234

Derivative liabilities:
 
 
 
 
 
 
 
 
 
IRS

 
460

 

 
460

 
460

Credit derivatives

 

 

 

 


26

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

Total derivative liabilities

 
460

 

 
460

 
460

 Total
$
19,234

 
$
460

 
$

 
$
19,694

 
$
19,694

(1) Indicates assets related to consolidated CLOs.

December 31, 2013
Assets:
Quoted prices in
 active markets
Level 1

 Other significant
 observable inputs
 Level 2

 Significant unobservable inputs
Level 3

Fair value

Carrying value
Trading investments:









Privately held equity securities (1)
$


$


$
5,306


$
5,306


$
5,306

Tax exempt securities


30,707


273


30,980


30,980

CDO




520


520


520

CLO




825


825


825

Corporate bonds (2)




17,674


17,674


17,674

Total trading investments


30,707


24,598


55,305


55,305

Derivative assets:









IRS


52




52


52

Total derivative assets


52




52


52

 Total trading securities


30,759


24,598


55,357


55,357

          Investment in loans (3)


1,438,699


30,543


1,469,242


1,469,242

Available for sale securities:









U.S. Treasury securities
7,751






7,751


7,751

Obligations of state and political subdivisions


4,238




4,238


4,238

Certificates of deposit


100




100


100

Corporate bonds


5,596




5,596


5,596

Asset-backed securities


78




78


78

 Total available for sale securities
7,751


10,012




17,763


17,763





27

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)


December 31, 2013

 Quoted prices in
active markets
Level 1

 Other significant
Level 2

 Significant
unobservable inputs
Level 3

 Fair value

 Carrying value










Separate Account Assets:









Cash
$
26,129


$


$


$
26,129


$
26,129

Short-term investments
171,927






171,927


171,927

Debt securities:









U.S. Treasury securities
17,634






17,634


17,634

U.S. government agencies


1,436




1,436


1,436

Municipal bonds


8,014




8,014


8,014

Asset-backed securities


8,113




8,113


8,113

Corporate bonds


18,116




18,116


18,116

Preferred stocks
1,018






1,018


1,018

Common stocks
100,630






100,630


100,630

Mutual funds
195,736






195,736


195,736

Real estate funds




2,719,387


2,719,387


2,719,387

Private equity




138


138


138

Hedge funds










Multi-strategy


66,615


682,751


749,366


749,366

Long/short


19,115


84,315


103,430


103,430

Fund of funds


2,509


191,423


193,932


193,932

Event driven




86,724


86,724


86,724

Long only


34,787


20,305


55,092


55,092

Global macro


13,157


8,245


21,402


21,402

Fixed income arbitrage




8,669


8,669


8,669

Master limited partnerships


102,394


28,814


131,208


131,208

Fixed income (non-arbitrage)


4,117


2,557


6,674


6,674

Other




73


73


73

Other


251




251


251

Subtotal - separate account assets
513,074


278,624


3,833,401


4,625,099


4,625,099

 Total
$
520,825


$
1,758,094


$
3,888,542


$
6,167,461


$
6,167,461

Liabilities:









Debt securities:









U.S. Treasury securities
$
18,493


$


$


$
18,493


$
18,493

Derivative Liabilities:









Credit derivatives


598




598


598

 Total
$
18,493


$
598


$


$
19,091


$
19,091


28

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

(1) Includes $1,692 related to CLOs classified in Level 3.
(2) Includes $17,674 related to CLOs classified in Level 3.
(3) Includes $1,267,612 and $30,543 classified in Level 2 and Level 3, respectively, related to CLOs.

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 period ending September 30, 2014 and 2013:    
 
Fair value measurement for the three months and nine months ended September 30, 2014 using significant unobservable inputs Level 3
 
Fair value measurement for the three months and nine months ended September 30, 2013 using significant unobservable inputs Level 3
Balance at December 31,
$
3,888,542

 
$
3,504,623

Net realized gains/(losses)
1,482

 
(1,571
)
Net unrealized (losses)/ gains
(86
)
 
2,722

Purchases
96,760

 
180,124

Sales
(195,559
)
 
(90,024
)
Issuances
1,292

 

Settlements

 
(1,195
)
Transfers into Level 3
593,325

 
13,357

Transfers (out of) Level 3
(132,270
)
 
(5,370
)
Attributable to policyowner
126,608

 
121,437

Balance at June 30,
4,380,094


3,724,103

Net realized gains/(losses)
400

 
(228
)
Net unrealized (losses)/gains
(1,889
)
 
(2,326
)
Purchases
41,355

 
36,116

Sales
(544,322
)
 
(64,356
)
Issuances
692

 
214

Settlements

 

Transfers into Level 3
169,524

 

Transfers (out of) Level 3
(96,371
)
 
(9,632
)
Attributable to policyowner
105,665

 
61,960

Balance at September 30,
$
4,055,148

 
$
3,745,851

Changes in unrealized gains included in earnings related to assets still held at period end
$
(1,975
)
 
$
396

For the nine month period ended September 30, 2014, $762,849 was transferred from Level 2 to Level 3 and were primarily corporate bonds. These transfers occurred due to the limited depth of market price supporting the price on these positions. For the nine month period ended September 30, 2013, $13,353 was transferred from Level 2 into Level 3, with the majority from corporate bonds held by the consolidated CLOs also due to limited depth of market price.
ASC Topic 820, as amended by ASU 2011-04, requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party

29

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

pricing service and the information regarding the unobservable inputs is not reasonably available to the Company. As such, the disclosure provided below provides quantitative information only about the significant unobservable inputs used in the valuation of certain privately held securities, credit default assets and tax-exempt municipal securities.
Assets
Fair value at
September 30, 2014
 
Fair value at
December 31,
2013
 
Valuation technique
 
Unobservable input(s)
 
September 30, 2014
Range (weighted average)
 
December 31, 2013
Range (weighted average)
Tax-exempt municipal
184

 
274

 
Discounted cash flow
 
Short and long term cash flows
 
.58% - 33.43%
 
.58% - 33.68%
Total
$
184

 
$
274

 
 
 
 
 
 
 
 
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities and the fair value hierarchy level(s) associated with these assets and liabilities as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
 Level within
fair value
hierarchy
 
Fair value
 
Carrying value
Assets:
 
 
 
 
 
Cash and cash equivalents-unrestricted
1
 
$
179,892

 
$
179,892

Cash and cash equivalents-restricted
1
 
23,785

 
23,785

Trading securities
2,3
 
38,837

 
38,837

Due from brokers, dealers, and trustees (1)
1
 
2,087

 
2,087

Loans held for sale
2
 
32,109

 
32,109

Investments in loans
2
 
222,020

 
222,020

Loans owned
2
 
32,714

 
32,714

Policy loans
3
 
94,779

 
94,779

Available for sale securities
1,2,3
 
17,064

 
17,064

Separate account assets
1,2,3
 
4,461,601

 
4,461,601

Assets of consolidated CLOs
2,3
 
1,627,680

 
1,627,680

 
 
 
 
 
 
Total Financial Assets
 
 
$
6,732,568

 
$
6,732,568

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Debt securities-U.S. Treasury securities
1
 
$
19,234

 
$
19,234

Debt
3
 
434,655

 
425,349

Separate account liabilities
1,2,3
 
4,461,601

 
4,461,601

Due to brokers, dealers and trustees
1
 
18,390

 
18,390

Due from separate accounts (2)
1
 
27,433

 
27,433

Derivative liabilities
2
 
460

 
460

Liabilities of consolidated CLOs
2,3
 
1,417,141

 
1,417,141

 
 
 
 
 
 
Total Financial Liabilities
 
 
$
6,378,914

 
$
6,369,608


30

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

(1)    Included as a component of other assets on the Company’s Consolidated balance sheets.
(2)    Included as a component of other liabilities on the Company’s Consolidated balance sheets.
 
December 31, 2013
 
 Level within
fair value
hierarchy
 
Fair value
 
Carrying value
Assets:
 
 
 
 
 
Cash and cash equivalents-unrestricted
1
 
$
120,557

 
$
120,557

Cash and cash equivalents-restricted
1
 
26,395

 
26,395

Trading securities
2,3
 
35,991

 
35,991

Due from brokers, dealers, and trustees (1)
1
 
6,956

 
6,956

Due from separate accounts (1)
1
 
1,963

 
1,963

Investment in loans
2
 
171,087

 
171,087

Loans owned
2
 
48,212

 
40,260

Policy loans
3
 
102,147

 
102,147

Available for sale securities
1,2,3
 
17,763

 
17,763

Separate account assets
1,2,3
 
4,625,099

 
4,625,099

Assets of consolidated CLOs
2,3
 
1,414,616

 
1,414,616

 
 
 
 
 
 
Total Financial Assets
 
 
$
6,570,786

 
$
6,562,834

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Debt securities-U.S. Treasury securities
1
 
$
18,493

 
$
18,493

Derivative liabilities
2
 
598

 
598

Debt
3
 
376,250

 
360,609

Due to brokers, dealer and trustees
1
 
8,193

 
8,193

Separate account liabilities
1,2,3
 
4,625,099

 
4,625,099

Liabilities of consolidated CLOs
2,3
 
1,175,606

 
1,175,606

 
 
 
 
 
 
Total Financial Liabilities
 
 
$
6,204,239

 
$
6,188,598

(1)    Included as a component of other assets on the Company’s Consolidated balance sheets.
(8) Derivative Financial Instruments
The Company utilizes derivative financial instruments as part of its overall investment activities. Investments in 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 the counterparties fail to meet the contract terms.
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. The Company is exposed to credit risk when

31

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

there is an unfavorable change in the value of investments as a result of adverse movements in the underlying credit spreads and enters into these contracts so as to manage the credit risk exposure of its investment portfolio.
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 held four CDX contracts as of September 30, 2014, with a notional amount of $399,538 ($199,738 of sold protection and $199,800 of purchased protection). 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. The Company is 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 September 30, 2014, total margin was $4,500.
Credit Default Swaps (CDS) 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. The company is exposed to credit risk when there is an unfavorable change in the value of investments as a result of adverse movements in the underlying credit spreads and enters into these contracts as a buyer of protection so as to minimize the credit risk exposure of its investment portfolio. The Company is party to one CDS contract with a notional amount of $2,779 at September 30, 2014.
Credit derivatives are included as a component of trading investments, at fair value, and are shown net of any right to reclaim cash collateral or obligation to return cash collateral.
Interest Rate Lock Commitments
The Company is exposed to certain risks in connection with its mortgage banking operations at Luxury. The Company is exposed to interest rate risk for certain interest rate lock commitments (IRLCs) until a purchaser for the related underlying loans is identified. The fair value of IRLCs is subject to change primarily due to changes in market interest rates. The notional amount of the Company’s IRLCs as of September 30, 2014 was $37,685 with an associated fair value of $326. As of September 30, 2014, the IRLCs were included as a component of trading investments, at fair value on the Company’s consolidated balance sheet.
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 to protect against such adverse movements in the interest rates. These interest rate swaps are included as a component of derivative financial instruments, at fair value, on the Company’s consolidated balance sheet. As of September 30, 2014, the Company had six interest rate swaps by its Care subsidiary with a fair value of $(460) and a notional amount of $43,988.
The following tables identify the fair value amounts of the derivative instruments as of September 30, 2014 and December 31, 2013, categorized by primary underlying risk:

32

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
September 30, 2014
 
Asset Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Credit derivatives
$
4,845

 
$

 
$
4,845

Interest rate lock commitments

 
326

 
326

Total
$
4,845

 
$
326

 
$
5,171

 
 
 
 
 
 
 
Liability Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Interest rate swaps
$

 
$
460

 
$
460

Total
$

 
$
460

 
$
460

 
December 31, 2013
 
Asset Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Interest rate swaps
$

 
$
52

 
$
52

Total
$

 
$
52

 
$
52

 
Liability Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Credit derivatives
$
598

 
$

 
$
598

Total
$
598

 
$

 
$
598

The following tables identify the unrealized gain/(loss) amounts included within the change in unrealized (depreciation)/appreciation of the consolidated statement of operations, categorized by primary underlying risk, for the nine month period ended September 30, 2014 and 2013:
Change in unrealized (depreciation)/appreciation - derivatives
 
September 30, 2014
 
Credit
risk
 
Interest rate
risk
 
Total
Credit derivatives
$
(642
)
 
$

 
$
(642
)
Interest rate lock commitments

 
(103
)
 
(103
)
Interest rate swaps

 
(512
)
 
(512
)
Total
$
(642
)
 
$
(615
)
 
$
(1,257
)

33

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
September 30, 2013
 
Credit
risk
 
Interest rate
risk
 
Total
Credit derivatives
$
(832
)
 
$

 
$
(832
)
Interest rate swaps

 
3,169

 
3,169

Total
$
(832
)
 
$
3,169

 
$
2,337


The following tables present derivative instruments that are subject to offset by a master netting agreement as of September 30, 2014. The Company nets these derivative assets and liabilities as these derivatives are subject to legally enforceable netting arrangements with the same party. The Company did not have any derivative instruments of this nature at December 31, 2013. There are no derivative instruments subject to a netting agreement for which we are not currently netting.
Offsetting of derivative assets
September 30, 2014

Derivatives subject to netting arrangements:
 
Credit default swap indices sold protection
$
34,821

Credit default swap indices bought protection
(27,365
)
Gross assets recognized
7,456

Collateral payable
(2,722
)
Net assets recognized
$
4,734


(9) Investments in Loans Held at Amortized Cost
The components of the Company’s loan portfolio measured at amortized cost were as follows as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
Commercial real estate - Care
$

 
$
22,335

Asset backed - Siena
30,722

 
16,493

Other loans
1,992

 
1,432

Total loans, net
$
32,714

 
$
40,260

Total loans include net deferred loan origination fees of $1,296 and $686 at September 30, 2014 and December 31, 2013, respectively. Asset backed loans are net of an allowance for loan losses of $129 and $9 at September 30, 2014 and December 31, 2013.
Commercial Real Estate - Care

34

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

On July 25, 2014, the Company’s Care subsidiary received principal proceeds of $29,846 resulting in a gain of approximately $7,891 on repayment in full of a loan that was secured by skilled nursing facilities as well as collateral relating to assisted living facilities and a multifamily property (the Westside Loan).

Asset Backed - Siena
Siena structures asset-based loan facilities in the $1,000 to $20,000 range across diversified industries which include manufacturing distribution, wholesale, and service companies. As of September 30, 2014, the Company carried $30,722 in loans receivable on its consolidated balance sheet which is net of a participation interest of $4,275. Collateral for asset-backed loan receivables as of September 30, 2014 consisted 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 has determined that no impairment existed as of September 30, 2014. As of September 30, 2014 and December 31, 2013, there were no delinquencies in the Siena portfolio and all loans were classified as performing.
Other Loans
Care, through indirect subsidiaries of Care, made a loan to the lessees of one of its properties. The loan is secured by a pledge of outstanding equity interest in the entities that are the lessees. The cost basis in the loan at September 30, 2014 was approximately $700, which equals its carrying value.
The Company granted two limited recourse loans totaling $424 and two limited recourse loan advances totaling $868 to two principals of Luxury Mortgage Corp.
(10) Investments in Partially-Owned Entities

On May 21, 2014, Star Asia Opportunity, LLC (SAO) was liquidated and Tiptree received a final distribution of $16.

During August and September, the Company received approximately $8,065 of distributions from its investment in Star Asia Opportunity II, LLC (SAO II). These distributions; $6,628 in cash and $1,437 in tax credits, were due to the sale of a Japanese property in which SAO II hold an interest.

(11) Investment in Real Estate
The following table contains information regarding the Company’s investment in real estate as of September 30, 2014 and December 31, 2013:

 
September 30, 2014
 
December 31, 2013
Land
$
10,379

 
$
9,213

Buildings and Improvements
98,597

 
97,671

Less: Accumulated depreciation and amortization
(4,143
)
 
(1,823
)
Total real estate, net
$
104,833

 
$
105,061

During the year, the Company completed its assessment of the allocation of the fair value of the real estate acquired from Heritage (including land, buildings, and equipment) in accordance with ASC 805 Business Combinations. This finalization resulted in a re-allocation between land and buildings on the Company’s consolidated balance sheets of $1,167.
(12) Debt
The long term debt of Tiptree’s subsidiaries are discussed below:
Operating Company

35

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress Credit Corp. (Fortress) and borrowed $50,000 thereunder, with an associated original issue discount of $1,000, which is being amortized over the term of the agreement. The Credit Agreement allows Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company. The principal of, and all accrued and unpaid interest on, all loans under the Credit Agreement become immediately due and payable on September 18, 2018. Borrowings under the Credit Agreement bear interest at a variable rate per annum equal to one-month LIBOR (with a minimum LIBOR rate of 1.25%) plus a margin of 6.50% per annum. The weighted average rate paid for the three months ended September 30, 2014 was 7.75%. The principal amounts of the loan are repaid in quarterly installments, the amount of which may be adjusted based on the Net Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company.
As of September 30, 2014, $48,000 in principal was outstanding and was recorded as part of debt on the consolidated balance sheet of the Company. The Company is obligated to pay interest on a monthly basis and has incurred interest expense of $2,880 for the period ended September 30, 2014. The Company capitalized approximately $1,272 of costs associated with entering into the credit agreement transaction and is amortizing the costs ratably over the life of the facility. The Company recorded approximately $191 of expense for the period ended September 30, 2014 relating to these capitalized costs. Operating Company believes it was in compliance with all of the financial covenants contained in the Credit Agreement as of September 30, 2014.
Also included in debt are any warehouse lines outstanding associated with the Company’s CLOs. As of September 30, 2014 there was $158,984 outstanding for a warehouse facility.
PFG
On July 13, 2012, Philadelphia Financial Administration Services Company, LLC (PFASC), an entity capitalized by TFP and PFGI, purchased certain assets of Hartford Life Private Placement, LLC (HLPP) from affiliates of The Hartford Financial Services Group, Inc. (The Hartford) for a purchase price of $117,500. PFASC and certain insurance subsidiaries of The Hartford entered into a long-term servicing agreement whereby PFASC administers approximately $37.6 billion in company owned life insurance (COLI) and bank owned life insurance (BOLI) business previously serviced by HLPP in exchange for a fee. The Company refers to this transaction as the PFAS Transaction.

In connection with the PFAS Transaction, PFAS issued a note in July 2012 in the amount of $100,000 to a third party. The note bears an annual interest rate of 12.66% and provides for monthly interest and principal payments commencing on August 15, 2012, with final payment due on July 15, 2022. The note is prepayable beginning on July 15, 2015. Membership interests of PFLAC, the borrower, serve as collateral for the note. As of September 30, 2014, $85,848 in principal was outstanding on this debt. The Company believes it was in compliance with all of the financial covenants contained in the note as of September 30, 2014.
Care

On April 24, 2012, Care refinanced a bridge loan for the acquisition of the Greenfield properties by entering into three separate non-recourse loans (each a Greenfield Loan and collectively the Greenfield Loans) with KeyCorp Real Estate Capital Markets, Inc. (KeyCorp). The Greenfield Loans bear interest at a fixed rate of 4.76%, and amortize over a thirty-year period. The Greenfield Loans are secured by separate cross-collateralized, cross-defaulted first priority deeds of trust on each of the Greenfield properties. A breach of the representations or covenants could result in a default under each of the Greenfield Loans, which would result in all amounts owing under each of the Greenfield Loans to become immediately due and payable. In June 2012, KeyCorp sold each of the Greenfield Loans to Federal Home Loan Mortgage Corporation (Freddie Mac) under Freddie Mac’s Capital Markets Execution (CME) Program.
In February 2013, with Care’s acquisition of the Calamar Properties, affiliates of Care entered into two separate loans from Liberty Bank. Both of these loans amortize over a thirty year period at a weighted average fixed rate of 4.21%. These loans are secured by separate first priority mortgages on each of the properties. A breach of representations or covenants could

36

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

result in a default under each of these loans, which would result in all amounts owing under the applicable loan to become immediately due and payable.
In December 2013, affiliates of Care refinanced an internal bridge loan for the Terraces Portfolio, by entering into two loans from First Niagara Bank. Both of these loans amortize over a twenty-five year period at a weighted average floating rate of LIBOR plus 2.50%. These loans are secured by first priority mortgages on each of the properties. A breach of representations or covenants could result in a default under each of these loans, which would result in all amounts owing under the applicable loan to become immediately due and payable.
Effective November 2013, in connection with the acquisition of The Heritage Portfolio, affiliates of Care entered into a loan with First Niagara Bank as an administrative agent on behalf of the lenders. The loan amortizes over a twenty-five year period at a floating rate of LIBOR plus 2.75%. The loan is secured by first priority mortgages on each of the properties. A breach of representations or covenants could result in a default under the loan, which would result in all amounts owing under the loan to become immediately due and payable.
As of September 30, 2014, the aggregate principal outstanding on the debt of the Care business described above was $80,776. Each of these loan transactions described above contains typical representations and covenants for loans of its type. As of September 30, 2014, the Company believes it was in compliance with such financial covenants.
Siena

On July 25, 2013, Siena entered into a credit agreement with Wells Fargo Bank. The agreement provides for a revolving line of credit up to $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of September 30, 2014, there was $20,369 outstanding. This warehouse line of credit contains certain covenants, which the Company believes that it is in compliance with as of September 30, 2014.
Luxury
In February 2014, Luxury entered into a $30,000 warehouse line of credit agreement, expiring February 5, 2015, with an interest rate of one-month LIBOR plus 2.75% and a 3% floor. A $250 compensating balance is required for the line. As of September 30, 2014, $30,901 in principal was outstanding on Luxury’s total debt including all of its credit lines. Luxury’s three existing credit agreements contain customary financial covenants that require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios, and minimum liquid assets. As of September 30, 2014, Luxury believes it was in compliance or had received waivers of compliance with certain financial covenants. Luxury’s ability to borrow under the warehouse line of credit agreements is not adversely affected by the waivers. The waivers are valid through and including September 30, 2014.

37

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

The following table summarizes the balance of the Company’s debt holdings excluding notes payable of consolidated VIE CLOs at (See Note 4 for notes payable of the consolidated VIE CLOs):
 
September 30, 2014
 
December 31, 2013
Operating Company:
 
 
 
Warehouse borrowing
$
158,984

 
$
133,715

Credit facility
48,000

 
49,500

Original issue discount on credit facility
(793
)
 
(943
)
Operating Company
206,191

 
182,272

PFG:
 
 
 
Note payable
85,848

 
91,015

Siena:
 
 
 
Revolving line of credit
20,369

 
5,371

Care:
 
 
 
Mortgage borrowings
80,931

 
82,151

Unamortized (discount)/premium
(155
)
 
(200
)
Care
80,776

 
81,951

Luxury:
 
 
 
Warehouse borrowing
30,901

 

Note payable
525

 

Mortgage borrowings
739

 

Luxury
32,165

 

Total debt
$
425,349

 
$
360,609

Interest expense of $17,019 and $11,257 was incurred on the Company’s debt for the period ended September 30, 2014 and 2013 respectively.
Future maturities of the Company’s long-term debt (excluding warehouse borrowing) are as follows as of September 30, 2014:
2014
$
7,365

2015
 
13,665

2016
 
13,739

2017
 
34,868

2018
 
54,423

Thereafter
 
111,088

Total
$
235,148



38

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

Consolidated CLOs
The Company includes in its consolidated balance sheets, as part of liabilities of consolidated CLOs, the debt obligations used to finance the investment in corporate loans and other investments owned by the CLOs that it manages. The carrying amount of the notes represents the accreted value from the initial consolidation and is recognized through the measurement date using the effective interest method or a method that approximates the effective interest method. See Note 4 for additional information.
(13) Income Taxes

The total income tax expense of $906 and $4,549 for the nine month periods ended September 30, 2014 and 2013, respectively, is reflected as a component of (loss) income from continuing operations.

For the period ended September 30, 2014, the Company’s effective tax rate on income from continuing operations, adjusted for the net loss attributable to the VIE subordinated noteholders, is equal to 66.0%, which does not bear a customary relationship to statutory income tax rates. The tax rate for the period ended September 30, 2014 is higher than the U.S. statutory income tax rate of 35% primarily due to the partnership losses that are not subject to income tax, and which do not generate an income tax benefit. Additionally, tax losses generated at certain of our taxable subsidiaries require valuation allowance and do not generate an income tax benefit. The higher tax in the period ended September 30, 2013 compared to 2014 was due in part to a one-time adjustment associated with the Company’s change in tax status from a REIT to a taxable entity, which took place on July 1, 2013 but was retroactive to January 1, 2013. Also contributing to the decrease in tax was the lower pre-tax income in 2014 compared to 2013.



39

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

(14) Stockholders’ Equity

Tiptree’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par value, 200,000,000 shares of Class A common stock, $0.001 par value, and 50,000,000 shares of Class B common stock, $0.001 par value. As of September 30, 2014 and December 31, 2013, no shares of preferred stock were issued and outstanding. As of September 30, 2014 and December 31, 2013, there were 21,955,877 and 10,556,390 shares of Class A common stock issued and outstanding, respectively. As of September 30, 2014 and December 31, 2013, there were 19,636,823 and 30,968,877 of Class B common stock issued and outstanding, respectively.

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).

Contribution Transactions

On July 1, 2013, Care Inc. completed a transaction with Tiptree Financial Partners, L.P. (TFP) in which Care Inc. contributed substantially all of its assets to Operating Company in exchange for common units in Operating Company representing an approximately 25% interest in Operating Company, and TFP contributed substantially all of its assets (excluding shares of Tiptree’s Class A Common Stock owned by TFP) to Operating Company in exchange for common units in Operating Company representing an approximately 75% interest in Operating Company and the same number of shares of Tiptree’s newly classified Class B Common Stock (Contribution Transactions).

In conjunction with the Contribution Transactions, Operating Company issued warrants to TFP, to purchase an aggregate of 2,098,500 shares of membership units at an exercise price of $8.48 per share which is immediately exercisable and expires on June 12, 2017 and another warrant to purchase 1,510,920 shares of membership units at an exercise price of $5.36 per share which is immediately exercisable and expires on June 30, 2022. TFP paid $4,328 and $6,846, respectively, for these. Since these warrants were issued by Operating Company, they are not included as a component of stockholders’ equity of the Company. TFP also 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.

Pursuant to Operating Company’s limited liability operating agreement, TFP has the right to redeem common units of Operating Company (including any common units issued upon exercise of the warrants described above) for an equal number of shares of Class A common stock of Tiptree (and an equal number of shares of Class B common stock held by TFP will be canceled). Tiptree may instead, at its election, deliver a cash amount (or combination of cash and Class A common stock) based on the fair market value of the Class A common stock on the redemption date. On July 18, 2014, TFP notified its limited partners that the Company will allow them to directly exchange TFP units for Class A common stock (at a rate of 2.798 shares of Class A common stock per TFP partnership unit). As of September 30, 2014, an aggregate of 11,332,054 Class A shares have been issued in exchange for 4,050,055 TFP units. The issuance of these Class A shares and corresponding cancellation of Class B shares in exchange for the TFP units was accounted for as a $123,760 adjustment within non-controlling interest and additional paid-in capital. See Note 20—Subsequent Events for redemptions after September 30, 2014.

For the three and nine months ended September 30, 2014 and the third quarter of 2013, the Company did not declare or pay a dividend.

(15) Stock Based Compensation

Equity Plans

In June 2007, the Company adopted the Care Investment Trust Inc. Equity Plan (2007 Equity Plan), as amended in December 2011, which provides for the issuance of equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based upon the Company’s Class A common stock

40

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

that may be made to directors and executive officers, employees and to the Company’s advisors and consultants who are providing services to the Company as of the date of the grant of the award.

The 2007 Equity Plan will automatically expire on the 10th anniversary of the date it was adopted. The Board of Directors may terminate, amend, modify or suspend the 2007 Equity Plan at any time, subject to stockholder approval in the case of certain amendments as required by law, regulation or stock exchange. As of December 31, 2013, no common shares remained for future issuance under the 2007 Equity Plan.

The following table summarizes changes to the issuances of Restricted Stock Units under the Company’s 2007 Equity Plan for the periods indicated:
 
Number of shares
Unvested units as of December 31, 2012
102,984

Granted
19,310

Vested
(45,263
)
Forfeited
(4,728
)
Unvested units as of December 31, 2013
72,303

Granted

Vested
(25,154
)
Forfeited

Unvested units as of September 30, 2014
47,149

Included in vested shares for 2014 are 6,578 shares surrendered to pay taxes on behalf of the employees with shares vesting.
In June 2007, the Company adopted the Care Investment Trust Inc. Manager Equity Plan, which will automatically expire on the 10th anniversary of the date it was adopted. As of September 30, 2014, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.
The Board adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013. The plan provides for the issuance of equity and equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based upon the Company’s Class A common stock that may be made to directors and executive officers, employees and to the Company’s advisors and consultants who are providing services to the Company as of the date of the grant of the award. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees, consultants and directors for the Company, to provide them with incentives and rewards for superior performance and to better align their interests with the interests of the Company’s stockholders. For the nine months ended September 30, 2014, 28,869 shares of immediately vested Class A common stock with an aggregate fair market value of $223 were issued to employees and persons providing services to the Company as incentive compensation under the 2013 Equity Plan. The number of remaining shares of Tiptree’s Class A common stock available for award under the 2013 Equity Plan is 1,800,574 shares of Class A common stock. Unless otherwise extended by the Board, the 2013 Equity Plan terminates automatically on August 8, 2023, the tenth anniversary of its adoption by the Board. For the nine months ended September 30, 2014, there was no restricted stock unit activity associated with the 2013 Equity Plan.
Shares of common stock issued to the Company’s independent directors in respect to their annual retainer fees have been issued under the 2013 Equity Plan. During the nine month period ended September 30, 2014, the Company issued 19,988 immediately vested shares of Class A common stock with an aggregate fair value of $154 to the Company’s independent directors as part of their annual retainer.
The following table summarizes changes to the issuances under the Company’s 2013 Equity Plan:

41

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
Number of shares
Available for issuance as of December 31, 2013
1,849,431

Shares issued
(48,857
)
Available for issuance as of September 30, 2014
1,800,574

Restricted share units
A holder of the restricted share units, as per the terms of the restricted stock unit agreement governing the awards, have all of the rights of a share holder, including the right to vote and receive distributions. The restricted share units 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.
As of September 30, 2014, the total unrecognized compensation cost related to restricted units was $160, which is expected to be recognized as compensation expense over a weighted average period of 1.1 year.
Restricted unit expense was $170 and $241 for the nine month periods ended September 30, 2014 and 2013, respectively. These expenses are included within payroll expense in the consolidated statement of operations.
Philadelphia Financial Group, Inc.
On October 14, 2010, the PFG board of directors adopted the PFG Plan. A total of 546,136 shares of common stock of PFG were reserved and available for issuance under the PFG Plan. The number of shares of PFG stock was increased to 583,300 during 2012. As of September 30, 2014, 564,092 shares have been granted to PFG employees.
Under the terms of the PFG Plan, the common stock shares shall vest and become nonforfeitable with respect to one-third of the shares initially granted on each of the first, second, and third anniversaries of the grant date. Grant dates were April 16, 2012, December 19, 2012 and March 8, 2013.
The Company has determined that the measurement date for shares granted under the PFG Plan awarded to employees occurs when the PFG common stock vests. The fair value of the unvested common stock granted is initially estimated based on the fair value of the individual assets and liabilities of PFG on the date of grant, and subsequently re-measured on each reporting date throughout the vesting period with changes in fair value during the requisite service period recognized as compensation cost through that period. The per unit fair value of unvested PFG common stock was $0.06 and $2.03 as of September 30, 2014 and December 31, 2013, respectively.
As of September 30, 2014, the total unrecognized compensation cost related to PFG common stock was $41, which is expected to be recognized as compensation expense over a weighted average period of less than one year. Total unrecognized compensation cost was $89 as of December 31, 2013. Expense incurred for PFG stock issued under the plan was $49 for both periods ended September 30, 2014 and 2013, respectively.
(16) Commitments and Contingencies
Contractual Obligations
The table below summarizes the Company’s contractual obligations for the periods indicated. In addition, the Company has off balance sheet arrangements in the form of letters of credit.

42

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
September 30, 2014
 
December 31, 2013
 
Mortgage notes payable and related interest (1)
$
104,973

 
$
107,705

 
Notes payable (2)
86,373

 
91,015

 
Notes payable CLOs (3)
1,546,589

 
1,341,701

 
Warehouse borrowings (4)
30,901

 

 
Operating lease obligations (5)
12,765

 
6,437

 
Credit facilities/Lines of credit (6)
68,369

 
54,871

 
Standby letters of credit (7)
2,566

 

 
Total
$
1,852,536

 
$
1,601,729

 
(1)
Mortgage notes payable include mortgage notes entered into by the Company in connection with its acquisition of several properties (See Note 12—Debt).
(2)
Notes payable relates to PFG’s acquisition of the administrative services rights from The Hartford, TFP payment for Series A preferred stock and common shares of PFG and Luxury promissory notes (See Note 12—Debt).
(3)
CLO notes payable principal is payable at the stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3, 2024 for Telos 4 and 2025 for Telos 5 (See Note 4—CLOs and Consolidated Variable Interest Entities).
(4)
The Company through its subsidiary Luxury has warehouse borrowings with several lenders (See Note 12—Debt).
(5)
Minimum rental obligations for Care, Siena, Luxury and PFG office leases. For the nine month periods ended September 30, 2014 and 2013, rent expense for the Company’s office leases were $1,838 and $1,259, respectively.
(6)
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress and borrowed $50,000 under the Credit Agreement. The Credit Agreement also includes an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions. On July 25, 2013, TFI’s subsidiary Siena closed on a line of credit with Wells Fargo Bank. This revolving line is for $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of September 30, 2014, there was $20,369 outstanding on this line (See Note 12—Debt).
(7)
Tiptree’s subsidiary Siena issues standby letters of credit to customers which generally guarantee the borrower’s performance.
Litigation
Tiptree and its subsidiaries are defendants in two putative class action lawsuits brought by shareholders of Fortegra (Stein v. Fortegra Financial Corporation, et al., Case No. 16-2014-CA-005825-XXXX-MA and Hickey v. Fortegra Financial Corporation, et al., Case No. 16-2014-CA-006485-XXXX-MA) in the Circuit Court of the Fourth Judicial Circuit in and for Duval County, State of Florida alleging that Tiptree and its subsidiaries aided and abetted the Fortegra directors’ breach of fiduciary duties in connection with the Merger Agreement. The court consolidated the Stein and Hickey actions on October 24, 2014. On October 13, 2014, the Company and attorneys for both Stein and Hickey executed a memorandum of understanding that provides for a settlement. The terms of the memorandum of understanding did not require any change to the merger agreement, but did require Fortegra to provide its stockholders with supplemental disclosures about the merger which Fortegra completed. Before the settlement is finalized it must be approved by the court. Management believes, based on information available at this time, the ultimate resolution of this litigation will not be materially adverse to the financial position, results of operations or cash flows of the Company.
Tiptree and its subsidiaries are parties to legal proceedings in the ordinary course of their 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.
(17) Earnings Per Share
The Company calculates basic net income per common share based on the Company’s common stock outstanding as well as its unvested restricted share units. The unvested restricted share units are included in the basic earnings per share calculation using the two class method because they are eligible to receive dividends. Under the two class method income is allocated

43

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

to the class of securities prior to the calculation of earnings per share. A diluted net income for the period takes into account the effect of dilutive instruments, such as any options on common shares, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of common shares outstanding. Diluted net income also includes the minimal dilutive impact of the 3,609,420 Operating Company warrants held by TFP as part of the Contribution Transactions as summarized in Note 14. Earnings per share data excludes Tiptree’s Class B common stock, as the Class B common stock evidences a voting right without any economic interest.
The following table presents a reconciliation of basic and diluted net income per common share for the three and nine month periods ended September 30, 2014 and 2013:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Basic:
 
 
 
 
 
 
 
 
Net income
 
$
272

 
$
1,830

 
$
2,368

 
$
6,563

 
 
 
 
 
 
 
 
 
Weighted average number of Class A common shares outstanding (basic)
 
17,449,974

 
10,246,176

 
12,909,949

 
10,243,893

Basic earnings per share
 
$
0.02

 
$
0.18


$
0.18


$
0.64

Diluted:
 
 
 
 
 
 
 
 
Net income
 
$
259

 
$
1,806

 
$
2,344

 
$
6,543

 
 
 
 
 
 
 
 
 
Weighted average number Class A common shares outstanding (diluted)
 
17,449,974


10,271,537


12,909,949


10,266,164

Diluted earnings per share
 
$
0.01

 
$
0.18

 
$
0.18

 
$
0.64

The above table excludes the effect of the 2008 warrant convertible into 652,500 shares because the exercise price of $11.33 was greater than the average market price during such periods.
(18) Dispositions, Assets Held for Sale and Discontinued Operations
On June 28, 2013, Care completed the sale of its membership interests in Care YBE Subsidiary LLC (Care YBE), which owned fourteen senior living facilities (Bickford Portfolio) to an affiliate of National Health Investors Inc. The Company has reclassified the income and expenses attributable to all properties sold prior to September 30, 2014 to discontinued operations related to its real estate segment. Expenses include an allocation of interest expense based on property carrying values and cost of debt. The following illustrates the reclassification impact as a result of classifying properties as discontinued operations for the periods presented:

44

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 30, 2014
(Unaudited)

 
Three months ended September 30, 2013
 
Nine months ended September 30, 2013
Revenues:
 
 
 
Rental revenue
$

 
$
5,920

Reimbursable income

 
655

Expenses:
 
 
 
Reimbursable expense

 
550

Interest expense

 
2,627

Other expenses

 
43

Depreciation and amortization

 
1,708

Income (loss) from discontinued operations, net
$

 
$
1,647

There was no reclassification impact from disposed operations for the three and nine month periods ended September 30, 2014.
(19) Accumulated Other Comprehensive Income
Activity in accumulated other comprehensive income/(loss) (AOCI), net of tax, for the periods ended September 30, 2014 and 2013, was as follows:
 
Unrealized gains/ (losses) on securities
 
Balance at December 31, 2012
$
311

 
Other comprehensive (loss) income before reclassification
(69
)
 
Amounts reclassified from AOCI
48

 
Period change
(21
)
 
Balance at September 30, 2013
$
290

 
 
 
 
Balance at December 31, 2013
$
33

 
Other comprehensive (loss) income before reclassification
54

 
Amounts reclassified from AOCI
20

 
Period change
74

 
Balance at September 30, 2014
$
107

 
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the income statement for the nine month period ended September 30, 2014:
Components of AOCI
 
Amount reclassified from AOCI
 
Affected line item in statement where net income is presented
Unrealized gains/ (losses) on available for sale securities
 
 
 
 
 
 
$
31

 
Net realized gains on investments
 
 
31

 
Net change before tax
 
 
11

 
Provision for income tax
 
 
$
20

 
Net change after tax

45


(20) Subsequent Events

The Company has evaluated events that have occurred from October 1, 2014 through November 12, 2014 (the date this Form 10-Q was filed), and except as already included in the notes to the consolidated financial statements, it believes that no events have occurred that would require recognition or additional disclosures in these consolidated financial statements.

On October 1, 2014, the Company, through its subsidiary Care, formed a $30,800 joint venture to own and operate three senior housing communities with affiliates of Greenfield Senior Living, Inc (“Greenfield”). Care owns an 80% interest in the joint venture, while affiliates of Greenfield own the remaining 20% interest and provide management services to the communities under a management contract. In connection with the acquisition, Care and Greenfield secured a $23,094, 5 year loan, which includes thirty-six months of interest only payments and a $2,000 earn out feature.

On October 29, 2014, PFG Acquisition Corp. (Buyer), an entity affiliated with The Blackstone Group L.P. (Blackstone), entered into a Stock Purchase Agreement (the Purchase Agreement) with Operating Company, and certain shareholders (the PFG Sellers and, together with the Operating Company, the Sellers) of Philadelphia Financial Group, Inc. (PFG), a subsidiary of Tiptree. Pursuant to the terms of the Purchase Agreement, Buyer will acquire (the Acquisition), directly or indirectly, all of the issued and outstanding capital stock of PFG Holdings Acquisition Corp. (Holdings) and all of the issued and outstanding capital stock of PFG, resulting in Buyer owning, directly or indirectly through Holdings, all of the issued and outstanding capital stock of PFG. Tiptree and Buyer expect to complete the transaction in the third quarter of 2015 after satisfaction of customary closing conditions.

At the closing of the Acquisition, Buyer will pay the Sellers aggregate cash consideration of $155,000 for the shares of capital stock of PFG and Holdings, subject to adjustments in respect of, among other things, cash and cash equivalents, net working capital and indebtedness of PFG and its subsidiaries and Holdings. In addition, Buyer will pay the Sellers for 90% of the cash and cash equivalents of PFASC, as of December 31, 2014, two-thirds of which payments will be made on the first anniversary of the closing under the Purchase Agreement and one-third of which will be made on the second anniversary of such closing.

On October 31, 2014, the Company and Luxury entered into an Exchange Agreement pursuant to which the Company exchanged the $5,000 secured note from Luxury for $5,000 of newly issued Series C Preferred Stock which accrues dividends at 9% per annum.

On November 3, 2014, the Company issued an aggregate of 9,866,456 shares of Class A common stock to limited partners of TFP in exchange for an aggregate of 3,526,253 TFP partnership units in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereunder. TFP delivered to Tiptree for cancellation one share of Class B common stock of Tiptree for each share of Class A common stock issued. As of November 12, 2014, there were 31,829,633 shares of Class A common stock of Tiptree outstanding and 9,770,367 shares of Class B common stock of Tiptree outstanding. As of November 12, 2014, there were 11,068,219 limited partnership units of TFP outstanding, of which Tiptree owns 7,576,308.







46



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

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 of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements provide management’s 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 the Company uses words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “should,” “target”, “will,” or similar expressions, the Company intends to identify forward-looking statements.

The forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or 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 Tiptree’s most recent Annual Report on Form 10-K.
 
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 federal securities laws, we undertake no obligation to update any forward-looking statements.

OVERVIEW
Tiptree Financial Inc. (“Tiptree”) is a diversified holding company engaged through its consolidated subsidiaries in a number of businesses and is an active acquirer of new businesses. Tiptree, whose operations date back to 2007, currently has subsidiaries that operate in four industry segments: insurance and insurance services, specialty finance, asset management and real estate.
The Company operates its business through Operating Company, which directly or indirectly owns all of its assets. Operating Company is owned 25% by Tiptree and 75% by Tiptree Financial Partners, L.P (“TFP”). As of November 5, 2014, Tiptree owned 68% of the limited partnership units of TFP so Tiptree’s combined direct and indirect interest in Operating Company is 77%. This report is being filed by Tiptree but includes information relating to Operating Company that may be of interest to partners of TFP as partnership units of TFP are redeemable for Class A common stock of Tiptree. TFP’s limited partners other than Tiptree may directly exchange TFP units for Class A common stock (at a rate of 2.798 shares of Class A common stock per TFP partnership unit, subject to certain conditions and limitations). For more information on the Company’s ownership and structure and the Fortegra acquisition and PFG sale, see Notes 1, 14 and 20 within the accompanying consolidated financial statements.
Insurance and Insurance Services
The Company’s insurance operations are currently conducted through PFG, of which it owns 94.04%, with the remainder owned by management and employees of PFG. PFG, through its insurance subsidiaries, develops and administers private placement insurance and annuities for high net worth and institutional clients through separate accounts. As of September 30, 2014, the total separate account assets for policies written by PFG were $4.5 billion. PFG, through its PFAS subsidiary, administered $37.6 billion of company-owned and bank-owned life insurance policies for other insurers.

Specialty Finance
The Company’s specialty finance operations include (i) MFCA, a wholly-owned business which provides financing for tax-exempt organizations, (ii) a preferred interest and a 67.5% equity ownership interest in Luxury, a residential mortgage lender that originates conforming prime jumbo and super jumbo mortgages for sale to institutional investors and (iii) a 62.11% ownership interest in Siena, an asset-based lender that offers asset-based loans to small and mid-sized U.S. businesses. As of September 30, 2014, MFCA had investments of $28.3 million, Siena had funded loans of $30.7 million of aggregate principal amount outstanding and Luxury had loans held for sale, at fair value, of $32.1 million.


47



Asset Management
The Company’s asset management operations include TAMCO, an SEC-registered investment adviser that, among other managerial and advisory entities, wholly-owns Telos Asset Management LLC (“Telos”). Telos is an asset manager focused on investing in corporate credit through managed accounts and structured investment vehicles, such as CLOs. As of September 30, 2014, Telos had approximately $1.6 billion of AUM. Our asset management operations also include MCM which manages NPPF I, a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of its investors. Interests in NPPF I in the form of tranched trust certificates are held solely by third parties unaffiliated with Tiptree. As of September 30, 2014, the underlying tax-exempt bonds held by NPPF I had an aggregate principal balance of $175.9 million.

Real Estate
The Company’s real estate operations include (i) Care LLC, a wholly-owned real estate investment company that invests in senior housing properties, and (ii) interests in various Star Asia Entities, Tokyo based real estate holding companies formed to invest predominately in Asian properties and real estate related debt instruments. As of September 30, 2014, Care LLC had total assets of $150.4 million and the carrying value of the Company’s investment in the Star Asia entities was $7.0 million.

Tiptree intends to continue to invest in its existing businesses and to opportunistically acquire majority control of new businesses, both in financial service sectors and complementary sectors; make seed investments in funds or products managed by TAMCO; and make minority debt or equity investments similar to those investments that Tiptree has made in the past. Accordingly, changes in the mix of Tiptree’s businesses, assets and investments should be expected. Management intends to take a disciplined approach by focusing on investing for the long-term in stable, scalable, cash flow positive businesses.

For additional information about our operating segments, see Note 5 to the financial statements.

Strategy
Tiptree’s primary strategy is to acquire controlling interests in a diversified group of businesses as described above. Tiptree looks for companies that offer sustainable, long-term and stable financial performance. We may also make investments that are not controlling acquisitions, and or invest in debt instruments, and have done so in the past.

Our structure allows us to focus on being long term investors in our companies as some of our companies may require operational turnaround to build shareholder value. We provide managerial assistance to our companies as needed, which at times has included developing growth strategies and providing strategic advice regarding complementary acquisitions and new business initiatives, as well as providing incremental capital.

As part of our strategy, we may also seed new opportunities, which may include new product launches by our existing companies, new asset management products and new businesses to take advantage of market disruptions. Accordingly, over time our mix of businesses may change as a result of new initiatives and new investments.

Recent Developments

The following highlights recent developments.

Tiptree received proceeds of $29,846 resulting in a gain of approximately $7,891 on the repayment of the Westside Loan.

Tiptree received approximately $8,065 of distributions from its investment in SAO II related to the sale of a Japanese property in which SAO II held an interest.

Operating Company and its subsidiaries Caroline Holdings LLC and Caroline Merger Sub, Inc. entered into an Agreement and Plan of Merger, dated August 11, 2014, to acquire Fortegra Financial Corporation (“Fortegra”) for approximately $218,000 in cash (“the Fortegra Acquisition”). Fortegra is a publicly traded insurance services company that offers a wide array of revenue enhancing products, including payment protection products, motor club memberships, service contracts, device and warranty services, and administration services to its business partners, including insurance companies, retailers, dealers, insurance brokers and agents and financial services companies. Closing of the merger is

48



subject to the satisfaction of customary conditions including, among other things, insurance regulatory approvals and is expected in the fourth quarter of 2014 or first quarter of 2015.

Tiptree entered into a definitive agreement, dated October 29, 2014, to sell its subsidiary Philadelphia Financial Group, Inc. (including both its third party administration and life insurance operations) (“PFG”), to funds managed by the Tactical Opportunities Group of The Blackstone Group L.P. (“Blackstone”), for approximately $155 million in cash plus additional consideration of approximately $10 million to be paid over two years (“the PFG sale”). The transaction is subject to customary closing conditions including regulatory approval and is expected to close in the third quarter of 2015.

Tiptree appointed Jonathan Ilany as its Executive Vice President, Head of Mortgage Finance and Asset Management. Mr. Ilany joins Michael G. Barnes, Executive Chairman of Tiptree, and Geoffrey N. Kauffman, President and Chief Executive Officer of Tiptree as a member of Tiptree’s Management Executive Committee.

Trends in Our Business and Outlook
Our results of operations are affected by a variety of factors, including general economic conditions and the resulting trends and market conditions specific to our businesses, some of which are discussed below.

A significant portion of Tiptree’s 2013 and 2014 revenues were generated from administrative fees from our servicing of PFG’s COLI/BOLI policies. We expect the amount of administrative fees to remain relatively constant until the end of 2014 unless significant policy holders terminate policies, in which case our revenues could decline. As a result of the PFG sale, Tiptree does not expect these revenues in 2015.

After several quiet years in the CLO market, there has been increased issuance of CLOs in 2013 and during 2014, which led to new entrants and greater supply. We issued two new CLOs in 2013, one in 2014 and initiated a warehouse facility for our sixth CLO. Tiptree expects to sponsor CLOs in 2015. Tiptree expects to close Telos 6 in the fourth quarter. However, uncertainties regarding regulatory guidance in the banking sector resulted in some institutional investors curtailing purchases of CLO liabilities which has had a negative effect on CLO issuances. Credit spreads on AAA tranches have widened and, if not offset by contracting spreads on other liability tranches in increased spreads on the underlying assets, could lead to lower returns on the subordinated notes on new CLOs.

The assets of our tax-exempt business, which consist primarily of fixed coupon instruments with long durations, are highly sensitive to changes in interest rates. The large decline in interest rates throughout 2012 significantly increased the market value of the tax-exempt assets. Throughout 2013, interest rates experienced further volatility; however, the overall impact on the value of the tax-exempt assets for the year was relatively modest. The value of the assets have increased in 2014, but it is unclear whether this trend will continue in 2015.

Our interest in the asset based lending business was acquired in 2013 and they continue to build their loan portfolio. This business was a negative contributor to net income in 2013, but we expect to reverse this trend and achieve profitable scale in the second half of 2014, although we can make no assurance that this will be the case. Similarly, we expect the asset based lenders business to be a positive contribution for 2015 but can make no assurances that this will be the case.

The mortgage market in which we operate is sensitive to interest rates and expected changes in interest rates. In the late summer and fall of 2013, the volume of mortgages dropped sharply because of changes in interest rates. In addition, it is unclear what impact new mortgage rules may have on volume and profitability for the rest of 2014 and beyond.

Our expenses increased during 2014 relative to 2013, primarily from additional expense associated with our acquisitions throughout 2013. Payroll expense and operating expenses increased with the acquisitions at Care LLC, Luxury and Siena. In addition, interest expense increased due to our credit and warehouse facilities. At PFG, the increase was primarily due to increased professional fees and other operating expenses. Management anticipates expenses to increase as these businesses continue to expand.

As a result of borrowing under the credit agreement and proceeds from the sale of real estate assets during 2013 (as described in Note 17—Dispositions, Assets Held for Sale and Discontinued Operations), we maintained a relatively larger cash balance

49



in 2014. A significant amount of our cash balance will be used to fund the Fortegra Acquisition, which we expect will be a material positive contribution to 2015 results, although we can make no assurance that this will be the case.

Tiptree Selected Consolidated Financial Data

The results presented in the table below are the consolidated results of Tiptree, which include its majority-owned subsidiaries, PFG, Care, MFCA, Siena, Luxury and TAMCO, as well as principal investments. Since acquisitions and dispositions occurred during the periods discussed below, it may be difficult to compare Tiptree’s results of operations from period to period as a result of purchase accounting adjustments, which only reflect the financial results of a new business from the point of acquisition forward, and dispositions, which are reflected in discontinued operations.

The Contribution Transactions were accounted for as a combination of entities under common control. As a result, the comparative financial information has been retrospectively adjusted to furnish comparative combined financial information from August 2010 (the date of common control). The application of this “as-if-pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity.

The acquisition of TAMCO was accounted for as a combination of entities under common control and, as a result, the consolidated results of operations for all periods presented have been retrospectively adjusted to furnish comparative combined financial information as if TAMCO was part of the consolidated group as of January 1, 2010. The application of this “as-if-pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity.

GAAP requires the consolidation of a VIE into the financial statements of the entity that is considered the VIE’s primary beneficiary. Generally, TAMCO’s contractual relationship as CLO collateral manager satisfy the criteria for TAMCO to be deemed the primary beneficiary of the CLOs that it manages. As a result, Tiptree is required to consolidate the CLOs into its financial statements. For economic purposes, as of September 30, 2014 the fair value of Tiptree’s direct investments in the subordinated notes of Telos 1, Telos 2, Telos 4 and Telos 5 was $70.4 million. For further detail on non-GAAP measures, see “Economic Net Income and Economic Book Value” within this section.
Income and expenses attributable to consolidated CLOs reflect all of the components of the CLOs: the interest income, interest expense, other related expenses, and most significantly, the mark-to-market of the underlying collateral assets. The unrealized gains and losses of the collateral assets are most affected by credit risk on the individual loans held by the CLOs. If, as a result of movement in the credit market, new loans are made at credit spreads wider than those held by the CLOs, the market value of loans held by the CLOs would decrease and could result in realized and unrealized losses. Since, under GAAP, we do not value the debt issued by the CLOs at market value, we would not recognize an offsetting decrease in the liabilities from such a change in credit spreads, which could make the reported realized and unrealized gains and losses appear larger or smaller than the economic impact on the Company’s results of operations. For economic purposes, we reverse the impact of the CLO consolidation and focus on the mark-to-market value of our underlying subordinated note positions. See “—Economic Net Income and Economic Book Value.”


50



Summary Consolidated Statements of Operations (in thousands)
 
 
Three months ended September 30,
 
2014 vs 2013
 
 
2014
 
2013
 
$ Variance
 
% Variance
Revenues:
 
 
 
 
 
 
 
 
Net realized and unrealized gains
 
$
8,294

 
$
5,983

 
$
2,311

 
38.6
 %
Interest income
 
7,363

 
3,916

 
3,447

 
88.0

Separate account fees
 
5,931

 
5,526

 
405

 
7.3

Administrative service fees
 
12,845

 
12,760

 
85

 
0.7

Rental revenue
 
4,469

 
1,363

 
3,106

 
227.9

Gain on sale of loans held for sale, net
 
2,383

 

 
2,383

 
100.0

Other income
 
1,537

 
325

 
1,212

 
372.9

Total revenue
 
42,822

 
29,873

 
12,949

 
43.3

Expenses:
 
 
 
 
 

 

Interest expense
 
8,500

 
4,110

 
4,390

 
106.8

Payroll expense
 
12,559

 
8,753

 
3,806

 
43.5

Professional fees
 
3,420

 
2,252

 
1,168

 
51.9

Change in future policy benefits
 
1,063

 
1,189

 
(126
)
 
(10.6
)
Mortality expenses
 
2,667

 
2,633

 
34

 
1.3

Commission expense
 
679

 
631

 
48

 
7.6

Depreciation and amortization expense
 
2,290

 
1,216

 
1,074

 
88.3

Other expenses
 
5,505

 
4,227

 
1,278

 
30.2

Total expenses
 
36,683

 
25,011

 
11,672

 
46.7

Net income before taxes and income attributable to consolidated CLOs from continuing operations
 
6,139

 
4,862

 
1,277

 
26.3

Results of consolidated CLOs:
 
 
 
 
 

 

Income attributable to consolidated CLOs
 
(4,093
)
 
11,256

 
(15,349
)
 
(136.4
)
Expenses attributable to the consolidated CLOs
 
15,552

 
12,783

 
2,769

 
21.7

Net income attributable to consolidated CLOs
 
(19,645
)
 
(1,527
)
 
(18,118
)
 
(1,186.5
)
Income before taxes
 
(13,506
)
 
3,335

 
(16,841
)
 
(505.0
)
Less provision for income taxes
 
(20
)
 
1,434

 
(1,454
)
 
(101.4
)
Net income
 
(13,486
)
 
1,901

 
(15,387
)
 
(809.4
)
Less net income attributable to noncontrolling interest
 
(1,904
)
 
7,008

 
(8,912
)
 
(127.2
)
Less net (loss) income attributable to VIE subordinated noteholders
 
(11,854
)
 
(6,937
)
 
(4,917
)
 
(70.9
)
Net income available to Class A common stockholders
 
$
272


$
1,830

 
$
(1,558
)
 
(85.1
)%

Statements of Operations Information - Three Months Ended September 30, 2014 compared to 2013
Total revenue
Total revenue for the period ended September 30, 2014 was $42.8 million, compared to $29.9 million for the same period in 2013, an increase of $12.9 million, or 43.3%. This increase was largely due to increases in net realized and unrealized gains, interest income, rental revenue and gain on sale of loans held for sale, net, as discussed further below.


51



Net realized and unrealized gains and losses
Realized and unrealized gains increased by $2.3 million, or 38.6%, for the period ended September 30, 2014 over 2013 levels. The increase from 2013 to 2014 was largely driven by the gain from repayment of the Westside Loan resulting in a gain of $7.9 million. This gain was partially offset by a net decline of approximately $5.5 million in other assets. This decline included a $1.5 million decline relating to the Company’s tax-exempt business, a $2.3 million decline due to the timing of warehouse income of Telos 4, which was issued in the prior year period, an unrealized $1.5 million decline relating to positions held by the Telos 6 warehouse and a $0.7 million decline relating to other assets. These declines were offset, in part, by a $0.4 million gain in partially owned entities for the quarter. While the tax exempt business had a gain in 2014, it was lower than the gain in the third quarter 2013. The gain of $0.4 million in 2014 declined from the gain of $1.8 million in 2013, representing a $1.5 million lower contribution.
Interest income
Interest income on loan and security portfolios increased $3.4 million or 88.0% for the period ended September 30, 2014 compared to the same period in the prior year, largely due to increases in interest income of $3.1 million relating to derivative positions held and a $1.3 million increase relating to the Telos 6 warehouse during the quarter ended September 30, 2014. Interest income also increased $0.7 million at Siena and $0.2 million at Luxury, a newly acquired entity in 2014, due to increased lending activity, but was largely offset by interest income declines at Care, MFCA, and PFG totaling approximately $0.9 million.
Separate account fees

Separate account fees increased $0.4 million, or approximately 7.3%, for the period ended September 30, 2014 compared to the same period in the prior year. This increase was the result of higher average separate account balances during 2014, which generated higher fees. Separate account assets were $4.5 billion at September 30, 2014 compared to $4.4 billion at September 30, 2013.

Administrative service fees

Administrative service fees increased $0.1 million, or less than 1%, for the period ended September 30, 2014 compared to the same period in the prior year. This increase was due to higher growth in assets under administration of $37.6 billion compared to $35.0 billion in the prior year.

Rental revenue
Rental revenues for the period ended September 30, 2014 from Care were $4.5 million, an increase over the comparable period in 2013 of $1.4 million due to Care’s acquisition of additional properties that were not owned in the prior period.
Gain on sale of loans held for sale, net
Gain on sale of loans held for sale, net for the period ended September 30, 2014 was $2.4 million compared to none in the prior period. This gain relates to the sale of loans within Luxury, which was acquired in the first quarter of 2014.
Other income
Other income increased $1.2 million, or 372.9%, from $0.3 million as of September 30, 2013 to $1.5 million as of September 30, 2014. This increase was largely attributable to the increase of $0.7 million of income at Luxury and increases of $0.2 million at Care and $0.4 million at Siena. Luxury was acquired at the beginning of 2014 and was not included in the corresponding prior year period. The increases at Care related to reimbursable escrow income and resident fees at Care’s newly acquired properties. The increase at Siena is consistent with the increase in lending activity in 2014 compared to 2013.
Total expenses
Total expenses for the period ended September 30, 2014 were $36.7 million compared to $25.0 million for the same period in 2013, an increase of $11.7 million, or 46.7%. The increase was largely attributable to increases in interest expense of $4.4 million, payroll of $3.8 million, other expenses of $1.3 million, professional fees of $1.2 million and depreciation and amortization expense of $1.1 million. Interest expense was largely driven by $2.6 million relating to borrowings under Tiptree’s credit facility and the payroll increase related to property acquisitions at Care and the acquisition of Luxury during 2014. The increase in

52



professional fees of $1.2 million was largely driven by professional fees related to transaction activity and the other expense increase was largely driven by Luxury of $0.8 million.
Interest expense
The $4.4 million increase in interest expense for the period ended September 30, 2014 over the same period in 2013 was the result of $0.6 million related to borrowings associated with newly acquired real estate operations at Care, $2.6 million related to Tiptree’s credit facility and approximately $1.0 million of expense associated with the Telos warehouse. Tiptree closed its credit facility during the end of the third quarter of 2013 and as a result did not incur comparable expense in the prior year corresponding period.
Payroll expense
The $3.8 million increase in payroll expense for the period ended September 30, 2014 over the same period in 2013 consists of a $2.5 million increase relating to Luxury and a $1.4 million increase relating to Care. The increase in payroll expense at Care is primarily due to consolidation of the operations of joint ventures formed in the period ended September 30, 2014. These properties were acquired later in the year in 2013 and were not included in the results for the three months ended September 30, 2013. These increases were offset, in part, due to net declines in expenses at other subsidiaries of less than $0.1 million.
Professional Fees
The $1.2 million increase in professional fees for the period ended September 30, 2014 was largely driven by legal fees incurred relating to transaction activity and legal fees and other costs including audit, tax preparation and consulting fees as a result of Tiptree reporting as a public company.
Depreciation and amortization expense
The $1.1 million increase in depreciation and amortization expense for the period ended September 30, 2014 compared to the same period in 2013 relates to an increase in depreciation expense largely as a result of the new properties acquired by Care in 2013, and depreciation expense relating to the Siena and Luxury acquisitions and increased amortization of intangible expense at PFG.
Other expenses
The $1.3 million increase in other expenses for the period ended September 30, 2014 compared to the same period in 2013 largely consists of expenses relating to Luxury, which was acquired in 2014 and therefore not applicable to the period in 2013.
Income (loss) attributable to consolidated CLOs
Loss attributable to consolidated CLOs was $4.1 million in 2014 compared to income of $11.3 million in 2013, a decrease of $15.3 million, or 136.4%. The decrease was driven by an increase in unrealized losses relating to loans of $16.5 million. The increase in unrealized losses was attributable to the mark-to-market declines of the loans within the CLOs driven by a sell off in the credit markets that occurred during the three months ended September 30, 2014.
Expenses attributable to the consolidated CLOs
The $2.8 million increase in expense attributable to the consolidated CLOs largely relates to increases in expenses for Telos 4 and Telos 5 of $7.4 million, offset by declines of $4.6 million in the other Telos entities. Telos 4 was issued during the third quarter of 2013. Telos 5 was issued during the second quarter of 2014.
Provision for income taxes

The provision for income taxes declined $1.5 million for the period ended September 30, 2014 from an income tax expense of $1.4 million in the prior period to an income tax benefit of less than $0.1 million in the current period. The prior year period reflects a one-time adjustment that was made due to the change in the Company’s tax status as of July 1, 2013, effective as of January 1, 2013, from that of a REIT to a taxable entity.

Net income attributable to noncontrolling interest


53



Net income attributable to noncontrolling interest represents the portion of net income generated by consolidated entities that are not attributable to Tiptree’s ownership interest in those entities.
Net (loss) income attributable to VIE subordinated noteholders
Since Tiptree consolidates the VIEs, all of the net income and expense of the VIEs are included in its consolidated results, even though Tiptree only benefits from the net income and incurs the net loss of the portion of the VIEs owned by it. Net (loss) income attributable to the VIE subordinated noteholders represents net (loss) income not attributable to Tiptree’s ownership interest in the VIEs. Therefore, higher net losses attributable to VIE subordinated noteholders increases net income available to Tiptree Class A stockholders. Conversely, higher income attributable to VIE subordinated noteholders decreases net income available to Tiptree Class A stockholders. The net loss attributable to the VIE subordinated noteholders for the period ended September 30, 2014 was $11.9 million, compared to $6.9 million for the same period in 2013, a decrease of $5.0 million. The decrease was primarily due to a gain of $3.1 and $1.2 million in Telos 3 and Telos 5, respectively, combined with a net loss of $0.6 million in the remaining Telos CLOs.
Net (loss) income available to Class A common stockholders
The net income available to Class A common stockholders for the period ended September 30, 2014 was $0.3 million compared to net income of $1.8 million for the same period in 2013, a decrease of $1.6 million, or 85.1%. This decrease was largely due to the decline in net income attributable to consolidated CLOs of $18.1 million, partially offset by the $1.3 million increase in net income before taxes and income attributable to consolidated CLOs from continuing operations. These amounts combined with the decline of $1.5 million in the tax provision and the $8.9 million and $4.9 million declines in the net income attributable to noncontrolling interest and income attributable to VIE subordinated noteholders, respectively, both of which have a beneficial effect to income available to Class A common stockholders, largely resulted in the overall $1.6 million decline for the quarter.

54



 
 
Nine months ended September 30,
 
2014 vs 2013
 
 
2014
 
2013
 
$ Variance
 
% Variance
Revenues:
 
 
 
 
 
 
 
 
Net realized and unrealized gains
 
$
8,361

 
$
3,457

 
$
4,904

 
141.9
 %
Interest income
 
17,664

 
11,131

 
6,533

 
58.7

Separate account fees
 
16,943

 
16,336

 
607

 
3.7

Administrative service fees
 
37,786

 
36,856

 
930

 
2.5

Rental revenue
 
13,308

 
3,279

 
10,029

 
NM

Gain on sale of loans held for sale, net
 
5,117



 
5,117

 
100.0

Other income
 
3,404


701

 
2,703

 
385.6

Total revenue
 
102,583

 
71,760

 
30,823

 
43.0

Expenses:
 
 
 
 
 
 
 
 
Interest expense
 
20,721

 
12,008

 
8,713

 
72.6

Payroll expense
 
35,642

 
26,277

 
9,365

 
35.6

Professional fees
 
7,334

 
6,204

 
1,130

 
18.2

Change in future policy benefits
 
3,260

 
3,502

 
(242
)
 
(6.9
)
Mortality expenses
 
7,892

 
7,885

 
7

 
0.1

Commission expense
 
1,837

 
1,805

 
32

 
1.8

Depreciation and amortization expense
 
5,656

 
3,382

 
2,274

 
67.2

Other expenses
 
15,562

 
10,722

 
4,840

 
45.1

Total expenses
 
97,904

 
71,785

 
26,119

 
36.4

Net income before taxes and income attributable to consolidated CLOs from continuing operations
 
4,679

 
(25
)
 
4,704

 
NM

Results of consolidated CLOs:
 
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
 
20,742

 
33,475

 
(12,733
)
 
(38.0
)
Expenses attributable to the consolidated CLOs
 
44,541

 
34,021

 
10,520

 
30.9

Net income attributable to consolidated CLOs
 
(23,799
)
 
(546
)
 
(23,253
)
 
NM

Income before taxes from continuing operations
 
(19,120
)
 
(571
)
 
(18,549
)
 
NM

Less provision for income taxes
 
906

 
4,549

 
(3,643
)
 
NM

(Loss) income from continuing operations
 
(20,026
)
 
(5,120
)
 
(14,906
)
 
(291.1
)
Discontinued operations:
 
 
 
 
 

 

Gain on sale of Bickford portfolio, net
 

 
15,463

 
(15,463
)
 
(100.0
)
Income from discontinued operations, net
 

 
1,647

 
(1,647
)
 
(100.0
)
Provision for income taxes
 

 

 

 
NM

Discontinued operations, net
 

 
17,110

 
(17,110
)
 
(100.0
)
Net income
 
(20,026
)
 
11,990

 
(32,016
)
 
(267.0
)
Less net income attributable to noncontrolling interest
 
(2,353
)
 
21,185

 
(23,538
)
 
(111.1
)
Less net (loss) income attributable to VIE subordinated noteholders
 
(20,041
)
 
(15,758
)
 
(4,283
)
 
NM

Net income available to Class A common stockholders
 
$
2,368

 
$
6,563

 
$
(4,195
)
 
(63.9
)%
    
NM indicates the metric is not meaningful.


55



Statements of Operations Information - Nine Months Ended September 30, 2014 Compared to 2013
Total revenue
Total revenue for the period ended September 30, 2014 was $102.6 million, compared to $71.8 million for the same period in 2013, an increase of $30.8 million, or 43.0%. This increase was largely due to increases in rental revenue of $10.0 million from newly acquired Care properties, interest income of $6.5 million from acquired entities, a $5.1 million gain on sale of loans held for sale at Luxury, net and $4.9 million of net realized and unrealized gains on investments largely driven by the gain from the repayment of the Westside Loan to Care of $7.9 million, offset in part by declines in asset values.

Net realized and unrealized gains and losses
Realized and unrealized gains increased by $4.9 million, or 141.9%, for the period ended September 30, 2014 over 2013 levels. Included in net realized and unrealized gains and losses was the gain from the repayment of the Westside Loan to Care of $7.9 million. In addition, the increase from 2013 to 2014 was also driven by the assets of the tax-exempt business, which consist of fixed coupon instruments with long durations that are highly sensitive to changes in interest rates. The decline in interest rates compared to the 2013 period resulted in $3.8 million of unrealized gains in 2014. This $3.8 million increase was offset by a $6.0 million overall decline in value of other assets, including credit derivatives and warehouse assets, for the period ended September 30, 2014 compared to the prior year period. This decline was driven by a decline in the unrealized gain of $2.4 million relating to a derivative position Tiptree no longer carries as of September 30, 2014 but did in the prior year and declines in unrealized gains, from market movements relating to positions held in the Telos 6 warehouse credit facility.
Interest income
Interest income on loan and security assets increased $6.5 million, or 58.7%, for the period ended September 30, 2014 compared to the same period in the prior year, largely due to increases in income of 5.3 million related to Tiptree’s investment holdings, income at Siena of $1.6 million and $0.8 million of income recorded for Luxury. These gains were offset, in part, by a decline in interest income of $0.9 million at MFCA. The increase in interest income included $3.0 million related to credit derivatives and $2.5 million related to investment in the warehouse. Also included was a net increase in interest income from Tiptree’s held CLO positions of $1.2 million. The increase at Siena was consistent with the increase in lending activity in 2014 compared to 2013. The decline in income at MFCA was due to continued reduction of the portfolio. Tiptree did not own the Luxury business in 2013.

Separate account fees

Separate account fees increased $0.6 million, or 3.7%, for the period ended September 30, 2014 compared to the same period in the prior year. This increase was the result of higher average separate account balances during 2014, which generated higher fees. Separate account assets were $4.5 billion at September 30, 2014 compared to $4.4 billion at September 30, 2013.

Administrative service fees

Administrative service fees increased $0.9 million, or 2.5%, for the period ended September 30, 2014 compared to the same period in the prior year. This increase was due to higher growth in assets under administration of $37.6 billion compared to $35.0 billion for the prior period.

Rental revenue
Rental revenues for the period ended September 30, 2014 from Care were $13.3 million, an increase over the comparable period in 2013 due to Care’s acquisition of additional properties that were not owned in the prior period.
Gain on sale of loans held for sale, net
Gain on sale of loans held for sale, net for the period ended September 30, 2014 was $5.1 million compared to none in the prior period. This gain relates to the sale of loans within Luxury, which was acquired in the first quarter of 2014.
Other income
Other income increased $2.7 million, or 385.6%, from $0.7 million as of September 30, 2013 to $3.4 million as of September 30, 2014. This increase was largely attributable to the increase of $1.3 million of income at Luxury as well as increases of $0.4

56



million at Care and $0.9 million at Siena. Luxury was acquired at the beginning of the year and was not included in the prior year comparative period. The increases at Care related to income and resident fees at Care’s newly acquired properties. The increase at Siena was consistent with the increase in lending activity in 2014 compared to 2013.
Total expenses
Total expenses for the period ended September 30, 2014 were $97.9 million compared to $71.8 million for the same period in 2013, an increase of $26.1 million, or 36.4%. The increase was largely attributable to increases in several line items including payroll of $9.4 million, interest expense of $8.7 million, other expenses of $4.8 million, depreciation and amortization expense of $2.3 million and professional fees of $1.1 million. Interest expense was largely driven by increases of $2.7 million relating to borrowings under Tiptree’s credit facility, $3.0 million on derivative positions held and $1.0 million relating to the Telos 6 warehouse. The payroll increase related to property acquisitions at Care and the acquisition of Luxury during 2014.
Interest expense
The $8.7 million increase in interest expense for the period ended September 30, 2014 over the same period in 2013 was the result of increases in interest expense at Tiptree consisting of $2.7 million relating to borrowings under Tiptree’s credit facility, $3.0 million on derivative positions held and $1.0 million relating to the Telos 6 warehouse. In addition to the $6.7 million increase in interest at Tiptree, interest expense increases occurred at Care, Luxury, and Siena of $1.8 million, $0.9 million and $0.3 million, respectively. These amounts were partially offset by a net decline of approximately $1.0 million at Tiptree’s other subsidiaries. The increase at Care was related to activity from its joint venture entities. Siena’s interest expense increased commensurate with borrowings as activity increased in 2014. The increase in Luxury was a result of Tiptree not owning Luxury in the prior year corresponding period.
Payroll expense
The $9.4 million increase in payroll expense for the period ended September 30, 2014 over the same period in 2013 consisted of a $6.3 million increase relating to Siena and Luxury and a $3.9 million increase relating to Care. The increase in payroll expense at Care was primarily due to the consolidation of the payroll expense of the acquired operating companies in the period ended September 30, 2014. These properties were acquired later in the year in 2013 and were not fully included in the results for the period ended September 30, 2013. These increases were offset, in part, by net declines in expenses at TAMCO and other subsidiaries of approximately $0.9 million.
Professional Fees
The $1.1 million increase in professional fees for the period ended September 30, 2014 largely related to legal fees incurred relating to increased transaction activity and increases in legal, audit, tax preparation and consulting fees as a result of Tiptree reporting as a public company.
Depreciation and amortization expense
The $2.3 million increase in depreciation and amortization expense for the period ended September 30, 2014 compared to the corresponding period in 2013 related to an increase in depreciation expense largely as a result of the new properties acquired by Care in 2013, and increased depreciation expense relating to the Siena and Luxury acquisitions.
Other expenses
The $4.8 million increase in other expenses for the period ended September 30, 2014 compared to the same period in 2013 largely consisted of $2.1 million of expenses attributable to Care largely relating to the consolidation of operations of joint ventures formed in the period. An increase of $0.5 million related to increased costs at PFG related to an office relocation occurring in 2014 and $2.1 million of expenses related to Luxury, which Tiptree did not own in the prior year corresponding period, also contributed to the increase for the period.
Income attributable to consolidated CLOs
Income attributable to consolidated CLOs was $20.7 million in 2014 compared to $33.5 million in 2013, a decrease of $12.7 million, or 38%. This decrease resulted from an increase in realized loss from loans of $5.4 million along with an increase in unrealized losses from loans of $14.4 million, partially offset by an increase in interest income of $7.1 million. The increase in realized losses in the consolidated CLOs was primarily related to Telos 1 and Telos 2, which are beyond their reinvestment

57



period. Telos 1 and Telos 2 have entered their pay down period in which tranches of debt issued by the CLO are repaid in accordance with the CLOs’ priority of payments. As the debt tranches, which are currently booked at discounted carrying value are paid down at par, a realized loss is recorded by the CLO. In addition, the increase in unrealized losses is attributable to the negative market movement on the pricing of loans within the CLO portfolio that occurred during the third quarter of 2014.
Expenses attributable to the consolidated CLOs
The $10.5 million increase in expenses attributable to the consolidated CLOs was largely attributable to increases in expenses for Telos 3, Telos 4 and Telos 5 offset against declines within the other Telos entities. Telos 4 was issued during the third quarter of 2013. Telos 5 was issued during the second quarter of 2014.
Provision for income taxes

The provision for income taxes decreased $3.6 million for the period ended September 30, 2014 from an income tax expense of $4.5 million in the prior period to an income tax expense of $0.9 million in the current period. This increase was due in part to a one-time adjustment associated with the Company’s change in tax status from a REIT to a taxable entity, which took place on July 1, 2013 but was retroactive to January 1, 2013. Also contributing to the decrease in tax was the lower pre-tax income in 2014 compared to 2013.

Discontinued operations, net

Discontinued operations, net, decreased $17.1 million, or 100%, for the period ended September 30, 2014 compared to the same period in 2013. This was comprised of the income related to the Bickford Portfolio in 2013. For more detail on the Bickford Portfolio sale see Note 18—Dispositions, Assets Held for Sale and Discontinued Operations within the accompanying consolidated financial statements.

Net income attributable to noncontrolling interest

Net income attributable to noncontrolling interest represents the portion of net income generated by consolidated entities that are not attributable to Tiptree’s ownership interest in those entities.
Net (loss) income attributable to VIE subordinated noteholders
Since Tiptree consolidates the VIEs, all of the net income and expense of the VIEs is included in its consolidated results, even though Tiptree only benefits from the net income and incurs the net loss of the portion of the VIEs owned by it. Net (loss) income attributable to the VIE subordinated noteholders represents net (loss) income not attributable to Tiptree’s ownership interest in the VIEs. Therefore, higher net losses attributable to VIE subordinated noteholders increases net income available to Tiptree Class A stockholders. Conversely, higher income attributable to VIE subordinated noteholders decreases net income available to Tiptree Class A stockholders. The net loss attributable to the VIE subordinated noteholders for the period ended September 30, 2014 was $20.0 million, compared to a net loss of $15.8 million for the same period in 2013, an increase of $4.3 million. The increase was largely due to income from Telos 1 of $2.0 million partially offset by net losses of $6.3 million from the remaining Telos entities.
Net income available to Class A common stockholders
Net income available to Class A common stockholders for the period ended September 30, 2014 was $2.4 million, compared to net income of $6.6 million for the same period in 2013, a decrease of $4.2 million, or 63.9%. This decrease was largely due to the decline of $17.1 million and increase of $4.7 million in discontinued operations, net and net income before taxes and income attributable to the CLOs from continuing operations, respectively. These movements were offset, in part, by the increase of $23.3 million in net loss attributable to CLOs and a decline in tax expense of $3.6 million. This decline, combined with the declines of $4.3 million and $23.5 million in the net loss attributable to VIE subordinated noteholders and in net income attributable to the noncontrolling interest, respectively, both of which have a beneficial affect to income available to Class A common stockholders, largely resulted in the overall $4.2 million decline for the year.
Balance Sheet Information - September 30, 2014 Compared to December 31, 2013
Tiptree’s total assets increased $168.1 million, or 2.4%, at September 30, 2014 compared to year end December 31, 2013. This increase was largely driven by the increase in assets of consolidated CLOs of $213.1 million due to the issuance of Telos 5, along with the increases in unrestricted cash of $59.3 million, loans held for sale of $32.1 million from the inclusion of Luxury

58



and investments in loans of $50.9 million from the Telos 6 warehouse. These increases in assets were offset by declines in separate account assets of $163.0 million, loans owned of $7.5 million, investments in partially owned entities of $7.1 million and policy loans of $7.4 million.
Total liabilities increased $186.2 million over the prior year end largely due to an increase in liabilities of consolidated CLOs of $241.5 million, and increases in debt and other liabilities and accrued expenses of $64.7 million and $39.0 million, respectively. These increases were partially offset by a decline in separate account liabilities of $163.5 million. The increase in debt related to increased borrowings for the Telos 6 warehouse of $25.0 million, and increases in borrowings at Luxury of $36.0 million and Siena of $15.0 to support lending activity, offset in part, by a $6.0 decline in debt at PFG due to note payments. The increase in other liabilities and accrued expenses largely relates to timing, as a large premium was collected on the last day of September but was not transferred to separate account assets until early October.
Segment Reporting
Tiptree has four reportable operating segments: insurance and insurance services, specialty finance, asset management and real estate (see Note 5 of the consolidated financial statements for a more detailed description of our segments). Tiptree’s operating segments are organized in a manner that reflects how management views its operations.
Intersegment revenues refers to those items of revenue which will be eliminated upon consolidation. Included in revenue, expense, interest revenue, interest expense, segment profit/(loss), and segment assets are items which are eliminated upon consolidation as well as adjustments for discontinued operations, reclassifications, assets of consolidated CLOs and non-controlling interest. These items are classified as “corporate eliminations and other” in the tables below.
The material components of “corporate eliminations and other” are as follows: (i) for total revenue, rental revenue from discontinued operations as well as Tiptree’s portion of interest income from the consolidated CLOs, (ii) for total expense, interest expense and depreciation/amortization expense associated with discontinued operations, and (iii) for total assets, the assets of the consolidated CLOs.
Each reportable segment’s measure of profit/(loss) is reported before income taxes and includes discontinued operations and non-controlling interest, as this is how management views its segments.

59




Three months ended September 30, 2014

Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate eliminations and other
 
Totals
Fee income
$
18,776

(1 
) 
$

 
$

 
$

 
$

 
$
18,776

Rental revenue

 
16

 

 
4,453

 

 
4,469

Interest income
1,131

 
9,988

 

 
139

 
(3,895
)
 
7,363

Other revenue
18

 
1,538

 
(313
)
(2) 
10,518

 
453

 
12,214

Intersegment revenues

 
114

 
5,089

(2) 

 
(5,203
)
 

Total revenue
19,925

 
11,656

 
4,776

 
15,110

 
(8,645
)
 
42,822



 

 

 

 

 

Interest expense
2,873

 
4,921

 

 
974

 
(268
)
 
8,500

Payroll expense
4,890

 
3,162

 
2,734

 
1,773

 

 
12,559

Professional fee expense
419

 
2,303

 
474

 
392

 
(168
)
 
3,420

Other expense
8,593

 
1,383

 
172

 
3,562

 
(1,506
)
 
12,204

Total expense
16,775

 
11,769

 
3,380

 
6,701

 
(1,942
)
 
36,683

Segment profit/(loss)
$
3,150

 
$
(113
)
 
$
1,396

 
$
8,409

 
$
(6,703
)
 
$
6,139

Net loss attributable to consolidated CLOs

 

 

 

 

 
$
(19,645
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders

 

 

 

 

 
(13,758
)
Discontinued operations

 

 

 

 

 

Income taxes

 

 

 

 

 
(20
)
Net income available to common stockholders

 

 

 

 

 
$
272

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees, which is a component of other income on the Company’s Consolidated Statements of Operations.


60




Three months ended September 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
18,286

(1) 
$


$


$


$


$
18,286

Rental revenue






1,363




1,363

Interest income
1,251


5,923




589


(3,847
)

3,916

Other revenue
5


4,353


85

(2) 
1,862


3


6,308

Intersegment revenues


(83
)

3,902

(2) 


(3,819
)


Total revenue
19,542


10,193

 
3,987

 
3,814

 
(7,663
)

29,873













Interest expense
3,121


596




393




4,110

Payroll expense
4,447


1,006


2,918


382




8,753

Professional fee expense
804


521


591


336




2,252

Other expense
8,064


827


346


1,181


(522
)

9,896

Total expense
16,436


2,950


3,855


2,292


(522
)

25,011

Segment profit/(loss)
$
3,106


$
7,243


$
132


$
1,522


$
(7,141
)

$
4,862

Net loss attributable to consolidated CLOs










$
(1,527
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










71

Discontinued operations











Income taxes










1,434

Net income available to common stockholders










$
1,830

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees, which is a component of other income in the Company’s Consolidated Statements of Operations.
Segment Results - Three month period ended September 30, 2014 compared to 2013
Insurance and Insurance Services Operations
Total revenues for insurance operations were $19.9 million for the three month period ended September 30, 2014, compared to $19.5 million for the same period in 2013, representing an increase of $0.4 million, or 2.0%. The primary driver of the increase was increased fee income from separate account fees and administrative service fees.
Total expenses for insurance operations for the three month periods ended September 30, 2014 and 2013 were $16.8 million and $16.4 million, respectively. This increase of $0.4 million was primarily attributable to increases in payroll and other expense, offset, in part, by declines in professional fee expenses and interest expenses.
Total operating profit for insurance operations for 2014 was $3.2 million, compared to $3.1 million for 2013, an increase of $0.1 million, or 1.0%. This increase was primarily the result of increased fee income from separate account fees and administrative service fees being offset by an increased expense base.

61



Specialty Finance Operations
Total revenues for specialty finance operations for the three month period ended September 30, 2014 were $11.7 million, compared to $10.2 million for 2013, an increase of $1.5 million, or 14.7%. The increase was largely attributable to the increase in interest income of approximately $4.1 million within this segment, offset, in part, by the decline of $2.8 million in other revenue. The increase related to increases in interest income on the derivative positions held by Tiptree and also related to the Telos 6 warehouse during the quarter. Income also increased at Siena and at Luxury due to increased lending activity. However, these gains were offset by an interest income decline at MFCA. The net decline of $2.8 million in other revenue was largely the result of a $1.5 million decline relating to the Company’s tax exempt business, a $2.3 million decline relating to the decline in warehouse assets and a $0.7 million decline for other positions held. The decline in the tax exempt business were due to lower gains in the municipal bond market of $0.4 million for the three months ended September 30, 2014 compared to the $1.8 million higher gains that occurred due to price gains in the prior year corresponding period. The remaining declines were largely related to unrealized losses incurred as a result of mark-to-market price declines driven by a sell off in the credit markets during the three months ended September 30, 2014. These were partially offset by a gain in partially owned entities for the quarter of $0.4 million and the inclusion of Luxury’s results for gain on sale of loans of $0.7 million, net of other items.
Total expenses for specialty finance operations for the three month period ended September 30, 2014 were $11.8 million, compared to $3.0 million for 2013, an increase of $8.8 million, or 293.3%. The increase in expenses were a result of an increase of $4.3 million in interest expense, $2.2 million in payroll expense and $1.8 million in professional fee expense. The increase in interest expense was largely due to $2.6 million in increased interest relating to borrowings under Tiptree’s credit facility, $1.0 million related to the Telos 6 warehouse and approximately $0.6 million increase relating to increased activity at Siena and Luxury. The increases in payroll expense and other expense were attributable to the increase in Siena and the inclusion of Luxury’s results for 2014 when compared to 2013. The increase in professional fees was largely due to increased transaction activity combined with the increase in expense at Siena and the inclusion of Luxury for 2014 when compared to 2013.
Total operating loss for specialty finance operations for the three month period ended September 30, 2014 was less than $0.1 million, compared to a gain of $7.2 million for 2013, a decrease of $7.3 million, or 101.4%. This decrease was largely driven by the increase in expenses for the quarter due to increased interest expense and the increase of operating expenses at Siena commensurate with lending activity increasing and the inclusion of Luxury in the current period compared to the corresponding prior year period.
Asset Management Operations
Total revenues for asset management were $4.8 million for the three month period ended September 30, 2014, compared to $4.0 million for 2013, an increase of $0.8 million, or 20.0%. The increase in revenue in 2014 was largely attributable to incentive management fees from the repayment of the Westside Loan to Care.
Total expenses for asset management were $3.4 million for the three month period ended September 30, 2014 compared to $3.9 million for 2013. This decrease of $0.5 million was largely attributable to lower compensation and other related costs in 2014 largely driven by a lower bonus accrual.
Total operating profit for asset management was $1.4 million for the three month period ended September 30, 2014 compared to $0.1 million in 2013, an increase of $1.3 million, or 1,300.0%. This was largely driven by the management fees from the repayment of the Westside Loan to Care during the third quarter of 2014.
Real Estate Operations
Total revenues for real estate operations for the three month period ended September 30, 2014 were $15.1 million, compared to $3.8 million for 2013, an increase of $11.3 million, or 297.4%. This increase was due to the gain on the repayment of the Westside Loan to Care in 2014 and an increase in rental revenues as a result of newly acquired properties reflected in the current period compared to the corresponding prior year period.
Total expenses for real estate operations for the three months ended September 30, 2014 were $6.7 million, compared to $2.3 million for 2013, an increase of $4.4 million, or 191.3%. This increase was largely the result of higher interest expense relating to borrowings and higher payroll and other expense associated with the inclusion of the newly acquired properties in the period ended September 30, 2014 compared to the corresponding period in the prior year.

62



Total operating profit for real estate operations for 2014 was $8.4 million, compared to $1.5 million in 2013, an increase of $6.9 million. This increase was largely due to the repayment of the Westside Loan to Care during the third quarter of 2014 and increased rental revenue on newly acquired properties in the current period compared to the corresponding prior year period.


Nine months ended September 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
54,729

(1) 
$


$


$


$


$
54,729

Rental revenue


34




13,274




13,308

Interest income
3,464


23,947




1,504


(11,251
)

17,664

Other revenue
32


5,908


224

(2) 
10,860


(142
)

16,882

Intersegment revenues


301


11,400

(2) 


(11,701
)


Total revenue
$
58,225


$
30,190


$
11,624


$
25,638


$
(23,094
)

$
102,583













Interest expense
$
8,683


$
9,408


$


$
2,930


$
(300
)

$
20,721

Payroll expense
14,960


7,577


7,818


5,287




35,642

Professional fee expense
1,344


4,485


941


564




7,334

Other expense
23,954


4,058


875


7,633


(2,313
)

34,207

Total expense
48,941


25,528


9,634


16,414


(2,613
)

97,904

Segment profit/(loss)
$
9,284


$
4,662


$
1,990


$
9,224


$
(20,481
)

$
4,679

Net loss attributable to consolidated CLOs










$
(23,799
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










(22,394
)
Discontinued operations











Income taxes










906

Net income available to common stockholders










$
2,368

Segment assets as of September 30, 2014
$
4,811,378


$
495,659


$
15,593

(3) 
$
153,231


$
1,572,661


$
7,048,522

(1)    Includes separate account and administrative servicing fees.
(2)    Includes management fees, which is a component of other income in the Company’s Consolidated Statements of Operations.
(3)    Refer to Management’s Discussion and Analysis—Economic Net Income Components for information on assets under management.


63




Nine months ended September 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
53,192

(1) 
$


$


$


$


$
53,192

Rental revenue






9,199


(5,920
)

3,279

Interest income
3,658


16,651




1,500


(10,678
)

11,131

Other revenue
77


517


296

(2) 
19,470


(16,202
)

4,158

Intersegment revenues


81


12,776

(2) 


(12,857
)


Total revenue
$
56,927


$
17,249


$
13,072


$
30,169


$
(45,657
)

$
71,760













Interest expense
$
9,383


$
1,660


$


$
3,755


$
(2,790
)

$
12,008

Payroll expense
14,059


1,281


9,587


1,350




26,277

Professional fee expense
1,463


2,194


1,022


1,525




6,204

Other expense
22,922


2,073


684


6,887


(5,270
)

27,296

Total expense
47,827


7,208


11,293


13,517


(8,060
)

71,785

Segment profit/(loss)
$
9,100


$
10,041


$
1,779


$
16,652


$
(37,597
)

$
(25
)
Net income attributable to consolidated CLOs










$
(546
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










5,427

Discontinued operations










17,110

Income taxes










4,549

Net income available to common stockholders










$
6,563

Segment assets as of December 31, 2013
$
4,949,262


$
385,987


$
7,896

(3) 
$
170,683


$
1,366,620


$
6,880,448

(1)    Includes separate account and administrative servicing fees.
(2)    Includes management fees, which is a component of other income in the Company’s Consolidated Statements of Operations.
(3)    Refer to Management’s Discussion and Analysis—Economic Net Income Components for information on assets under management.
Segment Results - Year to date September 30, 2014 compared to 2013
Insurance and Insurance Services Operations
Total revenues for insurance operations were $58.2 million for the nine month period ended September 30, 2014, compared to $56.9 million for the same period in 2013, representing an increase of $1.3 million, or 2.3%. The increase was largely due to the increased fee income from separate account fees and administrative service fees.
Total expenses for insurance operations for the periods ended September 30, 2014 and 2013 were $48.9 million and $47.8 million, respectively. This increase of $1.1 million was primarily due to increases in payroll and costs associated with a build out and office relocation, offset in part by a decline in interest expense on notes payable.
Total operating profit for insurance operations for 2014 was $9.3 million, relatively flat when compared to $9.1 million for 2013, as increases in income from administrative service fees were offset by a higher expense base.

64



Specialty Finance Operations
Total revenues for specialty finance operations for the nine month period ended September 30, 2014 were $30.2 million, compared to $17.2 million for 2013, an increase of $13.0 million, or 75.6%. The increase was largely attributable to an increase in interest income of $7.2 million along with an increase in other revenues of $5.4 million. The $7.2 million increase in interest income largely related to increases of $5.3 million related to Tiptree’s investment holdings, income at Siena of $1.6 million and $0.8 million of income recorded for Luxury. These gains were offset, in part, by a decline in interest income of $0.9 million at MFCA. The increase of $5.4 million in other revenues largely related to the gain on sale of loans held for sale, net at Luxury.
Total expenses for specialty finance operations for the nine months ended September 30, 2014 were $25.5 million, compared to $7.2 million for 2013, an increase of $18.3 million, or 254.2%. The increase was primarily the result of increases in interest expense of $7.7 million, payroll expense of $6.3 million, professional fees expense of $2.3 million and other expense of $2.0 million. The increase in interest expense was largely due to $2.7 million in increased interest relating to borrowings under Tiptree’s credit facility, $3.0 million of interest on derivative positions held and $1.0 million related to the Telos 6 warehouse. The increase in professional fees was largely due to increased expenses from transaction activity and the inclusion of Luxury for 2014 when compared to 2013. The increases in payroll expense and other expense were attributable to increases at Siena and the inclusion of Luxury’s results for 2014 when compared to 2013.
Total operating profit for specialty finance operations for the nine month period in 2014 was $4.7 million, compared to $10.0 million for 2013, a decrease of $5.3 million, or 53%. This decrease was largely driven by the higher expense base driven by increased costs due to acquired subsidiaries and higher interest expense.
Asset Management Operations
Total revenues for asset management were $11.6 million for the nine month period ended September 30, 2014, a decrease of $1.4 million, or 10.7%, compared to $13.1 million for 2013. The decrease in revenue in 2014 was primarily attributable to lower management fees received from Telos 1 and Telos 2, offset in part by the addition of Telos 3 and Telos 4 in 2013, and Telos 5 in 2014 and the associated management fees in 2014.
Total expenses for asset management were $9.6 million for the nine month period ended September 30, 2014, compared to $11.3 million for 2013. This decrease of $1.7 million was primarily attributable to lower compensation related costs in 2014.
Total operating profit for asset management was $2.0 million for the nine month period ended September 30, 2014, compared to $1.8 million in 2013, an increase of $0.2 million, or 11.1%. This increase was largely driven by lower compensation costs.
Real Estate Operations
Total revenues for real estate operations for the nine month period ended September 30, 2014 were $25.6 million, compared to $30.2 million for 2013, a decrease of $4.6 million, or 15.2%. This decrease was attributed to the recognition of the Bickford sale in the prior year when compared to the current year. Also included in 2014 revenues was the gain from the repayment of the Westside Loan to Care of $7.9 million and increased rental revenues from newly acquired properties of $4.1 million.
Total expenses for real estate operations for the nine month period ended September 30, 2014 were $16.4 million, compared to $13.5 million for 2013, an increase of $2.9 million. This increase was primarily due to increased payroll expense offset, in part, by decreased professional fees.
Total operating profit for real estate operations for 2014 was $9.2 million, compared to $16.7 million in 2013, a decrease of $7.5 million. This decrease was largely driven by the recognition of the Bickford sale in the prior year when compared to the current year’s higher rental revenues.

Economic Net Income and Economic Book Value
Economic Net Income
Economic Net Income (“ENI”) is a non-GAAP financial measure of profitability which Tiptree uses to measure the performance of its core business. Management believes that ENI reflects the nature and substance of the economic results of Tiptree’s businesses. Management also uses ENI as a measurement for determining incentive compensation. ENI as used by Tiptree may not be comparable to similar measures presented by other companies as it is a non-GAAP financial measure that is not based on a

65



comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. ENI should be considered in addition to, not as a substitute for, financial measures determined in accordance with GAAP.
Economic Net Income Components
The following table details the individual revenue and expense components of the non-GAAP measure ENI for the periods indicated (in thousands):
 
Three months ended September 30,

Nine months ended September 30,
 
2014

2013

2014

2013
Revenues:
 
 
 
 
 
 
 
Interest income
$
4,779


$
1,830

 
$
8,919


$
3,622

Dividend/distribution income
11,994


3,475

 
20,168


12,439

Realized gains (losses)
1


(7
)
 
(751
)

(1,015
)
Unrealized (losses) gains
(1,775
)

7,599

 
558


20,273

Management fee income (see table below for details)
4,705


3,694

 
11,354


12,281

Total revenues
19,704


16,591

 
40,248


47,600

Expenses:



 



Compensation expense
3,497


2,935

 
7,853


9,839

Distribution expense (convertible preferred)



 


1,747

Interest expense
4,158


596

 
8,158


1,496

Professional fees and other
3,093


1,694

 
6,713


4,633

Total expense
10,748


5,225


22,724


17,715

Economic Net Income of Operating Company
8,956


11,366


17,524


29,885

Less: Economic Net Income attributable to the portion of TFP not held by TFI
4,229


8,544


10,609


22,450

Economic Net Income of Tiptree before tax provision
4,727


2,822


6,915


7,435

Less: Tax adjustment attributable to Tiptree
(771
)

894


(1,308
)

567

Economic Net Income of Tiptree
$
5,498


$
1,928


$
8,223


$
6,868


The following table presents detail regarding components of management fee income:
 
Three months ended September 30,

Nine months ended September 30,
 
2014

2013

2014

2013
Management fees associated with CLOs
$
2,975

 
$
3,402

 
$
9,208

 
$
9,848

Other non-CLO advisory fees (1)
1,730

 
292

 
2,146

 
2,433

Total management fee income
$
4,705

 
$
3,694


$
11,354

 
$
12,281

(1) Other non-CLO advisory fees represent the advisory/management fees earned by MCM and TREIT.


66



The following table summarizes the structure of each CLO managed:
 
Issuance date
 
Fee earning assets under management (1)
 
First optional call date (2)
 
Termination of reinvestment period (3)
 
Maturity date (4)
Telos 1
11/2006
 
$
209,409

 
01/2011
 
01/2013
 
10/2021
Telos 2
06/2007
 
266,902

 
07/2011
 
07/2013
 
04/2022
Telos 3
02/2013
 
352,482

 
01/2015
 
01/2017
 
01/2024
Telos 4
08/2013
 
351,636

 
07/2015
 
07/2017
 
07/2024
Telos 5
05/2014
 
400,240

 
04/2016
 
04/2018
 
04/2025
Total CLOs
 
 
$
1,580,669

 
 
 
 
 
 

(1)     Fee Earning AUM are as of the next Distribution Date after September 30, 2014.

(2)
CLOs are generally callable by equity holders (or the subordinated note holders of the CLO) once per quarter beginning after termination of a non-call period and subject to certain other restrictions.

(3)
Termination of reinvestment period refers to the date after which we can no longer use certain principal collections to purchase additional collateral and such collections are instead used to repay the outstanding amounts of certain debt securities issued by the CLO.

(4)     Represents the contractual maturity of the CLO. Generally, the actual maturity of the deal is expected to occur in advance of contractual maturity.

Reconciliation of GAAP Net Income to Economic Net Income
In addition to the other adjustments indicated in the table below, ENI includes the following adjustments: (i) adjustment to results from real estate to eliminate non-cash items similar to adjusted funds from operations (“AFFO”), which is a non-GAAP financial measure widely used in the real estate industry, (ii) in our insurance segment, adjustment for fair value on available for sale securities, which is a non-GAAP measure frequently used throughout the insurance industry, and (iii) in our specialty finance segment, VIEs are shown as if not consolidated.
The following is a reconciliation of GAAP Net Income attributable to Tiptree to ENI for the periods ended September 30, 2014 and 2013 (in thousands):



67



 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
GAAP Net Income of Tiptree
 
$
272


$
1,830


$
2,368


$
6,563

Plus: Tax adjustment attributable to Tiptree companies (1)
 
(1,459
)

1,881


(3,565
)

567

Plus: Portion of NCI attributed to TFP
 
(1,655
)

7,260


(1,664
)

21,589

GAAP Net (Loss)/Income of Operating Company
 
(2,842
)

10,971


(2,861
)

28,719

 
 





 





Adjustments:
 





 





Adjustments to results from real estate operations (2)
 
1,386


(356
)

2,478


(3,758
)
Effect of change in majority ownership of subsidiaries (3)
 
585


(1,297
)

519


(1,673
)
Fair value adjustments to carrying value (4)
 
(5,145
)

(74
)

(7,973
)

914

Reversal of VIEs net losses (gains) attributable to TFI (5)
 
14,972


2,065


25,361


6,256

Reversal of TAMCO net gains for periods prior to acquisition of TAMCO (6)
 


57





TFP convertible preferred reclass of distributions to expense (7)
 






(1,747
)
Foreign exchange reserve (8)
 






1,174

Economic Net Income of Operating Company
 
8,956


11,366


17,524


29,885

Less: Economic Net Income attributable to the portion of TFP not held by TFI
 
4,229


8,544


10,609


22,450

Economic Net Income of Tiptree before tax provision
 
4,727


2,822


6,915


7,435

Less: Tax adjustment attributable to Tiptree (9)
 
(771
)

894


(1,308
)

567

Economic Net Income of Tiptree
 
$
5,498


$
1,928


$
8,223


$
6,868


(1)Tax provision adjustment for Tiptree to reflect tax benefits at certain entities which reduces the tax expense at Operating Company.
(2)
Adjustments to results from real estate operations includes the effects of straight lining lease revenue, expenses associated with depreciation and amortization, certain transaction expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustments for unconsolidated partnerships and joint ventures.
(3)
Effect of change in majority ownership of subsidiaries is the dilutive effect of Care Inc.’s issuance of shares related to the Contribution Transactions and stock-based compensation and the effect of Tiptree’s increased ownership of PFG due to the accretion of preferred shares.
(4)
Adjustment is to account at fair value for the CLO subordinated notes held by Tiptree and PFG’s available-for-sale securities. Fair values are obtained from independent third party pricing sources.
(5)
Reversal of VIEs net losses/(gains) attributable to Tiptree (see Management’s Discussion and Analysis—Tiptree Portion of Net Income and Ownership of Consolidated CLOs for further detail).
(6)
The purchase of TAMCO on June 30, 2012 was accounted for as a combination of entities under common control. As a result, the assets and liabilities of TAMCO were presented as if TAMCO had been consolidated by Tiptree on January 1, 2010. For non-controlling interest, we reversed the effect of this recasting of financial information for prior periods.
(7)
Convertible preferred distribution reclassified as expense for purposes of ENI so as to reflect a cost of capital charge for outstanding convertible preferred. This class automatically converted to common shares effective July 1, 2013.
(8)Reflects the timing difference on the recognition of yen exposure GAAP versus ENI.
(9)Tax adjustment for Tiptree Financial Inc. only and not its consolidated subsidiaries.

68



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

EBV as used by Tiptree may not be comparable to similar measures presented by other companies as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. EBV should be considered in addition to, not as a substitute for, financial measures determined in accordance with GAAP. The following is a reconciliation of GAAP book value attributable to Tiptree to EBV as of September 30, 2014 and December 31, 2013 (in thousands except share data):


69



 
September 30, 2014
 
December 31, 2013
Economic Book Value
 
 
 
GAAP TFI Total Capital
$
547,764


$
565,856

Less: Non-controlling interest in TFI
235,951


361,354

Less: Retained Earnings of consolidated TAMCO
64,550


84,591

GAAP Net Assets to Tiptree Class A Stockholders
247,263


119,911

Less: Net assets held directly at Tiptree
7,960


4,259

Plus: Portion of NCI attributed to TFP
214,024


339,283

GAAP Net Assets of Operating Company
453,327


454,935

Reversal of consolidation of TAMCO (including VIEs)(1)
(141,117
)

(144,817
)
Fair values of CLOs (2)
70,523


61,145

Value of TAMCO (3)
57,661


57,661

Adjustments to results from real estate operations (4)
6,157


3,711

Total Adjustments
(6,776
)

(22,300
)
Economic Operating Company Book Value
$
446,551


$
432,635

Basic Units outstanding (5)
41,593


41,525

Fully Diluted Unit adjustments (6)
578


480

Fully Diluted Economic Book Value Per Unit
42,171


42,005

Basic Economic Tiptree Book Value Per Class A Share
$
10.74


$
10.42

Net assets held directly at Tiptree
7,960


4,259

Economic Operating Company Book Value (including Tiptree level net assets)
454,511


436,894

Basic Economic Book Value Per Share (including Tiptree level net assets)
10.93


10.52

Dilutive Economic Book Value Per Share (including Tiptree level net assets)
$
10.78


$
10.40


(1)
Under GAAP, Tiptree is required to consolidate all of the assets and liabilities of the VIEs managed by TAMCO on Tiptree’s balance sheet regardless of Tiptree’s economic interest. See Note 2(c) to the consolidated financial statements included in the 2013 Annual Report on Form 10-K. Adjustment is reversal of consolidation of TAMCO and VIEs.
(2)
Adjustment includes the fair value of our ownership position in the VIEs, which has been reversed as described in note (1) above.
(3)
Values TAMCO at the lower of cost or market, and reflects the valuation of the purchase price based on the value of the partnership units issued in consideration for TAMCO.
(4)
Adjustments to results from real estate operations reverses the amounts, since inception, related to the effects of straight lining lease revenue, expenses associated with depreciation and amortization, certain transaction expenses, non-cash transaction expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustment for unconsolidated partnerships and joint ventures.
(5)
Assumes full redemption of Operating Company units for Class A common stock or exchange by TFP limited partners of their limited partnership units for shares of Class A common stock. Operating Company is owned approximately 25% by Tiptree and approximately 75% by TFP. As of September 30, 2014, Tiptree owned approximately 37% of TFP, with the remainder owned by the existing limited partners of TFP. As a result, Tiptree’s combined direct and indirect ownership of Operating Company was approximately 53% as of September 30, 2014. Tiptree’s direct ownership of Operating Company’s shares is equal to the number of shares of Class A common stock and, pursuant to Operating Company’s limited liability

70



agreement, this ratio will remain 1:1. TFP’s ownership is equal to 2.798 times the number of TFP partnership units outstanding and this ratio is expected to remain 2.798:1. There were 11,068 and 11,068 partnership units outstanding as of September 30, 2014 and December 31, 2013, respectively. The basic EBV per partnership unit was $30.05 and $29.16 as of September 30, 2014 and December 31, 2013, respectively. The basic EBV (including Tiptree level net assets) per partnership unit was $30.58 and $29.43 as of September 30, 2014 and December 31, 2013, respectively. The Dilutive EBV (including Tiptree level net assets) per partnership unit was $30.16 and $29.10 as of September 30, 2014 and December 31, 2013, respectively. As of November 3, 2014, Tiptree owned 68% of the limited partnership units of TFP.
(6)
Assumes net exercise of all in-the-money outstanding warrants.

Tiptree Portion of Net Income and Ownership of Consolidated CLOs (in thousands)
 
 
Three months ended September 30, 2014
 
 
Tiptree pro rata portion of Net Income
 
Net Income (net of 1% NCI)
 
Telos 1
 
$
(485
)
 
$
(6,811
)
 
Telos 2
 
(9,691
)
 
(10,153
)
 
Telos 3 (*)
 

 
(3,066
)
 
Telos 4
 
(1,862
)
 
(2,620
)
 
Telos 5
 
(2,934
)
 
(4,162
)
 
Total
 
$
(14,972
)
 
$
(26,812
)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
 
Tiptree pro rata portion of Net Income
 
Net Income (net of 1% NCI)
 
Telos 1
 
$
(535
)
 
$
(7,536
)
 
Telos 2
 
(1,843
)
 
(1,931
)
 
Telos 3
 
(83
)
 
(94
)
 
Telos 4
 
396

 
557

 
Total
 
$
(2,065
)
 
$
(9,004
)
 


71



 
 
Nine months ended September 30, 2014
 
 
Tiptree pro rata portion of Net Income
 
Net Income (net of 1% NCI)
 
Tiptree’s ownership %
Telos 1
 
$
(1,133
)
 
$
(15,931
)
 
7.11%
Telos 2
 
(21,903
)
 
(22,947
)
 
95.45
Telos 3 (*)
 
7

 
(3,228
)
 
0.00
Telos 4
 
(1,064
)
 
(1,497
)
 
71.08
Telos 5
 
(1,268
)
 
(1,799
)
 
70.51%
Total
 
$
(25,361
)
 
$
(45,402
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
Tiptree pro rata portion of Net Income
 
Net Income (net of 1% NCI)
 
Tiptree’s ownership %
Telos 1
 
$
(1,285
)
 
$
(18,080
)
 
7.11%
Telos 2
 
(5,649
)
 
(5,918
)
 
95.45
Telos 3
 
282

 
1,426

 
19.79
Telos 4
 
396

 
557

 
71.08%
Total
 
$
(6,256
)
 
$
(22,015
)
 
 

(*)
During 2014, Tiptree sold its ownership interest in Telos 3. The Tiptree pro rata portion of net income reflects the net income received by Tiptree during the period the CLO was owned. The net income (net of NCI) reflects the current net income of the CLO. Tiptree ownership is now 0% of Telos 3.


Liquidity and Capital Resources

Tiptree is a holding company and conducts all of its operations through Operating Company. Dividends and distributions from its subsidiaries to Operating Company and sales of assets are the principal source of cash to make acquisitions, invest in existing businesses, pay employee compensation, dividends, professional fees (including advisory services, legal and accounting fees), office rent, insurance costs, and certain support services (including under the Transition Services Agreement and Administrative Services Agreement). Tiptree’s current source of liquidity is its cash, cash equivalents and investments and distributions from operating subsidiaries and principal investments, including subordinated notes of CLOs managed by Telos. At September 30, 2014, Tiptree had unrestricted cash of $179.9 million. As a result of the $50.0 million borrowed under the credit agreement with Fortress and the $44.0 million of proceeds from the sale of the Bickford Portfolio in our real estate segment during 2013, we are maintaining a relatively larger cash balance. Tiptree expects to use a substantial portion of its available cash to complete the purchase of Fortegra Acquisition in the fourth quarter of 2014 or first quarter of 2015. The PFG sale is expected to close in the third quarter of 2015 and Tiptree expects to use the proceeds to reinvest in its businesses and/or make additional acquisitions. Tiptree expects that during the period of time in between the Fortegra Acquisition and PFG sale, it will fund its immediate cash needs through cash from existing operations including sales of assets if necessary. Tiptree also intends to opportunistically acquire majority control of new businesses both in its existing financial services sectors and complementary sectors. Accordingly, Tiptree’s cash needs will differ over time from Tiptree’s historical cash needs and Tiptree 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.
The ability of Tiptree’s subsidiaries to generate sufficient net income and cash flows to make cash distributions to us 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

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rating agencies to maintain or improve current ratings. For example, Telos will require additional capital in order to form future CLOs, and PFG and Luxury may require additional capital to meet regulatory capital requirements.
Consolidated Comparison of Cash Flows

Summary Consolidated Statements of Cash Flows

(in thousands)
 
Nine months ended September 30,
 
2014
 
2013
Net cash provided by/(used in):
 
 
 
Operating activities
$
65,698

 
$
41,116

Investing activities
(242,881
)
 
(701,862
)
Financing activities
236,518

 
695,904

Net increase in cash and cash equivalents
$
59,335

 
$
35,158


Operating Activities

Cash provided by operating activities for the period ended September 30, 2014 was $65.7 million, compared to $41.1 million for the comparable period in 2013, an increase of $24.6 million. Cash provided by operating activities from VIEs for the period ended September 30, 2014 was $55.6 million, a change of $68.9 million from cash used of $13.3 million for the period ended September 30, 2013. Excluding the activity attributable to the VIEs, cash provided by operating activities decreased $44.3 million. The decrease was largely attributable to the change in the increase in due to brokers, dealers and trustees of $45.2 million and the net change in loans originated for sale of $10.5 million, offset by the decline in the net realized gain on sale of properties, net of $15.5 million. The $45.2 million change in increase in due to brokers, dealers and trustees is related to the due to trustee amounts at the Telos 6 warehouse compared to amounts that existed at the Telos 5 warehouse in the prior year. The net change in loans originated for sale of $10.5 million related to activity for Luxury which did not exist in the prior year. The $15.5 million related to the sale of the Bickford Portfolio that occurred in the prior year.

Investing Activities

Cash used in investing activities for the period ended September 30, 2014 was $242.9 million, compared to cash used of $701.9 million for the comparable period in 2013, an increase of $459.0 million. Cash used in investing activities from VIEs was $225.8 million for the period ended September 30, 2014, a decrease of $367.6 million from cash used of $593.4 million for the period ended September 30, 2013. Excluding the activity attributable to the VIEs, cash used in investing activities declined $91.5 million. The decline in cash used in investing activities was largely attributable to the increase in the purchase of trading securities and loans carried at fair value of $168.3 million net against the increase the proceeds received from sales of trading securities of $206.1 million. There was a decline in purchases of real estate of $16.7 million relating to Care and an increase of $32.9 million received relating to loan repayments at Care. There was a $5.2 million increase in purchases of derivatives at Tiptree in conjunction with $9.6 million of higher amounts utilized on purchases of loans relating to Siena during the period when compared to the prior year.

Financing Activities

Cash provided by financing activities for the period ended September 30, 2014 was $236.5 million, compared to $695.9 million in cash provided for the comparable period in 2013, a decrease of $459.4 million. Cash provided by financing activities for VIEs was $193.4 million for the period ended September 30, 2014 and cash provided by financing activities for VIEs was $592.4 million for the comparable period in 2013. Excluding the activity attributable to VIEs, cash provided by financing activities decreased $60.3. This decrease of $60.3 million was largely due to the increase in the partial paydown of borrowings of $136.5 million offset against the increase in the proceeds from loans of $75.8 million. The increase in the partial paydown of borrowings related to the activity of the current warehouse when compared to the warehouse activity in the prior year. The increase in the proceeds from loans related to varying nature of proceeds of loans when comparing September 30, 2014 and September 30,

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2013. In 2014, the proceeds were $159.0 million for the warehouse, $15.2 million for Siena, and $10.3 million for Luxury. In the prior year, the proceeds were $58.7 million from a previous warehouse and $50.0 million from Tiptree’s credit facility. The increase in proceeds from loans at Siena and Luxury were commensurate with increases in lending activity at these businesses.

Indebtedness
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress and borrowed $50.0 million under the Credit Agreement. The Credit Agreement also includes an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125.0 million, subject to satisfaction of certain customary conditions. The principal of, and all accrued and unpaid interest on, all loans under the Credit Agreement shall become immediately due and payable on September 18, 2018. Borrowings under the Credit Agreement bear interest at a variable rate per annum equal to the one-month London interbank offering rate (LIBOR), with a minimum LIBOR rate of 1.25%, plus a margin of 6.50% per annum. The principal amounts of the loans are to be repaid in consecutive quarterly installments, which may be adjusted based on the Net Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company. As of September 30, 2014, $48.0 million was outstanding on this obligation. The weighted average interest rate for the nine months ended September 30, 2014 was 7.75%. See Note 12 to the consolidated financial statements for a discussion of other debt instruments of our operating segments.
Contractual Obligations
The table below summarizes the Company’s contractual obligations for the periods indicated (in thousands). Not all of the Company’s commitments and contingencies are reflected on its consolidated balance sheets:
 
September 30, 2014
 
December 31, 2013
Mortgage notes payable and related interest (1)
$
104,973

 
$
107,705

Notes payable (2)
86,373

 
91,015

Notes payable CLOs (3)
1,546,589

 
1,341,701

Warehouse borrowings (4)
30,901

 

Operating lease obligations (5)
12,765

 
6,437

Credit facilities/Lines of credit (6)
68,369

 
54,871

Standby letters of credit (7)
2,566

 

Total
$
1,852,536

 
$
1,601,729

(1)
Mortgage notes payable include mortgage notes entered into by the Company in connection with its acquisition of several properties (See Note 12—Debt).
(2)
Notes payable relates to PFG’s acquisition of the administrative services rights from The Hartford, TFP payment for Series A preferred stock and common shares of PFG and Luxury promissory notes (See Note 12—Debt).
(3)
CLO notes payable principal is payable at the stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3, 2024 for Telos 4 and 2025 for Telos 5 (See Note 4—CLOs and Consolidated Variable Interest Entities).
(4)
The Company through its subsidiary Luxury has warehouse borrowings with several lenders (See Note 12—Debt).
(5)
Minimum rental obligations for Care, Siena, Luxury and PFG office leases. For the nine month periods ended September 30, 2014 and 2013, rent expense for the Company’s office leases were $1,838 and $1,259, respectively.
(6)
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress and borrowed $50,000 under the Credit Agreement. The Credit Agreement also includes an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions. On July 25, 2013, TFI’s subsidiary Siena closed on a line of credit with Wells Fargo Bank. This revolving line is for $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of September 30, 2014, there was $20,369 outstanding on this line (See Note 12—Debt).
(7)
Tiptree’s subsidiary Siena issues standby letters of credit to customers which generally guarantee the borrower’s performance.
Critical Accounting Policies and Estimates


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The preparation of our financial statements in accordance with 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 2013 Annual Report on Form 10-K. Refer to Note 2 (Acquisitions) for information regarding accounting principles associated with Luxury.

Recently Adopted Accounting Standards
In fiscal 2014, the Company has adopted the following accounting standards:
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Financial Services-Investment Companies (ASC Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. This ASU introduces a new approach for assessing whether an entity is an investment company. To determine whether an entity is an investment company for accounting purposes, Tiptree will now be required to evaluate the fundamental and typical characteristics of the entity including its purpose and design. The amendments in the ASU were effective for Tiptree in the first quarter of 2014. The Company completed its analysis of ASU No. 2013-08 and the adoption of this standard does not have a material effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (ASC Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) (ASU 2013-11), which provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. The amendments are applied prospectively to all unrecognized tax benefits that exist at the effective date. ASU 2013-11 was effective for the Company beginning in the first quarter of fiscal 2014. The Company completed its analysis of ASU 2013-11 and the adoption of this standard does not have a material effect on the Company’s consolidated financial statements.

Off-Balance Sheet Arrangements

Luxury enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes, as well as commitments to sell real estate loans to various investors. Substantially all of Luxury’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. In addition, Siena issues standby letters of credit to customers which generally guarantee the borrower’s performance. Other than these commitments to originate and sell loans and letters of credit, the Company did not guarantee any obligations of unconsolidated entities, or express intent to provide additional funding to any such entities.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information contained in this item.

Item 4. Controls and Procedures

Tiptree completed the Contribution Transactions on July 1, 2013, and as a result is disclosing a change to internal control over financial reporting related thereto. The businesses contributed by TFP in the Contribution Transactions are excluded from management’s annual certifications pursuant to Section 906 and Section 302 of the Sarbanes-Oxley Act of 2002. Management is in the process of evaluating internal control over financial reporting for the businesses contributed by TFP and expects that the assessment will be completed with Tiptree’s December 31, 2014 Annual Report on Form 10-K.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of September 30, 2014. Based upon that evaluation the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2014, the Company’s disclosure controls and procedures were effective in causing material information relating to the Company to be recorded, processed, summarized and reported by management in a timely basis and ensuring the quality and timeliness of the Company’s public disclosures with SEC disclosure obligations.

PART II. Other Information

Item 1. Legal Proceedings

Tiptree and its subsidiaries are defendants in two putative class action lawsuits brought by shareholders of Fortegra (Stein v. Fortegra Financial Corporation, et al., Case No. 16-2014-CA-005825-XXXX-MA and Hickey v. Fortegra Financial Corporation, et al., Case No. 16-2014-CA-006485-XXXX-MA) in the Circuit Court of the Fourth Judicial Circuit in and for Duval County, State of Florida alleging that Tiptree and its subsidiaries aided and abetted the Fortegra directors’ breach of fiduciary duties in connection with the Merger Agreement. The court consolidated the Stein and Hickey actions on October 24, 2014. On October 13, 2014, the Company and attorneys for both Stein and Hickey executed a memorandum of understanding that provides for a settlement. The terms of the memorandum of understanding did not require any change to the merger agreement, but did require Fortegra to provide its stockholders with supplemental disclosures about the merger which Fortegra completed. Before the settlement is finalized it must be approved by the court. Management believes, based on information available at this time, the ultimate resolution of this litigation will not be materially adverse to the financial position, results of operations or cash flows of the Company.

Tiptree and its subsidiaries are parties to legal proceedings in the ordinary course of their 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.

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, 2013. There has been no material change in those risk factors.


Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Recent Sales of Unregistered Securities

From July 1, 2014 and through September 30, 2014 Tiptree has issued an aggregate of 11,332,054 shares of Class A common stock to limited partners of TFP in exchange for transfer to Tiptree of an aggregate of 4,050,055 TFP partnership units and one

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share of Class B common stock of Tiptree for each share of Class A common stock. Except for the receipt of TFP partnership units, Tiptree received no other consideration.
From October 1, 2014 and through November 12, 2014, Tiptree has issued an aggregate of 9,866,456 shares of Class A common stock to limited partners of TFP in exchange for an aggregate of 3,526,253 TFP partnership units and one share of Class B common stock of Tiptree for each share of Class A common stock.
These transactions are exempt from registration under the Securities Act of 1933, pursuant to Section 4(a)(2) thereunder. TFP delivered to Tiptree for cancellation one share of Class B common stock of Tiptree for each share of Class A common stock issued. Partnership units of TFP are exchangeable for Class A common stock at a rate of one partnership unit of TFP for 2.798 shares of Class A common stock of the Company. One share of Class B common stock is canceled for each share of Class A common stock issued in exchange for limited partnership units of TFP.
As of November 12, 2014, there were 31,829,633 shares of Class A common stock of Tiptree outstanding and 9,770,367 shares of Class B common stock of Tiptree outstanding. As of November 12, there were 11,068,219 limited partnership units of TFP outstanding, of which Tiptree owned 7,576,308.
Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.



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Item 6. Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Form 10-Q:
 
 
 
Financial Statements (Unaudited):
 
 
 
Exhibits:
 
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page and is incorporated herein by reference, as filed as part of this Form 10-Q.
 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Tiptree Financial, Inc. has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 
Tiptree Financial Inc.
 
 
 
 
Date: November 12, 2014
 
By:/s/ Geoffrey N. Kauffman 
 
 
Geoffrey N. Kauffman
 
 
Chief Executive Officer
 
 
 
 
Date: November 12, 2014
 
By:/s/ Julia Wyatt
 
 
Julia Wyatt
 
 
Chief Financial Officer


78

E

EXHIBIT INDEX
Exhibit No.    Description
10.1
Stock Purchase Agreement, dated as of October 29, 2014, among Tiptree Operating Company, LLC, each of the person’s identified as a Seller on the Signature Pages thereto and PFG Acquisition Corp.

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2
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 September 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2014 and 2013, (iii) the Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2014 and 2013, (iv) the Consolidated Statement of Changes in Stockholders’ Equity for the period ended September 30, 2014, (v) the Consolidated Statements of Cash Flows for the periods ended September 30, 2014 and 2013 and (vi) the Notes to the Consolidated Financial Statements.


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