10-K 1 tfi201410-k.htm 10-K TFI 2014 10-K
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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, 2014
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Financial Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
38-3754322
(State or Other Jurisdiction of
(IRS Employer
Incorporation of Organization)
Identification No.)
 
 
780 Third Avenue, 21st Floor, New York, New York
10017
(Address of Principal Executive Offices)
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
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 30, 2014, 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 $73,895,060, based upon the closing sales price of $8.70 per share as reported on the NASDAQ Capital Market. For purposes of this calculation, all of the registrant’s directors and executive officers were deemed to be affiliates of the registrant.
As of March 27, 2015, there were 31,992,470 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 9,770,367 shares, par value $0.001, of the registrant’s Class B common stock outstanding.

Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2015 Annual Meeting of Stockholders is incorporated by reference into Part III.





Tiptree Financial Inc.
Table of Contents
 
 
             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 and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “may,” “might,” “plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend to identify forward-looking statements.

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:

“1940 Act” means the Investment Company Act of 1940, as amended.

“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.

“Blackstone” means The Blackstone Group L.P.

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

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

“Care LLC” means Care Investment Trust LLC.

“CFPB” means the Consumer Financial Protection Bureau.

“CLOs” means collateralized loan obligations.

“Code” means the Internal Revenue Code of 1986, as amended.

“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.

“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“EBITDA” means earnings before interest, taxes, depreciation and amortization.


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“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
 
“Fortegra” means Fortegra Financial Corporation.

“GAAP” means U.S. generally accepted accounting principles.
 
“Gramm-Leach-Bliley Act” means the Gramm-Leach-Bliley Act of 1999.

“HIPAA” means the Health Insurance Portability and Accountability Act of 1996.

“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.

“NAIC” means the National Association of Insurance Commissioners.

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

“Operating Company” means Tiptree Operating Company, LLC.

“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.

“PFLAC” means Philadelphia Financial Life Assurance Company.

“PFLAC NY” means Philadelphia Financial Life Assurance Company of New York.

“Reliance” means Reliance First Capital, LLC.

“SEC” means the U.S. Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended.

“Siena” means Siena Capital Finance LLC.

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

“Synovus” means Synovus Bank.

“TAMCO” means Tiptree Asset Management Company, LLC.

“Telos” means Telos Asset Management, LLC.

“Telos 1” means Telos CLO 2006-1, Ltd.

“Telos 2” means Telos CLO 2007-2, Ltd.

“Telos 3” means Telos CLO 2013-3, Ltd.

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“Telos 4” means Telos CLO 2013-4, Ltd.

“Telos 5” means Telos CLO 2014-5, Ltd.

“Telos 6” means Telos CLO 2014-6, Ltd.

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

“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means, unless otherwise indicated by the context, Operating Company and its consolidated subsidiaries, together with the standalone net assets held by Tiptree Financial.

“Tiptree Direct” means Tiptree Direct Holdings LLC.

“Tiptree Financial” or “TFI”, means Tiptree Financial Inc.

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

“Tricadia” means Tricadia Holdings, L.P.

“Westside Loan” means that certain loan by Care which was secured by skilled nursing facilities as well as collateral relating to assisted living facilities and a multifamily property.
Item 1. Business

OVERVIEW
Tiptree Financial is a holding company that primarily acquires and manages control interests of operating businesses. The Company, whose operations date back to 2007, currently owns subsidiaries that operate in the following industries: insurance and insurance services, specialty finance, asset management and real estate. The Company’s principal investments are included in a corporate and other segment. See “Item 1. Business — Operating Businesses” and Note 6 — Operating Segment Data, to the accompanying consolidated financial statements for detailed information regarding our segments. Tiptree Financial’s Class A common stock trades on the NASDAQ Capital Market. Tiptree Financial’s Class B common stock have voting but no economic rights.

Operating Company owns substantially all of our assets. Operating Company is owned 25% by Tiptree Financial and 75% by TFP, a limited partnership which is currently approximately 68% owned by Tiptree Financial. The effect of this structure is that approximately 77% of the assets of Operating Company were directly or indirectly owned by Tiptree Financial as of December 31, 2014. From July 1, 2014, the limited partners of TFP (other than Tiptree Financial itself) have been provided with the opportunity to exchange TFP partnership units for Tiptree Financial Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit. The percentage of TFP (and therefore Operating Company) owned by Tiptree Financial may increase in the future to the extent TFP’s limited partners choose to exchange their limited partnership units of TFP for Class A common stock of Tiptree Financial.


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The following chart shows a simplified version of our organizational structure:
For more information on our ownership and structure, see Notes 1—Organization and Note 18—Stockholders’ Equity, within the accompanying consolidated financial statements.

RECENT TRANSACTIONS

Tiptree acquired its Fortegra subsidiary in December 2014 and this report includes Fortegra’s results from the acquisition. In October 2014, Tiptree entered into a definitive agreement to sell its PFG subsidiary, subject to customary closing conditions, including regulatory approvals. The sale of PFG is expected to close in the third quarter of 2015. PFG has been classified as a discontinued operation in our financial statements.

In November, 2014, Tiptree entered into a Stock Purchase Agreement with the equityholders of Reliance to acquire all of the outstanding equity interests in Reliance for aggregate consideration equal to $7.5 million in cash and 1,625,500 shares of Class A Common Stock of Tiptree Financial, subject to adjustments in respect of net working capital and indebtedness of Reliance. In addition, Tiptree will pay the sellers up to 2,000,000 additional shares of Class A Common Stock of Tiptree Financial, to be paid annually over three years, if Reliance achieves specified performance metrics after the closing and in certain other circumstances. The transaction is subject to customary closing conditions including regulatory approval and is expected to close by the end of the third quarter of 2015.

HOLDING COMPANY

Tiptree’s Strategy
Tiptree Financial is a diversified holding company that draws upon the extensive experience of its management in the areas of insurance, specialty finance, asset management, real estate and credit investing to acquire and grow primarily controlling interests of operating businesses. We believe our business ownership mix of (i) specialty insurance, insurance services and warranty protection companies, (ii) operating companies which principally originate or own tangible assets, and (iii) asset management

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companies which earn fees from third-party investment vehicles, provides business synergies which generate a higher overall return on shareholder capital.

When making new acquisitions, we strive to identify businesses that: (i) have strong and experienced management, (ii) have the potential to generate attractive and stable returns on capital with limited downside, (iii) complement existing businesses or strategies through clearly identifiable synergies, and (iv) have sustainable and scalable business models. Tiptree’s permanent capital base allows us to view our businesses through a long-term lens, providing competitive advantages relative to alternative capital sources with shorter-term objectives. We will retain a well-performing business for an indefinite period, but will consider selling a business when we believe material shareholder value creation will be achieved.

When we acquire a business, we aim to partner with the management and employees, providing assistance when needed, but relying on their unique expertise to run the business day-to-day. We enhance the value of our businesses by utilizing our experience in capital markets, mergers and acquisitions, capital raising, credit markets, distressed investing, securitization, asset management, corporate governance and government regulatory issues. We also optimize the efficiencies of our business operations by strategically using the resources and talents of our more than 700 employees at our consolidated subsidiaries.

We seek to adopt a prudent approach with regard to our capital structure, the diversification of financial risk and the avoidance of reputational risk. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital (change in book value plus dividends paid), to alternative investment options and major market indices.

We acquired Fortegra in December, 2014. The acquisition is expected to generate a significant portion of our revenue and net income in 2015. For 2014, only the revenues earned and expenses incurred from the date of Fortegra’s acquisition have been incorporated in our financial statements. The net results of Fortegra in this limited period reflects certain closing costs and adjustments which we do not foresee recurring in 2015.

In October, 2014, we entered into an agreement to sell PFG to funds managed by Blackstone. A significant portion of the Company’s 2014 net income was generated from our PFG subsidiary, which has been classified as “discontinued operations” in our financial statements. PFG’s net income for 2013 has also been reclassified as “discontinued operations.” The sale agreement specifies any results generated by PFG in 2015 will remain with PFG when sold and as such, PFG’s 2015 results will be reported in discontinued operations. The sale of PFG to Blackstone is expected to close in the third quarter of 2015. Based on a total purchase price of $165 million, we estimate that the GAAP pretax gain over December 31, 2014 book value will be approximately $35.2 million for the Company.  We estimate Tiptree Financial’s incremental tax provision at the time of sale to be approximately $11.1 million.  The incremental provision would bring total provisions for PFG related tax to approximately $26.5 million, which includes the deferred tax liability of $15.4 million already recorded as of December 31, 2014.

Tiptree’s Financing
We generally fund our operations and acquisitions with borrowings at the operating subsidiary level or asset level and with cash contributed by Operating Company. Cash at Operating Company is generated from distributions from our subsidiaries and assets, sales of assets, and borrowings at the Operating Company level. For a description of Operating Company’s credit agreement, see Note 15—Debt, in the accompanying consolidated financial statements. For a description of limitations on certain of our subsidiaries’ ability to make distributions to us, see “Risk Factors — Risks Related to our Structure — Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders, when applicable, will depend on distributions from our subsidiaries that may be subject to restrictions.”

Tiptree Regulation
Because Tiptree Financial indirectly owns capital stock in several insurance company subsidiaries, it is subject to the state insurance holding company statutes of states in which it has insurance operations, which limit affiliate transactions and dividends or distributions from our insurance subsidiaries. See “Risk Factors — Risks Related to our Structure — Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders will depend on distributions from our subsidiaries that may be subject to restrictions.” The holding company statutes, as well as other laws, also require, among other things, prior regulatory approval of an acquisition of control of a domestic insurer, certain transactions between affiliates and payments of extraordinary dividends or distributions. As a holding company, Tiptree Financial is not regulated as an insurance company.

Each of Tiptree’s operating businesses is subject to regulation as described under “— Operating Businesses” below.

The 1940 Act may limit the types and nature of businesses that we engage in and assets that we may acquire. See “Risk Factors — Risks Related to Regulatory and Legal Matters — Maintenance of our 1940 Act exemption will impose limits on our operations.”

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Tiptree’s Competition

Each of our businesses faces competition, as discussed under “— Operating Businesses” below. In addition to the competition our businesses face, we are subject to significant competition for 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 from 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 Financial’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 its own equity securities.

Tiptree Employees

As of December 31, 2014, Tiptree had 761 employees, which includes 96 employees related to discontinued operations. As of that date, 16 persons provided services to Tiptree (as employees or pursuant to a services agreement) at the holding company.

OPERATING BUSINESSES
Insurance and Insurance Services
Tiptree’s insurance operations consist of Fortegra, which is a specialized insurance and insurance services company offering consumer related protection products, including credit insurance, warranties, service contracts and auto warranty and roadside assistance. Fortegra also offers administration services through a vertically integrated platform as well as providing fronting services for self insured clients.
Fortegra’s products and related services offer protection from life events and uncertainties along with simplified steps to ease consumers’ recovery. Credit insurance and debt protection products offer consumers the option to protect a loan balance in the event of death, disability, job loss or other events that could impair the consumers’ ability to repay a debt and damage their credit. Warranty and other service contracts for mobile handsets, furniture and major appliances provide consumers protection from product failure and loss. Automotive products protect consumers from mechanical failure and provide roadside assistance when needed.

Fortegra’s products are marketed under its Fortegra, Life of the South, ProtectCELL, 4Warranty, United Motor Club, Continental Car Club and Auto Knight brands. Through these brands, Fortegra delivers credit insurance, debt protection, warranty and other service contracts, motor club solutions and membership plans to installment loan companies, retailers, independent wireless dealers, regional banks, community banks, warranty administrators, automobile dealers, vacation ownership developers and credit unions. Fortegra’s clients then offer these complementary products and services to their customers in conjunction with consumer transactions.

Fortegra typically structures agreements with its agents whereby they share in the economic results of the program either through retrospective commission arrangements or fully-collateralized reinsurance companies. Fortegra may selectively assume insurance underwriting risk to meet clients’ needs or to enhance its profitability.

Fortegra generates service and administrative fees for administering payment protection products and fronting arrangements on behalf of its clients. Fortegra also earns ceding commissions for credit insurance that it cedes to reinsurers through coinsurance arrangements. Fortegra elects to cede to reinsurers a significant portion of the credit insurance that it distributes for loss protection and capital management. In addition, Fortegra also generates net investment income from its investment portfolio.

Fortegra generates revenues from net earned premiums consisting of direct and assumed earned premiums generated from the direct sale of payment protection insurance policies by Fortegra’s distributors and premiums written for payment protection insurance policies by another carrier and assumed by Fortegra. The underlying insurance plans primarily relate to credit protection in the event of job loss or disability. Earned premiums are offset by commission expenses and member benefit claims.

Competition

Fortegra operates in several niche markets and we believe that no single competitor competes against it in all of its business lines. The markets in which Fortegra operates are competitive based on many factors, including price, industry knowledge, quality of client service, the effectiveness of sales force, technology platforms and processes, the security and integrity of information systems, financial strength ratings, breadth of products and services, brand recognition and reputation. Fortegra’s

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credit protection products and warranty service contracts compete with similar products of insurance companies, warranty companies and other insurance service providers. Many of Fortegra’s competitors are significantly larger, have greater access to capital and may possess other competitive advantages. The principal competitors for Fortegra include: The Warranty Group, Inc., Assurant, Inc., eSecuritel Holdings, LLC, Asurion, LLC, AmTrust Financial Services, Inc. and several smaller regional companies.

Regulation
Fortegra’s business is subject to extensive regulation and supervision, including at the federal, state, local and foreign levels. Fortegra’s insurance company, service contract, and motor club subsidiaries are subject to regulation in the various states and jurisdictions in which they transact business. Fortegra’s insurance products and its business are also affected by U.S. federal, state and local tax laws, and the tax laws of non-U.S. jurisdictions.
Fortegra owns and operates insurance company subsidiaries to meet the various requirements of the jurisdictions where it operates. Fortegra’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. See “Risk Factors — Risks Related to our Structure — Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders, when applicable, will depend on distributions from our subsidiaries that may be subject to restrictions.”
Fortegra’s insurance company subsidiaries are domiciled in California, Delaware, Georgia, Kentucky and Louisiana. The regulation, supervision and administration by state departments of insurance relate, among other things, to:
standards of solvency that must be met and maintained;
restrictions on the payment of dividends;
changes in control of insurance companies;
the licensing of insurers and their agents and other producers;
the types of insurance that may be written;
privacy practices;
the ability to enter and exit certain insurance markets;
the nature of and limitations on investments and premium rates, or restrictions on the size of risks that may be insured under a single policy;
reserves and provisions for unearned premiums, losses and other obligations;
deposits of securities for the benefit of policyholders;
payment of sales compensation to third parties;
approval of policy forms; and
the regulation of market conduct, including underwriting and claims practices.

A portion of Fortegra’s business is ceded to its reinsurance company subsidiaries domiciled in Turks and Caicos. Those subsidiaries must satisfy local regulatory requirements, such as filing annual financial statements, filing annual certificates of compliance and paying annual fees.
Fortegra’s insurance company subsidiaries must comply with their respective state of domicile’s laws regulating insurance company investments, which are generally modeled on the standards promulgated by the NAIC. Such investment laws are generally permissive with respect to federal, state and municipal obligations, and more restrictive with respect to corporate obligations, particularly non-investment grade obligations, foreign investment, equity securities and real estate investments. Each insurance company is therefore limited by the investment laws of its state of domicile from making excessive investments in any given security (such as single issuer limitations) or in certain classes or riskier investments (such as aggregate limitation in non-investment grade bonds).
The NAIC has adopted a model act with risk-based capital (“RBC”) formulas to be applied to insurance companies to measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. State insurance regulators use RBC standards to determine appropriate actions relating to insurers that show signs of weak or deteriorating conditions. The domiciliary states of Fortegra’s insurance company subsidiaries have adopted laws substantially similar to the NAIC’s RBC model act. Under laws adopted by individual states, insurers having total adjusted capital less than that required by the RBC calculation will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.

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In connection with the Dodd-Frank Act, Congress created the CFPB. While under the Dodd-Frank Act, the CFPB does not have direct jurisdiction over insurance products, it is possible that regulatory actions taken by the CFPB may affect the sales practices related to these products and thereby potentially affect Fortegra’s business or the clients that it serves.
Fortegra is also subject to federal and state laws and regulations related to its administration of insurance products on behalf of other insurers. In order for Fortegra to process and administer insurance products of other companies, it is required to maintain licenses of a third party administrator in the states where those insurance companies operate. Fortegra is also subject to the related federal and state privacy laws and must comply with data protection and privacy laws such as the Gramm-Leach-Bliley Act and HIPAA and certain state data privacy laws. Fortegra is also subject to laws and regulations related to call center services, such as the Telemarketing Consumer Fraud and Abuse Prevention Act and the Telemarketing Sales Rule, the Telephone Consumer Protection Act, the Do-Not-Call Implementation Act and rules promulgated by the Federal Communications Commission and the Federal Trade Commission and the CAN-SPAM Act.
Seasonality
Fortegra’s financial results may be affected by seasonal variations. Revenues associated with its products may fluctuate seasonally based on consumer spending trends. Consumer spending has historically been higher in September and December, corresponding to the back-to-school and holiday seasons. Accordingly, Fortegra’s revenues from its products may be higher in the third and fourth quarters than in the first half of the year. Member benefit claims on mobile device protection are typically more frequent in the summer months, and accordingly, Fortegra’s claims expense from those products may be higher in the second and third quarters than other times of the year.
Employees
At December 31, 2014, Fortegra employed 523 employees, on a full or part time basis.
Intellectual Property
Fortegra owns or licenses a number of trademarks, patents, trade names, copyrights, service marks, trade secrets and other intellectual property rights that relate to its services and products. Although Fortegra believes that these intellectual property rights are, in the aggregate, of material importance to its business, Fortegra believes that its business is not materially dependent upon any particular trademark, trade name, copyright, service mark, license or other intellectual property right. Fortegra has entered into confidentiality agreements with its clients that impose restrictions on its clients’ use of Fortegra’s proprietary software and other intellectual property rights.
Specialty Finance
Tiptree’s specialty finance operations consists of a controlling ownership interest in Siena, which provides asset-based loans to smaller U.S. businesses; and a controlling ownership interest in Luxury, a residential mortgage lender that originates agency, prime jumbo and super jumbo mortgages for sale to institutional investors. The Company 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.

Siena Lending Group
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 $25 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 funds its lending practice from capital contributions by its owners as well as from a $65.0 million revolving credit agreement with Wells Fargo Bank, N.A.
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.

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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 13 employees as of December 31, 2014.
Luxury Mortgage Corp.
Luxury’s operations include the origination, packaging and sale of primarily prime jumbo and super jumbo mortgage loans. 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 finances its operations using warehouse revolving credit facilities to fund mortgage loans which generate gain on sale of loans, net interest income and loan fee income.
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 channel (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.

Competition

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. 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 CFPB, 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, the 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.

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Employees
Luxury had 99 employees as of December 31, 2014.
Asset Management
TAMCO

Tiptree’s asset management operations are conducted through TAMCO, an SEC-registered investment adviser that is primarily a holding company for Tiptree’s asset management subsidiaries, which include Telos and MCM. Telos is primarily a manager of CLOs. MCM currently manages portfolios of tax exempt securities for third parties and the Company. Tiptree seeks to grow its asset management operations through acquisitions and through investments in new products launched and managed by its subsidiaries. As of December 31, 2014, TAMCO had approximately $2.1 billion of AUM for third parties.

The formation of a CLO is funded by a combination of cash from Tiptree and warehouse revolving credit facilities which generate net interest income. At issuance of the new CLO, funding is provided by a combination of cash from Tiptree and from third party investors, creating a CLO that generates management fees to TAMCO and investment income to the Company.
Competition
TAMCO and its subsidiaries compete for business 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 may make it more difficult for TAMCO and its subsidiaries to compete with them. Some competitors have greater portfolio management resources, greater name recognition, 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. TAMCO is registered with the SEC as an investment adviser and Telos and MCM (collectively with TAMCO, the “Advisers”) rely on TAMCO’s registration. The Advisers are also 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. In addition, investment vehicles managed by the Advisers are subject to various securities laws and other laws.
Employees
As of December 31, 2014, 10 employees were dedicated to TAMCO.

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 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.

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The investment advisory fees paid to Telos by the CLOs under management are its primary source of revenue and are generally paid on a quarterly basis. Investment advisory fees typically consist of senior and subordinated management fees based on the amount of assets and, in certain cases, include incentive fees based on the returns generated for certain investors.
Telos is currently the manager of the following CLOs:
($ in thousands)
Issuance date
 
Fee earning AUM (1)
 
First optional call date (2)
 
Termination of reinvestment period (3)
 
Maturity date (4)
Telos 1
11/2006
 
$
198,162

 
1/2011
 
1/2013
 
10/2021
Telos 2
06/2007
 
252,540

 
7/2011
 
7/2013
 
4/2022
Telos 3
02/2013
 
352,653

 
1/2015
 
1/2017
 
1/2024
Telos 4
08/2013
 
351,945

 
7/2015
 
7/2017
 
7/2024
Telos 5
05/2014
 
400,632

 
4/2016
 
4/2018
 
4/2025
Telos 6
12/2014
 
350,000

 
1/2017
 
1/2019
 
1/2027
Total CLOs
 
 
$
1,905,932

 
 
 
 
 
 
(1)     Fee earning AUM as of the next distribution date after December 31, 2014, except for Telos 6, which is the target par.

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

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

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

Management fees are reported in the asset management segment. Tiptree owns various amounts of subordinated notes issued by Telos 1 through Telos 6 with an aggregate fair market value of $94.3 million. Distributions earned, realized gains/(losses), and changes in the fair value of subordinated notes owned by Tiptree are reported in our corporate and other segment.
Muni Capital Management - MCM
MCM is a manager of investments in securities exempt from U.S. federal income taxes. MCM currently manages NPPF I, a structured tax-exempt pass-through vehicle. Interests in NPPF I are held solely by third parties unaffiliated with Tiptree. MCM is also the manager of the Company’s portfolio of tax exempt securities. Investment gains and losses on the portfolio of tax-exempt securities are reported in our corporate and other segment. Management fees earned by MCM from the management of NPPF I are reported in our asset management segment. The AUM of NPPF I as of December 31, 2014 was $175.2 million.

Real Estate
Tiptree’s real estate operations consist of Care, a real estate investment company that primarily acquires and owns seniors housing properties within the U.S. Care’s focus is on acquisitions ranging in size from $5 to $200 million in the seniors housing and care industry. Care’s overall strategy is to identify strong and experienced managers or operators of seniors 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 own the operations of seniors housing properties and partner with experienced managers to run the day to day operations at the properties. Care is funded by a combination of cash from Tiptree and property specific recourse debt used to acquire properties that generate rental income and gain on sale of assets.

Care’s seniors 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 seniors 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

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class and geography within the seniors 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 seniors 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 and seniors housing operators and developers. Care competes for investments based on a number of factors including 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, staff and price.

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

As of December 31, 2014, 4 employees were dedicated to Care.

Principal Investments

The Company’s principal investments consist primarily of the positions in the subordinated notes of CLOs managed by Telos, a portfolio of tax-exempt securities held by MFCA and Tiptree’s 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. The Company has been liquidating its tax exempt securities portfolio.

Discontinued Operations

Tiptree owns approximately 94% of PFG. In October, 2014, Tiptree and the management shareholders of PFG entered into a definitive agreement to sell PFG, a life insurance and annuity company and PFAS, a subsidiary of PFG and third party administrator of COLI/BOLI policies, to funds managed by Blackstone, for approximately $155 million in cash plus additional

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consideration of approximately $10 million to be paid over two years. Any dividends or distributions from PFG or PFAS are prohibited with the effect that any retained earnings from and after January 1, 2015 will benefit Blackstone. The transaction is subject to customary closing conditions including regulatory approval and is expected to close in the third quarter of 2015. Based on a total purchase price of $165 million, we estimate that the GAAP pretax gain over December 31, 2014 book value will be approximately $35.2 million for the Company.  We estimate Tiptree Financial’s incremental tax provision at the time of sale to be approximately $11.1 million.  The incremental provision would bring total provisions for PFG related tax to approximately $26.5 million, which includes the deferred tax liability of $15.4 million already recorded as of December 31, 2014. Pursuant to GAAP guidance, the results of PFG have been reclassified as “Discontinued Operations” in this report, having been previously classified as an insurance and insurance services segment. Summary information relating to PFG is presented below.

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 COLI/BOLI markets. PFG’s international operations consist 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.
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. 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
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. For a discussion of the regulations to which insurance companies, including PFG, are generally subject, see “Item 1. Business — Operating Businesses — Insurance and Insurance Services — Regulation.”
Employees
PFG and PFAS had 96 employees as of December 31, 2014.
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.

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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, 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.

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

Tiptree is subject to certain risks and uncertainties in its business operations which are described below. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties that are not presently known or are currently deemed immaterial may also impair our business, results of operations and financial condition. In October, 2014, we entered into a definitive agreement to sell PFG and that sale is expected to close during the third quarter of 2015. However, we cannot assure you of the timing of the sale or whether it will occur. Accordingly, the PFG business is discussed in these Risk Factors.

Risks Related to our Businesses

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

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.

Acquisitions may have an adverse effect on us, including due to the failure to successfully integrate the businesses we acquire.

We regularly evaluate opportunities for strategic growth through acquisitions. Acquired companies and operations may result in unforeseen operating difficulties and may require greater than expected financial and other resources. In addition, potential issues associated with acquisitions could include, among other things:

our ability to realize the full extent of the benefits, synergies or cost savings that we expect to realize as a result of the completion of an acquisition within the anticipated time frame, or at all;
receipt of necessary consents, clearances and approvals in connection with the acquisition;
diversion of management’s attention from other strategies and objectives;
motivating, recruiting and retaining executives and key employees; and
conforming and integrating financial reporting, standards, controls, procedures and policies, business cultures and compensation structures.

If an acquisition is not successfully completed or integrated into our existing operations, our business, results of operations and financial condition could be materially adversely effected.

We may need to raise additional capital in the future or may need to refinance existing indebtedness, but there is no assurance that such capital will be available on a timely basis, on acceptable terms or at all.

We may need to raise additional funds in order to grow our business or fund our strategy or acquisitions. Additional financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders if raised through additional equity offerings. Additionally, any securities issued to raise such funds may have rights, preferences and privileges senior to those of our existing stockholders. If adequate funds are not available on a timely basis or on acceptable terms, our ability to expand, develop or enhance our subsidiaries’ services and products, enter new markets, consummate acquisitions or respond to competitive pressures could be materially limited.


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The amount of required statutory capital of our insurance subsidiaries can increase because of factors outside of our control.

Our insurance subsidiaries are subject to statutory capital and reserve requirements established by the applicable insurance regulators based on risk-based capital formulas. In any particular year, these requirements may increase or decrease depending on a variety of factors, most of which are outside our 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 the subsidiary’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 our insurance subsidiaries are required to hold can adversely affect our financial condition and results of operations.

A downgrade in our insurance subsidiaries’ claims paying ability or financial strength ratings could increase policy surrenders and 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 insurers. Some distributors of insurance products may choose not to do business with insurance companies that are rated below certain financial strength ratings. Fortegra currently has a rating of “A-” from A.M. Best Company, Inc. Each of PFLAC and PFLAC NY currently have a rating of “A-” from A.M. Best Company, Inc. Rating agencies can be expected to continue to monitor our insurance subsidiaries’ financial strength and claims paying ability, and no assurances can be given that future ratings downgrades will not occur, whether due to changes in their performance, changes in rating agencies’ industry views or ratings methodologies, or a combination of such factors. A ratings downgrade or the potential for such a downgrade in a rating could, to the extent applicable to a particular type of policy, materially increase the number of policy surrenders or withdrawals by policyholders of cash values from their policies, adversely affect relationships with distributors of insurance products, reduce new policy sales and adversely affect our ability to compete in the insurance industry.

Our insurance subsidiaries may incur losses if reinsurers are unwilling or unable to meet their obligations under reinsurance contracts.

Fortegra reinsures a substantial portion of the risks underwritten through third party reinsurance companies. Our insurance subsidiaries use reinsurance to reduce the severity and incidence of claims costs, and to provide relief with regard to certain reserves. As of December 31, 2014, 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 the insurers’ losses and related expenses; however, the insurer remains liable as the direct insurer on all risks reinsured. Consequently, reinsurance arrangements do not eliminate our obligation to pay claims and we assume credit risk with respect to our ability to recover amounts due from reinsurers. The inability or unwillingness of any reinsurer to meet its financial obligations could negatively affect our financial condition and results of operations.
Fortegra’s reinsurance facilities are generally subject to annual renewal. Fortegra may not be able to maintain its current reinsurance facilities and its clients may not be able to continue to operate their captive reinsurance companies. As a result, even where highly desirable or necessary, Fortegra may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. If Fortegra is unable to renew its expiring facilities or to obtain or structure new reinsurance facilities, either its net exposures would increase or, if it is unwilling to bear an increase in net exposures, it may have to reduce the level of its underwriting commitments. Either of these potential developments could have a material adverse effect on our results of operations and financial condition.

Our insurance subsidiaries’ actual claims losses may exceed their reserves for claims, which may require them to establish additional reserves that may materially and adversely affect their business, results of operations and financial condition.

Our insurance subsidiaries maintain reserves to cover their estimated ultimate exposure for claims with respect to reported claims and incurred but not reported claims as of the end of each accounting period. Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of exposure. Instead, they represent our insurance subsidiaries’ best estimates, generally involving actuarial projections, of the ultimate settlement and administration costs for a claim or group of claims, based on our assessment of facts and circumstances known at the time of calculation. The adequacy of reserves will be impacted by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by external factors such as changes in the economic cycle, unemployment, changes in the social perception of the value of work, emerging medical perceptions regarding physiological or psychological causes of disability, emerging health issues, new methods of treatment or accommodation, inflation, judicial trends, legislative changes, as well as changes in claims handling procedures. Many of these items are not directly quantifiable, particularly on a prospective basis. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement

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of income of the period in which such estimates are updated. Because the establishment of reserves is an inherently uncertain process involving estimates of future losses, we can give no assurances that ultimate losses will not exceed existing claims reserves. In general, future loss development could require reserves to be increased, which could have a material adverse effect on our insurance subsidiaries’ business, results of operations and financial condition.

Fortegra may lose clients or business as a result of consolidation within the financial services industry.

There has been considerable consolidation in the financial services industry, driven primarily by the acquisition of small and mid-size organizations by larger entities. We expect this trend to continue. Fortegra may lose business or suffer decreased revenues if one or more of its significant clients or distributors consolidate or align themselves with other companies. To date, Fortegra’s business has not been materially affected by consolidation. However, it may be affected by industry consolidation that occurs in the future, particularly if any of its significant clients are acquired by organizations that already possess the operations, services and products that it provides.

Fortegra is dependent on independent financial institutions, lenders and retailers for distribution of its products and services, and the loss of these distribution sources, or their failure to sell Fortegra’s products and services could materially and adversely affect its business, results of operations and financial condition.

Fortegra is dependent on financial institutions, lenders and retailers to distribute its products and services and its revenue is dependent on the level of business conducted by such distributors as well as the effectiveness of their sales efforts, each of which is beyond Fortegra’s control because such distributors typically do not have any minimum performance or sales requirements. Further, although its contracts with these distributors are typically exclusive, they can be canceled on relatively short notice. Therefore, Fortegra’s growth is dependent, in part, on its ability to identify and attract new distribution relationships and successfully implement its information systems with those of its new distributors. The impairment of Fortegra’s distribution relationships, the loss of a significant number of its distribution relationships, the failure to establish new distribution relationships, the failure to offer increasingly competitive products, the increase in sales of competitors’ services and products by these distributors or the decline in their overall business activity or the effectiveness of their sales of Fortegra’s products could materially reduce Fortegra’s sales and revenues and have a material adverse effect on its business, results of operations and financial condition.

Due to the structure of some of Fortegra’s commissions, it is exposed to risks related to the creditworthiness of some of its agents.

Fortegra is subject to the credit risk of some of the agents with which it contracts to sell its products and services. Fortegra typically advances agents’ commissions as part of its product offerings. These advances are a percentage of the premiums charged. If Fortegra over-advances such commissions to agents, the agents may not be able to fulfill their payback obligations, which could have a material adverse effect on Fortegra’s results of operations and financial condition.

Our information systems may fail or their security may be compromised, which could damage our business and materially and adversely affect our results of operations and financial condition.

Our insurance and insurance services business is highly dependent upon the effective operation of our information systems and our ability to store, retrieve, process and manage significant databases and expand and upgrade our information systems. We rely on these systems throughout our businesses for a variety of functions, including marketing and selling our products and services, performing our services, managing our operations, processing claims and applications, providing information to clients, performing actuarial analyses and maintaining financial records. The interruption or loss of our information processing capabilities through the loss of stored data, programming errors, the breakdown or malfunctioning of computer equipment or software systems, telecommunications failure or damage caused by weather or natural disasters or any other significant disruptions could harm our business, ability to generate revenues, client relationships, competitive position and reputation. In addition, our information systems may be vulnerable to physical or electronic intrusions, computer viruses or other attacks which could disable our information systems and our security measures may not prevent such attacks. The failure of our systems as a result of any security breaches, intrusions or attacks could cause significant interruptions to our operations, which could result in a material adverse effect on our business, results of operations and financial condition.

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 (for example as a result of exercise of optional call provisions by subordinated noteholders) or lower than expected returns, could adversely affect our results of operations.

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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.

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 use of joint ventures for investments may limit our flexibility with respect to such jointly owned investments and could, thereby, have a material adverse effect on our business, results of operations and financial condition and our ability to sell these joint venture interests.

We have invested in joint ventures for real estate investments with other persons or entities when circumstances warrant the use of these structures and may form additional joint ventures to invest in real estate and other assets in the future. 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;
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 consents which we may not be able to obtain;

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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 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 Code, including as a result of the Contribution Transactions or the exchange by TFP’s limited partners of their partnership units in TFP for Tiptree Financial Class A common stock in 2014, our ability to use those net operating losses to offset taxable income could 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 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.

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.

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 credit 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.

Certain of our and our subsidiaries’ 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 assets, including our direct investments, are subject to credit risk, interest rate risk, market risk, credit spread risk, selection risk, call and redemption risk and refinancing risk.
Credit risk is the risk that the obligor will be unable to pay scheduled principal and/or interest payments. Defaults by third parties in the payment or performance of their obligations could reduce our income and realized gains or result in the recognition of losses. The fair value of our assets may be materially and adversely affected by increases in interest rates, downgrades in our direct investments and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the fair value of our assets.
With respect to fixed-rate instruments, interest rate risk is the risk that the market value of such instruments 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 instruments goes down and instruments with longer maturities are typically affected more by changes in interest rates than instruments 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 will increase in the future causing these instruments to decline in market value.

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With respect to floating-rate instruments, interest rate risk is the risk that defaults on such instruments will increase during periods of rising interest rates and that during periods of declining interest rates, obligors may exercise their option to prepay principal earlier than scheduled.
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 instruments.
Credit spread risk is the risk that the market value of fixed income instruments 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.
Refinancing risk is the risk that we will be unable to refinance some or all of our indebtedness or that any refinancing will not be on terms as favorable as those of our existing indebtedness, which could increase our funding costs, limit our ability to borrow, or result in a sale of the leveraged asset on disadvantageous terms. Any one of these risks may materially and adversely affect the value of our assets, our results of operations and our financial condition.

Our risk mitigation or hedging strategies could result in our experiencing significant losses that may materially adversely affect us.
We pursue risk mitigation and hedging strategies to seek to reduce our exposure to losses from adverse credit events, interest rate changes and other risks. These strategies include short Treasury positions, interest rate swaps, credit derivative swaps, CDX derivative index positions, buying and selling credit protection on different tranches of risk in differing CDX indexes and derivative hedging instruments. Since we account for derivatives at fair market value, changes in fair market value are reflected in net income other than derivative hedging instruments which are reflected in accumulated other comprehensive income in stockholders’ equity. Some of these strategies could result in our experiencing significant losses that may materially adversely affect our business, financial condition and results of operations.
We face risks related to recession, financial and credit market disruptions and other economic conditions.

Demand for our products and services may be impacted by weak economic conditions, recession, equity market, and fixed income volatility or other negative economic factors that are out of our control. Similarly, disruptions in financial and/or credit markets may impact our and our subsidiaries’ ability to manage normal commercial relationships with customers, counterparties and creditors which could negatively impact our business, financial condition and results of operations.

Risks Related to our Structure

Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders will depend on distributions from our subsidiaries that may be subject to restrictions.

We are a holding company and do not have any significant operations of our own. Our ability to meet our obligations will depend on distributions from our subsidiaries. The amount of dividends and other distributions 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. Such restrictions would also affect our ability to pay dividends to stockholders, if and when we choose to do so. We did not pay any cash dividends on our common stock in fiscal 2014.
Our regulated insurance company subsidiaries are required to satisfy minimum capital and surplus requirements according to the laws and regulations of the states in which they operate, which regulate the amount of dividends and distributions we receive from them. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which varies by state. Some states have an additional stipulation that dividends may only be paid out of earned surplus. States also regulate transactions between our insurance company subsidiaries and us or our other subsidiaries, such as those relating to the shared services, and in some instances, require prior approval of such transactions within the holding company structure. If insurance regulators determine that payment of an ordinary dividend or any other payments by our insurance company subsidiaries to us or our other subsidiaries (such as payments for employee or other services) would be adverse to policyholders or creditors, the regulators may block or otherwise restrict such payments that would otherwise be permitted without prior approval. In addition, there could be future regulatory actions restricting the ability of our insurance company subsidiaries to pay dividends or share services.


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Termination of our 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 a Transition Services Agreement, we pay fees to Tricadia for the services of Michael Barnes, our Executive Chairman, Julia Wyatt, our Chief Operating 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 any of the Transition Services Agreement, Tricadia’s services agreement with Mariner 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 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, private equity funds and structured vehicles with business strategies that may compete with ours. Furthermore, Geoffrey Kauffman, our Co-Chief Executive Officer, is the Co-Chief Executive Officer of TFP and is a limited partner of Tricadia. Julia Wyatt, our Chief Operating Officer, is the Chief Financial Officer of Tricadia and the Chief Operating Officer of TFP and is also a limited partner of Tricadia. Jonathan Ilany, our Co-Chief Executive Officer, is a limited partner of Mariner, which is a stockholder of Tiptree Financial and provides certain back office services to Tiptree. 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 the 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 currently 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 its stockholders.

We incur costs as a result of operating as a public company, and our management is required to devote substantial time to these compliance activities.

As a public company, we incur legal, accounting and other costs that we did not incur prior to the Contribution Transactions. In addition, the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” the Dodd-Frank Act and the rules of the SEC, and NASDAQ, impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to these compliance activities. Moreover, these rules and regulations increase our legal and financial compliance costs and 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 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

20



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. Our charter also generally only permits stockholders to act without a meeting by unanimous consent. These provisions may delay, deter or prevent takeovers and business combinations that stockholders consider in their best interests.

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 acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer 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.

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

Tiptree holds and manages multiple lines of business. 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 at a holding company level. 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 or one or more of our lines of business.

Risks Related to Regulatory and Legal Matters

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 forgo 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

21



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 were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

A change in law, regulation or regulatory enforcement applicable to insurance products could adversely affect our financial condition and results of operations.

A change in state or U.S. federal tax laws could materially affect our insurance businesses. Currently, Fortegra does not collect sales or other related taxes on its services. Whether sales of Fortegra’s services are subject to state sales and use taxes is uncertain, due in part to the nature of its services and the relationships through which its services are offered, as well as changing state laws and interpretations of those laws. One or more states may seek to impose sales or use tax or other tax collection obligations on Fortegra, whether based on sales by Fortegra or its resellers or clients, including for past sales. A successful assertion that Fortegra should be collecting sales or other related taxes on its services could result in substantial tax liabilities for past sales, discourage customers from purchasing its services, discourage clients from offering or billing for its services, or otherwise cause material harm to its business, financial condition and results of operations.
With regard to Fortegra’s payment protection products, there are federal and state laws and regulations that govern the disclosures related to lenders’ sales of those products. Fortegra’s ability to offer and administer these products on behalf of financial institutions is dependent upon their continued ability to sell such products. To the extent that federal or state laws or regulations change to restrict or prohibit the sale of these products, Fortegra’s revenues would be adversely affected. For example, the Dodd-Frank Act created the CFPB to add new regulatory oversight for the sales practices of such payment protection products. The CFPB’s enforcement actions have resulted in large refunds and civil penalties against financial institutions in connection with their marketing of payment protection and other products. Due to such regulatory actions, some lenders may reduce their sales and marketing of payment protection and other ancillary products, which may adversely affect Fortegra’s revenues. The full impact of the CFPB’s oversight is unpredictable and continues to evolve. With respect to the property and casualty insurance policies Fortegra underwrites, federal legislative proposals regarding national catastrophe insurance, if adopted, could reduce the business need for some of the related products that Fortegra provides. Additionally, as the U.S. Congress continues to respond to the housing foreclosure crisis, it could enact legislation placing additional barriers on creditor-placed insurance.
PFG generates revenue from the sale and administration of variable annuity and variable life insurance products which 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, prior to its sale, could adversely affect our financial condition and results of operations.

Compliance with existing and new regulations affecting our business 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 in the industries in which we operate. Regulation of such industries are expected to increase. In the past several years, there has been significant legislation affecting financial services, insurance and health care, including the Dodd-Frank 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. We can give no assurances that with changes to laws and regulations, our businesses can continue to be conducted in each jurisdiction in the manner as we have in the past.
Our insurance subsidiaries are subject to regulation by state and, in some cases, foreign insurance authorities with respect to statutory capital, reserve and other requirements. The laws of the various states in which our insurance businesses operate establish insurance departments and other regulatory agencies with broad powers to preclude or temporarily suspend our insurance subsidiaries from carrying on some or all of their activities or otherwise fine or penalize them in any jurisdiction in which they operate. Such regulation or compliance could reduce our insurance businesses’ profitability or limit their growth by increasing the costs of compliance, limiting or restricting the products or services they sell, or the methods by which they sell their services and products, or subjecting their business to the possibility of regulatory actions or proceedings.
TAMCO is an asset management holding company registered with the SEC as an investment advisor and is subject to various federal and state laws and regulations and rules of various securities regulators and exchanges. These laws and regulations primarily are intended to protect clients and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. Possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser, censures and fines.

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The properties held by our Care subsidiary 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 CFPB, the Federal Trade Commission and various state agencies that license, audit and conduct examinations.

Our businesses are subject to risks related to litigation and regulatory actions.

Over the last several years, businesses in many areas of the financial services industry have been subject to increasing amounts of regulatory scrutiny. In addition, there has been an increase in litigation involving firms in the financial services industry and public companies generally, some of which have involved new types of legal claims, particularly in the insurance industry. We may be materially and adversely affected by judgments, settlements, fines, penalties, unanticipated costs or other effects of legal and administrative proceedings now pending or that may be instituted in the future, including from investigations by regulatory bodies or administrative agencies. An adverse outcome of any investigation by, or other inquiries from, any such bodies or agencies also could result in non-monetary penalties or sanctions, loss of licenses or approvals, changes in personnel, increased review and scrutiny of us by our clients, counterparties, regulatory authorities, potential litigants, the media and others, any of which could have a material adverse effect on us.

Failure to protect our clients’ confidential information and privacy could result in the loss of our reputation and customers, reduction in our profitability and subject us to fines, penalties and litigation and adversely affect our results of operations and financial condition.

We and our subsidiaries retain confidential information in our information systems, and we are subject to a variety of privacy regulations and confidentiality obligations. For example, some of the Company’s subsidiaries are subject to the privacy regulations of the Gramm-Leach-Bliley Act. We and certain of our subsidiaries also have contractual obligations to protect confidential information we obtain from third parties. These obligations generally require us, in accordance with applicable laws, to protect such information to the same extent that we protect our own confidential information. We have implemented physical, administrative and logical security systems with the intent of maintaining the physical security of our facilities and systems and protecting our clients’ and their customers’ confidential information and personally-identifiable information against unauthorized access through our information systems or by other electronic transmission or through misdirection, theft or loss of data. Despite such efforts, we may be subject to a breach of our security systems that results in unauthorized access to our facilities and/or the information we are trying to protect. Anyone who is able to circumvent our security measures and penetrate our information systems could access, view, misappropriate, alter or delete any information in the systems, including personally identifiable customer information and proprietary business information. In addition, most states require that customers be notified if a security breach results in the disclosure of personally-identifiable customer information. Any compromise of the security of our or our subsidiaries’ information systems that results in inappropriate disclosure of such information could result in, among other things, unfavorable publicity and damage to our and our subsidiaries’ reputation, governmental inquiry and oversight, difficulty in marketing our services, loss of clients, significant civil and criminal liability, litigation and the incurrence of significant technical, legal and other expenses, any of which may have a material adverse effect on our results of operations and financial condition.
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, 2014, 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.

Leased Properties
Location
Square Footage
Purpose
Segment Used In
Jacksonville, FL
58,089

Office Space
Insurance
Jacksonville, FL
9,473

Office Space
Insurance
Marksville, LA
3,996

Office Space
Insurance

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Leased Properties
Location
Square Footage
Purpose
Segment Used In
Rose, LA
1,025

Office Space
Insurance
Paducah, KY
2,500

Office Space
Insurance
Palm Desert, CA
6,340

Office Space
Insurance
Novi, MI
20,053

Office Space
Insurance
Beaverton, OR
11,364

Office Space
Insurance
Boca Raton, FL
350

Office Space
Specialty Finance
Greenwich, CT                 
115

Office Space
Specialty Finance
Westport, CT                    
2,775

Office Space
Specialty Finance
Stamford, CT
3,500

Office Space
Specialty Finance
Stamford, CT
14,643

Office Space
Specialty Finance
Los Angeles, CA               
3,050

Office Space
Specialty Finance
Newport Beach, CA       
200

Office Space
Specialty Finance
Montvale, NJ                    
1,797

Office Space
Specialty Finance
East Hampton, NY           
580

Office Space
Specialty Finance
Garden City, NY                
2,900

Office Space
Specialty Finance
New York, NY
2,900

Office Space
Specialty Finance
White Plains, NY              
3,625

Office Space
Specialty Finance
New York, NY
2,750

Office Space
Asset Management
New York, NY
1,532

Office Space
Real Estate
New York, NY
7,693

Tiptree Corporate Offices
Corporate and Other
Philadelphia, PA
17,269

Office Space
Discontinued Operations

Real Estate Owned

The Company’s owned real estate as of December 31, 2014 is listed below. All of the owned real estate consists of properties managed by Care, except the Stamford, CT location, which is owned by Luxury.
Owned Properties
Location
Square Feet
Purpose
Segment Used In
Stamford, CT
3,500

Investment Property
Specialty Finance
Wheatfield, NY
212,079

Seniors Housing
Real Estate
Baldwinsville, NY
34,535

Seniors Housing
Real Estate
Geneva, NY
38,334

Seniors Housing
Real Estate
Sewell, NJ
168,000

Seniors Housing
Real Estate
Milford, PA
49,170

Seniors Housing
Real Estate
Weatherly, PA
48,829

Seniors Housing
Real Estate
Fredericksburg, VA
16,322

Seniors Housing
Real Estate
Richmond, VA
19,600

Seniors Housing
Real Estate
Stafford, VA
29,436

Seniors Housing
Real Estate
Berryville, VA
28,708

Seniors Housing
Real Estate
Oak Ridge, TN
105,500

Seniors Housing
Real Estate
Arlington, TX
128,486

Seniors Housing
Real Estate
Item 3. Legal Proceedings


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Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's agents. While the court did not award sanctions, it did order Fortegra to subpoena certain records from its agents. Although Fortegra appealed the order on numerous grounds, the Kentucky Supreme Court ultimately denied the appeal in April 2014. Consequently, Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's agents. The parties are currently conducting discovery in preparation for trial on September 8, 2015.

Tiptree considers such litigation customary in Fortegra’s lines of business. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position, results of operations or cash flows of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. Tiptree may record loss contingencies as developments warrant.

Tiptree and its subsidiaries are defendants in a consolidated class action in connection with Tiptree’s acquisition of Fortegra, entitled Stein v. Fortegra Financial Corporation, et al., Case No. 16-2014-CA-005825-XXXX-MA in the Circuit Court of the Fourth Judicial Circuit in and for Duval County, State of Florida. The complaint alleges that the merger consideration was inadequate, that the members of Fortegra’s board of directors breached their fiduciary obligations to Fortegra’s stockholders by approving the merger agreement and related agreements, engaging in an unfair sales process and failing to make adequate disclosures to Fortegra’s stockholders, and that the other named defendants aided and abetted the breach of those duties.

On February 6, 2015, the court granted preliminary approval of a disclosure-only settlement pursuant to which the terms of the merger agreement remain unchanged, but Fortegra issued additional supplemental disclosures about the merger to stockholders. We expect the settlement to be finally proved at a hearing on April 20, 2015. Tiptree has provided notice to the class as required. Accordingly, in management's opinion, based on information available at this time, the ultimate resolution of this litigation will not be materially adverse to the financial position, results of operations or cash flows of Tiptree.

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

Item 4. Mine Safety Disclosures

Not applicable.

PART II

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

Market Information
Tiptree Financial’s Class A common stock has traded on the NASDAQ Capital Market under the ticker symbol “TIPT” since August 9, 2013. Prior to the Contribution Transactions, Care’s common stock was quoted on the OTCQX market under the ticker symbol “CVTR”.

Holders
As of March 27, 2015, there were 119 Class A common stockholders of record.


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Stock Price and Dividends
The following table sets forth the high and low stock prices per share of our Class A common stock and the dividends declared and paid per share on our Class A common stock for the periods indicated.
2014
High Price
Low Price
Dividends
First Quarter
$
8.25

$
6.48

$

Second Quarter
13.98

7.05


Third Quarter
8.64

6.67


Fourth Quarter
$
8.50

$
7.00

$

 
 
 
 
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

$


Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity for the year ended December 31, 2014 was as follows:
Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs
December 4, 2014 to December 31, 2014: Open Market Purchases
Tiptree Financial
5,238
$7.56
5,238
$2,460,399
Michael Barnes
5,024
7.56
5,024
2,462,057
Total
10,262
$7.56
10,262
$4,922,456

Share repurchase activity for the period from January 1, 2015 to March 20, 2015 was as follows:
Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs
January 1, 2015 to January 31, 2015: Open Market Purchases
Tiptree Financial
30,384
$7.66
30,384
$2,227,625
Michael Barnes
29,906
7.67
29,906
2,232,807
Total
60,290
$7.66
60,290
$4,460,432
 
 
 
 
 
 
February 1, 2015 to February 28, 2015: Open Market Purchases
Tiptree Financial
15,635
$7.44
15,635
$2,111,282
Michael Barnes
15,447
7.45
15,447
2,117,706
Total
31,082
$7.45
31,082
$4,228,988
 
 
 
 
 
 
March 1, 2015 to March 20, 2015: Open Market Purchases
Tiptree Financial
15,865
$6.73
15,865
$2,004,559
Michael Barnes
15,848
6.72
15,848
2,011,203
Total
31,713
$6.72
31,713
$4,015,762


26



(1)
On December 4, 2014, Tiptree Financial engaged a broker in connection with a share repurchase program for the repurchase of up to $2.5 million of its outstanding Class A common stock. In addition, on the same date, Michael Barnes, Tiptree Financial’s Executive Chairman, entered into a Rule 10b5-1 plan pursuant to which he will, for his own account, purchase up to $2.5 million of Tiptree Financial’s outstanding Class A common stock. Repurchases by Tiptree Financial and purchases by Mr. Barnes will be made through a single broker and is anticipated to be allocated equally between Tiptree Financial and Mr. Barnes (or to Tiptree Financial in the case of trades that cannot be split evenly). We expect the share purchases to be made from time to time in the open market or through privately negotiated transactions, or otherwise, subject to applicable laws and regulations. Unless otherwise completed or terminated earlier, the repurchase program will expire on November 18, 2015.

Item 6. Selected Financial Data

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

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

Tiptree Financial is a diversified holding company that draws upon the extensive experience of its management in the areas of insurance, specialty finance, asset management, real estate and credit investing to acquire and grow primarily controlling interests of operating businesses. We believe our business ownership mix of (i) specialty insurance, insurance services and warranty protection companies, (ii) operating companies which principally originate or own tangible assets, and (iii) asset management companies which earn fees from third-party investment vehicles, provides business synergies which generate a higher overall return on shareholder capital.

When making new acquisitions, we strive to identify businesses that: (i) have strong and experienced management, (ii) have the potential to generate attractive and stable returns on capital with limited downside, (iii) complement existing businesses or strategies through clearly identifiable synergies, and (iv) have sustainable and scalable business models. Tiptree’s permanent capital base allows us to view our business through a long-term lens, providing competitive advantages relative to alternative capital sources with shorter-term objectives. We will retain a well-performing business for an indefinite period, but will consider selling a business when we believe material shareholder value creation will be achieved.

When we acquire a business, we aim to partner with the management and employees, providing assistance when needed, but relying on their unique expertise to run the business day-to-day. We enhance the value of our businesses by utilizing our experience in capital markets, mergers and acquisitions, capital raising, credit markets, distressed investing, securitization, asset management, corporate governance and government regulatory issues. We also optimize the efficiencies of our business operations by strategically using the resources and talents of our more than 700 employees at our consolidated subsidiaries. We seek to adopt a prudent approach with regard to our capital structure, the diversification of financial risk and the avoidance of reputational risk. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital (change in book value plus dividends paid), to alternative investment options and major market indices.

The Company, whose operations date back to 2007, currently operates in five reporting segments: insurance and insurance services, specialty finance, asset management, real estate and corporate and other. See “Item 1. Business — Operating Businesses” and Note 6 — Operating Segment Data, to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following is presented on both a consolidated and segment basis.

We acquired Fortegra in December, 2014. The acquisition is expected to generate a significant portion of our revenue and net income in 2015. For 2014, only the revenues earned and expenses incurred from the date of Fortegra’s acquisition have been incorporated in our financial statements. The net results of Fortegra in this limited period reflects certain closing costs and adjustments which we do not foresee recurring in 2015.

In October, 2014, we entered into an agreement to sell PFG to Blackstone. A significant portion of the Company’s 2014 net income was generated from our PFG subsidiary, which has been classified as “discontinued operations” in our financial statements. PFG’s net income for 2013 has also been reclassified as “discontinued operations.” The sale of PFG to Blackstone is expected to close in the third quarter of 2015. Based on a total purchase price of $165 million, we estimate that the GAAP pretax gain over December 31, 2014 book value will be approximately $35.2 million for the Company.  We estimate Tiptree Financial’s incremental tax provision at the time of sale to be approximately $11.1 million.  The incremental provision would bring total provisions for PFG related tax to approximately $26.5 million, which includes the deferred tax liability of $15.4 million already recorded as of December 31, 2014. The sale agreement specifies any results generated by PFG in 2015 will remain with PFG when sold.

27



Tiptree Selected Consolidated Financial Data

Summary Consolidated Statements of Operations ($ in thousands)
 
 
Year ended December 31,
 
 
2014
 
2013 As adjusted (1)
Revenues:
 
 
 
 
Net realized and unrealized gains on investments
 
$
8,961

 
$
6,887

Interest income
 
14,845

 
11,650

Net credit derivative loss
 
(1,606
)
 
(1,828
)
Service and administrative fees
 
8,657

 

Ceding commissions
 
3,737

 

Earned premiums, net
 
12,827

 

Gain on sale of loans held for sale, net
 
7,154

 

Loan fee income
 
3,736

 
459

Rental revenue
 
19,747

 
5,760

Other income
 
2,255

 
815

Total revenue
 
80,313

 
23,743

 
 
 
 
 
Expenses:
 
 
 
 
Interest expense
 
12,541

 
4,865

Payroll and employee commissions
 
33,788

 
16,741

Commission expense
 
4,287

 

Member benefit claims
 
2,676

 

Net losses and loss adjustment expenses
 
3,153

 

Professional fees
 
9,254

 
7,137

Depreciation and amortization expenses
 
11,945

 
1,988

Acquisition costs
 
6,121

 

Other expenses
 
15,285

 
5,610

Total expense
 
99,050

 
36,341

 
 
 
 
 
Results of consolidated CLOs:
 
 
 
 
Income attributable to consolidated CLOs
 
64,681

 
61,179

Expenses attributable to consolidated CLOs
 
45,156

 
32,314

Net Income attributable to consolidated CLOs
 
19,525

 
28,865

Income before taxes from continuing operations
 
788

 
16,267

Provision for income taxes
 
4,141

 
560

 (Loss) income from continuing operations
 
(3,353
)
 
15,707

 
 
 
 
 
Discontinued operations:
 
 
 
 
Income from discontinued operations, net
 
7,937

 
9,559

Gain on sale of discontinued operations, net
 

 
15,463

Discontinued operations, net
 
7,937

 
25,022

Net income before non-controlling interests
 
4,584

 
40,729

Less net income attributable to noncontrolling interest
 
6,294

 
30,336

Net (loss) income available to common stockholders
 
$
(1,710
)
 
$
10,393


(1) See Note 3—Out of Period Adjustments, Changes in Accounting Principles and Reclassifications, for detail descriptions of these adjustments.

Consolidated Statements of Operations - Year ended December 31, 2014 compared with Year ended December 31, 2013

Summary of results

Net after tax income of the Company was $4.6 million for 2014 compared with $40.7 million in 2013. Revenues increased to $80.3 million in 2014 from $23.7 million in 2013. Expenses increased to $99.1 million in 2014 from $36.3 million in 2013. Expenses in 2014 include $6.1 million of charges incurred related to our Fortegra acquisition which are not expected to recur. Discussion of the changes in revenues, expenses and net income is presented below and in our segment analysis.



28




Net realized and unrealized gains on investments

The Company’s realized and unrealized gains on investments was $9.0 million in 2014, compared to $6.9 million in 2013. The majority of the gains in 2014 were realized by the Company’s Care subsidiary as the result of the repayment in full of a loan that had been held at a discounted value.

Interest income

Interest income is earned on the Company’s holdings of bonds and loans. Consolidated interest income was $14.8 million in 2014, compared to $11.7 million in 2013. Interest income was primarily earned from loans made by the Company’s specialty finance and real estate segments and from assets held in our corporate and other segment. Increased interest income in 2014 was attributable primarily to higher interest income from Siena’s expanded lending activities in 2014, which earned an additional $2.1 million of interest income in 2014 and at Luxury, which was acquired in 2014 and earned $1.0 million in 2014.

Net credit derivative revenue

The Company’s net credit derivative income/(loss) is earned on its credit swap and credit derivative index (CDX) positions. Net credit derivative revenue is the net total of premium income earned and premium expense incurred on our credit derivatives and net unrealized gains and losses from changes in the fair value of our credit derivative transactions. The net credit derivative loss of $1.6 million in 2014 was consistent with the net credit derivative loss of $1.8 million in 2013.

Service and administrative fees

Service and administrative fees were $8.7 million in 2014 and represent fees earned by Fortegra, since its acquisition, from a number of different activities, but principally from the provision of warranty protection on furniture, equipment and cell phones. Service fees are also earned through Fortegra’s car club program, offering road side assistance to motorists and car damage protection plans. Fortegra also earns administrative fees paid by reinsurance companies for insurance policies ceded by Fortegra to the reinsurer. The fee covers Fortegra’s administrative cost for issuing the policies plus a profit margin.

Ceding commissions

Ceding commissions were $3.7 million in 2014 and represent commissions earned by Fortegra, since its acquisition, under coinsurance agreements with third party insurers that are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by companies assuming the insurance risks. As experience changes, adjustments to ceding commissions are reflected in the period and are based on the claim and investment experience of the related polices.

Earned premium, net

Earned premium, net, was $12.8 million in 2014 and represent direct and assumed earned premiums generated by Fortegra, since its acquisition, from the direct sale of payment protection insurance policies by Fortegra’s distributors and premiums written for payment protection insurance policies by another carrier and assumed by Fortegra. The underlying insurance plans primarily relate to credit protection in the event of job loss or disability.

Further discussion of service and administrative fee income, ceding fees and commissions and net earned premium earned by Fortegra in the period since acquisition is presented in our insurance and insurance services segment analysis, see “— Segment Reporting — Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013 —Insurance and Insurance Services.”

Gain on sale of loans held for sale, net

Gain on sale of loans held for sale, net, were $7.2 million which was earned by Luxury from the origination and sale of loans, primarily residential mortgages, since its acquisition in January 2014.

Loan fee income

Siena and Luxury earn fees associated with their lending activities which are classified as loan fee income. Loan fee income was $3.7 million in 2014 and $459 thousand in 2013. Siena’s loan fee income was $1.9 million in 2014 and $459 thousand in 2013. The increase in loan fee income in 2014 was attributable to Siena’s increased lending activity in 2014. Luxury earned $1.8 million in loan fees since its acquisition in January 2014.

29




Rental revenue

Rental revenues are primarily earned from the properties owned by our Care subsidiaries. Rental revenue was $19.7 million in 2014 and $5.8 million in 2013. The higher revenue earned in 2014 was attributable to the increased number of properties owned by Care in 2014. Further discussion of rental income in 2014 and 2013 is presented in our real estate segment analysis.

Interest expense

The Company incurs interest expense on its borrowings. Interest expense was $12.5 million in 2014 and $4.9 million in 2013. The increase in interest expense was attributable to higher borrowings by the Company in 2014 and 2013. Further discussion of interest expenses in 2013 and 2014 is presented in our segment analysis. Further information relating to our borrowings may be found in “— Liquidity and Capital Resources” and in Note 15—Debt, in the accompanying consolidated financial statements.

Payroll and employee commissions

Payroll expense was $33.8 million in 2014, compared to $16.7 million in 2013. Payroll expenses increased in 2014 due to three primary factors: the acquisition of Luxury in January 2014, which added $8.2 million in payroll and employee commission expense; an increase in the number of Care joint ventures in 2014, which added $5.3 million in payroll expenses; and Fortegra’s payroll expense of $3.5 million for the period since its acquisition. Payroll expense at the corporate level also increased as the Company expanded its management and accounting resources to match the increased scope of its operations.

Commission expense

Commission expense was $4.3 million in 2014 and was incurred by Fortegra, since its acquisition, on most of its revenue classes, including commissions paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many instances, set by state regulators and are also impacted by market conditions.

Member benefit claims

Member benefit claims were $2.7 million in 2014 and were incurred by Fortegra in the period since its acquisition. Member benefit claims represent costs of services and replacement devices incurred on Motor Club and ProtectCELL warranty protection programs.

Net losses and loss adjustment expenses

Net losses and loss adjustment expenses were $3.2 million in 2014 and were incurred by Fortegra in the period since its acquisition. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering said claims. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.

Professional fees

Professional fees include audit, legal, tax advice, consultancy and other professional fees. Professional fee expenses are incurred by our subsidiary companies and Tiptree and Operating Company. Consolidated professional fee expense was $9.3 million in 2014, compared to $7.1 million in 2013. The increase in professional fees is primarily attributable to higher audit and legal fees associated with the acquisition and sale of subsidiaries.

Depreciation and amortization expense

Depreciation and amortization expense relates to the depreciation and amortization of the Company’s fixed assets, including buildings, leasehold improvements and other fixed assets. The Company also incurs amortization expense on the intangible assets acquired as a result of the purchase of subsidiary companies. Depreciation and amortization expense was $11.9 million in 2014, compared to $2.0 million in 2013. The increase in depreciation and amortization expense in 2014 was attributable primarily to $4.4 million in amortization of intangible assets acquired in conjunction with the expansion in Care joint ventures and due to $4.2 million in amortization of intangible assets acquired with the purchase of Fortegra.

30




Acquisition costs

The Company incurred costs of $6.1 million in connection with its acquisition of Fortegra, including consultancy fees and accelerated stock vesting expenses, which are not expected to be recurring, and have been classified as acquisition costs.

Other expenses

Other expenses were $15.3 million in 2014 and $5.6 million in 2013. Other expenses are incurred by all our segments and primarily consist of office and rent expenses, together with other expenses specific to each of the Company’s operating segments. The increase in other expenses in 2014 was primarily attributable to the expansion in the Company’s business activities including the acquisition of Luxury in 2014 which added $2.9 million of other expenses and Fortegra’s other expenses of $4.0 million incurred in the period since its acquisition.

Net Income attributable to consolidated CLOs

ASC Topic 810, Consolidations, requires the consolidation of a Variable Interest Entity (“VIE”) into the financial statements of the entity that is considered the VIE’s primary beneficiary (for further discussion, see Note 13—CLOs and Consolidated Variable Interest Entities of the accompanying financial statements). The Company has reviewed the CLOs it manages and determined that these CLOs should be consolidated into the Company’s financial statements.

New accounting guidance (ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity), enables the Company to recognize the value of the financial liabilities of the CLOs as the residual value of: (i) the sum of the fair value of the financial assets and the carrying value of any non-financial assets held temporarily, less (ii) the sum of the fair value of any beneficial interests in the CLOs held by the Company, including the fair value of subordinated debt and interest-only positions issued by the CLOs and unpaid compensation for management services provided by the Company. The Company has elected to early adopt this new accounting guidance and has also elected to apply it retrospectively for all relevant prior periods.

Previously, the Company did not elect to fair value the debt issued by the CLOs, which resulted in potentially significant movements in the net income attributable to CLOs as a result of the mark-to-market valuation of the assets of the CLOs but not the mark-to-market valuation of the debt issued by the CLOs.

The impact of the early adoption of the change in accounting guidance is that the net income attributed to consolidated CLOs now represents the Company’s economic interests in the CLOs, which includes realized and unrealized gains and losses on the subordinated debt and interest-only positions of the CLOs held by the Company, distributions earned on such debt and positions and the CLO management fees earned by the Company.

Both income and expenses attributable to consolidated CLOs increased over the prior year, primarily due to the increased number of CLOs managed by the Company. On December 31, 2014, the Company managed six CLOs, compared to four CLOs on December 31, 2013. The net income attributable to CLOs was $19.5 million in 2014, compared to $28.9 million in 2013. The decrease in net income in 2014 was primarily attributable to the decline in the net value of subordinated notes held by the Company in 2014 and by a reduction in management fees earned by the Company in 2014. The components of net income attributable to the consolidated CLOs are tabulated below:
Net Income attributable to CLOs managed by the Company
 
Year ended December 31,
 
2014
 
2013
Management fees paid by the CLOs to the Company
$
11,770

 
$
13,192

Distributions from the subordinated notes held by the Company
15,720

 
15,333

Realized and unrealized gains on subordinated notes held by the Company
(7,965
)
 
340

Net income attributable to the consolidated CLOs
$
19,525

 
$
28,865


The net income attributable to consolidated CLOs has been allocated to the asset management segment (representing the fees earned from the management of CLOs) and to the corporate and other segment (representing the distributions earned on the CLO subordinated debt and interest-only positions held by the Company and realized and unrealized gains and losses on such

31



debt and positions). The expenses the Company incurs in connection with the management of the CLOs have also been allocated to the asset management segment.

For further discussion of the Company’s CLO income and the costs the Company incurs associated with the management of the CLOs, which are not included in the table above, see “— Segment Reporting — Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013 —Asset Management” and “— Segment Reporting — Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013 — Corporate and Other”.

Provision for income taxes

The provision for income taxes increased in 2014 over the prior year primarily due to state income taxes, non-deductible transaction costs incurred on the Fortegra transaction and the effect of changes in valuation allowance on net operating losses reported by Tiptree Financial, Siena, Luxury and MFCA. The effective tax rate on income from continuing operations for the year ended December 31, 2014 was approximately 525.5% compared to 3.44% for the prior year end (which does not bear a customary relationship to statutory income tax rates). Differences from the statutory income tax rates are primarily the result of: (i) non-deductible transaction costs incurred in the Fortegra transactions (ii) the effect of changes in valuation allowance on net operating losses reported by Tiptree Financial, Siena, Luxury, and MFCA, and (iii) the effect of state income taxes required to be reported on a separate legal entity basis resulting in higher aggregate state taxable income than the consolidated pre-tax income from continuing operations.

Discontinued operations, net

Discontinued operations, net totaled $7.9 million in 2014, compared to $25.0 million in 2013. The components of discontinued operations in 2014 and 2013 are tabulated below:
Discontinued Operations
 
Year ended December 31,
 
2014
 
2013
Net income from Bickford discontinued operations

 
1,647

Gain on sale from Bickford discontinued operations

 
15,463

Net income from PFG discontinued operations
7,937

 
7,912

Discontinued operations, net
$
7,937


$
25,022


In 2013, the Company had a $15.5 million net gain from the sale of the Bickford Portfolio of properties which had been owned by Care. There was no comparable gain on sale earned in 2014.

Net income from discontinued operations decreased to $7.9 million in 2014 from $9.6 million in 2013. The decline in net income from discontinued operations in 2014 is principally due to the absence of income from Bickford operations as noted below. Net income from discontinued operations at PFG increased slightly in 2014, principally due to increased separate account fees of $1.1 million, resulting from increased assets held in separate accounts and higher account management fee rates. Fees from the administration of Hartford policies increased in 2014 by $1.1 million due to higher assets under administration. Interest expense on PFAS’s notes declined by $1.0 million due to the amortization of the principal amount outstanding. These gains were largely offset by an increase in depreciation and amortization expense of $1.4 million, principally due to the increase in depreciation expense incurred in 2014 in connection with the move of PFAS’s physical location from New Jersey to Philadelphia and amortization expense relating to PFG’s intangible assets. Other expenses in 2014 also increased as a result of the move. There were no comparable move-related expenses in 2013. PFG incurred tax expense of $6.1 million in 2013 and $5.5 million in 2014.

Included in income from discontinued operations in 2013 was net income of $1.6 million from the Bickford Portfolio which did not recur in 2014. For further information relating to the sale of PFG see the discussion of discontinued operations in Part I of this document and Note 5—Dispositions, Assets Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements.

Net loss available to Class A common stockholders

Net loss available to Class A common stockholders for the year ended December 31, 2014 was $1.7 million compared to net income of $10.4 million for the same period in 2013. The decline in net income available to Class A common stockholders was primarily due to the decline in the Company’s net income from $40.7 million in 2013 to $4.6 million in 2014.

32



Balance Sheet Information - Year Ended December 31, 2014 compared to December 31, 2013
The Company’s total assets were $8.2 billion as of December 31, 2014, compared to $6.9 billion as of December 31, 2013. The $1.3 billion increase in assets is primarily attributable to $760.2 million of assets acquired as a result of the purchase of Fortegra in 2014 and an increase of $572 million in the assets of the consolidated CLOs as a result of the issuance of two new CLOs under management in 2014. Total stockholders’ equity of the Company increased to $401.7 million as of December 31, 2014 compared to $396.9 million as of December 31, 2013. Total stockholders’ equity of Tiptree Financial rose to $284.5 million as of December 31, 2014 compared to $99.0 million as of December 31, 2013. The primary reason for the change in Tiptree Financial Inc. stockholders’ equity was the increased proportion of the Company owned by Class A stockholders as of December 31, 2014 compared with December 31, 2013, coupled with an increase in the Company’s total stockholder equity, as noted above.
Segment Reporting
During the year ended December 31, 2014, management changed its reportable operating segments. The Company now has five reportable operating segments, organized in a manner that reflects how management views the strategic business units.

The Company’s five operating segments are: insurance and insurance services, specialty finance, asset management, real estate and our corporate and other segment. See Note 6—Operating Segment Data, of the accompanying consolidated financial statements for a more detailed description of our segments.

The principal changes made to the operating segments in 2014 are summarized below:

Fortegra, which was acquired in December, 2014, was added to the insurance and insurance services segment. PFG, which the Company had agreed to sell in October, 2014, was reclassified as a discontinued operation and removed from the insurance and insurance services segment.
Luxury, a mortgage loan originator, which the Company acquired in January, 2014, was incorporated in the specialty finance segment. The Company had previously included MFCA and Tiptree Direct, which hold the Company’s principal investments, in the specialty finance segment. The results of the principal investments are now included in the corporate and other segment. The Company’s principal investments include CLO subordinated notes, risk mitigation transactions, warehouse holdings, holdings in the Star Asia entities and other corporate investments.
The real estate segment previously included investments in Star Asia entities. These investments are now reported in the corporate and other segment.
The net income attributable to consolidated CLOs has been allocated to the asset management segment (representing the fees earned from the management of CLOs) and to the corporate and other segment (representing the distributions earned on the CLO subordinated notes and interest-only positions held by the Company and realized and unrealized gains and losses on such debt and positions). The expenses the Company incurs in connection with the management of the CLOs have also been allocated to the asset management segment.

Each reportable segment’s profit/(loss) is reported before income taxes, discontinued operations and non-controlling interests. Intersegment revenue and expense relate to interest paid and received on loans and interest rate swaps between segments.


33



Segment results - year ended December 31, 2014
($ in thousands)
 
Year ended December 31, 2014
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate and other
 
Totals
Net realized and unrealized gains on investments
$
5

 
$
664

 
$

 
$
7,006

 
$
1,286

 
$
8,961

Interest income
196

 
3,611

 

 
1,529

 
9,509

 
14,845

Net credit derivative loss

 

 

 

 
(1,606
)
 
(1,606
)
Service and administrative fees
8,657

 

 

 

 

 
8,657

Ceding commissions
3,737

 

 

 

 

 
3,737

Earned premiums, net
12,827

 

 

 

 

 
12,827

Gain on sale of loans held for sale, net

 
7,154

 

 

 

 
7,154

Loan fee income

 
3,736

 

 

 

 
3,736

Rental revenue

 
52

 

 
19,695

 

 
19,747

Other income
753

 
6

 
278

 
1,051

 
167

 
2,255

Total revenue
$
26,175

 
$
15,223

 
$
278

 
$
29,281

 
$
9,356

 
$
80,313

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$
637

 
$
1,530

 
$

 
$
4,111

 
$
6,263

 
$
12,541

Payroll and employee commissions
3,483

 
10,690

 
5,117

 
8,056

 
6,442

 
33,788

Commission expense
4,287

 

 

 

 

 
4,287

Member benefit claims
2,676

 

 

 

 

 
2,676

Net losses and loss adjustment expenses
3,153

 

 

 

 

 
3,153

Professional fees
690

 
842

 
294

 
873

 
6,555

 
9,254

Depreciation and amortization expenses
4,265

 
499

 

 
7,181

 

 
11,945

Acquisition costs
6,121

 

 

 

 

 
6,121

Other expenses
4,034

 
3,624

 
480

 
5,889

 
1,258

 
15,285

Total expense
29,346

 
17,185

 
5,891

 
26,110

 
20,518

 
99,050

Net intersegment revenue/(expense)

 
(341
)
 

 

 
341

 

Net income attributable to consolidated CLOs (1)

 

 
11,770

 

 
7,755

 
19,525

Segment profit/(loss)
$
(3,171
)
 
$
(2,303
)
 
$
6,157

 
$
3,171

 
$
(3,066
)
 
$
788

Less: Provision for income taxes
 
 
 
 
 
 
 
 
 
 
4,141

Discontinued operations
 
 
 
 
 
 
 
 
 
 
7,937

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
4,584

Less: Net income attributable to non-controlling interest from continuing operations and discontinued operations
 
 
 
 
 
 
 
 
 
 
6,294

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
(1,710
)
 
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
760,149

 
$
79,075

 
$
2,871

 
$
179,822

 
$
65,570

 
$
1,087,487

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
1,978,094

Assets held for sale
 
 
 
 
 
 
 
 
 
 
5,129,745

Total Assets
 
 
 
 
 
 
 
 
 
 
$
8,195,326


(1) Net income attributable to CLO’s represents the Company’s interest in the CLOs it manages. These interests have been allocated to asset management fees of $11.8 million earned by the Company and net realized and unrealized gains/losses and distributions of $7.8 million received from the subordinated notes and interest-only positions of the CLOs held by the Company.


34



Segment results - year ended December 31, 2013
($ in thousands)
 
Year ended December 31, 2013
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate and other
 
Totals
Net realized and unrealized gains on investments
$

 
$

 
$

 
$
385

 
$
6,502

 
$
6,887

Interest income

 
498

 

 
2,316

 
8,836

 
11,650

Net credit derivative loss

 

 

 

 
(1,828
)
 
(1,828
)
Service and administrative fees

 

 

 

 

 

Ceding commissions

 

 

 

 

 

Earned premiums, net

 

 

 

 

 

Gain on sale of loans held for sale, net

 

 

 

 

 

Loan fee income

 
459

 

 

 

 
459

Rental revenue

 

 

 
5,760

 

 
5,760

Other income

 
12

 
350

 
413

 
40

 
815

Total revenue
$

 
$
969

 
$
350

 
$
8,874

 
$
13,550

 
$
23,743

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$

 
$
24

 
$

 
$
1,825

 
$
3,016

 
$
4,865

Payroll and employee commissions

 
1,732

 
6,006

 
2,707

 
6,296

 
16,741

Commission expense

 

 

 

 

 

Member benefit claims

 

 

 

 

 

Net losses and loss adjustment expenses

 

 

 

 

 

Professional fees

 
292

 
242

 
1,957

 
4,646

 
7,137

Depreciation and amortization expenses

 
96

 

 
1,892

 

 
1,988

Acquisition costs

 

 

 

 

 

Other expenses

 
529

 
402

 
3,702

 
977

 
5,610

Total expense

 
2,673

 
6,650

 
12,083

 
14,935

 
36,341

Net intersegment revenue/(expense)
 
 

 

 

 

 

Net income attributable to consolidated CLOs (1)
 
 

 
13,192

 

 
15,673

 
28,865

Segment profit/(loss)
$

 
$
(1,704
)
 
$
6,892

 
$
(3,209
)
 
$
14,288

 
$
16,267

Less: Provision for income taxes
 
 
 
 
 
 
 
 
 
 
560

Discontinued operations
 
 
 
 
 
 
 
 
 
 
25,022

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
40,729

Less: Net income attributable to non-controlling interest from continuing operations and discontinued operations
 
 
 
 
 
 
 
 
 
 
30,336

Less: non-controlling interest on discontinued operations
 
 
 
 
 
 
 
 
 
 

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
10,393

 
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$

 
$
21,338

 
$
176

 
$
160,328

 
$
334,347

 
$
516,189

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
1,405,355

Assets held for sale
 
 
 
 
 
 
 
 
 
 
4,950,727

Total Assets
 
 
 
 
 
 
 
 
 
 
$
6,872,271


(1) Net income attributable to CLO’s represents the Company’s interest in the CLOs it manages. These interests have been allocated to asset management fees of $13.2 million earned by the Company and the net realized and unrealized gains/losses and distributions of $15.7 million received from the subordinated notes of the CLOs and interest-only positions held by the Company.

35




Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013

Insurance and Insurance Services

The financial results of our insurance and insurance services segment are comprised of the revenues and expenses of our Fortegra subsidiary since the entity was acquired. The incorporation of full year Fortegra operations will result in a substantial increase in reported segment revenue and expense in 2015. For further discussion of the purchase of Fortegra and the effect of purchase price accounting adjustments made as a result of the acquisition, see Note 4—Business Acquisitions, of the accompanying consolidated financial statements.

Results of the Company’s PFG subsidiary, which had previously been presented in the insurance and insurance services segment have been reclassified as discontinued operations for 2014 and 2013.

Fortegra revenues earned from the date of acquisition totaled $26.2 million, comprised primarily of service and administrative fees of $8.7 million, ceding commissions of $3.7 million and net earned premiums of $12.8 million.

Fortegra earned $196 thousand of interest income in the period on its $171 million investment portfolio, comprised primarily of U.S. Treasury securities, obligations of U.S. government authorities and agencies and municipal and corporate securities. The average remaining maturity of this portfolio was 4.2 years and the average annualized yield on the portfolio was 2%.

Service and administrative fees for the period totaled $8.7 million. These fees include service and administrative fees of $7.7 million earned on Fortegra’s warranty programs for furniture and appliances, the ProtectCELL program for cell phone protection and car club memberships providing roadside assistance and car damage protection. Fortegra also earned fees of $1.0 million related to the administration of insurance policies ceded to reinsurance companies.

Ceding commissions of $3.7 million is revenue earned under reinsurance agreements with third party insurers who co-insure risks with Fortegra. The agreements with the third party insurers take into account the underwriting performance and investment returns experienced by the assuming companies. Ceding commission income is computed based upon the earned premium and investment income from the assets held in trust for Fortegra’s benefit, less earned commissions, incurred claims and the reinsurer’s fee for coverage.

Fortegra’s expenses for the period totaled $29.3 million, comprised primarily of interest expense of $637 thousand, payroll and employee commissions expense of $3.5 million, commission expenses of $4.3 million, member benefit claims of $2.7 million, net losses and loss adjustment expense of $3.2 million, depreciation and amortization expenses of $4.3 million and other expenses of $4.0 million.

Fortegra’s interest expense was $637 thousand for the period, which consisted of $582 thousand related to the borrowings under bank lines and the trust preferred security issued by Fortegra and $55 thousand of other interest expense. For further information relating to Fortegra’s debt and interest expenses, please refer to our Liquidity and Capital Resources discussion and analysis and to Note 15—Debt, of the accompanying consolidated financial statements.

Fortegra’s payroll and employee commissions expense of $3.5 million includes base salaries, employee commissions and accruals for employee paid time off and bonuses. As of December 31, 2014, Fortegra employed 523 full and part time employees.

Depreciation and amortization expense of $4.3 million related primarily to the amortization of the intangible assets acquired as a result of Tiptree’s purchase of Fortegra. The most significant of these expenses is the amortization of the insurance policies and contracts acquired, which had a value of $36.5 million as of the acquisition date and which has a steep amortization curve. Amortization of this intangible asset cost approximately $4.0 million in the period.

Other expenses of $4.0 million included deferred administrative costs of $1.7 million, an accrual of $500 thousand related to the potential settlement cost of outstanding legal claims, bank and credit card processing fees of $220 thousand, technology expenses of $180 thousand and filing and licensing fees of $129 thousand. Also included in other expenses is Fortegra’s rent expense for its offices of $194 thousand for the period.

During the period, the Company incurred $6.1 million of costs, including consultancy fees and accelerated stock vesting costs, in connection with the Company’s purchase of Fortegra which are not expected to recur. These costs have been included in the insurance and insurance services segment results.


36



Specialty Finance

Our specialty finance segment is comprised of Siena, a commercial finance company, which is 62% owned by the Company and Luxury, a mortgage originator which is 67.5% owned by the Company. Siena commenced its operations in April 2013, and Luxury was acquired by the Company in January 2014. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.

Total revenues of our specialty finance segment were $15.2 million in 2014, compared to $969 thousand for 2013. Total segment expenses were $17.2 million in 2014 and $2.7 million in 2013. Net losses for the segment before taxes and non-controlling interests were $2.3 million in 2014 and $1.7 million in 2013.

The Company manages Siena and Luxury as a single operating segment. However, for additional analysis, the revenues and expenses of Siena and Luxury have been tabulated below:
 
Siena
 
Luxury
 
Year ended December 31, 2014
 
9 month period ended December 31, 2013
 
11 month period ended December 31, 2014
Net realized and unrealized gains on investments
$

 
$

 
$
664

Interest income
2,566

 
498

 
1,045

Gain on sale of loans held for sale, net

 

 
7,154

Loan fee income
1,931

 
459

 
1,805

Rental revenue

 

 
53

Other income
5

 
12

 

Total revenue
4,502

 
969

 
10,721

 
 
 
 
 
 
Interest expense
497

 
24

 
1,033

Payroll and employee commissions
2,468

 
1,732

 
8,222

Professional fees
448

 
292

 
394

Depreciation and amortization expenses
244

 
96

 
254

Other expenses
726

 
529

 
2,899

Total expense
4,383

 
2,673

 
12,802

 
 
 
 
 
 
 Intersegment expense

 

 
(341
)
 
 
 
 
 
 
Segment profit/(loss)
$
119

 
$
(1,704
)
 
$
(2,422
)
Siena - year ended December 31, 2014 and nine month period ending December 31, 2013

Siena earned net pre-tax income of $119 thousand in 2014 and incurred a net pre-tax loss of $1.7 million in 2013. The improvement in results was chiefly attributable to significant increases in interest income and loan fee income in 2014. Siena’s expenses also increased in 2014 but not to the same extent as the increase in revenues. Revenues earned by Siena totaled $4.5 million in 2014 and $969 thousand in 2013. Siena’s revenues are primarily from interest on its loans to small and medium sized U.S. companies and fees charged in connection with those loans. Siena’s expenses were $4.4 million in 2014 and $2.7 million in 2013. Siena’s expenses are comprised primarily of interest expense on the Company’s borrowings, payroll and employee commissions, professional fees, depreciation and amortization and other expenses.

Siena’s interest income totaled $2.6 million in 2014, compared to $498 thousand in 2013. Total interest income in 2014 consisted of interest income on loans of $1.9 million and amortized origination income of $1.0 million, partly offset by amortization of loan origination expenses of $357 thousand. Interest income in 2013 consisted of interest income on loans of $379 thousand and amortized origination income of $119 thousand. Siena’s average outstanding loan balance was $29.3 million in 2014 and $6.0 million in 2013. The average interest rate earned on the outstanding loans was 6.48% in 2014 and 6.67% in 2013.

Siena’s loan fee income was $1.9 million in 2014, compared to $459 thousand in 2013. Loan fee income in 2014 principally comprised unused line of credit fees of $289 thousand, loan monitoring fees of $491 thousand, collection fees of $213 thousand, consulting fees of $256 thousand and facility cancellation and other fees of $381 thousand. The increase in net interest income and loan fee income was attributable chiefly to the increased volume of loans made in 2014.


37



Siena’s interest expense was $497 thousand in 2014, compared to $24 thousand in 2013. Interest expense was incurred on drawings under Siena’s $65 million line of credit facility, of which an average of $18.0 million was drawn down in 2014 and $1.8 million in 2013. The increase in interest expense in 2014 was due both to higher average borrowings and a full year of operations.

Siena’s payroll and employee commission expense was $2.5 million in 2014, compared to $1.7 million in 2013. These expenses were chiefly comprised of wages of $1,253 thousand in 2014 and $904 thousand in 2013, together with bonus expenses of $770 thousand in 2014 and $683 thousand in 2013. Other payroll expenses totaled $445 thousand in 2014 and $145 thousand in 2013, consisting of payroll taxes and employee benefits. The number of Siena employees increased from 7 at the end of 2013 to 13 at the end of 2014.

Professional fees at Siena totaled $448 thousand in 2014 and $292 thousand in 2013. Professional fees included audit, legal, contractor fees, director fees and other professional fees. Siena’s other expenses were $726 thousand in 2014 and $529 thousand in 2013. Other expenses include bad debt expense, bank fees, line of credit fees, technology expense, insurance expense and miscellaneous other offices charges.

Luxury - 11 month period ended December 31, 2014

Luxury incurred a pre-tax loss of $2.4 million during the year. Revenues earned by Luxury during the eleven months period ended December 31, 2014 were chiefly comprised of gains on loans held for sale of $7.2 million, interest income of $1.0 million on the loans held pending sale to investors and fee income and other income of $1.8 million. Luxury also recorded unrealized gains totaling $664 thousand on derivative and other transactions designed to mitigate the interest rate risk associated with holding mortgages prior to sale to investors.

Interest expense was $809 thousand in the period, representing interest paid on drawings under Luxury’s warehouse lines of credit. Luxury has entered into three warehouse lines of credit agreements totaling $82.5 million. As of December 31, 2014, $27.4 million was outstanding under these lines of credit.

Expenses of Luxury totaled $12.8 million in the period, primarily payroll and commission costs of $8.2 million, of which $4.8 million was employee salaries, incentive compensation and employee benefits and $3.3 million in commissions paid to Luxury’s loan officers. Employee commissions are based on the volume of mortgage transactions originated. For the eleven month period ended December 31, 2014, Luxury originated mortgage loans with a total face value of $538.7 million.

Professional fees at Luxury were chiefly comprised of design consulting fees of $230 thousand associated with recruiting initiatives and the build-out of new branches, together with audit and legal fees of $75 thousand. Other expenses of $2.9 million included mortgage origination related fees and mortgage recording taxes of $793 thousand, branch occupancy expense of $1.1 million and $472 thousand in office related expenses. Luxury’s intersegment expense of $341 thousand represented interest on a subordinated loan from Tiptree that was converted into preferred equity in October 2014.

Asset Management

The asset management segment generates fee income from the CLOs under management and from its management of NPPF 1, a portfolio of tax-exempt securities owned by third-party investors.

CLO asset management fees totaled $11.8 million in 2014, compared to $13.2 million in 2013. Although the number of CLOs under management increased from four CLOs as of December 31, 2013 to six CLOs as of December 31, 2014, management fee income declined between 2013 and 2014. The decrease was due principally to the reduction in management fees earned on Telos 1 and Telos 2, which have passed their re-investment period and whose assets are declining, generally resulting in reduced management fees. Fees on Telos 5 and Telos 6, both new in 2014, were earned at a lower rate than the fees generated from Telos 1 and Telos 2. In addition, Telos 5 was launched in May 2014 and Telos 6 in December 2014 which meant that fees from the new CLOs were earned for only a portion of 2014.

Total expenses for asset management were $5.9 million for 2014, compared to $6.7 million for 2013. The expenses were comprised primarily of the payroll expense for the asset managers, together with professional fees and other office expenses. The decrease in expenses of $759 thousand in 2014 was primarily attributable to a reduction in staff bonuses for 2014.

Total pre-tax income for the asset management segment was $6.2 million for 2014, compared to $6.9 million in 2013. The decline in net segment income in 2014 was primarily attributable to lower CLO management fees earned in 2014, somewhat offset by lower expenses in 2014.


38



Real Estate

The real estate segment consists of our Care subsidiary, which primarily acquires and owns seniors housing properties. As of the issuance date of this report, Care’s portfolio consists of 24 properties across 9 states primarily in the Mid-Atlantic and Southern United States. Care’s portfolio is comprised of 5 triple net lease properties, 13 joint venture properties and 6 hybrid triple net lease properties, which are properties where Care owns the real estate and the operator owns the operating company, with the operator paying a contractual annual minimum rent and Care and the operator both sharing in the upside of the property’s net operating income based on agreed metrics.

Care’s investment strategy targets properties and portfolios ranging from $5 million to $250 million with a profile mix of stabilized properties, turnaround properties and development properties. Care’s operating and growth strategy is focused on strategic partnerships with regional operators who are looking for a capital base to grow their current portfolio. This partnership model builds long-term relationships over multiple property transactions and allows operators to focus on facility management while Care focuses on managing capital structure.

Total revenues for real estate operations were $29.3 million for 2014, compared with $8.9 million for 2013, an increase of $20.4 million. The increase in revenues was partly due to realized and unrealized gains of $7.0 million attributable to the net gain of $7.9 million from the 2014 repayment of the Westside Loan, which had previously been carried at lower carrying value, offset by $0.9 million in unrealized losses on interest rate swaps. Rental income increased to $19.7 million for 2014 compared with $5.8 million for 2013. The significant increase in rental income was principally due to the increase in number of the properties owned by Care in 2014, compared to 2013. As of December 31, 2014, Care owned properties with a total area of approximately 879,000 square feet compared with 576,000 square feet as of December 31, 2013.

Interest income earned by Care was $1.5 million in 2014, compared to $2.3 million in 2013. The interest income was primarily from the Westside Loan which ceased upon repayment of the Westside Loan during the third quarter in 2014. Care has also earned interest income on a secured loan to the lessees of one of its properties. The carrying value of the loan was $700 thousand as of December 31, 2014.

Other revenues earned by Care were $1.1 million in 2014, compared to $413 thousand in 2013. Revenues in 2014 included resident fees of $547 thousand and reimbursable escrow earnings of $507 thousand. In 2013, resident fees exclusive of rental revenue were $95 thousand and reimbursable escrow earnings were $319 thousand. The increase in other revenues in 2014 was due to the increased number of properties owned by Care.

Total expenses for the real estate segment were $26.1 million in 2014, compared to $12.1 million in 2013. Segment expenses are comprised of interest expenses on Care’s borrowings, payroll expenses, professional fees, depreciation and amortization of properties and leases acquired and other expenses.

Interest expense was $4.1 million in 2014, compared to $1.8 million in 2013. The increase in 2014 was due to additional secured loans financing Care’s purchases of additional properties in 2014. The total amount of loans outstanding under these secured loans was $108.3 million as of December 31, 2014, compared with $82.0 million as of December 31, 2013. Further details of Care’s borrowings are provided in our Liquidity and Capital discussion and in Note 15—Debt, in the accompanying consolidated financial statements.

Payroll expense, which includes the payroll expenses of managers which are allocated to the operators of the properties owned by Care’s joint venture subsidiaries as well as the expense of Care’s management team, was $8.1 million in 2014, compared to $2.7 million in 2013. The increase in payroll expense is attributable to the expansion in the number of Care joint venture acquisitions during 2013 and 2014.

Professional fee expense was $873 thousand in 2014, compared to $2.0 million in 2013. Professional fees in 2014 were comprised of legal expenses of $686 thousand, chiefly incurred as a result of acquisitions and dispositions of properties in the year, and audit and tax preparation expenses totaling $130 thousand. Professional fees were higher in 2013 principally due to significant expenses incurred in connection with the Contribution Transaction on July 1, 2013.

Depreciation and amortization expenses were $7.2 million in 2014, compared to $1.9 million in 2013. Depreciation and amortization expense chiefly relates to the depreciation of Care’s buildings and improvements and the amortization of the fair value attributed to leases in place upon the acquisition of joint ventures. The increase in 2014 was attributable to Care’s acquisition of properties during 2013 and 2014 and a $3.8 million increase in the amortization of intangible lease assets resulting from new joint ventures.


39



Other expenses were $5.9 million in 2014, compared to $3.7 million in 2013. Other expenses include property operating expenses, rent and facilities of office premises, office related expenses, management fees to third parties, escrow fees related to mortgage notes payable, property taxes, insurance, and travel related expenses. In 2014, property operating expenses and other office expenses were $2.5 million, rent and facilities expense was $929 thousand, management fees to third parties were $699 thousand, escrow fees were $508 thousand, property taxes were $501 thousand, insurance expense was $308 thousand, start-up costs were $274 thousand, and travel expenses were $118 thousand. In 2013, property operating expenses and other office expenses were $2.5 million, escrow fees were $314 thousand, rent and facilities were $229 thousand, insurance was $212 thousand, and property operating expenses were $131 thousand. The increase in other expenses in 2014 was generally attributable to the expansion in the number of Care’s owned properties in 2013 and 2014.

Corporate and Other

Revenues and expenses of the corporate and other segment for the year ended December 31, 2014 and 2013, are tabulated below:
 
Year ended December 31, 2014
 
 CLO subordinated notes
 
 Tax exempt portfolio
 
 Risk mitigation transactions
 
 Warehouse credit facilities
 
 Star Asia entities
 
Corporate
 
Total
Net realized and unrealized gains on investments
$

 
$
1,047

 
$
(1,153
)
 
$
(1,584
)
 
$
3,200

 
$
(224
)
 
$
1,286

Interest income

 
1,667

 

 
7,315

 

 
527

 
9,509

Net credit derivative loss

 

 
(1,606
)
 

 

 

 
(1,606
)
Other income

 

 

 

 
168

 
(1
)
 
167

Total revenue

 
2,714

 
(2,759
)
 
5,731

 
3,368

 
302

 
9,356

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 

 
386

 
1,595

 

 
4,282

 
6,263

Payroll and employee commissions

 
665

 

 

 

 
5,777

 
6,442

Professional fees

 
75

 

 
42

 

 
6,438

 
6,555

Depreciation and amortization expenses

 

 

 

 

 

 

Other expenses

 
183

 

 

 

 
1,075

 
1,258

Total expense

 
923

 
386

 
1,637

 

 
17,572

 
20,518

 Intersegment revenue

 

 

 

 

 
341

 
341

Distributions received and realized and unrealized gains and losses on the subordinated notes and interest-only positions held by the Company, net
7,755

 

 

 

 

 

 
7,755

Segment profit/(loss)
$
7,755


$
1,791


$
(3,145
)

$
4,094


$
3,368


$
(16,929
)

$
(3,066
)

 
Year ended December 31, 2013
 
 CLO Subordinated notes
 
 Tax exempt portfolio
 
 Risk mitigation transactions
 
 Warehouse credit facilities
 
 Star Asia entities
 
Corporate
 
Totals
Net realized and unrealized gains on investments
$

 
$
(863
)
 
$
2,610

 
$
1,571

 
$
3,343

 
$
(159
)
 
$
6,502

Interest income

 
2,656

 
85

 
5,311

 

 
784

 
8,836

Net credit derivative loss

 

 
(1,828
)
 

 

 

 
(1,828
)
Other income

 
(3
)
 
 
 

 

 
43

 
40

Total revenue

 
1,790

 
867

 
6,882

 
3,343

 
668

 
13,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 

 
695

 
943

 

 
1,378

 
3,016

Payroll and employee commissions

 
990

 

 

 

 
5,306

 
6,296

Professional fees

 
132

 

 

 

 
4,514

 
4,646

Depreciation and amortization expenses

 

 

 

 

 

 

Other expenses

 
201

 

 

 

 
776

 
977


40



 
Year ended December 31, 2013
 
 CLO Subordinated notes
 
 Tax exempt portfolio
 
 Risk mitigation transactions
 
 Warehouse credit facilities
 
 Star Asia entities
 
Corporate
 
Totals
Total expense

 
1,323

 
695

 
943

 

 
11,974

 
14,935

 Intersegment revenue

 
(213
)
 

 

 

 
213

 

Distributions received and realized and unrealized gains and losses on the subordinated note and interest-only positions held by the Company, net
15,673

 

 

 

 

 

 
15,673

Segment profit/(loss)
$
15,673


$
254


$
172


$
5,939


$
3,343


$
(11,093
)

$
14,288


Revenues of the corporate and other segment were comprised of realized and unrealized gains on the Company’s principal investments, including: holdings of subordinated notes and interest-only positions issued by CLOs managed by the Company; distributions on those subordinated notes; realized and unrealized gains and losses and interest income from the Company’s portfolio of tax exempt securities; net loss from the short Treasury position and credit derivative risk mitigation transactions; unrealized gain from the Star Asia entities and revenues from the loan warehouse credit facilities established by the Company in anticipation of launching new CLOs.

As of December 31, 2014 and 2013, the Company held total investments at fair value of $97.9 million and $65.4 million respectively, in subordinated notes and interest-only positions issued primarily by CLOs managed by the Company. In 2014, the Company earned a net total of $7.8 million from distributions received and realized and unrealized gains and losses on its holdings of CLO subordinated notes. In 2013, the Company earned a net total of $15.7 million from distributions received and realized and unrealized gains and losses on its holdings of CLO subordinated notes.

As of December 31, 2014 and 2013, the Company held investments at fair value of $13.2 million and $31.0 million, respectively, in portfolios of tax-exempt securities managed by the Company. The Company earned realized and unrealized gains of $1.0 million in 2014 and incurred realized and unrealized losses of $863 thousand in 2013 from these portfolios. Interest income earned from these securities was $1.7 million in 2014, compared to $2.7 million in 2013. The decline in interest income in 2014 was due to reduced size of the securities portfolio.

The Company has entered into a short Treasury position, and in 2013 also held an interest rate swap position to mitigate the potential negative impact of a general rise in interest rates. The Company has also entered into a credit derivative swap and CDX derivative index positions, buying and selling credit protection on different tranches of risk in differing CDX indices. The credit swap and CDX transactions are designed to mitigate the potential impact of a general deterioration in corporate credit risk.

Net pre-tax results from the risk mitigation transactions was a pre-tax loss of $3.1 million in 2014, compared to a pre-tax gain of $172 thousand in 2013. The Company incurred realized and unrealized losses of $1.2 million in 2014 from its short Treasury and interest rate swap positions and earned realized and unrealized gains of $2.6 million in 2013. Net credit derivative losses on its credit swap and CDX transactions were $1.6 million in 2014, compared to $1.8 million in 2013. Interest expenses incurred in connection with these risk mitigation transactions were $386 thousand in 2014, compared to $695 thousand in 2013.

Corporate realized and unrealized gains and losses and interest income on investments were $302 thousand in 2014 and $668 thousand in 2013. The gain in 2014 comprised of $485 thousand of interest earned on a collateralized debt obligation (“CDO”) asset held by the Company and distributions on CLO subordinated notes managed by a third party, and bank and loan interest of $42 thousand offset by unrealized losses of $224 thousand on the CDO asset. The gain in 2013 comprised of $613 thousand of interest earned on the CDO assets and distributions on CLO subordinated notes managed by a third party and $170 thousand of interest earned on loans to two senior executives of Luxury made by the Company offset by a realized loss of $84 thousand on an equity investment and unrealized losses totaling $75 thousand on the CDO and the subordinated notes of the CLOs under third party management.

In 2013 and in 2014, the Company established loan warehouse credit facilities which were designed to hold loans until new CLOs could be formed. The warehouse loans were used to seed Telos 3 and Telos 4 in 2013 and Telos 5 and Telos 6 in 2014, which are all CLOs managed by the Company. Net pre-tax income from the warehouse loans was $4.1 million in 2014, compared to $5.9 million in 2013. Interest income earned from the warehouse loans was $7.3 million partially offset by unrealized losses of $1.6 million in 2014, compared to interest income of $5.3 million and unrealized gains of $1.6 million in 2013. Interest expense incurred in the funding of the warehouse loans was $1.6 million in 2014, compared to $943 thousand in 2013.


41



The Corporate and other segment revenues include income from the Company’s investments in the Star Asia Entities. The Star Asia Entities are Tokyo-based real estate holding companies formed to invest in Asian properties and real estate related debt instruments. The Company earned a total of $3.4 million in 2014, compared to $3.3 million in 2013 from its investments in these entities. The Star Asia Entities revenues in 2014 primarily comprised gains of $2.6 million from Star Asia Opportunity II, LLC’s sale of a property and unrealized gains of $556 thousand from the appreciation in Star Asia Finance, Limited’s shares held by the Company. The Star Asia Entities’ revenue of $3.3 million in 2013 chiefly comprised mark-to-market gains from the Company’s interests in Star Asia Opportunity II, LLC.

Corporate interest expense was $4.3 million in 2014, compared to $1.4 million in 2013. This expense includes the amortization of capitalized costs associated with the Company’s credit agreement with Fortress. Interest expense incurred on the Company’s borrowings under the Fortress line of credit was $4.3 million in 2014, compared to $1.3 million in 2013. Interest expense in 2013 also included $126 thousand paid on a note which was redeemed prior to the end of 2013. Further details of the Company’s borrowings under the Fortress credit agreement are provided in our Liquidity and Capital Resources discussion and analysis and in Note 15—Debt, in the accompanying consolidated financial statements. Corporate operating expenses include payroll, professional fees and other expenses. Payroll expenses, which include salaries, bonuses and benefits totaled $6.4 million in 2014, compared to $6.3 million in 2013. Corporate payroll expense in 2014 was comprised of $665 thousand for the staff and management of the Company’s tax exempt portfolio and $5.8 million of corporate payroll expenses, primarily associated with the head office management, legal and accounting staff. Payroll expenses increased in 2014 as the Company expanded its staff to match the increased scope of its activities.

Corporate professional fees include external legal and audit costs as well as fees paid to affiliate companies for the provision of professional services. Corporate professional fees totaled $6.4 million in 2014 and chiefly comprised audit expenses of $1.3 million, legal expenses of $1.3 million, taxation advice and tax filing preparation fees of $775 thousand, consulting and other professional fees of $1.4 million and director fees and expenses of $503 thousand. Also included in corporate professional fees in 2014 are amounts paid to Tricadia and Mariner of $1.2 million for the provision of senior management and finance staff services, legal compliance and information technology services. For further information relating to the payment of fees to Mariner and Tricadia, see Note 21—Related Party Transactions, in the accompanying consolidated financial statements.

Corporate professional fees totaled $4.6 million in 2013 and primarily consisted of audit expenses of $1.2 million, legal expenses of $743 thousand, taxation advice and tax filing preparation fees of $437 thousand, consulting fees of $485 thousand and director fees and expenses of $322 thousand. Also included in corporate professional fees in 2013 are amounts paid to Mariner and Tricadia of $1.4 million for the provision of senior management and finance staff services, legal compliance and information technology services.

Other expenses were $1.3 million in 2014 and $977 thousand in 2013. The other expenses primarily consisted of insurance, shareholder support, office rent and other office costs and travel expenses. In 2014, there were slight increases in these items largely driven by an increase of $0.2 million in insurance and $0.1 million in office rent.

Non-GAAP Financial Measure

Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe that EBITDA and Adjusted EBITDA provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP. Our presentation of EBITDA and Adjusted EBITDA may differ from similarly titled non-GAAP financial measures used by other companies. We define EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated income taxes and consolidated depreciation and amortization expense as presented in our financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of our subsidiaries business operations and (ii) add significant non-recurring costs.

42



Reconciliation from the Company’s GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
($ in thousands)
 
Year ended
 
Year ended
 
 
December 31, 2014
 
December 31, 2013
Net income (loss) available to Class A common stockholders

$
(1,710
)
 
$
10,393

Add net income attributable to noncontrolling interest

6,294


30,336

Less net income from discontinued operations

(7,937
)

(25,022
)
Income (loss) from Continuing Operations of the Company

$
(3,353
)

$
15,707

Consolidated interest expense

12,541


4,865

Consolidated income taxes

4,141


560

Consolidated depreciation and amortization expense

11,945