10-K 1 tiptreeform10-k2013.htm 10-K Tiptree Form 10-K 2013
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2013
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)
Securities Registered Pursuant to Section 12(b) of the Act: Class A Common Stock, par value $0.001 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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
As of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was $1,177,400, based upon the closing sales price of $7.00 per share as


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reported on the OTCQX Capital market. For purposes of this calculation, all of the registrant’s directors and executive officers were deemed to be affiliates of the registrant. Since August 9, 2013, the registrant’s Class A common stock has traded on the NASDAQ Capital Market under the symbol “TIPT.”
As of March 17, 2014, there were 10,610,281 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 30,968,877 shares, par value $0.001, of the registrant’s Class B common stock outstanding.

Documents Incorporated by Reference

Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2014 Annual Meeting of Stockholders is incorporated by reference into Part III.




Tiptree Financial Inc.
INDEX
 
 
             Signatures





PART I

Forward-Looking Statements

Except for the historical information included and incorporated by reference in this Annual Report on Form 10-K, 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 our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend 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 this 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.

Note to Reader

In reading this Annual Report on Form 10-K, references to:

“Administrative Services Agreement” means the Administrative Services Agreement between Operating Company (as assignee of TFP) and BackOffice Services Group, Inc., dated as of June 12, 2007.

“AUM” means assets under management.

“Care Inc.” means Care Investment Trust Inc. prior to the Contribution Transactions.

“Care LLC” means Care Investment Trust LLC.

“Care” means Care Inc. and Care LLC, collectively.

“CLOs” means collateralized loan obligations.

“COLI/ BOLI” means company owned life insurance and bank owned life insurance.

“Contribution Transactions” means the closing on July 1, 2013 of the transactions pursuant to the Contribution Agreement by and between the Company, Operating Company and TFP, dated as of December 31, 2012.

“Luxury” means Luxury Mortgage Corp.

“Mariner” means Mariner Investment Group LLC.

“MCM” means Muni Capital Management, LLC.

“MFCA” means Muni Funding Company of America LLC.

“NPPF I” means Non-Profit Preferred Funding Trust I.

“Operating Company” means Tiptree Operating Company, LLC.

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“PFAS” means Philadelphia Financial Administration Services Company, LLC.

“PFAS Transaction” means PFG’s purchase of assets and administrative servicing rights of COLI/BOLI business from The Hartford in 2012.

“PFG” means Philadelphia Financial Group, Inc.

“Siena” means Siena Capital Finance LLC.

“Star Asia Entities” means collectively Star Asia Finance, Limited, Star Asia Opportunity, LLC and Star Asia Opportunity II, LLC.

“TAMCO” means Tiptree Asset Management Company, LLC.

“Telos” means Telos Asset Management, LLC.

“TFP” means Tiptree Financial Partners, L.P.

“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means Tiptree Financial Inc. and its consolidated subsidiaries.

“Tiptree Direct” means Tiptree Direct Holdings LLC.

“Transition Services Agreement” means the Transition Services Agreement among TAMCO, Tricadia and Operating Company (as assignee of TFP), dated as of June 30, 2012.

“Tricadia” means Tricadia Holdings, L.P.

Item 1. Business

OVERVIEW
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.
We operate our business through Operating Company, which directly or indirectly owns all of our assets. Operating Company is owned 25% by Tiptree Financial Inc. and 75% by Tiptree Financial Partners, L.P. This report is being filed by Tiptree Financial Inc. but includes information of Operating Company that may be of interest to partners of Tiptree Financial Partners, L.P. Beginning on July 1, 2014, partnership units of Tiptree Financial Partners, L.P. are redeemable for Class A common stock of Tiptree Financial Inc. For more information on our ownership and structure see “—Structure” and Notes 1 and 15 within the accompanying consolidated financial statements.
Strategy
Tiptree’s primary strategy is to acquire controlling interests in a diversified group of businesses. We look 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 complimentary 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.

Business Segments
Tiptree’s activities are organized, for management and financial reporting purposes, into four business segments.

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Segment
Subsidiaries
Insurance and insurance services
Philadelphia Financial Group, Inc. and Philadelphia Financial Administration Services Company, LLC
Specialty finance
Muni Funding Company of America, LLC, Siena Capital Finance LLC, Luxury Mortgage Corp. and Tiptree Direct Holdings LLC
Asset management
Tiptree Asset Management Company, LLC, Telos Asset Management, LLC and Muni Capital Management, LLC
Real estate
Care LLC and the Star Asia Entities

For additional financial information regarding Tiptree’s operating segments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Segment Reporting”.
BUSINESS SEGMENTS
Insurance and Insurance Services
Tiptree’s insurance operations include PFG, a life insurance and annuity company and PFAS, a third party administrator of COLI/BOLI policies.
Philadelphia Financial Group
PFG provides annuity and life insurance products within the U.S. and internationally. PFG’s principal insurance activity is the structuring, underwriting, marketing and administration of life insurance and annuity products. PFG’s life insurance products are primarily targeted to high net worth individuals and its annuity products are targeted to both the individual and institutional markets. PFAS, a subsidiary of PFG, also provides administration services of life insurance products in the institutional bank owned and corporate owned life insurance markets. In August 2012, PFG launched its international operations with the establishment of two Bermuda domiciled subsidiaries.
PFG distributes its products through a select network of intermediaries who work directly with individuals, institutions and families or in concert with family offices, wealth managers, private bankers or other professionals.
PFG’s life insurance products are generally marketed to high net worth individuals and families in the form of variable life insurance policies, which give flexibility in investment choices. In variable life products, the premiums are held in separate accounts that may be invested into a variety of investment options. PFG does not receive or participate in management fees on the performance of separate accounts. PFG’s annuity products are marketed to both the individual and institutional markets, in the form of individual and group variable annuities. Variable annuities allow for the contract holder to make deposits into various investment options in a separate account, as determined by the contract holder. In all of PFG’s annuity products, the investment risks associated with such investment options are borne entirely by the contract holder.
PFAS is a third party administrator of group life insurance policies, primarily in the COLI/BOLI market. Employers looking for tax-efficient ways to fund their employee benefit programs have accomplished this goal through the use of COLI/BOLI, by purchasing life insurance policies on employees. The employer pays the premium, owns the cash value of the policy and is the designated beneficiary. PFAS does not structure, underwrite or distribute COLI/BOLI policies. It provides policy service and administration services on behalf of the insurance company issuing the policy.
Reinsurance
PFG reinsures a significant portion of its mortality risk exposure and in connection therewith, pays to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce the net exposure to mortality risk and protect against large losses. PFG, unlike traditional life insurance companies, reinsures substantially all of its exposure to mortality risk. Reinsurance does not relieve PFG of its obligations to its policyholders and exposes PFG to credit risk with respect to its reinsurers.
Competition
Competition faced by PFG is based on a variety of factors, including service, product features, scale, price, financial strength, rating and name recognition. PFG competes with private and public insurance companies many of whom are significantly larger and have greater access to capital and other resources that may provide competitive advantages. PFG’s ability to compete depends on its ability to develop profitable products, maintain relationships with intermediaries who distribute its products, maintain adequate ratings from ratings agencies, and provide a high quality of service to its customers.
Regulation

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Insurance companies are subject to supervision and regulation in the states in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance company’s business and financial condition. The purpose of such supervision and regulation is the protection of policyholders. The extent of such supervision and regulation varies, but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the state insurance departments typically includes the establishment of standards of solvency which must be met and maintained by insurers, the licensing to do business of insurers and agents, the nature of and limitations on investments, the approval process for premium rates, the provisions which insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders and the approval of policy forms. Such insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. PFG is primarily domiciled in Pennsylvania and is subject to regulation by the Pennsylvania Insurance Department, among other regulatory authorities, with respect to statutory capital and reserve requirements. Certain other subsidiaries are subject to regulation by the New York State Department of Financial Services and the Bermuda Monetary Authority.
PFG’s insurance subsidiaries are generally restricted by the insurance laws of their respective domiciles as to the amount of dividends they may pay to their shareholders without the prior approval of the respective regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior regulatory approval is limited to a stated percentage of that subsidiary’s statutory surplus as of a certain date, or adjusted net income of the subsidiary for the preceding year.
Employees
PFG and PFAS had 111 employees as of December 31, 2013.
Asset Management
Tiptree’s asset management operations are conducted through TAMCO, an SEC-registered investment adviser that is primarily a holding company for all of Tiptree’s asset management subsidiaries, which include among others, Telos and MCM. Tiptree, through these subsidiaries, manages assets within a variety of investment vehicles, including CLOs, managed accounts and other investment funds. Tiptree seeks to grow its asset management operations through acquisitions and through investments in new products launched and managed by its subsidiaries.
Telos Asset Management
Telos is an investment manager that establishes and manages investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors. Its core investment products are primarily in the form of collateralized loan obligations ("CLOs") and managed accounts. The term CLO generally refers to a special purpose vehicle that owns a portfolio of senior secured loans and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. Telos, as investment advisor/ manager of CLOs, selects and actively manages the underlying assets to achieve target investment performance, while seeking to avoid losses.
The investment advisory fees paid to Telos by these investment products are its primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as Telos manages the products. Investment advisory fees typically consist of senior and subordinated management fees based on the amount of assets held in the investment product and, in certain cases, include incentive fees based on the returns generated for certain investors.
Telos is currently the manager of four CLOs: Telos CLO 2006-1, Ltd. (“Telos 1”), Telos CLO 2007‑2, Ltd. (“Telos 2”), Telos CLO 2013-3, Ltd. (“Telos 3”) and Telos CLO 2013-4, Ltd. (“Telos 4”).
Muni Capital Management - MCM
MCM is a manager of investments in securities exempt from U.S. federal income taxes. MCM currently manages Non-Profit Preferred Funding Trust I (“NPPF I”), a structured tax-exempt pass-through (“STEP”) vehicle. Interests in NPPF I are held solely by third parties unaffiliated with Tiptree. MCM is also the external manager and advisor to Tiptree’s subsidiary MFCA, which currently does not invest third party capital.
Competition

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TAMCO and its subsidiaries compete for asset management clients and assets under management (“AUM”) with numerous other asset managers, including those affiliated with major commercial or investment banks and other financial institutions. Many of these organizations offer products and services that are similar to, or compete with, those TAMCO and its subsidiaries may offer, and many of these organizations have substantially more personnel and greater financial resources. Some of these competitors have proprietary products and distribution channels that make it more difficult for TAMCO and its subsidiaries to compete with them. Some competitors have greater portfolio management resources, have managed client accounts for longer periods of time, have greater experience over a wider range of products or have other competitive advantages. The factors considered by clients in choosing TAMCO and its subsidiaries or a competitor include the past performance of the products managed, the background and experience of key personnel, the experience in managing a particular product, and reputation, investment advisory fees and the structural features of the investment products offered.
Regulation
The asset management industry in the U.S. is subject to extensive regulation under federal and state securities laws as well as the rules of self-regulatory organizations. The Securities and Exchange Commission (“SEC”) is the federal agency charged with administration of federal securities laws. Each of TAMCO, Telos and MCM (collectively, the “Advisers”) are registered with the SEC as investment advisers, and are required to make notice filings in certain states. Virtually all aspects of the asset management business, including related sales and distribution activities, are subject to various federal and state laws and regulations and self-regulatory organization rules. These laws, rules and regulations are primarily intended to protect the asset management clients and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict an investment advisor from conducting its asset management business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed include the suspension of individual employees, the imposition of limitations on engaging in the asset management business for specified periods of time, the requirement to hire independent compliance consultants, the revocation of licenses or registrations, and imposition of censures and fines. In addition, investment vehicles managed by the Advisers are subject to various securities laws and other laws.
Employees
TAMCO had 19 employees as of December 31, 2013, 8 of whom are dedicated to Telos, 3 dedicated to MCM, and 8 to Tiptree’s corporate activities.
Specialty Finance
Tiptree’s specialty finance operations include: Muni Funding Company of America, which provides financing to tax-exempt organizations; Siena Lending Group, which provides asset-based loans to smaller U.S. businesses; Luxury Mortgage Corp., a residential mortgage lender that originates agency, prime jumbo and super jumbo mortgages; and Tiptree Direct, which holds our principal investments and all non-consolidated minority investments. Tiptree intends to continue to grow its specialty finance operations through acquisitions and by exploring strategic alternatives with respect to new financing products which may provide attractive returns to Tiptree.
Muni Funding Company of America - MFCA
MFCA is a specialty finance company that acquires and invests in the debt and securities of tax-exempt organizations, primarily in the healthcare, educational and social services sectors. MFCA operates in the tax advantaged finance sector, which may include holding or acquiring tax-exempt obligations, mortgage-related holdings, interests in structured credit entities, taxable municipal bonds, derivative instruments, equity interests in real estate (such as affordable housing partnerships), other equity investments, investments in “taxable tails” or tax credits, investments in leases with municipal borrowers and other assets. MFCA derives income from interest on the assets held by it and its subsidiaries and from any gains on the sale or prepayment of assets.
Competition
MFCA competes with mutual funds, closed-end funds, specialty finance companies, hedge funds, insurance companies, institutional investors, investment banking firms and other financial entities specifically focused on acquiring tax-exempt assets many of whom may be significantly larger, have greater access to capital and other resources and may possess other competitive advantages.
Employees
MFCA is externally managed by MCM, a subsidiary of TAMCO, so it does not have any employees. Three TAMCO employees were dedicated to MFCA as of December 31, 2013.
Siena Lending Group

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Siena is a commercial finance company providing financing solutions to small and medium sized U.S. companies. Siena originates, structures, underwrites and services senior, secured asset-based loans for companies with sales typically between $5 million and $50 million operating across a range of industry sectors. Its core financing solutions include revolving lines of credit and term loans, which may collectively be referred to as asset-based loans and typically range in size from $1 million to $20 million. Siena also has the ability to arrange significantly larger transactions that may be syndicated to others or Siena may participate in large syndications itself.
Siena’s asset-based loans are typically used to fund working capital needs and are secured by eligible, margined collateral, including accounts receivable, inventories, and, to a lesser extent, other long-term assets. In determining a borrowers’ ability and willingness to repay loans, Siena conducts a detailed due diligence investigation to assess financial reporting accuracy and capabilities as well as to verify the values of business assets among other things. Siena employs third parties to conduct field exams to audit financial reporting and to appraise the value of certain types of collateral in order to estimate its liquidation value. Financing arrangements with customers also typically include substantial controls over the application of borrowers’ cash and Siena retains discretion over collateral advance rates and eligibility among other key terms and conditions.
Siena also offers a servicing platform which provides asset based lending solutions for community and regional banks that do not have the expertise or capacity to underwrite or service asset-based loans.
Competition
Siena’s market is competitive, based on factors that vary by product, customer, and geographic region. Competitors include global and domestic commercial and investment banks, regional and community banks, captive finance companies, and other niche specialty finance companies. Many of the larger competitors have greater financial, technological, and marketing resources than Siena.
Employees
Siena had 7 employees as of December 31, 2013.
Luxury Mortgage Corp.
Tiptree completed the acquisition of 67.5% of Luxury in January 2014 and Luxury will be consolidated within Tiptree’s financial statements beginning with the first quarter of 2014. 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. Loans sold into the secondary market may be sold “servicing-retained” or “servicing-released,” referring to whether the rights to service the mortgage are retained by the originator or released to the secondary market investor at the time of sale. Luxury currently sells all of its loans on a servicing released basis.
Luxury offers a variety of residential adjustable and fixed rate mortgage products . Luxury currently uses two production channels to originate or acquire mortgage loans: retail sales offices (commonly referred to as “retail”), as well as a broker (commonly referred to as “wholesale”). Each production channel produces similar mortgage loan products and generally applies the same underwriting standards. Luxury leverages technology to streamline the mortgage origination process and bring service and convenience to both channels. Brokers are able to register and lock loans, check the status of the loan, and deliver documents in electronic format through the internet and are supported by a sales support team assists brokers where Luxury is licensed to do business.

In the retail channel, loans are originated by mortgage loan originators employed by Luxury. When loans are originated on a retail basis, the origination documentation is completed internally inclusive of customer disclosures and other aspects of the lending process and the funding of the transactions. In the wholesale channel, an unaffiliated bank, mortgage bank, or mortgage brokerage company completes much of the loan paperwork. All loans are underwritten on a loan-level basis to
Luxury’s underwriting standards.

The wholesale channel also includes correspondent transactions, where an unaffiliated bank or mortgage company completes the loan paperwork and also supplies the funding for the loan at closing. Luxury does not currently participate in this channel but may choose to do so in the future.

Luxury’s revenues include interest income earned for the period the loans are on Luxury’s balance sheet, gain on sale income representing the difference between the origination value and the sale value of the loan and fee income earned at origination.
Competition

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The market for origination of residential mortgages is highly competitive. There are a large number of institutions offering mortgage loans, including many that operate on a national scale, as well as local savings banks, commercial banks, and other lenders. With respect to those products that Luxury offers, the company competes by offering competitive interest rates, fees, and other loan terms and services and by offering efficient and rapid service. Many of Luxury’s competitors are larger and have access to greater financial resources, which can place Luxury at a competitive disadvantage. In addition, many of the largest competitors are banks or are affiliated with banking institutions, the advantages of which include, but are not limited to, the ability to hold mortgage loan originations in an investment portfolio and having access to financing with more favorable terms, including lower interest rate bank deposits as a favorable source of funding.
Regulation
Luxury is subject to extensive regulation by federal, state and local governmental authorities, including the Consumer Financial Protection Bureau, the Federal Trade Commission and various state agencies that license, audit and conduct examinations. Luxury is licensed or qualified to do business in 19 states in the U.S. Luxury must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, Homeowners Protection Act, the Federal Trade Commission Act and, more recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and state foreclosure laws. These statutes apply to loan origination, debt collection, use of credit reports, safeguarding of non−public personally identifiable information about customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated or amended. Over the past few years, state and federal lawmakers and regulators have adopted a variety of new or expanded laws and regulations, including the Dodd-Frank Act.
Employees
Luxury had 103 employees as of December 31, 2013.
Tiptree Direct
Tiptree Direct primarily holds our principal investments, which includes the positions we own in the subordinate notes of CLOs managed by Telos. In addition, Tiptree Direct holds the Company’s non-consolidated investments.
Real Estate
Tiptree’s real estate operations include Care, a real estate investment company, and interests in the Star Asia Entities, which are Tokyo based real estate holding companies formed to invest predominately in Asian properties and real estate related debt instruments. Tipree intends to continue to grow its real estate operations through new acquisitions and investments by Care.
Care LLC

Care is a real estate investment company that primarily acquires and owns senior housing properties within the U.S. Care’s focus is on acquisitions ranging in size from $5 to $200 million in the senior housing and care industry that provide attractive returns. Care’s overall strategy is to identify strong and experienced managers or operators of senior housing facilities who are looking to expand and diversify their operations by entering into strategic relationships with capital partners. Through joint ventures, Care may also operate senior housing properties and hire experienced managers to run the day to day operations at the properties.

Care’s senior housing communities currently include senior apartments, independent and assisted living communities, and communities providing care for individuals with Alzheimer’s disease and other forms of dementia or memory loss. Rent payments and services provided in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid and Medicare. Care intends to continue to grow its portfolio primarily through the acquisition of senior housing properties, utilizing investments structures such as leases and joint ventures. As Care acquires additional properties and expands its portfolio, it intends to further diversify its concentrations by tenant, asset class and geography within the senior housing sector, including further investments in senior apartments, independent and assisted living communities, memory care communities and skilled nursing facilities.

Competition

Care competes for investments in the senior housing and care sector with other real estate investment companies and real estate investment trusts, real estate partnerships, private equity firms and hedge funds, finance/investment companies, taxable and tax-exempt bond funds, health care operators and developers. Care competes for investments based on a number of factors including

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investment structures, underwriting criteria and reputation. Care’s ability to successfully compete is impacted by economic and demographic trends, availability of acceptable investment opportunities, ability to negotiate beneficial investment terms, availability and cost of capital and new and existing laws and regulations.

The operators/managers/lessees of Care’s properties compete on a local and regional basis with those of properties that provide comparable services. Operators/managers/lessees compete for residents based on a number of factors including quality of service, reputation, physical appearance of properties, location, services offered, family preferences, physicians, staff and price. Care also faces competition from other health care facilities for tenants, such as physicians and other health care providers that provide comparable facilities and services.

Regulation

Tenants and operators of healthcare properties are typically subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. Some of these laws and regulations impose joint and several liabilities on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, there are various federal, state and local fire, health, life-safety and similar regulations applicable to healthcare properties.

Care’s properties may be affected by Care’s operators’, managers’ and lessees’ operations, the existing condition of land when acquired, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property.

In addition, the healthcare industry is highly regulated by federal, state and local licensing requirements, facility inspections, reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other laws, regulations and rules. In addition, regulators require compliance by our tenants and third party operators with a variety of safety, health, staffing and other requirements relating to the design and conditions of the licensed facility and quality of care provided. The failure of any tenant, manager or operator to comply with such laws, requirements and regulations could affect a tenant’s, manager’s or operator’s ability to operate the facilities that Care owns.

Private, federal and state payment programs, including Medicaid and Medicare, and the effect of laws and regulations may also have a significant influence on the profitability of the properties and their tenants.

Employees

Tiptree had 4 employees dedicated to Care as of December 31, 2013.

STRUCTURE
On July 1, 2013, in exchange for interests in the Operating Company, TFP and Care Inc. contributed substantially all of their assets to the Operating Company, which we refer to as the “Contribution Transactions.” Approximately 75% of Operating Company is owned by TFP and the remaining approximately 25% is owned by Tiptree. In connection with the Contribution Transactions, Care Inc. changed its name to “Tiptree Financial Inc.”
TFP was organized in May 2007 and completed a private placement of approximately $139 million in June 2007. From 2007 until the Contribution Transactions, TFP pursued the strategy described above as a private partnership. Prior to June 30, 2012, TFP was externally managed by an affiliate of Tricadia. Care Inc. was incorporated as Care Investment Trust Inc. in Maryland in March 2007 and completed its initial public offering in June 2007. From 2007 until the Contribution Transactions, Care Inc. operated as a real estate investment trust investing in healthcare related real estate assets.
The following chart shows a simplified version of our organizational structure:

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1 Percentages shown are approximate as of December 31, 2013 and will change accordingly as membership units are redeemed for Class A common stock of Tiptree Financial Inc.

Competition

In addition to the competition our businesses face, we are subject to significant competition in identifying, evaluating and pursuing acquisition opportunities. Many of these competitors are of varying sizes and compete with us to make the types of acquisitions that we plan to make, including strategic corporate buyers, banks, mortgage companies, specialty finance companies, insurance companies, asset managers, private equity funds, hedge funds, family offices, real estate investment trusts, limited partnerships, business development companies and special purpose acquisition vehicles. Many of our competitors are significantly larger, have greater access to capital and other resources and may possess other competitive advantages. We believe that Tiptree’s position as a public company may provide a competitive advantage over privately held entities that may compete to acquire certain target businesses, and unlike private buyers of companies such as private equity firms, Tiptree is able to pay for acquisitions with cash or equity securities.

Employees

As of December 31, 2013, 18 persons provided services to Tiptree (as employees or pursuant to a services agreement) at the holding company and on a consolidated basis, including all of Tiptree’s consolidated subsidiaries, Tiptree had 250 employees.

AVAILABLE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended (the Exchange Act), are also available free of charge on our Internet site at www.tiptreefinancial.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.


9



Our Investor Relations Department can be contacted at Tiptree Financial Inc., 780 Third Avenue, 21st Floor, New York, NY, 10017, Attn: Investor Relations, telephone: (212) 446-1400, email: IR@tiptreefinancial.com.

Item 1A. Risk Factors

We are a holding company with multiple lines of business, which may adversely impact the market price of our Class A common stock and our ability to raise equity and debt capital.

Operating Company holds and manages multiple lines of business. Research analysts, investors and lenders may have difficulty analyzing and valuing a company with multiple lines of business, which could adversely impact the market price of our Class A common stock and our ability to raise equity and debt capital. Moreover, our management is required to make decisions regarding the allocation of capital among the different lines of business, and such decisions could materially and adversely affect our business.

Because we are a holding company, our ability to make distributions to stockholders will depend on distributions from our subsidiaries that may be subject to restrictions.

Because we are a holding company, our ability to make distributions to stockholders will depend on distributions from our subsidiaries. The amount of dividends that our subsidiaries may distribute to us may be subject to restrictions imposed by state law, restrictions that may be imposed by state regulators and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur. For example, PFG, an insurance holding company in which we own a controlling interest, is required to maintain minimum capital and surplus requirements and is subject to laws and regulations that limit the amount of dividends that PFG can pay to us. PFG may also be required to limit the amount of dividends paid to us to maintain a risk-based capital ratio to maintain or improve its ratings by rating agencies.

We may be limited in the future in utilizing net operating losses incurred during prior periods to offset taxable income.

Care and PFG previously incurred net operating losses. In the event that we experience an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, which we refer to as the “Code”, including as a result of the Contribution Transactions, our ability to use those net operating losses to offset taxable income would be subject to an annual limitation. The annual limitation would be equal to a percentage of our equity value at the time the ownership change occurred. In general, such an “ownership change” would occur if the percentage of our stock owned by one or more 5% stockholders were to increase by 50 percentage points during any three-year period. A 5% stockholder is a person (including certain groups of persons acting in concert) that owns at least 5% of our stock. All stockholders that own less than 5% of our stock are treated as a single 5% stockholder. In addition, the Treasury Regulations under Section 382 of the Internal Revenue Code contain additional rules the effect of which is to make it more likely that an ownership change could be deemed to occur. Accordingly, our ability to use prior net operating losses to offset future taxable income would be subject to a limitation if we experience an ownership change.

Compliance with existing and new regulations affecting our businesses in regulated industries may increase costs and limit our ability to pursue business opportunities.

We are subject to extensive laws and regulations administered and enforced by a number of different federal and state governmental authorities. For example, PFG’s insurance subsidiaries are subject to regulation by the Pennsylvania Insurance Department, among other regulatory authorities, with respect to statutory capital and reserve requirements and certain of its subsidiaries are subject to regulation by the New York State Department of Financial Services and the Bermuda Monetary Authority. TAMCO, is an asset management holding company registered with the SEC as an investment advisor and the properties held by our subsidiary Care LLC, are regulated by state and federal laws regarding healthcare facilities. Luxury is subject to extensive regulation by federal, state and local governmental authorities, including the Consumer Financial Protection Bureau, the Federal Trade Commission and various state agencies that license, audit and conduct examinations. Regulation of the industries in which we operate is expected to increase. In the past several years there has been significant legislation affecting financial services, insurance and health care, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Patient Protection and Affordable Care Act, and many of the regulations associated with these laws have yet to be written. Accordingly, we cannot predict the impact that any new laws and regulations will have on us. The costs to comply with these laws and regulations may be substantial and could have a significant negative impact on us and limit our ability to pursue business opportunities.


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A portion of our assets are illiquid or have limited liquidity, which may limit our ability to sell those assets at favorable prices or at all and creates uncertainty in connection with valuing such assets.

Our assets include real estate, non-controlling interests in credit assets and related equity interests which may be illiquid or have limited liquidity. It may be difficult for us to dispose of assets with limited liquidity rapidly, or at favorable prices, if at all. In addition, assets with limited liquidity may be more difficult to value and may be sold at a substantial discount or experience more volatility than more liquid assets. We may not be able to dispose of assets at the carrying value reflected in our financial statements. Our results of operations and cash flows may be materially and adversely affected if our determinations regarding the fair value of our illiquid assets are materially higher than the values ultimately realized upon their disposal.

Certain of our assets are subject to credit risk, market risk, interest rate risk, credit spread risk, selection risk, call and redemption risk and/or tax risk, and any one of these risks may materially and adversely affect the value of our assets, our results of operations and our financial condition.

Some of our specialty finance assets are subject to credit risk, market risk, interest rate risk, credit spread risk, selection risk, call and redemption risk and/or tax risk.

Credit risk is the risk that the obligor will be unable to pay scheduled principal and/or interest payments. In this regard, investing in non-investment grade obligations is riskier than investing in higher quality instruments. In addition, market value fluctuations may be larger and more frequent. Changes in the underlying obligor’s financial results may affect the credit rating or the market’s perception of its creditworthiness, which may affect the market value of the credit assets of that obligor. The degree of credit risk depends on the terms of the obligation as well as on the financial condition of the obligor in respect thereof.

Market risk is the risk that one or more markets to which the assets relate will decline in value, including the possibility that such markets will deteriorate sharply and unpredictably, which will likely impair the market value of the related obligations.

With respect to fixed-rate obligations, interest rate risk is the risk that the market value of these obligations will change in response to changes in the interest rate environment or other developments that may affect the fixed income market generally. When market interest rates go up, the market value of existing fixed rate obligations goes down and obligations with longer maturities are typically affected more by changes in interest rates than obligations with shorter maturities. Because market interest rates continue to be near their lowest levels in many years, there is a greater risk that prevailing interest rates increase in the future and, as a result, that these obligations may decline in market value. With respect to floating-rate obligations, interest rate risk is the risk that defaults on these obligations will increase during periods of rising interest rates and, during periods of declining interest rates, that obligors may exercise their option to prepay principal earlier than scheduled.

Credit spread risk is the risk that the market value of fixed income obligations will change in response to changes in perceived or actual credit risk beyond changes that would be attributable to changes, if any, in interest rates.

Call and redemption risk is the risk that debt instruments will be called or redeemed prior to maturity at a time when yields on other debt instruments in which the call or redemption proceeds could be invested are lower than the yield on the called or redeemed instrument. Any one of these risks may materially and adversely affect the value of our assets, results of operations and financial condition.

We leverage our assets and a decline in the fair value of such assets may adversely affect our financial condition and results of operations.

We leverage our assets, including through borrowings, generally through warehouse facilities, secured loans, derivative instruments such as total return swaps, securitizations (including the issuance of CLOs) and other borrowings. A rapid decline in the fair value of our leveraged assets, such as the declines experienced in the fourth quarter of 2007 and the first quarter of 2008, may adversely affect us. Lenders may require us to post additional collateral to support the borrowing. If we cannot post the additional collateral, we may have to rapidly liquidate assets, which we may be unable to do on favorable terms or at all. Even after liquidating assets, we may still be unable to post the required collateral, further harming our liquidity and subjecting us to liability to lenders for the declines in the fair values of the collateral. A reduction in credit availability may adversely affect our business, financial condition and results of operations.

A reduction in administrative fees paid to PFAS could adversely affect our financial condition and results of operations.

PFAS generates revenue from administrative fees collected from a portfolio of company-owned life insurance policies and bank-owned life insurance policies issued and underwritten by affiliates of The Hartford pursuant to a servicing agreement. A reduction

11



in administrative fees paid to PFAS, due to the lapse or surrender of policies administered or termination of PFAS’s servicing agreement with a subsidiary of The Hartford, could adversely affect our financial condition and results of operations.

The amount of PFG’s required statutory capital can increase because of factors outside of PFG’s control.

PFG’s insurance subsidiaries are subject to statutory capital and reserve requirements established by the applicable insurance regulators based on risk-based capital formulas. As of December 31, 2013, PFG’s insurance subsidiaries maintained statutory capital and reserves of $20.1 million. In any particular year, these requirements may increase or decrease depending on a variety of factors, most of which are outside PFG’s control, such as the amount of statutory income or losses generated, changes in equity market levels, the value of fixed-income and equity securities in PFG’s investment portfolio, changes in interest rates and foreign currency exchange rates, as well as changes to the risk-based capital formulas used by insurance regulators. Increases in the amount of additional statutory reserves that PFG is required to hold can adversely affect our financial condition and results of operations.

A downgrade in PFG’s claims paying ability or financial strength ratings could increase policy surrenders or withdrawals, adversely affecting relationships with distributors and reducing new policy sales.

Claims paying ability ratings, sometimes referred to as financial strength ratings, indicate a rating agency’s view of an insurance company’s ability to meet its obligations to its policy holders. These ratings are therefore key factors underlying the competitive position of life insurers. Some non-affiliated distributors of PFG’s life insurance products may choose not to do business with insurance companies that are rated below certain financial strength ratings. PFG currently has ratings of “A-” from A.M. Best Company, Inc. A ratings downgrade or the potential for such a downgrade in its rating could materially increase the number of policy surrenders or withdrawals by policyholders of cash values from their policies, adversely affect relationships with distributors of PFG’s annuity and life insurance products, reduce new annuity policy sales and adversely affect our ability to compete in the life insurance industry.

A change in law or regulation applicable to PFG’s annuity and insurance products could adversely affect our financial condition and results of operations.

PFG generates revenue from the sale and administration of variable annuity and variable life insurance products. These products enjoy favorable U.S. federal income tax benefits that are conferred by statute or regulation. Should such benefits be curtailed or eliminated by changes in statute or regulation, PFG’s continuing issuance of variable annuity and variable life insurance products could be adversely affected. Any retroactive application of changes could result in surrenders by holders of PFG’s existing variable annuity and variable life insurance products and reduce PFG’s revenues, which could adversely affect our financial condition and results of operations.

PFG may incur losses if its reinsurers are unwilling or unable to meet their obligations under reinsurance contracts.

PFG uses reinsurance to reduce the severity and incidence of claims costs, and to provide relief with regard to certain reserves. As of December 31, 2013, substantially all of the mortality risk on the insurance policies issued by PFG was reinsured by third parties. Under these reinsurance arrangements, other insurers assume a portion of PFG’s losses and related expenses; however, PFG remains liable as the direct insurer on all risks reinsured. Consequently, reinsurance arrangements do not eliminate PFG’s obligation to pay claims and PFG assumes credit risk with respect to its ability to recover amounts due from its reinsurers. The inability or unwillingness of any reinsurer to meet its financial obligations could negatively affect our financial condition and results of operations.

A reduction in fees paid to TAMCO could adversely affect our profitability.

TAMCO generates management, servicing and advisory fees based on the amount of assets managed and, in certain cases, on the returns generated by the assets managed. A reduction in fees paid to TAMCO, due to termination of management agreements, reduction in assets managed or lower than expected returns, could adversely affect our results of operations.

The nature of the assets owned by MFCA presents risks related to the special nature of such assets.

MFCA’s assets may also include certain tax-exempt lease obligations, which may be subject to annual appropriation by the municipality. Failure to appropriate would result in MFCA having to exercise remedies, including repossession of equipment or foreclosure on property, which could result in losses by MFCA, which may materially and adversely affect our results of operations and financial condition.

Prepayment rates on MFCA’s assets could negatively affect the value of MFCA’s assets.

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The value of MFCA’s assets and derivative arrangements related to its assets, if any, may be adversely affected by prepayment rates of the underlying assets. Prepayment rates are influenced by changes in interest rates and a variety of economic, political, geographic and other factors beyond our control. Consequently, our results of operations may be adversely affected if the underlying obligors prepay the assets at higher-than-projected or estimated rates.

Liability relating to environmental matters may decrease the value of our real estate assets.

Under various federal, state and local laws, an owner or operator of real property may become liable for the costs of cleanup of certain hazardous substances released on or under its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that any of our owned real estate encounters environmental issues, it may adversely affect the value of that real estate. Further, in regard to any mortgage investment, if the owner of the underlying property becomes liable for cleanup costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us. In addition, in certain instances, we may be liable for the cost of any required remediation or clean up.

Violation of fraud and abuse laws applicable to our real estate tenants, lessees and operators may jeopardize a tenant’s, lessee’s or operator’s ability to make payments to us.

The federal government and numerous state governments have passed laws and regulations that attempt to eliminate healthcare fraud and abuse by prohibiting business arrangements that induce patient referrals or inappropriately influence the ordering of specific ancillary services. In addition, numerous federal laws have continued to strengthen the federal fraud and abuse laws to provide for broader interpretations of prohibited conduct and stiffer penalties for violations. Violations of these laws may result in the imposition of criminal and civil penalties, including possible exclusion from federal and state healthcare programs. Imposition of any of these penalties upon any of our tenants, lessees or operators could jeopardize their ability to operate a facility or to make payments to us, thereby potentially adversely affecting us, or our financial condition and results of operations.

In the past several years, federal and state governments have significantly increased investigation and enforcement activity to detect and eliminate fraud and abuse in the Medicare and Medicaid programs. In addition, legislation and regulations have been adopted at state and federal levels, which severely restricts the ability of physicians to refer patients to entities in which they have a financial interest. It is anticipated that the trend toward increased investigation and enforcement activity in the area of fraud and abuse, as well as self-referrals, will continue in future years and could adversely affect our prospective tenants, lessees or operators and their operations, and in turn their ability to make payments to us.

Our real estate operating entities expose us to various operational risks, liabilities and claims that could adversely affect our ability to generate revenues or increase our costs and could adversely affect our financial condition and results of operations.
Our ownership of real estate operating entities exposes us to various operational risks, liabilities and claims that could increase our costs or adversely affect our ability to generate revenues, thereby reducing our profitability. These operational risks include fluctuations in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), rent control regulations, increases in the cost of food, materials, energy, labor (as a result of unionization or otherwise) or other services, national and regional economic conditions, the imposition of new or increased taxes, capital expenditure requirements, professional and general liability claims, and the availability and cost of professional and general liability insurance. Any one or a combination of these factors could result in operating deficiencies in our operating assets, which could adversely affect our financial condition and results of operations.
Our use of joint ventures may limit our flexibility with respect to such jointly owned investments and could, thereby, have a material adverse affect on our business, results of operations and financial condition and our ability to sell these joint venture interests.

We have invested in joint ventures with other persons or entities when circumstances warrant the use of these structures and may invest in additional joint ventures. Our participation in joint ventures is subject to the risks that:

we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes;

our joint venture partners could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments;

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our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as joint venture partners, which may require us to infuse our own capital into such venture(s) on behalf of the joint venture partner(s) despite other competing uses for such capital;
our joint venture partners may have competing interests in our markets that could create conflict of interest issues;
any sale or other disposition of our interest in a joint venture may require lender consents which we may not be able to obtain;
such transactions may also trigger other contractual rights held by a joint venture partner, lender or other third party depending on how the transaction is structured; and
there may be disagreements as to whether consents and/or approvals are required in connection with the consummation of a particular transaction with a joint venture partner, lender and/or other third party, or whether such transaction triggers other contractual rights held by a joint venture partner, lender and/or other third party, and in either case, those disagreements may result in litigation.
We incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, we incur additional legal, accounting and other costs that we did not incur prior to the Contribution Transactions. Although we are currently unable to estimate these costs with any degree of certainty, they may be material in amount. In addition, the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules of the SEC, and Nasdaq, have imposed various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives as well as investor relations. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
Furthermore, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our common stock could decline and we could be subject to potential delisting by Nasdaq and review by such exchange, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our stockholders could lose confidence in our financial reporting, which would harm our business and the market price of our common stock.
Some of our officers and directors currently or may in the future act as members, managers, officers, directors or employees of entities with conflicting business strategies.

Some of our officers and directors currently or may in the future act as members, managers, officers, directors or employees of entities with business strategies that may conflict with our business strategies. Michael Barnes, our Executive Chairman, is a founding partner and Co-Chief Investment Officer of Tricadia Holdings, L.P., an asset management holding company which we refer to as “Tricadia”, and Executive Chairman and a member of the board of directors of TFP. Tricadia’s subsidiaries include, and Mr. Barnes is co-chief investment officer of, companies that manage hedge funds and structured vehicles with business strategies that may compete with ours. Furthermore, Geoffrey Kauffman, our President, Chief Executive Officer and Vice Chairman, is the Chief Executive Officer of TFP and is a limited partner of Tricadia. Julia Wyatt, our Chief Financial Officer is the Chief Financial Officer of Tricadia and TFP and is also a limited partner of Tricadia. Such positions may give rise to actual or potential conflicts of interest, which may not be resolved in a manner that is in the best interests of the Company or the best interests of its stockholders.

Our duties as managing member of Operating Company may come into conflict with the duties that our directors and officers have to the Company and its stockholders.

We and TFP are the sole members of Operating Company, and we are the managing member of Operating Company. Our directors and officers have duties to us and our stockholders under applicable Maryland law in connection with our management. At the same time, we, as managing member of Operating Company, have fiduciary duties and obligations to Operating Company and its members (including TFP) under Delaware law and the Amended and Restated Limited Liability Company Agreement of Operating Company. Our duties as managing member of Operating Company may come into conflict with the duties that our directors and officers have to us and our stockholders. These conflicts may be resolved in a manner that is not in the best interests of the Company or the best interests of its stockholders.

We operate in highly competitive markets for business opportunities and personnel, which could impede our growth and negatively impact our results of operations.

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We operate in highly competitive markets for business opportunities in each of our operating segments. Many of our competitors have financial, personnel and other resources that are greater than ours and may be better able to react to market conditions. These factors may place us at a competitive disadvantage in successfully competing for future business opportunities and personnel, which could impede our growth and negatively impact our business, financial condition and results of operations.

Maintenance of our 1940 Act exemption will impose limits on our operations.

We intend to continue to conduct our operations so that we are not required to register as an investment company under the 1940 Act. Therefore, we must limit the types and nature of businesses in which we may engage and assets that we may acquire.

Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Assets that would generally be excluded from the term “investment securities,” include securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on certain exceptions from the definition of investment company set forth in the 1940 Act. Assets that generally would constitute “investment securities” include loans, debt securities, preference shares and subordinated notes issued by CLOs.

We monitor our compliance with the 1940 Act on an ongoing basis and may be compelled to take or refrain from taking actions, to acquire additional income or loss generating assets or to forego opportunities that might otherwise be beneficial or advisable, including, but not limited to selling assets that are considered to be investment securities or forgoing the sale of assets that are not investment securities, in order to ensure that we (or a subsidiary) may continue to rely on the applicable exceptions or exemptions. These limitations on our freedom of action could have a material adverse effect on our financial condition and results of operations.

If we fail to maintain an exemption, exception or other exclusion from registration as an investment company, we could, among other things, be required to substantially change the manner in which we conduct our operations either to avoid being required to register as an investment company or to register as an investment company. If we were required to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to, among other things, our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and our financial condition and results of operations may be adversely affected. If we did not register despite being required to do so, criminal and civil actions could be brought against us, our contracts would be unenforceable unless a court was to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business

Termination of the Transition Services Agreement or the Administrative Services Agreement could materially increase our costs, which could adversely affect our financial condition and results of operations.

Pursuant to the Transition Services Agreement, we pay fees to Tricadia for the services of Michael G. Barnes, our Executive Chairman, Julia Wyatt, our Chief Financial Officer, and for certain back office, administrative, information technology, insurance, legal and accounting services. A portion of the services that Tricadia provides to us are in turn provided to Tricadia by Mariner pursuant to a services agreement that may be terminated by Tricadia or Mariner without our consent. In addition, pursuant to an Administrative Services Agreement, a subsidiary of Mariner provides certain back office services to us directly for a fee. If the Transition Services Agreement is terminated, Tricadia’s services agreement with Mariner is terminated or the Administrative Services Agreement is terminated, we would be required to make alternative arrangements for the performance of these services. We may not be able to obtain these services promptly or at reasonable rates or at all, and our costs of obtaining such services could materially increase, which could adversely affect our results of operations.

Some provisions of our charter may delay, deter or prevent takeovers and business combinations that stockholders consider in their best interests.
Our charter restricts any person that owns 9.8% or more of our capital stock, other than TFP and its affiliates or another stockholder approved by applicable state insurance regulators, from voting in excess of 9.8% of our voting securities. This provision is intended to satisfy the requirements of applicable state regulators in connection with insurance laws and regulations that prohibit any person from acquiring control of a regulated insurance company without the prior approval of the insurance regulators. In addition, our charter provides for the classification of our board of directors into three classes, one of which is to be elected each year. These provisions may delay, deter or prevent takeovers and business combinations that stockholders consider in their best interests.

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Maryland takeover statutes may prevent a change of our control, which could depress our stock price.

Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter under the Maryland Control Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: one-tenth or more but less than one-third; one-third or more but less than a majority; or a majority or more of all voting power. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which such stockholder became an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities.

Our bylaws contain a provision exempting from the control share statute any and all acquisitions by any person of our shares of stock. Our board of directors has also adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the business combination statute, provided that the business combination is first approved by the board of directors. However, our board of directors may amend or eliminate this provision in our bylaws regarding the control share statute or amend or repeal this resolution regarding the business combination statute. If our board takes such action in the future, the control share and business combination statutes may prevent or discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Under our charter, as long as TFP owns more than 50% of our then-outstanding voting stock, it will be able to take action by written consent, without prior notice to and without a vote of other stockholders.
Until the date on which TFP, its affiliates and any person who is an express assignee or designee of TFP cease to own, in the aggregate, more than 50% of our then-outstanding voting stock, TFP may take any action required or permitted to be taken at any annual or special meeting of stockholders by written consent, without prior notice, and without a vote, if a consent or consents in writing setting forth the action so taken are signed by holders of the minimum number of votes necessary to authorize or take such action at a meeting at which all outstanding shares of common stock entitled to vote on the action were present and voted. As of the December 31, 2013, TFP and its affiliates owned common stock representing approximately 79.6% of the combined voting power of our stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Administrative Offices

Our principal executive offices are located at 780 Third Avenue, 21st Floor, New York, New York 10017. The table below outlines the Company’s leased properties as of December 31, 2013, all of which are used as administrative offices. All facilities are considered adequate and suitable for the Company’s current level of operations. We do not own any properties for administrative purposes.


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Leased Properties
Location
Square Footage
Purpose or Segment Used In
New York, NY
3,064
Corporate Offices
Philadelphia, PA
17,269
Insurance
Florham Park, NJ
31,075
Insurance Services
Stamford, CT
2,140
Specialty Finance
New York, NY
2,750
Asset Management
New York, NY
1,532
Real Estate

On January 31, 2014, the Company completed a transaction resulting in our 67.5% ownership interest in Luxury Mortgage Corp., which operates out of leased office space of 22,450 square feet located in Stamford, CT.

Investment Properties

The Company’s real estate segment also owns the properties below.

Portfolio
Location
Square Feet
Senior Apartment Units
Independent Living Units
Assisted Living Units
Total Units
Calamar
Wheatfield, NY
96,819
110
110
Calamar
Wheatfield, NY
115,260
92
92
 
 
 
 
 
 
 
Terraces
Baldwinsville, NY
34,535
51*
51
Terraces
Geneva, NY
38,334
48*
48
 
 
 
 
 
 
 
Heritage
Weatherly, PA
48,829
69*
69
Heritage
Sewell, NJ
168,000
104
98
202
 
 
 
 
 
 
 
Greenfield
Fredericksburg, VA
16,322
27
27
Greenfield
Stafford, VA
29,436
44*
44
Greenfield
Berryville, VA
28,708
48*
48
*Certain units are permitted to be used as memory care/Alzheimer’s units.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.


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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class A common stock has traded on the NASDAQ Capital Market under the ticker symbol “TIPT” since August 9, 2013. Prior to that, our common stock was quoted on the OTCQX market under the ticker symbol “CVTR” since January 31, 2011.

Holders

As of March 17, 2014, there were 114 Class A common stockholders of record.

Dividends and Distribution Policy

The following table sets forth the high and low sales prices per share of our Class A common stock and the distributions declared and paid per share on our Class A common stock for the periods indicated.

2013
High Price
Low Price
Dividends
First Quarter
$
7.60

$
5.80

$
0.135

Second Quarter
$
7.25

$
5.90

$
0.020

Third Quarter
$
10.00

$
5.00

$
0.020

Fourth Quarter
$
8.00

$
6.71

$

 
 
 
 
2012
High Price
Low Price
Dividends
First Quarter
$
7.10

$
6.08

$

Second Quarter
$
7.50

$
6.60

$
0.270

Third Quarter
$
7.49

$
5.38

$
0.135

Fourth Quarter
$
7.50

$
6.60

$
0.135

 
 
 
 

Item 6. Selected Financial Data

The following table sets forth certain selected historical financial information for the periods and as of the dates presented and should be read in conjunction with the Company’s accompanying consolidated financial statements and the related notes thereto referenced in Item 8 of this report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report. All amounts are in thousands, except for per share amounts.

 
 
Year ended December 31,
 
 
2013
 
2012
Selected Income Statement Data:
 
 
 
 
Revenues:
 
 
 
 
Net realized and unrealized gains on investments
 
$
5,388

 
$
12,814

Investment income
 
95,519

 
57,395

Total revenue
 
$
100,907

 
$
70,209

Expenses:
 
 
 
 
Other expenses
 
99,077

 
67,288

Total expense
 
$
99,077

 
$
67,288

Income before taxes from Continuing Operations and results of Consolidated CLOs
 
$
1,830

 
$
2,921

Results of consolidated CLOs:
 
 
 
 

18



Income attributable to consolidated CLOs
 
$
52,687

 
$
71,412

Expenses attributable to consolidated CLOs
 
48,268

 
37,883

Net income attributable to consolidated CLOs
 
$
4,419

 
$
33,529

Income before taxes from continuing operations
 
$
6,249

 
$
36,450

Less: provision for income taxes
 
6,941


(321
)
Discontinued operations, net
 
17,110

 
2,882

Net Income
 
$
16,418

 
$
39,653

Less: net income attributable to non-controlling interest & VIE subordinated noteholders
 
7,573

 
30,924

Net income available to Class A common stockholders
 
$
8,845

 
$
8,729

 
 
 
 
 
Per Share Data:
 
 
 
 
Net income per Class A common share:
 
 
 
 
Basic
 
$
0.86


$
0.85

Diluted
 
$
0.86


$
0.85

Weighted average Class A common shares outstanding:
 
 
 
 
Basic
 
10,250,438

 
10,286,412

Diluted
 
10,250,438

 
10,286,412

 
 
 
 
 
Selected Financial Data (1):
 
 
 
 
Operating Company:
 
 
 
 
GAAP net assets of Operating Company
 
$
454,935

 
$
419,909

Economic net assets of Operating Company (before dilutive adjustments)
 
432,635

 
390,105

Economic Net Income of Operating Company
 
34,744

 
36,325

Units outstanding of Operating Company
 
41,525,267

 
41,048,789

Economic Operating Company book value per share
 
$
10.42

 
$
9.50

Tiptree Financial Inc.:
 
 
 
 
Economic Net Income of Tiptree
 
$
9,029

 
$
9,049

Economic Tiptree Class A book value per share
 
$
10.42

 
$
9.50


(1) Financial data presented within this selected financial data section for Tiptree and Operating Company include non-GAAP measures which Tiptree uses to evaluate the performance of its core business. For further discussion and a comparison and reconciliation of these measures to corresponding GAAP measures, see Item 7 of this report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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,

19



asset management, and
real estate.

Our insurance operations are conducted through PFG, of which we own 93.58%, with the remainder owned by management and employees of PFG. PFG develops and administers private placement insurance and annuities for high net worth and institutional clients. As of December 31, 2013, PFAS, a subsidiary of PFG, administered $35 billion of company-owned and bank-owned life insurance and the total separate account assets for policies written by PFG was $4.6 billion.

Our specialty finance operations include MFCA, a wholly-owned business which provides financing for tax-exempt organizations, a 62% ownership interest in Siena, a recently formed asset-based lender that offers asset-based loans to small and mid-sized U.S. businesses, and a debt interest and a 67.5% ownership interest in Luxury, a residential mortgage lender that originates conforming prime jumbo and super jumbo mortgages for sale to institutional investors. As of December 31, 2013, MFCA's investments had an aggregate principal balance of $37.1 million and a fair value of $31.0 million. As of December 31, 2013, Siena has funded 11 loans with an aggregate principal balance of $16.5 million of aggregate principal amount outstanding.

Our asset management operations include TAMCO, an SEC-registered investment adviser that, among other managerial and advisory entities, wholly-owns Telos Asset Management LLC (“Telos”), an asset manager focused on investing in corporate credit through managed accounts and structured investment vehicles, such as CLOs. As of December 31, 2013, Telos had approximately $1.5 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 December 31, 2013, the underlying tax-exempt bonds held by NPPF I had an aggregate principal balance of $213.0 million.

Our real estate operations include Care LLC, a wholly-owned real estate investment company that invests in senior housing properties, and interests in the Star Asia Entities, which are all Tokyo based real estate holding companies formed to invest predominately in Asian properties and real estate related debt instruments. As of December 31, 2013, Care LLC had total assets of $160.7 million.

Tiptree intends to continue to invest in its existing businesses and to opportunistically acquire majority control of new businesses, both in existing 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, cash flow positive businesses.

For additional information about our operating segments, see Note 4 to the financial statements.

Recent Developments

The year ended December 31, 2013 was a transformative period for Tiptree. The following highlights certain developments during this period, which are described in more detail elsewhere in this report.

Contribution Transactions. We completed a transaction we refer to as the Contribution Transactions, creating Tiptree's current capital and ownership structure on July 1, 2013. TFP and Care Inc. each contributed substantially all of their assets to Operating Company in exchange for ownership in Operating Company. We operate our business through Operating Company, which directly or indirectly owns all of our assets. Operating Company is owned 25% by Tiptree and 75% by TFP. Beginning on July 1, 2014, partnership units of TFP are redeemable for Class A common stock of Tiptree. See Notes 1 and 15 to the financial statements for further details.

Acquisitions and dispositions.

Care Inc. sold its membership interests in an entity that owned fourteen senior living facilities, which we refer to as the Bickford Portfolio, on June 28, 2013 for cash of $44 million and a net gain of approximately $15.5 million.
We purchased an aggregate of approximately 66.7% of the voting equity interests of Siena for an aggregate of $10 million in two stages on April 2013 and July 2013. A scheduled capital contribution by another investor in Siena diluted our interest in Siena to approximately 62% in October 2013.
We made a $5 million term loan to Luxury in April 2013 and in January 2014 completed a strategic transaction resulting in Tiptree owning 67.5% of the equity of Luxury.


20



Asset Management Activity. Telos 3 and Telos 4 became effective on June 5, 2013 and September 23, 2013, respectively. In anticipation of issuing CLO notes for another CLO, Telos entered into a $100 million warehouse credit agreement on August 6, 2013, which was increased to $140 million on September 25, 2013.

Debt Financing. Operating Company borrowed $50 million under a credit agreement entered into with Fortress Credit Corp. (“Fortress”) on September 18, 2013. The Credit Agreement includes an option for Operating Company to borrow up to an additional $125 million, subject to satisfaction of certain customary conditions.

Equity Activity. Our Class A common stock began trading on the Nasdaq Capital Market under the symbol “TIPT” on August 9, 2013. A registration statement facilitating public resales of approximately 7.2 million shares of our Class A common stock owned by TFP prior to the Contribution Transactions became effective on October 18, 2013.

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 revenues were generated from administrative fees from our servicing of COLI/BOLI policies. We expect the amount of administrative fees to remain relatively constant in 2014 unless significant policy holders terminate policies, in which case our revenues could decline.

After several quiet years in the CLO market, there was increased issuance of CLOs in 2013, which led to new entrants and greater supply. We issued two new CLOs in 2013 and initiated a warehouse facility for a third CLO. More recently, uncertainties regarding regulatory guidance in the banking sector resulted in some institutional investors curtailing purchases of CLO liabilities. This 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, could lead to lower returns on the subordinated notes on new CLOs. It is uncertain whether we will continue to sponsor the same volume of CLOs as in 2013.

The decrease in realized and unrealized gains we experienced from 2012 to 2013 was primarily driven by the assets of our tax-exempt business. These assets, 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 value and unrealized gains of the tax-exempt assets. Because interest rates remained relatively flat in 2013, the tax-exempt portfolio value remained flat.

Our expenses increased significantly in 2013 primarily from additional payroll expense associated with our acquisition of the administrative services business in our insurance and insurance services segment. We expect to incur additional expenses to relocate the administrative servicing business from New Jersey to Pennsylvania in 2014, although we expect that relocation to improve the profitability of our insurance servicing operations over time. Our operating expenses also increased in 2013 as a result of operating as a newly public company.

As a result of the $50 million borrowed under the credit agreement with Fortress and the $44 million of proceeds from the sale of the Bickford Portfolio in our real estate segment during 2013, we maintained a relatively larger cash balance. In 2014, we intend to deploy a significant amount of our cash balance to purchase assets, sponsor CLOs, support our existing business and invest in new products. To the extent we are unable to deploy cash effectively, we could experience lower returns than we would expect from the deployment of cash into higher returning assets.

As a result of the Contribution Transactions, the assets of Operating Company are held by an entity taxable as a C corporation, rather than flow through entities for tax purposes, resulting in a one-time increase in our provision for income taxes in 2013.

Our asset based lending business was acquired in 2013 and continues to ramp up its operations. This start-up business was a negative contributor to net income in 2013 and we intend to reverse this trend as the company achieves profitable scale in 2014 although we cannot assure you that will be the case.

The mortgage market in which we operate is sensitive to interest rates and expected changes in interest rates. For example, in the late summer and fall of 2013, the volume of mortgages dropped sharply because of changes and expected changes in interest rates. In addition, it is unclear what impact the Consumer Finance Protection Bureau's new mortgage rules on qualified mortgages may have on volume and profitability in 2014.

Tiptree Selected Consolidated Financial Data


21



The results presented in the table below are the consolidated results of Tiptree, which include its majority-owned subsidiaries, PFG, Care, MFCA, Siena, and TAMCO, as well as principal investments. Due to acquisitions and dispositions 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 an acquisition from that point forward.

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 collateral manager of the CLOS satisfies 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. As of December 31, 2013 the fair value of Tiptree’s direct investments in the subordinated notes of the CLOs is $61.1 million.
Income and expenses attributable to consolidated CLOs reflect all of the components of 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 our 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.”

Summary Consolidated Statements of Operations (in thousands)


22



 
 
Year ended December 31,
 
2013 vs 2012
 
 
2013
 
2012
 
$ Variance
% Variance
Revenues:
 
 
 
 
 
 
 
Net realized and unrealized gains
 
$
5,388

 
$
12,814

 
$
(7,426
)
(58.0
)%
Interest income
 
16,477

 
9,938

 
6,539

65.8

Separate account fees
 
22,248

 
19,875

 
2,373

11.9

Administrative service fees
 
49,489

 
22,995

 
26,494

115.2

Rental revenue
 
5,760

 
1,717

 
4,043

235.5

Other income
 
1,545

 
2,870

 
(1,325
)
(46.2
)
Total revenue
 
$
100,907

 
$
70,209

 
$
30,698

43.7
 %
Expenses:
 
 
 
 
 
 
 
Interest expense
 
$
17,517

 
$
8,096

 
$
9,421

116.4
 %
Payroll expense
 
35,552

 
21,437

 
14,115

65.8

Professional fees
 
8,555

 
11,873

 
(3,318
)
(27.9
)
Change in future policy benefits
 
4,710

 
4,040

 
670

16.6

Mortality expenses
 
10,476

 
9,924

 
552

5.6

Commission expense
 
2,344

 
1,960

 
384

19.6

Depreciation and amortization expense
 
4,467

 
2,238

 
2,229

99.6

Other expenses
 
15,456

 
7,720

 
7,736

100.2

Total expenses
 
$
99,077

 
$
67,288

 
$
31,789

47.2
 %
Net income before taxes and income attributable to consolidated CLOs from continuing operations
 
$
1,830

 
$
2,921

 
$
(1,091
)
(37.4
)%
Results of consolidated CLOs:
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
 
$
52,687

 
$
71,412

 
$
(18,725
)
(26.2
)%
Expenses attributable to the consolidated CLOs
 
48,268

 
37,883

 
10,385

27.4

Net income attributable to consolidated CLOs
 
$
4,419

 
$
33,529

 
$
(29,110
)
(86.8
)
Income before taxes from continuing operations
 
$
6,249

 
$
36,450

 
$
(30,201
)
(82.9
)
Less provision for income taxes
 
6,941

 
(321
)
 
7,262

NM

(Loss) income from continuing operations
 
$
(692
)
 
$
36,771

 
$
(37,463
)
(101.9
)%
Discontinued operations:
 
 
 
 
 


Gain on sale of Bickford portfolio, net
 
$
15,463

 
$

 
$
15,463

100.0

Income from discontinued operations, net
 
1,647

 
2,882

 
(1,235
)
(42.9
)
Discontinued operations, net
 
$
17,110

 
$
2,882

 
$
14,228

493.7

Net income
 
$
16,418

 
$
39,653

 
$
(23,235
)
(58.6
)%
 
 
 
 
 
 
 
 
Less net income attributable to noncontrolling interest
 
25,617

 
26,883

 
(1,266
)
(4.7
)%
Less net (loss) income attributable to VIE subordinated noteholders
 
(18,044
)
 
4,041

 
(22,085
)
NM

Net income available to Class A common stockholders
 
$
8,845

 
$
8,729

 
$
116

1.3
 %
    
NM indicates the metric is not meaningful.

23




Statements of Operations Information - Year Ended December 31, 2013 compared to 2012
Total revenue
Total revenue for the year ended December 31, 2013 was $100.9 million, compared to $70.2 million for 2012, an increase of $30.7 million, or 43.7%. This increase was primarily due to an increase in administrative service fees of $26.5 million, interest income of $6.5 million, and rental revenue of $4.0 million, partially offset by a decrease in realized and unrealized gains of $7.4 million.

Net realized and unrealized gains and losses
Realized and unrealized gains decreased by $7.4 million, or 58%, for the year ended December 31, 2013 over 2012 levels. The decrease from 2012 to 2013 was primarily driven by the assets of our tax-exempt business.  These assets, 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 resulted in $10.1 million of unrealized gains in 2012, whereas interest rates remained relatively flat in 2013 therefore the tax-exempt portfolio value remained relatively flat with $0.8 million of losses in 2013. The lower realized and unrealized gains in 2013 were partially offset by a $3.9 million change in unrealized gain related to interest rate swaps and increased value in loans in the Telos 5 warehouse credit facility and a $0.9 million net increase in the investment in the Star Asia portfolio due to improvement in the Japanese commercial real estate market in 2013.
Interest income
Interest income on loan and security portfolios increased $6.5 million, or 65.8%, for the year ended December 31, 2013 compared to the prior year, primarily due to $5.2 million of interest income from loans held by warehouse credit agreements in 2013 in connection with the formation of Telos 3, Telos 4 and Telos 5 and additional interest income of $1.5 million primarily from real estate operations in 2013.

Separate account fees

Separate account fees increased $2.4 million, or 11.9%, for the year ended December 31, 2013 compared to the prior year. This increase is the result of better performance of, and an increases in, separate account assets under administration within PFG’s life insurance portfolio.

Administrative service fees

Administrative service fees increased $26.5 million, or 115.2%, for the year ended December 31, 2013 compared to the prior year. This was primarily due to a full year of administrative service fees from the acquisition of administrative services rights from The Hartford Financial Services Group, Inc. (“The Hartford”) by PFG in July 2012 (the “PFAS Transaction”).

Rental revenue
Rental revenues for 2013 from Care LLC were $5.8 million, an increase over the comparable period in 2012, due to Care LLC’s acquisition of additional properties, including Calamar, Heritage and the Premier properties in 2013.
Total expenses
Total expenses for 2013 were $99.1 million compared to $67.3 million for 2012, an increase of $31.8 million, or 47.2%. The primary drivers of this increase were $9.4 million of increased interest expense, a $14.1 million increase in payroll expenses, a $2.2 million increase in depreciation and amortization expense, and a $7.7 million increase in other expenses.
Interest expense
The $9.4 million increase in interest expense is a result of increased interest expense related to the CLO warehouse credit agreements and interest expense associated with the Company’s credit facility which closed in September 2013.
Payroll expense
The $14.1 million increase in payroll expense consists of a $5.9 million increase associated with additional employees as a result of the PFAS Transaction in July 2012. The remaining $8.2 million largely is a result of a full year of payroll expense incurred in 2013 at TAMCO, compared to 2012, as TAMCO was acquired June 30, 2012.

24



Depreciation and amortization expense
The $2.2 million increase in depreciation and amortization expense relates to an increase in amortization expense due to the PFAS Transaction in July 2012 and the Care properties acquired in 2013.
Other expenses
The $7.7 million increase in other expenses primarily consists of $3.7 million related to the PFAS Transaction and $1.7 million related to Care property acquisitions.
Income attributable to consolidated CLOs
Income attributable to consolidated CLOs was $52.7 million in 2013 compared to $71.4 million in 2012, a decrease of $18.7 million, or 26.2%. This decrease resulted from an increase in net realized and unrealized losses in the CLOs of $33 million compared to realized and unrealized gains of $12.8 million in 2012, partially offset by an increase of $15.9 million in additional interest income attributable to the addition of Telos 3 and Telos 4 in 2013.
Expenses attributable to the consolidated CLOs
The $10.4 million increase in expenses attributable to the consolidated CLOs consists of interest payments made by Telos 3 and Telos 4 in 2013.
Provision for income taxes

The provision for income taxes increased $7.3 million in 2013 from an income tax benefit of $0.3 million in the prior year to an income tax expense of $6.9 million in the current year. The effective tax rate on income available to common stockholders for the year ended December 31, 2013 was approximately 15.1%. Prior periods do not have comparable effective tax rates as the Company, as a REIT, was not subject to income taxes.

Discontinued operations, net

Discontinued operations, net increased $14.2 million, or 493.7%, for the year ended December 31, 2013 compared to the prior year. This is comprised of the gain on sale of the Bickford portfolio, net of $15.5 million recognized in 2013 along with a decline of $1.2 million, or 42.9%, of income related to Bickford in 2013. For more detail on the Bickford sale see Note 22—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 income attributable to the noncontrolling interest was relatively flat in 2013 compared to 2012.
Net (loss) income attributable to VIE subordinated noteholders
Because 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 suffers 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 2013 was $18.0 million, compared to net income of $4.0 million for 2012, a decrease of $22.1 million. This decrease was primarily due to losses of $20.8 million in the performance of Telos 1 in which Tiptree has a small ownership, partially offset by gains in the performance of Telos 3 and Telos 4 of $3.1 million.
Net income available to Class A common stockholders
Net income available to Class A common stockholders for 2013 was $8.8 million compared to $8.7 million for 2012, a increase of $0.1 million, or 1.3%. This increase was primarily due to the $29.1 million decrease representing the net impact of the consolidated CLOs on our net income available to Class A common stockholders offset in part by increases in revenue from administrative service fees of $26.5 million and the gain on the sale of the Bickford portfolio of $15.5 million.

25



Balance Sheet Information - Year Ended December 31, 2013 compared to December 31, 2012
Tiptree’s total assets increased $1.3 billion, or 24.3%, at December 31, 2013 compared to year end December 31, 2012. This increase was driven primarily by an increase in separate account assets of $590.0 million from PFG as well as an increase of $563.0 million due to the increased assets of the consolidated CLOs related to the addition of Telos 3 and Telos 4 in 2013.
Total liabilities increased over the prior year end primarily due to an increase in separate account liabilities of $590.0 million and an increase in liabilities of consolidated CLOs of $555.3 million (consisting primarily of notes payable from Telos 3 and Telos 4). Total stockholders’ equity of Tiptree increased as of December 31, 2013 to $565.9 million, compared to $535.6 million at December 31, 2012, primarily due to an increase in retained earnings.

Segment Reporting
Tiptree has four reportable operating segments: insurance and insurance services, specialty finance, asset management and real estate (see Note 4 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.


26



 
Year ended December 31, 2013
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate eliminations and other
 
Totals
Fee income
$
71,737

(1) 
$


$

 
$

 
$


$
71,737

Rental revenue






11,680

 
(5,920
)

5,760

Interest income
4,946


24,629




2,316

 
(15,414
)

16,477

Other revenue
89


2,783


350

(2) 
19,834

 
(16,123
)

6,933

Intersegment revenues


81


16,215

(2) 

 
(16,296
)


Total revenue
$
76,772


$
27,493


$
16,565


$
33,830

 
$
(53,753
)

$
100,907

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$
12,430


$
3,425


$


$
4,452

 
$
(2,790
)

$
17,517

Payroll expense
18,820


1,797


12,228


2,707

 


35,552

Professional fee expense
1,858


3,463


1,277


1,957

 


8,555

Other expense
29,663


2,641


1,119


9,373

 
(5,343
)

37,453

Total expense
62,771


11,326


14,624


18,489

 
(8,133
)

99,077

Segment profit/(loss)
$
14,001


$
16,167


$
1,941


$
15,341

 
$
(45,620
)

$
1,830

Net income attributable to consolidated CLOs
 
 
 
 
 
 
 
 
 
 
4,419

Less: non-controlling interest and net income attributable to the VIE subordinated noteholders
 
 
 
 
 
 
 
 
 
 
$
7,573

Discontinued operations
 
 
 
 
 
 
 
 
 
 
17,110

Income taxes
 
 
 
 
 
 
 
 
 
 
6,941

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
8,845

Segment assets
$
4,949,262


$
385,987


$
7,896


$
170,683

 
$
1,366,620


$
6,880,448

(1) Includes separate account and administrative service fees
(2) Includes management fees


27



 
Year ended December 31, 2012
 
Insurance
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate eliminations and other
 
Totals
Fee income
$
42,870

(1) 
$


$

 
$

 
$


$
42,870

Rental revenue





 
13,769

 
(12,052
)

1,717

Interest income
4,498


20,846



 
802

 
(16,208
)

9,938

Other revenue
542


9,945


1,184

(2) 
3,860

 
153


15,684

Intersegment revenues


181


16,243

(2) 

 
(16,424
)


Total revenue
$
47,910


$
30,972


$
17,427


$
18,431

 
$
(44,531
)

$
70,209

 











 





Interest expense
$
6,083


$
1,458


$


$
6,310

 
$
(5,755
)

$
8,096

Payroll expense
12,477




7,341


1,619

 


21,437

Professional fee expense
2,800


3,430


3,062


2,581

 


11,873

Other expense
23,202


2,834




6,447

 
(6,601
)

25,882

Total expense
44,562


7,722


10,403


16,957

 
(12,356
)

67,288

Segment profit/(loss)
$
3,348


$
23,250


$
7,024


$
1,474

 
$
(32,175
)

$
2,921

Net income attributable to consolidated CLOs
 
 
 
 
 
 
 
 
 
 
33,529

Less: non-controlling interest and net income attributable to the VIE subordinated noteholders
 
 
 
 
 
 
 
 
 
 
30,924

Discontinued operations
 
 
 
 
 
 
 
 
 
 
2,882

Income taxes
 
 
 
 
 
 
 
 
 
 
(321
)
Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
8,729

Segment assets
$
4,354,945


$
139,471


$
4,242


$
191,693

 
$
843,451


$
5,533,802

(1) Includes separate account and administrative service fees
(2) Includes management fees
Segment Results - Year ended December 31, 2013 compared to 2012
Insurance and Insurance Services Operations
Total revenues for insurance operations were $76.8 million for fiscal 2013, compared to $47.9 million for 2012, an increase of $28.9 million, or 60.3%. This increase was primarily the result of a full year of administrative service fees from the PFAS Transaction in July 2012.
Total expenses for insurance operations for fiscal 2013 were $62.8 million, compared to $44.6 million for 2012, an increase of $18.2 million, or 40.8%. This increase was primarily the increase in other expense of $6.5 million which was largely the result of a full year of expenses associated with the PFAS Transaction in 2013 as compared to 2012. Also included in the increase in total expenses was the $6.3 million increase in interest expense on the note used to finance the PFAS transaction.
Total operating profit for insurance operations for fiscal 2013 was $14.0 million, compared to $3.3 million for 2012, an increase of $10.7 million, or 324.2%. This increase was primarily the result of the additional profit from the PFAS Transaction, which offset an increase in related expenses.
Specialty Finance Operations
Total revenues for specialty finance operations for fiscal 2013 were $27.5 million, compared to $31.0 million for 2012, a decrease of $3.5 million, or 11.2%. The decline was primarily attributable to a decline in unrealized gains of $6.2 million due to declines

28



in market values in 2013, primarily related to Telos 1, Telos 2 and MFCA. This decline was partially offset by an increase in interest income of $3.8 million due to the revenue from the additional positions in Telos 3, Telos 4 and Telos 5, related to the warehouses.
Total expenses for specialty finance operations for fiscal 2013 were $11.3 million, compared to $7.7 million for 2012, an increase of $3.6 million, or 46.7%. The increase was primarily the result of the inclusion of Siena in results for 2013.
Total operating profit for specialty finance operations for fiscal 2013 was $16.2 million, compared to a profit of $23.3 million for 2012, a decrease of $7.1 million, or 30.5%. This decrease was driven primarily by the decline in the underlying value of our investments as well as the inclusion of Siena as a start-up entity in our results.
Asset Management Operations
Total revenues for asset management were $16.6 million for fiscal 2013, relatively flat when compared to $17.4 million for 2012. The lower revenue in 2013 was primarily attributable to lower management fees received from third parties offset in part by the addition of Telos 3 and Telos 4 and the associated management fees.
Total expenses for asset management were $14.6 million for fiscal 2013 compared to $10.4 million for 2012. This increase of $4.2 million was primarily attributable to the inclusion of payroll expense resulting from the acquisition of TAMCO in June 2012 for a full year in 2013 compared to six months in 2012.
Total operating profit for asset management was $1.9 million for fiscal 2013 compared to $7.0 million in 2012. This was primarily attributable to the aforementioned increase in payroll expense.
Real Estate Operations
Total revenues for real estate operations for fiscal 2013 were $33.8 million, compared to $18.4 million for 2012, an increase of $15.4 million, or 83.7%. This increase was primarily due to the gain on sale of the Bickford Portfolio.
Total expenses for real estate operations for fiscal 2013 were $18.5 million, compared to $17.0 million for 2012. This increase was primarily due to the addition of the Calamar and Heritage joint ventures in 2013.
Total operating profit for real estate operations for fiscal 2013 was $15.3 million, compared to a profit of $1.5 million in 2012, an increase of $13.8 million, or 920%. The gain on sale of the Bickford Portfolio was the primary driver of this increase.

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 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):

29



 
Year Ended December 31,
 
 
2013
 
2012
 
Revenues:
 
 
 
 
Interest income
$
510

 
$
527

 
Dividend/distribution income
22,844

 
20,436

 
Realized gains (losses)
(1,024
)
 
414

 
Unrealized gains
20,572

 
27,355

 
Management fee income
16,165

 
6,974

 
Total revenues
59,067

 
55,706

 
Expenses:
 
 
 
 
Compensation expense
12,480

 
6,568

 
Distribution expense (convertible preferred)
1,747

 
2,789

 
Interest expense
3,261


1,276

 
Professional fees and other
6,835


4,359

 
Total expense
24,323

 
14,992

 
Economic Net Income (loss) before management fee expenses and waivers and incentive allocation
34,744

 
40,714

 
Less: Management fee expenses (1)

 
1,996

 
Less: Management fee expenses waived (1)

 
(1,066
)
 
Economic Net Income before incentive allocation
34,744

 
39,784

 
Less: Incentive allocation (1)

 
3,459

 
Economic Net Income of Operating Company
34,744


36,325

 
Less: Economic net income attributable to TFP
25,911


27,276

 
Economic Net Income of Tiptree before tax provision
8,833


9,049

 
Less: Tax provision attributable to Tiptree
(197
)


 
Economic Net Income of Tiptree
$
9,030

 
$
9,049

 
(1) Following TFP’s acquisition of TAMCO in June 2012 described in Note 1 to the financial statements, TAMCO no longer pays management or incentive fees.
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 years ended December 31, 2013 and 2012 (in thousands):

30



 
Year Ended December 31,
 
2013
 
2012
GAAP Net Income of Tiptree
$
8,845

 
$
8,729

Plus: Tax provision attributable to Tiptree
(197
)
 

Plus: Portion of NCI held by TFP
26,164

 
26,423

GAAP net income of Operating Company
34,812

 
35,152

Adjustments:
 
 
 
Adjustments to results from real estate operations (1)
(1,929
)
 
2,937

Effect of change in majority ownership of subsidiaries (2)
(1,811
)
 
3,018

Fair value adjustments to carrying value (3)
(3,135
)
 
5,813

Reversal of VIEs net losses (gains) attributable to TFI (4)
7,380

 
(3,752
)
Reversal of TAMCO net gains for periods prior to acquisition of TAMCO (5)

 
(2,760
)
TFP convertible preferred reclass of distributions to expense (6)
(1,747
)
 
(2,790
)
Foreign exchange reserve (7)
1,174

 
(1,174
)
Amortization of start-up expenses (8)

 
(119
)
Economic Net Income of Operating Company
34,744

 
36,325

Less: Economic Net Income attributable to TFP
25,911

 
27,276

Economic Net Income of Tiptree before tax provision
8,833

 
9,049

Less: Tax provision attributable to Tiptree
(197
)
 

Economic Net Income of Tiptree
$
9,030

 
$
9,049

(1)
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.
(2)
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, the effect of Tiptree’s increased ownership of PFG due to the accretion of preferred shares, and the increase in ownership of Siena.
(3)
Adjustment is to account at fair value the CLO subordinated notes held by Tiptree and PFG’s available-for-sale securities. Fair values are obtained from independent third party pricing sources.
(4)
Reversal of VIEs net losses/(gains) attributable to Tiptree (see reconciliation table below in thousands):

31



 
 
Year Ended December 31, 2013

 
 
Tiptree pro rata portion of Net Income
 
Net Income (net of 1% NCI)
 
Tiptree’s ownership %
Telos 1
 
$
(1,588
)
 
$
(22,341
)
 
7.11%
Telos 2
 
(7,934
)
 
(8,312
)
 
95.45%
Telos 3
 
549

 
2,988

 
18.38%
Telos 4
 
1,593

 
2,241

 
71.08%
Total
 
$
(7,380
)
 
$
(25,424
)
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2012

 
 
Tiptree pro rata portion of Net Income
 
Net Income (net of 1% NCI)
 
Tiptree’s ownership %
Telos 1
 
$
297

 
$
4,173

 
7.11%
Telos 2
 
3,455

 
3,620

 
95.45%
Total
 
$
3,752

 
$
7,793

 
 


(5)
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 are reversing the effect of this recasting of financial information for prior periods.
(6)
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.
(7)
Reflects the timing difference on the recognition of yen exposure GAAP versus ENI.
(8)
Amortization of expenses associated with the start-up of Tiptree in 2007. The amortization period ended on June 30, 2012.
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 December 31, 2013 and 2012 (in thousands except share data):

32



 
Year Ended December 31,
Economic Book Value
2013
 
2012
GAAP TFI Total Capital
$
565,856

 
$
535,588

Less: Non-controlling Interest in TFI
361,354

 
324,595

Less: Retained Earnings of consolidated TAMCO
84,591

 
102,635

GAAP Net Assets to Tiptree Class A Stockholders
119,911

 
108,358

Less net assets held directly at Tiptree
4,259

 
4,089

Plus portion of NCI held by TFP
339,283

 
315,640

GAAP Net Assets of Operating Company
454,935

 
419,909

Reversal of consolidation of TAMCO (including VIEs)(1)
(144,817
)
 
(120,513
)
Fair values of CLOs (2)
61,145

 
30,737

Value of TAMCO (3)
57,661

 
56,353

Adjustments to results from real estate operations (4)
3,711

 
5,603

TFP convertible preferred reclass of distributions to expense (5)

 
(810
)
Foreign exchange reserve (6)

 
(1,174
)
Total Adjustments
(22,300
)
 
(29,804
)
Economic Operating Company Net Assets
$
432,635

 
$
390,105

Units outstanding (7)
41,525

 
41,049

Economic Tiptree Book Value Per Class A Share
$
10.42


$
9.50


(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. Adjustment is reversal of consolidation of TAMCO and VIEs.
(2)
Adjustment is to include 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 transactions expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustment for unconsolidated partnerships and joint ventures.

(5)
Convertible preferred distribution was reclassified as expense for purposes of ENI. This adjustment conforms the reclassification for EBV purposes.
(6)
A reserve was established for EBV purposes as of December 31, 2012 reflecting a timing difference relative to GAAP recognition of yen foreign exchange. Such reserve was subsequently reversed.
(7)
Assumes full redemption of Operating Company units for Class A common stock. Operating Company is owned approximately 25% by Tiptree and approximately 75% by TFP. Tiptree’s ownership is equal to the number of shares of Class A common stock and pursuant to Operating Company’s limited liability agreement this ratio will remain 1:1. TFP’s

33



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 11,016 partnership units outstanding as of December 31, 2013 and 2012, respectively. The basic EBV per partnership unit was $29.16 and $26.58 as of December 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

Tiptree is a holding company and conducts all of its operations through Operating Company. Dividends and distributions from our subsidiaries to Operating Company and investments 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 December 31, 2013, Tiptree had unrestricted cash of $120.6 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 maintained a relatively larger cash balance. In 2014 we intend to deploy a significant amount of our cash balance to purchase assets, sponsor CLOs, support our existing business and invest in new products. Tiptree 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 rating agencies to maintain or improve current ratings. For example, Telos will require additional capital in order to form future CLOs, and PFG may require additional capital to meet regulatory capital requirements.
Consolidated Comparison of Cash Flows

Summary Consolidated Statements of Cash Flows
(in thousands)
 
Year ended December 31,
 
2013
 
2012
Net cash provided by/(used in):
 
 
 
Operating activities
$
(18,386
)

$
36,686

Investing activities
(689,182
)
 
(144,214
)
Financing activities
739,562


99,082

Net increase in cash and cash equivalents
$
31,994

 
$
(8,446
)
Operating Activities
Cash used in operating activities for the period ended December 31, 2013 was $18.4 million, compared to $36.7 million cash provided for the comparable period in 2012, a decrease of $55.1 million. Cash used in operating activities from VIEs for the year ended December 31, 2013 was $19.5 million, an increase of $13.6 million from cash used of $5.9 million for the year ended December 31, 2012. Also included in cash used in operating activities was $15.5 million from the net realized gain on sale of properties related to the Bickford sale. Excluding the activity attributable to the VIEs and this one time gain related to Bickford, cash provided by operating activities declined $26.0 million. The decrease was largely attributable to the decline in net income.
Investing Activities
Cash used in investing activities for the period ended December 31, 2013 was $689.2 million, compared to $144.2 million for the comparable period in 2012, an increase of $545.0 million. Cash used in investing activities from VIEs was $537.9 million for the year ended December 31, 2013, an increase of $534.7 million from cash used of $3.2 million for the year

34



ended December 31, 2012. This increase was primarily related to the formation of Telos 3 and Telos 4 in 2013. Excluding the activity attributable to the VIEs, cash used in investing activities increased $10.3 million. This increase was largely attributable to the increase in the purchases of trading securities and loans carried at fair value of $166.2 million offset against the decline in cash used in acquisitions of $109.7 million compared to the prior year and proceeds from sales of real estate of $44.0 million received in 2013. The increase in the purchases of trading securities and loans relate to the Telos 5 warehouse activity during the year and the decline in cash used in acquisitions relate to the PFAS Transaction in 2012.
Financing Activities
Cash provided by financing activities for the year ended December 31, 2013 was $739.6 million, compared to $99.1 million in cash provided for the comparable period in 2012, an increase of $640.5 million. Cash provided by financing activities for VIEs was $545.0 million for the year ended December 31, 2013 and cash used in financing activities for VIEs was $3.9 million for the comparable period in 2012. Excluding the activity attributable to VIEs, cash provided by financing activities increased $91.6 million. The increase was largely attributable to the increase in the proceeds from loans of $70.4 million and the proceeds from borrowings under mortgage notes payables of $16.0 million. The increase in proceeds from loans was a result of borrowings related to the Telos 5 warehouse activity and net proceeds from Tiptree’s credit facility. Borrowings under mortgage notes payable were used to fund Care’s acquisition of real estate.
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. Loans 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 installments 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 December 31, 2013, $49.5 million was outstanding on this obligation. The weighted average interest rate for 2013 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 Tiptree’s contractual obligations by period for payments that are due as of December 31, 2013 (in thousands):
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
 
Total 
Mortgage notes payable and related interest (1)
$
5,232

 
$
10,702

 
$
11,105

 
$
80,666

 
 
$
107,705

Note payable (2)
7,667

 
20,000

 
21,417

 
41,931

 
 
91,015

Notes payable CLOs (3)

 

 

 
1,341,701

 
 
1,341,701

Credit Agreement (4)
2,000

 
4,000

 
43,500

 

 
 
49,500

Operating lease obligations (5)
1,518

 
1,813

 
1,798

 
1,308

 
 
6,437

Revolving line of credit (6)

 

 
5,371

 

 
 
5,371

Total
$
16,417

 
$
36,515

 
$
83,191

 
$
1,465,606

 
 
$
1,601,729

(1)
Mortgage notes payable include mortgage notes entered into by Care LLC in connection with its acquisition of several properties (see Note 12Debt).
(2)
Note payable relates to the PFAS Transaction and TFP payment for Series A Preferred stock and common shares of PFG. (see Note 12Debt).
(3)
Non-recourse CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and Telos 4.

35



(4)
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.
(5)
Minimum rental obligation for Care, Siena and PFG office lease. The total rent expense for the Company for fiscal 2013 and 2012 was $1.5 million and $0.9 million, respectively.
(6)
On July 25, 2013, Tiptree’s subsidiary Siena closed on a line of credit with Wells Fargo Bank. This non-recourse revolving line is for $65.0 million with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of December 31, 2013 there was $5.4 million outstanding on this line.
Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 2—Summary of Significant Accounting Policies. Tiptree’s critical accounting policies and estimates are those related to principles of consolidation, variable interest entities, fair value of financial instruments, goodwill and other intangibles and income taxes. Further information can be found in the Notes to Consolidated Financial Statements related to the following: variable interest entities can be found in Note 3; valuation of assets where quoted market prices are not available can be found under “Fair Value Measurement” in Note 6; policies related to goodwill and intangible assets can be found in Note 2—Summary of Significant Accounting Policies—Goodwill and Identifiable Intangible Assets; and additional information on income taxes can be found under Note 13—Income Taxes. The consolidated financial statements prepared under GAAP for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common control described in Note 1 related to TAMCO and the Contribution Transactions. All intercompany items have been eliminated for these periods.
Principles of Consolidation
The consolidated financial statements reflect the consolidated accounts of Tiptree and (i) its wholly-owned subsidiaries, (ii) subsidiaries in which it has a controlling interest, and (iii) certain VIEs in which Tiptree, through its subsidiaries is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. This consolidation, particularly with respect to the VIEs, significantly impacts these subsidiaries’ financial statements.
Variable Interest Entities
ASC Topic 810, Consolidations, requires the consolidation of a VIE into the financial statements of the entity that is considered the VIE’s primary beneficiary. ASC Topic 810 provides a framework for determining whether an entity should be considered a VIE and accordingly evaluated for consolidation. If an entity is a VIE, it would then need to be determined whether Tiptree’s relationship, direct or indirect through subsidiaries to the VIE (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If Tiptree does have a variable interest in the entity, it would then need to be determined whether Tiptree is deemed to be the primary beneficiary. For VIEs, if Tiptree is deemed to (i) have the power to direct the activities of the VIE that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, then Tiptree would be deemed to be the primary beneficiary of the VIE and would be required to consolidate the VIE. Generally, TAMCO’s contractual relationship as collateral manager of the CLO described herein satisfies criteria (i) of the prior sentence, and its ownership interests in and/or ability to earn certain incentive or other management fees in certain CLOs can typically satisfy criteria (ii).
Prior to the closing of the acquisition of TAMCO, it was established that TAMCO was the primary beneficiary of two CLOs that it managed at that time. As such, the financial statements of these two CLOs were included in the consolidated financial statements of Tiptree. See Note 1 under “Acquisition of Businesses” for additional details regarding this transaction.
The consolidation of the CLOs required the initial recognition of the assets and liabilities at fair value as of January 1, 2010 for Telos 1 and Telos 2 and at inception for subsequent CLOs (Telos 3 and Telos 4). Since the assets are solely for the benefit of the beneficial interest holders (liability holders) and no residual value from their liquidation is available to TAMCO, the difference between the fair value of the assets of the CLOs and its liabilities upon consolidation have been reflected as appropriated retained earnings. Given the nature and activity of the CLOs, TAMCO has applied the investment company accounting guidance to the CLOs’ financial statements and as such recognizes changes in fair value of the assets of the CLOs and accreted the fair value adjustment to the liabilities of the CLOs (recorded upon consolidation) in the consolidated statement of operations.
The following table summarizes the Company’s consolidated assets and non-recourse liabilities of the consolidated CLOs included in the Condensed Balance Sheets (in thousands):

36



 
 
As of December 31,
 
 
2013
 
 
2012
Restricted Cash
 
$
67,604

 
 
$
75,105

Investment in loans
1,298,155
 
 
741,743
 
Other assets
48,857
 
 
34,812
 
Total assets
 
$
1,414,616

 
 
$
851,660

 
 
 
Notes payable-nonrecourse
 
$
1,154,097

 
 
$
571,752

Other liabilities
21,509
 
 
48,558
 
Total liabilities
 
$
1,175,606

 
 
$
620,310


Net income attributable to the VIE subordinated noteholders (“non-Tiptree ownership” presented in the table below) represents the portion of net income generated by the consolidated CLOs that are not attributable to Tiptree’s ownership interest in those entities.

Total net results of consolidated CLOs included in the Company’s Consolidated Statements of Operations were as follows:
 
Year ended December 31,
 
2013
 
2012
Consolidated CLOs (1)
$
(25,424
)
 
$
7,793
 
Less Non-Tiptree portion
(18,044
)
 
4,041
 
Tiptree portion (2)
$
(7,380
)
 
$
3,752
 

(1)
Before elimination of management fee expense of $13.2 million and interest expense of $16.9 million as of December 31, 2013 and $16.1 million and $9.6 million as of December 31, 2012, respectively.
(2)
Net income of the CLOs to the Company as a result of its investments in the CLOs.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, describes the framework for measuring fair value, and addresses fair value measurement disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC Topic 820 establishes a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:
Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities that Tiptree has the ability to access at the measurement date.
Level 2 - Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.
The types of financial assets and liabilities carried at Level 2 are valued based on one or more of the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in nonactive markets;
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

37



Level 3 - Significant inputs that are unobservable inputs for the asset or liability, including Tiptree’s own data and assumptions that are used in pricing the asset or liability.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by Tiptree in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Tiptree’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset. From time to time, Tiptree’s assets and liabilities will transfer between one level to another level. It is Tiptree’s policy to recognize transfers between different levels at the end of each reporting period.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Tiptree’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations or pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy. Further, management has a process in place to review all changes in fair value from measurement period to measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. Tiptree utilizes observable and unobservable inputs into its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be market participants. Unobservable inputs may include expected cash flow streams, default rates, supply and demand considerations and market volatility.
Trading Securities: Trading securities consist primarily of privately held equity securities, exchange-traded equity securities, U.S. Treasury securities (“USTs”), CLOs, collateralized debt obligations (“CDOs”), asset backed securities (“ABSs”), loans, and tax exempt securities. The fair value of privately held equity securities are either valued based on quotes obtained from dealers or internally developed valuation models. Because significant inputs used to determine the dealer quotes or model values are not observable, such as projected future earnings and price volatility, Tiptree has classified them within Level 3 of the fair value hierarchy. Exchange-traded equity securities are valued based on quoted prices from the exchange. These securities are actively traded and valuation adjustments are not applied. Accordingly, they are categorized in Level 1 of the fair value hierarchy. USTs are actively traded and valuation adjustments are not applied. They are categorized in Level 1 of the fair value hierarchy. Positions in securitized products such as CLOs, CDOs, and ABSs are based on quotes obtained from dealers. When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in an active or inactive market, Tiptree has classified them within Level 2 of the fair value hierarchy. If these quotes are based on valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand considerations, and market volatility, Tiptree has classified them within Level 3 of the fair value hierarchy.
The fair value of tax exempt securities is determined by obtaining quotations from independent pricing services. In most cases, quotes are obtained from two pricing services and the average of both quotes is used. The independent pricing services determine their quotes using observable inputs such as current interest rates, specific issuer information and other market data for such securities. Therefore, the estimate of fair value is subject to a high degree of variability based upon market conditions, the availability of issuer information and the assumptions made. The valuation inputs used to arrive at fair value for such debt obligations are generally classified within Level 2 or Level 3 of the fair value hierarchy.
Available for Sale Securities: Available for sale securities consist primarily of obligations of states and political subdivisions, USTs, certificates of deposit, ABSs, and corporate bonds. These securities will generally be classified within either Level 1 or Level 2 of the fair value hierarchy. The fair value of fixed maturity securities is based on quoted market prices obtained from an independent pricing service, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently sourced market parameters, including interest rate yield curves, option volatilities, and currency rates.
Derivative Assets and Liabilities: Derivative assets and liabilities consist of credit default swaps (“CDS”), index credit default swaps (“CDX”) and interest rate swaps (“IRS”). The fair value of derivative assets and liabilities is based upon valuation pricing models, which represent what the Company would expect to receive or pay at the balance sheet date if the contracts were canceled. In general, the fair value of CDSs and CDXs are based on dealer quotes. These derivatives will generally be classified

38



within either Level 2 or Level 3 of the fair value hierarchy. The fair value of IRSs is determined by obtaining broker or counterparty quotes. Because there were observable inputs used to arrive at these quotes, Tiptree has classified the IRSs within Level 2 of the fair value hierarchy.
Separate Account Assets: Separate account assets are primarily invested in alternative investments (which include investments in limited partnerships, private equity funds, hedge funds, and fund of funds), mutual funds, fixed maturity securities, and equity securities. The alternative investments are valued at estimated fair value with the assistance of investment managers of the underlying alternative investments. Since the entities underlying these alternative investments are investment companies for accounting purposes, as a practical expedient, Tiptree utilizes the separate account’s proportionate interest in the fair value of the underlying net assets to determine the fair value of these investments. The fair value of the underlying net assets of each alternative investment is determined from financial information provided by the investment manager. These alternative investments are generally classified within Level 3 of the fair value hierarchy. Most hedge fund investments are classified as Level 3. However, some alternative asset investments with minimal liquidity restrictions such as no lockup period, redemption notification of 35 days or less, withdrawal frequency greater than annually, and withdrawal payouts within 30 days are classified within Level 2. Mutual funds and equity securities are exchange-traded and are value based on quoted market prices from independent pricing services and are classified within Level 1 of the fair value hierarchy. U.S. Treasury securities are classified within Level 1 of the fair value hierarchy and all other fixed maturity securities are classified within Level 2.
In times of illiquid markets and financial stress, actual prices and valuations may significantly diverge from results predicted by models. In addition, other factors can affect Tiptree’s estimate of fair value, including market dislocations, incorrect model assumptions, and unexpected correlations. These valuation methods could expose Tiptree to materially different results should the models used or underlying assumptions be inaccurate.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes the enactment date. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting guidance requires these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner.
In accordance with ASC 740, the Company establishes valuation allowances for deferred tax assets when, in its judgment, it concludes that it is more likely than not that the deferred tax assets will not be realized. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdiction. Changes in economic conditions and the competitive environment may impact the accuracy of the Company’s projections. In accordance with ASC 740, on a quarterly basis, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to the Company’s valuation allowance is appropriate. As a result of this assessment, as of December 31, 2013, the consolidated valuation allowance for Tiptree was $1.5 million. The increase and/or decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2013, the Company recorded a net reduction of valuation allowances of $6.8 million. In 2012, the Company recorded net changes in valuation allowances of $1.8 million.
The total income tax expense of $6.9 million for the period ended December 31, 2013 is reflected as a component of net income (loss) from continuing operations. This tax expense represents a consolidated total of all of Tiptree’s subsidiaries and includes $6.4 million related to PFG. In addition, Tiptree incurred approximately $2.1 million current federal and state income tax expense as a result of the gain on sale of the Bickford Portfolio (see Notes 10 and 22). A significant portion of the gain was reduced by available net operating loss carryforwards that were previously unrecorded as a result of Care, Inc.’s historical 0% statutory income tax rate in effect as of December 31, 2012 and June 30, 2013, prior to the Contribution Transaction. The tax associated with the Bickford portfolio gain is included with tax expense from continuing operations, rather than with discontinued operations because it arose as a result of Tiptree’s termination of REIT status, described below.

As a result of the Contribution Transaction on July 1, 2013, Tiptree no longer qualifies as a REIT, therefore Tiptree is no longer eligible to deduct the amount of distributions paid to shareholders and became a fully taxable corporation. Pursuant to the Internal Revenue Code, when a corporation loses REIT status within a tax year it becomes taxable retroactively to the first day of the tax year. As of July 1, 2013, an adjustment of $2.6 million was made to the Company’s deferred tax assets as a result of the Company no longer qualifying as a REIT.

For the year ended December 31, 2013, the Company’s effective tax rate on income from continuing operations is equal to 111.1%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax

39



rates are primarily the result of: (i) income and (loss) attributable to noncontrolling interests and to the VIE subordinated noteholders which do not result in income tax expense or (benefit) to the Company, (ii) the one-time effect of the Company’s change from nontaxable to taxable status which must be reported as part of the income tax provision on continuing operations, and (iii) the effect of changes in valuation allowance on net operating losses reported by Siena, MFCA and a portion of net operating losses reported by PFG. Prior periods do not have comparable effective tax rates as the Company, as a REIT, was not subject to income taxes.

The Company’s primary tax jurisdiction is the U.S., which currently has a statutory income tax rate of 35%. The Company also operates in several state jurisdictions that have an average combined statutory rate of approximately 6%. The Company is a holding company and several of the subsidiaries file separate federal and state income tax returns, rather than filing tax returns as a single consolidated group with the Company. The U.S. federal and state income tax returns are subject to examination by the Internal Revenue Service and the various state departments of revenue where filings are required.
Goodwill and Intangible Assets
The Company initially records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite lived intangibles and other intangibles, in accordance with ASC 805 Business Combinations. Goodwill, indefinite-lived intangibles and other intangibles are subsequently accounted for in accordance with ASC 350 Intangibles-Goodwill and Other and ASC 360 Impairment or Disposal of Long-Lived Assets.The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill ($4.3 million at December 31, 2013) and indefinite-lived intangible assets ($2.5 million at December 31, 2013) are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.

GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit might be less than its carrying value. No such events or circumstances have occurred during 2013.

Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles requiring amortization. Indefinite-lived intangible assets are evaluated for impairment at least annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other amortizing intangible assets ($152.2 million at December 31, 2013) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is initially based on undiscounted cash flow projections. See Note 2—Summary of Significant Accounting Policies for further detail.

Off-Balance Sheet Arrangements

Tiptree does not have any off-balance sheet obligations. Other than the consolidation of Telos 1, Telos 2, Telos 3, and Telos 4, Tiptree does not maintain any other relationships with unconsolidated entities or financial partnerships, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2013, Tiptree did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.


40



Item 7A. 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 8. Financial Statements and Supplementary Data

Financial Statements Introductory Note

Tiptree is a holding company that is the sole managing member, and owns approximately 25%, of 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. TFP’s ownership of approximately 75% of Operating Company is reflected as a non-controlling interest in Tiptree’s consolidated financial statements. See “Business—Structure” and Notes 1 and 15 to the consolidated financial statements for further discussion of the Company’s capital and ownership structure.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Audited Financial Statements
Consolidated Balance Sheet as of December 31, 2013 and 2012
Consolidated Statement of Operations for the years ended December 31, 2013 and 2012
Consolidated Statement of Comprehensive Income for the years ended December 31, 2013 and 2012
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012
Consolidated Statement of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements


41



Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Tiptree Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Tiptree Financial, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tiptree Financial, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
New York, New York
March 18, 2014


42



TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except share and per share data)
 
As of December 31,

2013

2012
Assets



Cash and cash equivalents – unrestricted
$
120,557


$
88,563

Cash and cash equivalents – restricted
26,395


20,748

Trading investments, at fair value
35,991


60,816

Investments in available for sale securities, at fair value
(amortized cost: $17,708 and $15,693 in 2013 and 2012, respectively)
17,763


16,303

Investments in loans, at fair value
171,087


20,423

Loans owned, at amortized cost – net of allowance
40,260


5,467

Investments in partially-owned entities
9,972


8,388

Real estate
105,061


118,827

Policy loans
102,147


99,123

Deferred tax assets
3,310


5,342

Intangible assets
154,695


162,412

Goodwill
4,294


3,088

Other assets
49,201


37,589

Separate account assets
4,625,099


4,035,053

Assets of consolidated CLOs
1,414,616


851,660

Total assets
$
6,880,448


$
5,533,802

Liabilities and Stockholders’ Equity



Liabilities:



Derivative financial instruments, at fair value
$
598


$
3,172

U.S. Treasuries, short position
18,493


20,175

Debt
360,609


195,648

Policy liabilities
112,358


108,868

Other liabilities and accrued expenses
21,829


14,988

Separate account liabilities
4,625,099


4,035,053

Liabilities of consolidated CLOs
1,175,606


620,310

Total liabilities
$
6,314,592


$
4,998,214





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, 10,556,390 and 10,226,250 shares issued and outstanding respectively
11


11

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 30,968,877 and 0 shares issued and outstanding respectively
31



Additional paid-in capital
100,903


96,144

Accumulated other comprehensive income
33


311


43


Retained earnings
18,933


11,892

Total stockholders’ equity of Tiptree Financial Inc.
119,911


108,358

Non-controlling interest
361,354


324,595

Appropriated retained earnings of consolidated TAMCO
84,591


102,635

Total stockholders’ equity
565,856


535,588

Total liabilities and stockholders’ equity
$
6,880,448


$
5,533,802


See accompanying notes to consolidated financial statements.



44


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
(in thousands, except share and per share data)



Year ended December 31,


2013

2012
Net realized (loss) gain on investments

$
(833
)

$
1,377

Change in unrealized appreciation on investments

2,971


9,129

Income from investments in partially owned entities

3,250


2,308

Net realized and unrealized gains

5,388


12,814

Investment income:




Interest income

16,477


9,938

Separate account fees

22,248


19,875

Administrative service fees

49,489


22,995

Rental revenue

5,760


1,717

Other income

1,545


2,870

Total investment income

95,519


57,395

Total net realized and unrealized gains and investment income

100,907


70,209


45


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
(in thousands, except share and per share data)



Year ended December 31,


2013

2012
Expenses:




Interest expense

17,517


8,096

Payroll expense

35,552


21,437

Professional fees

8,555


11,873

Change in future policy benefits

4,710


4,040

Mortality expenses

10,476


9,924

Commission expense

2,344


1,960

Depreciation and amortization expenses

4,467


2,238

Other expenses

15,456


7,720

Total expenses

99,077


67,288

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

1,830


2,921

Results of consolidated CLOs:
 
 
 
 
Income attributable to consolidated CLOs

52,687


71,412

Expenses attributable to consolidated CLOs

48,268


37,883

Net Income attributable to consolidated CLOs

4,419


33,529

Income before taxes from continuing operations

6,249

 
36,450

Provision for income taxes

6,941


(321
)
(Loss) income from continuing operations

(692
)

36,771

Discontinued operations:




Gain on sale of Bickford portfolio, net

15,463



Income from discontinued operations, net

1,647


2,882

Provision for income taxes




Discontinued operations, net

17,110


2,882

Net income

16,418


39,653

Less net income attributable to noncontrolling interest

25,617


26,883

Less net (loss) income attributable to VIE subordinated noteholders

(18,044
)

4,041

Net income available to common stockholders

$
8,845


$
8,729

Net income (loss) per Class A common share:




Basic, continuing operations, net
 
(0.81
)

0.57

Basic, discontinued operations, net

1.67


0.28

Net income basic

0.86


0.85

Diluted, continuing operations, net

(0.81
)

0.57

Diluted, discontinued operations, net

1.67


0.28

Net income dilutive

$
0.86


$
0.85


46


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
(in thousands, except share and per share data)



Year ended December 31,


2013

2012
Weighted average number of Class A common shares:




Basic

10,250,438


10,286,412

Diluted

10,250,438


10,286,412

See accompanying notes to consolidated financial statements.

47


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
(in thousands, except share and per share data)

 
 
Year ended December 31,
 
 
2013
 
2012
Net income:
 
16,418

 
39,653

Other comprehensive income:
 
 
 
 
Net unrealized holding (losses)/gains on securities available for sale net of tax (benefit)/expense of ($121) and $154
 
(224
)
 
285

Less: reclassification adjustment for net gains included in net income net of tax expense of $29 and $188
 
54

 
348

Total comprehensive income:
 
16,140

 
39,590

Less: comprehensive income (loss) attributable to non-controlling interests and VIE subordinated noteholders
 
$
7,573


$
(30,924
)
Total comprehensive income available to common stockholders
 
$
8,567