10-Q 1 tfi2017q3-10q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended September 30, 2017
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer x
Non-accelerated filer ¨                    Smaller reporting company ¨
Emerging growth company ¨
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
As of November 3, 2017, there were 29,805,453 shares, par value $0.001, of the registrant’s Class A common stock outstanding (excluding 5,197,551 shares of Class A common stock held by a subsidiary of the registrant) and 8,049,029 shares, par value $0.001, of the registrant’s Class B common stock outstanding.






Tiptree Inc.
Quarterly Report on Form 10-Q
September 30, 2017
Table of Contents
ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in our other public filings with the SEC.
 
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.

Market and Industry Data

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

Note to Reader

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

“Administrative Services Agreement” means the Administrative Services Agreement between Operating Company (as assignee of TFP) and BackOffice Services Group, Inc., dated as of June 12, 2007 (terminated as of December 31, 2016).
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CLOs” means collateralized loan obligations.
“consolidated CLOs” means, for the 2017 period, Telos 6 and Telos 7 and for the 2016 period, Telos 5, Telos 6 and Telos 7.
“Contribution Transactions” means the closing on July 1, 2013 of the transactions pursuant to the Contribution Agreement by and between the Company, Operating Company and TFP, dated as of December 31, 2012.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“Luxury” means Luxury Mortgage Corp.
“Mariner” means Mariner Investment Group LLC.
“MFCA” means Muni Funding Company of America LLC.
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Siena” means Siena Capital Finance LLC.

F-1




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


F-2


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

Item 1. Financial Statements (Unaudited)
 
As of
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments:
 
 
 
Available for sale securities, at fair value
$
164,093

 
$
146,171

Loans, at fair value
323,122

 
373,089

Loans at amortized cost, net
150,596

 
113,838

Equity securities, trading, at fair value
28,106

 
48,612

Real estate, net
371,137

 
309,423

Other investments
27,191

 
25,467

Total investments
1,064,245

 
1,016,600

Cash and cash equivalents
111,751

 
63,010

Restricted cash
23,400

 
24,472

Notes and accounts receivable, net
178,726

 
157,500

Reinsurance receivables
333,023

 
296,234

Deferred acquisition costs
139,471

 
126,608

Goodwill and intangible assets, net
176,820

 
178,245

Other assets
48,544

 
37,886

Assets of consolidated CLOs
372,774

 
989,495

Total assets
$
2,448,754

 
$
2,890,050

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Debt, net
$
865,629

 
$
793,009

Unearned premiums
475,047

 
414,960

Policy liabilities and unpaid claims
110,928

 
103,391

Deferred revenue
53,930

 
52,254

Reinsurance payable
81,887

 
70,588

Other liabilities and accrued expenses
115,858

 
133,735

Liabilities of consolidated CLOs
354,337

 
931,969

Total liabilities
$
2,057,616

 
$
2,499,906

Commitments and contingencies (see Note 22)

 


 
 
 
Stockholders’ Equity
 
 
 
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
$

 
$

Common stock - Class A: $0.001 par value, 200,000,000 shares authorized, 35,003,004 and 34,983,616 shares issued and outstanding, respectively
35

 
35

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

 
8

Additional paid-in capital
296,476

 
297,391

Accumulated other comprehensive income (loss), net of tax
1,223

 
555

Retained earnings
28,913

 
37,974

Class A common stock held by subsidiaries, 5,209,523 and 6,596,000 shares, respectively
(34,664
)
 
(42,524
)
Class B common stock held by subsidiaries, 8,049,029 and 8,049,029 shares, respectively
(8
)
 
(8
)
Total Tiptree Inc. stockholders’ equity
291,983

 
293,431

Non-controlling interests (including $74,074 and $76,077 attributable to Tiptree Financial Partners, L.P., respectively)
99,155

 
96,713

Total stockholders’ equity
391,138

 
390,144

Total liabilities and stockholders’ equity
$
2,448,754

 
$
2,890,050

See accompanying notes to condensed consolidated financial statements.

F-3


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



Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Earned premiums, net
$
96,073

 
$
47,609

 
$
272,781

 
$
138,516

Service and administrative fees
24,018

 
25,842

 
70,861

 
84,421

Ceding commissions
2,513

 
1,397

 
6,801

 
22,645

Net investment income
3,840

 
3,307

 
12,032

 
8,409

Net realized and unrealized gains (losses)
7,526

 
26,215

 
35,183

 
65,954

Rental and related revenue
19,170

 
15,371

 
54,819

 
43,389

Other income
11,379

 
12,419

 
33,820

 
31,725

Total revenues
164,519

 
132,160

 
486,297

 
395,059


 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Policy and contract benefits
31,570

 
25,881

 
94,364

 
72,436

Commission expense
63,066

 
24,032

 
176,405

 
91,906

Employee compensation and benefits
36,596

 
38,767

 
109,437

 
102,175

Interest expense
10,361

 
7,839

 
28,444

 
20,770

Depreciation and amortization
7,775

 
6,437

 
23,781

 
21,899

Other expenses
23,164

 
21,686

 
73,380

 
68,351

Total expenses
172,532

 
124,642

 
505,811

 
377,537


 
 
 
 
 
 
 
Results of consolidated CLOs:
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
7,216

 
12,556

 
24,024

 
34,713

Expenses attributable to consolidated CLOs
4,633

 
8,524

 
14,631

 
24,664

Net income (loss) attributable to consolidated CLOs
2,583

 
4,032

 
9,393

 
10,049

Income (loss) before taxes
(5,430
)
 
11,550

 
(10,121
)
 
27,571

Less: provision (benefit) for income taxes
(2,052
)
 
3,712

 
(2,761
)
 
5,298

Net income (loss) before non-controlling interests
(3,378
)
 
7,838

 
(7,360
)
 
22,273

Less: net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
(595
)
 
1,362

 
(1,432
)
 
4,660

Less: net income (loss) attributable to non-controlling interests - Other
331

 
571

 
529

 
20

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
$
(3,114
)
 
$
5,905

 
$
(6,457
)
 
$
17,593

 
 
 
 
 
 
 
 
Net income (loss) per Class A common share:
 
 
 
 
 
 
 
Basic earnings per share
$
(0.11
)
 
$
0.20

 
$
(0.22
)
 
$
0.53



 

 
 
 
 
Diluted earnings per share
$
(0.11
)
 
$
0.19

 
$
(0.22
)
 
$
0.53


 
 
 
 
 
 
 
Weighted average number of Class A common shares:
 
 
 
 
 
 
 
Basic
29,455,462

 
29,143,470

 
28,908,195

 
32,845,124

Diluted
29,455,462

 
37,230,650

 
28,908,195

 
32,912,516

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.030

 
$
0.025

 
$
0.090

 
$
0.075




See accompanying notes to condensed consolidated financial statements.

F-4


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



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss) before non-controlling interests
$
(3,378
)
 
$
7,838

 
$
(7,360
)
 
$
22,273

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
355

 
(553
)
 
1,800

 
3,779

Related tax (expense) benefit
(124
)
 
198

 
(635
)
 
(1,331
)
Reclassification of (gains) losses included in net income
(394
)
 
(960
)
 
(367
)
 
(1,100
)
Related tax expense (benefit)
138

 
336

 
129

 
385

Unrealized gains (losses) on available-for-sale securities, net of tax
(25
)
 
(979
)
 
927

 
1,733

 
 
 
 
 
 
 
 
Interest rate swaps (cash flow hedges):
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
(33
)
 
156

 
(411
)
 
(515
)
Related tax (expense) benefit
19

 
(46
)
 
115

 
158

Reclassification of (gains) losses included in net income
(25
)
 
172

 
212

 
(56
)
Related tax expense (benefit)
8

 
(54
)
 
(69
)
 
30

Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
(31
)
 
228

 
(153
)
 
(383
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(56
)
 
(751
)
 
774

 
1,350

Comprehensive income (loss)
(3,434
)
 
7,087

 
(6,586
)
 
23,623

Less: Comprehensive income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
(620
)
 
1,214

 
(1,278
)
 
4,897

Less: Comprehensive income (loss) attributable to non-controlling interests - Other
409

 
604

 
481

 
(9
)
Comprehensive income (loss) attributable to Tiptree Inc. Class A common stockholders
$
(3,223
)
 
$
5,269

 
$
(5,789
)
 
$
18,735






















See accompanying notes to condensed consolidated financial statements.

F-5


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

 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Common Stock held by subsidiaries
 
Total stockholders’ equity to Tiptree Inc.
 
Non-controlling
interests - Tiptree Financial Partners, L.P.
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
Class A Shares
 
Class A Amount
 
Class B Shares
 
Class B Amount
 
 
 
 
Balance at December 31, 2015
34,899,833

 
8,049,029

 
$
35

 
$
8

 
$
297,063

 
$
(111
)
 
$
15,845

 

 
$

 

 
$

 
$
312,840

 
$
69,278

 
$
15,576

 
$
397,694

Stock-based compensation to directors and employees
189,896

 

 

 

 
1,810

 

 

 

 

 

 

 
1,810

 

 

 
1,810

Shares issued to settle
contingent consideration
72,868

 

 

 

 
377

 
 
 

 

 

 

 

 
377

 

 

 
377

Other comprehensive income, net of tax

 

 

 

 

 
1,142

 

 

 

 

 

 
1,142

 
237

 
(29
)
 
1,350

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
6,163

 
6,163

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(603
)
 
(1,456
)
 
(2,059
)
Shares purchased under stock purchase plan
(215,358
)
 

 

 

 
(1,230
)
 

 

 

 

 

 

 
(1,230
)
 

 

 
(1,230
)
Shares acquired by subsidiaries

 

 

 

 

 

 

 
(6,596,000
)
 
(42,524
)
 
(8,049,029
)
 
(8
)
 
(42,532
)
 

 

 
(42,532
)
Net changes in non-controlling interest

 

 

 

 
(746
)
 

 

 

 

 

 

 
(746
)
 
1,058

 
(335
)
 
(23
)
Dividends declared

 

 

 

 

 

 
(2,482
)
 

 

 

 

 
(2,482
)
 

 

 
(2,482
)
Net income

 

 

 

 

 

 
17,593

 

 

 

 

 
17,593

 
4,660

 
20

 
22,273

Balance at September 30, 2016
34,947,239

 
8,049,029

 
$
35

 
$
8

 
$
297,274

 
$
1,031

 
$
30,956

 
(6,596,000
)
 
$
(42,524
)
 
(8,049,029
)
 
$
(8
)
 
$
286,772

 
$
74,630

 
$
19,939

 
$
381,341


See accompanying notes to condensed consolidated financial statements.


F-6


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

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

 
8,049,029

 
$
35

 
$
8

 
$
297,391

 
$
555

 
$
37,974

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

$
293,431


$
76,077


$
20,636


$
390,144

Amortization of share-based incentive compensation

 

 

 

 
1,541

 

 

 

 

 

 

 
1,541

 

 
536

 
2,077

Vesting of share-based incentive compensation
19,388

 

 

 

 
(588
)
 

 

 
119,511

 
775

 

 

 
187

 

 

 
187

Shares issued to settle contingent consideration

 

 

 

 
(76
)
 

 

 
756,046

 
4,914

 

 

 
4,838

 

 

 
4,838

Issuance of common stock for cash upon exercise of stock options

 

 

 

 
(1,371
)
 

 

 
1,510,920

 
9,471

 

 

 
8,100

 

 

 
8,100

Other comprehensive income, net of tax

 

 

 

 

 
668

 

 

 

 

 

 
668

 
154

 
(48
)
 
774

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
2,464

 
2,464

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(725
)
 
(1,676
)
 
(2,401
)
Shares acquired by subsidiaries

 

 

 

 

 

 

 
(1,000,000
)
 
(7,300
)
 

 

 
(7,300
)
 

 

 
(7,300
)
Net changes in non-controlling interest

 

 

 

 
(421
)
 

 

 

 

 

 

 
(421
)
 

 
2,640

 
2,219

Dividends declared

 

 

 

 

 

 
(2,604
)
 

 

 

 

 
(2,604
)
 

 

 
(2,604
)
Net income

 

 

 

 

 

 
(6,457
)
 

 

 

 

 
(6,457
)
 
(1,432
)
 
529

 
(7,360
)
Balance at September 30, 2017
35,003,004

 
8,049,029

 
$
35

 
$
8

 
$
296,476

 
$
1,223

 
$
28,913

 
(5,209,523
)
 
$
(34,664
)
 
(8,049,029
)
 
$
(8
)
 
$
291,983

 
$
74,074

 
$
25,081

 
$
391,138


See accompanying notes to condensed consolidated financial statements.

F-7



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


 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss) available to common stockholders
$
(6,457
)
 
$
17,593

Net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
(1,432
)
 
4,660

Net income (loss) attributable to non-controlling interests - Other
529

 
20

Net income (loss)
(7,360
)
 
22,273

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net realized and unrealized (gains) losses
(35,183
)
 
(65,954
)
Net unrealized loss (gain) on interest rate swaps
(67
)
 
1,233

Change in fair value of contingent consideration
3,192

 
(262
)
Non cash compensation expense
4,275

 
1,696

Amortization/accretion of premiums and discounts
971

 
1,094

Depreciation and amortization expense
24,120

 
21,899

Provision for doubtful accounts
967

 
1,321

Amortization of deferred financing costs
2,178

 
1,326

Deferred tax expense (benefit)
(2,371
)
 
(327
)
Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(1,151,150
)
 
(1,258,931
)
Proceeds from the sale of mortgage loans originated for sale
1,205,868

 
1,259,091

(Increase) decrease in notes and accounts receivable
(26,262
)
 
(16,964
)
(Increase) decrease in reinsurance receivables
(33,312
)
 
(28,237
)
(Increase) decrease in deferred acquisition costs
(12,863
)
 
(2,292
)
(Increase) decrease in other assets
(8,205
)
 
(2,223
)
Increase (decrease) in unearned premiums
59,481

 
22,934

Increase (decrease) in policy liabilities and unpaid claims
4,666

 
21,250

Increase (decrease) in deferred revenue
1,267

 
(6,810
)
Increase (decrease) in reinsurance payable
11,299

 
(11,772
)
Increase (decrease) in other liabilities and accrued expenses
(14,297
)
 
12,499

Operating activities from consolidated CLOs
(2,684
)
 
(3,505
)
Net cash provided by (used in) operating activities
24,530

 
(30,661
)
 
 
 
 
Investing Activities:
 
 
 
Purchases of investments
(147,764
)
 
(178,599
)
Proceeds from sales and maturities of investments
201,754

 
159,773

(Increase) decrease in loans owned, at amortized cost, net
(37,166
)
 
(44,640
)
Purchases of real estate capital expenditures
(463
)
 
(4,372
)
Proceeds from the sale of real estate
11,396

 
2,526

Purchases of corporate fixed assets
(1,616
)
 
(991
)
Proceeds from the sale of subsidiaries (1)
4,846

 

Proceeds from notes receivable
40,273

 
25,193

Issuance of notes receivable
(35,109
)
 
(32,137
)
(Increase) decrease in restricted cash
1,072

 
(3,315
)
Business and asset acquisitions, net of cash and deposits
(75,489
)
 
(81,183
)
Investing activities from consolidated CLOs
224,107

 
(96,834
)
Net cash provided by (used in) investing activities
185,841

 
(254,579
)
 
 
 
 
Financing Activities:
 
 
 
Dividends paid
(2,604
)
 
(2,482
)
Non-controlling interest contributions
2,464

 
3,050

Non-controlling interest distributions
(1,657
)
 
(2,059
)
Payment of debt issuance costs
(1,738
)
 
(2,508
)

F-8


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


 
Nine Months Ended September 30,
 
2017
 
2016
Proceeds from borrowings and mortgage notes payable
1,297,203

 
1,477,446

Principal paydowns of borrowings and mortgage notes payable
(1,232,705
)
 
(1,368,585
)
Proceeds from the exercise of options for common stock
8,100

 

Repurchases of common stock
(7,300
)
 
(43,754
)
Financing activities from consolidated CLOs
(223,393
)
 
220,727

Net cash provided by (used in) financing activities
(161,630
)
 
281,835

Net increase (decrease) in cash and cash equivalents
48,741

 
(3,405
)
Cash and cash equivalents – beginning of period
63,010

 
69,400

Cash and cash equivalents – end of period
$
111,751

 
$
65,995

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
$
9,793

 
$
10,288

Real estate acquired through asset acquisition
$
8,178

 
$

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

 
$

Assets of consolidated CLOs deconsolidated due to sale and redemption
$
407,323

 
$

Liabilities of consolidated CLOs deconsolidated due to sale and redemption
$
389,333

 
$

Debt assumed through asset acquisition
$
7,586

 
$

Settlement of contingent consideration payable with Class A common stock
$
4,838

 
$

(1) Represents the final payment received for the sale of Philadelphia Financial Group in 2015.





















See accompanying notes to condensed consolidated financial statements.

F-9



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



(1) Organization

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

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

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. The condensed consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited condensed consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2017.

As a result of changes in presentation made in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations. The primary difference in the presentation of the condensed consolidated financial statements from the prior year is the aggregation of investments on the condensed consolidated balance sheets and the summation of the net investment income of our specialty insurance business in the condensed consolidated statements of operations. The condensed consolidated cash flow statement has also been conformed to this new presentation. In addition certain immaterial balances have been combined in the condensed consolidated balance sheet and condensed consolidated statement of operations.

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

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


F-10


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


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

Use of Estimates

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

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

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

Business Combination Accounting

The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other expense in the condensed consolidated statements of operations. Acquisition and transaction costs are expensed as incurred.

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

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

Fair Value Measurement

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

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

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

Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments

F-11


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:

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

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

Fair Value Option

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

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

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

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

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

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

F-12


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



Recently Issued Accounting Pronouncements, Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect on its condensed consolidated financial statements.

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

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

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

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

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements

F-13


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


at the March 3, 2016 EITF Meeting, which  rescinds SEC paragraphs pursuant to the SEC Staff Announcement, “Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606,” and the SEC Staff Announcement, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity,” announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting.  The Company believes that that the adoption of this standard will not have a material impact on the Company’s condensed consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides guidance on collectability, noncash consideration, and completed contracts at transition.  Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its condensed consolidated financial statements.

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

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

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

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

F-14


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units. The Company is currently evaluating the effect on its condensed consolidated financial statements.

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

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

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provided clarity as to what changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for the Company for interim and annual periods beginning after December 15, 2017, with early adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company will consider the impact that this standard may have on future stock-based payment award modifications should they occur.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the guidance on hedge accounting. The amendment will make more financial and nonfinancial hedging strategies eligible for hedge accounting and amend the presentation and disclosure requirements. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 can be adopted immediately in any interim or annual period. The mandatory effective date for calendar year-end public companies is January 1, 2019. The Company is currently evaluating the effect on its condensed consolidated financial statements.
(3) Acquisitions

Acquisitions during the nine months ended September 30, 2017
Senior Living
Managed Properties
During the nine months ended September 30, 2017, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate two senior living communities for total consideration of $25,999, of which $7,000 was financed through mortgage debt issued in connection with one of the acquisitions, $4,096 was financed by contributions from partners of our subsidiaries and the remainder was paid with cash on hand. Affiliates of the partners provide management services to the communities under management contracts.

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

The primary reason for the Company’s acquisitions of the senior living communities are to expand its real estate operations. For the period from acquisition until September 30, 2017, revenue and the net loss for the two properties acquired were $4,398 and $1,941, respectively.


F-15


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



The following table summarizes the consideration paid and the amounts of the final determination, as described above, for the transactions completed during the nine months ended September 30, 2017:
 
2017 Acquisitions
 
Senior living
Consideration:
 
Cash
$
25,999

Fair value of total consideration
$
25,999

 
 
Acquisition costs
$
288

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Cash and cash equivalents
$
717

Real estate, net
21,800

Intangible assets, net
3,850

Other assets
76

 
 
Liabilities:
 
Deferred revenue
(409
)
Other liabilities and accrued expenses
(35
)
Total identifiable net assets assumed
$
25,999


The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Senior living
In-place lease
1.38
 
$
3,850


Supplemental pro forma results of operations have not been presented for the above 2017 business acquisitions as they are not material in relation to the Company’s reported results.

Acquisitions during the nine months ended September 30, 2016
Senior Living
Managed Properties
During the nine months ended September 30, 2016, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate three senior living communities for total consideration of $84,605 (which includes deposits of $125 paid in the fourth quarter of 2015), of which $59,817 was financed through mortgage debt issued in connection with the acquisitions, $4,778 was financed by contributions from partners of our subsidiary, and the remainder was paid with cash on hand. Affiliates of the partners provide management services to the communities under management contracts.

The primary reason for the Company’s acquisition of the senior living communities is to expand its real estate operations. For the period from acquisition until September 30, 2016, revenue and the net loss for the three managed properties acquired were $7,247 and $1,899, respectively.


F-16


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table summarizes the consideration paid and the amounts of the final determination, as described above, for transactions completed during the nine months ended September 30, 2016:
 
2016 Acquisitions
 
Senior living
Consideration:
 
Cash
$
81,492

Non-cash non-controlling interests contributions
3,113

Fair value of total consideration
$
84,605

 
 
Acquisition costs
$
612

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Cash and cash equivalents
$
184

Real estate, net
77,787

Intangible assets, net
6,838

Other assets
248

 
 
Liabilities:
 
Deferred revenue
(290
)
Other liabilities and accrued expenses
(162
)
Total identifiable net assets assumed
$
84,605


The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Senior living
In-place lease
1.61
 
$
6,838


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

(4) Operating Segment Data

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

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

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

In the fourth quarter of 2016, the Company made certain segment realignments in order to conform to the way the CODM internally evaluates segment performance. These realignments primarily consisted of the transfer of principal investments from corporate and other to the specialty insurance and asset management operating segments. As a result, corporate and other is no longer deemed to be an operating segment of the Company. For the three months ended September 30, 2016, $6,808 of pretax income (loss) previously reported in corporate and other was allocated $2,634 and $4,174 to the specialty insurance and asset management operating segments, respectively. For the three months ended September 30, 2016, inclusive of what was allocated to the asset management operating segment there was $3,312 of net income (loss) attributable to consolidated CLOs. For the

F-17


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


nine months ended September 30, 2016, $20,160 of pretax income (loss) previously reported in corporate and other was allocated $10,527 and $9,633 to the specialty insurance and asset management operating segments, respectively. For the nine months ended September 30, 2016, inclusive of what was allocated to the asset management operating segment there was $7,583 of net income (loss) attributable to consolidated CLOs. The Company has reclassified prior period amounts to provide visibility and comparability. This reclassification had no impact on the allocation of goodwill to reporting units. None of these changes impact the Company’s previously reported consolidated net income or earnings per share.

Descriptions of each of the reportable segments are as follows:

Specialty Insurance operations are conducted through Fortegra Financial Corporation (Fortegra), an insurance holding company. Fortegra underwrites and provides specialty insurance products, primarily in the United States, and is a leading provider of credit insurance and asset protection products. Fortegra’s diverse range of products and services include products such as mobile protection, extended warranty and service, debt protection and credit insurance and select niche personal and commercial lines insurance. The specialty insurance investment portfolio also includes results related to corporate loans held at fair value and non-performing residential mortgage loans due to the aforementioned segment realignment.
Asset Management operations are primarily conducted through Telos Asset Management LLC’s (Telos) management of CLOs. Telos is a subsidiary of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. Results include net income (loss) from consolidated CLOs.
Senior Living operations are conducted through Care Investment Trust LLC (Care) which has a geographically diverse portfolio of seniors housing properties including senior apartments, assisted living, independent living, memory care and skilled nursing facilities in the U.S.
Specialty Finance operations are conducted through Siena Capital Finance LLC (Siena) and the Company’s mortgage businesses, which consist of Luxury and Reliance. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs and FHA/VA. Siena’s business consists of structuring asset-based loan facilities across diversified industries.
The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following periods:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Total revenue
$
118,714

 
$
1,448

 
$
19,583

 
$
24,976

 
$
(202
)
 
$
164,519

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
121,059

 
1,058

 
21,118

 
22,381

 
6,916

 
172,532

Net income attributable to consolidated CLOs

 
2,583

 

 

 

 
2,583

Income (loss) before taxes
$
(2,345
)
 
$
2,973

 
$
(1,535
)
 
$
2,595

 
$
(7,118
)
 
$
(5,430
)
Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(2,052
)
Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
(3,378
)
Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
(264
)
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
(3,114
)

F-18


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
Specialty insurance(1)
 
Asset management(1)
 
Senior living
 
Specialty finance
 
Corporate and other(1)
 
Total
Total revenue
$
82,630

 
$
4,746

 
$
15,695

 
$
29,013

 
$
76

 
$
132,160

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
71,971

 
2,303

 
16,168

 
24,832

 
9,368

 
124,642

Net income attributable to consolidated CLOs

 
4,032

 

 

 

 
4,032

Income (loss) before taxes
$
10,659

 
$
6,475

 
$
(473
)
 
$
4,181

 
$
(9,292
)
 
$
11,550

Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
3,712

Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
7,838

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
1,933

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
5,905

(1) Reclassified to conform to current period presentation

 
Nine Months Ended September 30, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Total revenue
$
351,731

 
$
8,239

 
$
55,927

 
$
70,325

 
$
75

 
$
486,297

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
350,007

 
4,549

 
61,286

 
67,696

 
22,273

 
505,811

Net income (loss) attributable to consolidated CLOs

 
9,393

 

 

 

 
9,393

Income (loss) before taxes
$
1,724

 
$
13,083

 
$
(5,359
)
 
$
2,629

 
$
(22,198
)
 
$
(10,121
)
Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(2,761
)
Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
(7,360
)
Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
(903
)
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
(6,457
)
 
Nine Months Ended September 30, 2016
 
Specialty insurance(1)
 
Asset management(1)
 
Senior living
 
Specialty finance
 
Corporate and other(1)
 
Total
Total revenue
$
268,743

 
$
10,754

 
$
44,204

 
$
67,790

 
$
3,568

 
$
395,059

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
233,116

 
6,131

 
49,691

 
62,280

 
26,319

 
377,537

Net income (loss) attributable to consolidated CLOs

 
10,049

 

 

 

 
10,049

Income (loss) before taxes
$
35,627

 
$
14,672

 
$
(5,487
)
 
$
5,510

 
$
(22,751
)
 
$
27,571

Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
5,298

Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
22,273

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
4,680

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
17,593

(1) Reclassified to conform to current period presentation
 
 
 
 
 
 
 
 
 
 
 
 

F-19


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the segment assets for the following periods:
 
Segment Assets as of September 30, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Segment assets
$
1,319,165

 
$
21,175

 
$
390,818

 
$
303,203

 
$
41,619

 
$
2,075,980

Assets of consolidated CLOs

 
372,774

 

 

 

 
372,774

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,448,754

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of December 31, 2016
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Segment assets
$
1,268,152

 
$
17,427

 
$
323,169

 
$
271,795

 
$
20,012

 
$
1,900,555

Assets of consolidated CLOs

 
989,495

 

 

 

 
989,495

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,890,050

(1) Reclassified to conform to current period presentation

(5) Investments

Available for Sale Securities, at fair value

All of the Company’s investments in available for sale securities as of September 30, 2017 and December 31, 2016 are held by subsidiaries in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
 
As of September 30, 2017
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
36,474

 
$
96

 
$
(216
)
 
$
36,354

Obligations of state and political subdivisions
47,542

 
415

 
(324
)
 
47,633

Corporate securities
53,589

 
447

 
(167
)
 
53,869

Asset backed securities
24,011

 
105

 
(16
)
 
24,100

Certificates of deposit
896

 

 

 
896

Equity securities
658

 
13

 
(9
)
 
662

Obligations of foreign governments
566

 
13

 

 
579

Total
$
163,736

 
$
1,089

 
$
(732
)
 
$
164,093

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

 
$
27

 
$
(377
)
 
$
26,799

Obligations of state and political subdivisions
57,425

 
107

 
(598
)
 
56,934

Corporate securities
58,769

 
204

 
(402
)
 
58,571

Asset backed securities
1,459

 
1

 

 
1,460

Certificates of deposit
895

 

 

 
895

Equity securities
818

 
3

 
(37
)
 
784

Obligations of foreign governments
733

 
3

 
(8
)
 
728

Total
$
147,248

 
$
345

 
$
(1,422
)
 
$
146,171



F-20


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following tables summarize the gross unrealized losses on available for sale securities in an unrealized loss position:
 
As of September 30, 2017
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
25,152

 
$
(187
)
 
119

 
$
924

 
$
(29
)
 
5

Obligations of state and political subdivisions
9,936

 
(145
)
 
55

 
7,142

 
(179
)
 
34

Corporate securities
16,269

 
(61
)
 
164

 
4,479

 
(106
)
 
86

Asset-backed securities
1,294

 
(16
)
 
2

 

 

 

Equity securities
411

 
(7
)
 
3

 
19

 
(2
)
 
2

Obligations of foreign governments

 

 

 

 

 

Total
$
53,062

 
$
(416
)
 
343

 
$
12,564

 
$
(316
)
 
127

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

 
$
(376
)
 
115

 
$
16

 
$
(1
)
 
5

Obligations of state and political subdivisions
41,639

 
(597
)
 
170

 
1,334

 
(1
)
 
3

Corporate securities
29,856

 
(400
)
 
279

 
253

 
(2
)
 
3

Asset-backed securities
706

 

 
1

 

 

 

Equity securities
736

 
(35
)
 
5

 
19

 
(2
)
 
2

Obligations of foreign governments
338

 
(8
)
 
4

 

 

 

Total
$
94,254

 
$
(1,416
)
 
574

 
$
1,622

 
$
(6
)
 
13

The Company does not intend to sell the investments that were in an unrealized loss position as of September 30, 2017, and management believes that it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. The unrealized losses were attributable to changes in interest rates and not credit-related issues. As of September 30, 2017 and December 31, 2016, based on the Company's review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the Company's analysis of the securities and its intent to hold the securities until recovery.

The amortized cost and fair values of investments in debt securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Excluded from this table are equity securities since they have no contractual maturity.
 
As of
 
September 30, 2017
 
December 31, 2016
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
19,075

 
$
19,074

 
$
22,846

 
$
22,833

Due after one year through five years
68,918

 
69,207

 
66,063

 
65,841

Due after five years through ten years
45,447

 
45,375

 
49,036

 
48,381

Due after ten years
5,627

 
5,675

 
7,026

 
6,872

Asset backed securities
24,011

 
24,100

 
1,459

 
1,460

Total
$
163,078

 
$
163,431

 
$
146,430

 
$
145,387


F-21


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company cannot remove invested assets from these accounts without prior approval of the contractual party or regulatory authority, as applicable. The following table presents the Company's restricted investments included in the Company's available for sale securities:
 
As of
 
September 30, 2017
 
December 31, 2016
Fair value of restricted investments for special deposits required by state insurance departments
$
9,939

 
$
10,111

Fair value of restricted investments in trust pursuant to reinsurance agreements
7,287

 
7,573

Total fair value of restricted investments
$
17,226

 
$
17,684


The following table presents additional information on the Company’s available for sale securities:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Purchases of available for sale securities
$
45,250

 
$
12,799

 
$
79,907

 
$
22,477

 
 
 
 
 
 
 
 
Proceeds from maturities, calls and prepayments of available for sale securities
$
7,686

 
$
4,483

 
$
23,909

 
$
26,086

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

 
$
(14
)
 
$
(5
)
 
$
83

 
 
 
 
 
 
 
 
Gross proceeds from sales of available for sale securities
$
21,167

 
$
35,069

 
$
39,493

 
$
45,928

 
 
 
 
 
 
 
 
Gains (losses) realized on sales of available for sale securities
$
395

 
$
974

 
$
372

 
$
1,016


Investment in Loans

The following tables present the Company’s investments in loans, measured at fair value:
 
As of September 30, 2017
 
As of December 31, 2016
 
Fair value
 
Unpaid principal balance (UPB)
 
Fair value exceeds / (below) UPB
 
Fair value
 
Unpaid principal balance (UPB)
 
Fair value exceeds / (below) UPB
Loans, at fair value
 
 
 
 
 
 
 
 
 
 
 
Corporate loans
$
162,512

 
$
162,582

 
$
(70
)
 
$
175,558

 
$
176,808

 
$
(1,250
)
Mortgage loans held for sale
114,461

 
110,803

 
3,658

 
121,439

 
118,162

 
3,277

Non-performing loans
44,980

 
62,237

 
(17,257
)
 
74,923

 
113,892

 
(38,969
)
Other loans receivable
1,169

 
1,169

 

 
1,169

 
1,169

 

Total loans, at fair value
$
323,122

 
$
336,791

 
$
(13,669
)
 
$
373,089

 
$
410,031

 
$
(36,942
)

The following table presents the Company’s investments in loans, measured at fair value pledged as collateral:
 
As of
 
September 30, 2017
 
December 31, 2016
Corporate loans
$
161,000

 
$
175,365

Mortgage loans held for sale
111,927

 
117,734

Non-performing loans
39,537

 
60,409

Total fair value of loans pledged as collateral
$
312,464

 
$
353,508


F-22


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



As of September 30, 2017, there are no mortgage loans held for sale 90 days or more past due. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $66, respectively, as of December 31, 2016.

The following table presents the Company’s investments in loans, measured at amortized cost:
 
As of
 
September 30, 2017
 
December 31, 2016
Loans at amortized cost, net
 
 
 
Asset backed loans and other loans, net
$
152,168

 
$
115,033

Less: Allowance for loan losses
1,572

 
1,195

Total loans at amortized cost, net
$
150,596

 
$
113,838

 
 
 
 
Net deferred loan origination fees included in asset backed loans
$
5,701

 
$
5,244


The following table presents additional information on the Company’s asset backed loans:
 
As of
 
September 30, 2017
 
December 31, 2016
Pledged as collateral
$
157,169

 
$
119,558

 
 
 
 
Loans receivable, net, attributable to a subsidiary in our specialty finance business
$
149,896

 
$
113,138


Our subsidiary structures asset-based loan facilities in the $1,000 to $25,000 range for small to mid-sized companies. Collateral for asset-backed loan receivables, as of September 30, 2017 and December 31, 2016, consisted primarily of inventory, equipment and accounts receivable. Management reviews collateral for these loans on at least a monthly basis or more frequently if a draw is requested and management has determined that no impairment existed as of September 30, 2017. As of September 30, 2017, there were no delinquencies in the portfolio and all loans were classified as performing.

Real Estate, net

The following table contains information regarding the Company’s investment in real estate as of the following periods:
 
As of September 30, 2017
 
Land
 
Buildings and equipment
 
Accumulated depreciation
 
Total
Managed properties
$
19,447

 
$
208,751

 
$
(16,283
)
 
$
211,915

Triple net lease properties
19,741

 
135,857

 
(9,455
)
 
146,143

Foreclosed residential real estate property

 
13,079

 

 
13,079

Total
$
39,188

 
$
357,687

 
$
(25,738
)
 
$
371,137

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

 
$
189,463

 
$
(11,212
)
 
$
194,598

Triple net lease properties
13,778

 
94,291

 
(6,610
)
 
101,459

Foreclosed residential real estate property

 
13,366

 

 
13,366

Total
$
30,125

 
$
297,120

 
$
(17,822
)
 
$
309,423

For the nine months ended September 30, 2017, the Company acquired ten senior living facilities accounted for as asset acquisitions, with $47,654 of real estate acquired, and $8,297 of identifiable intangible assets related to in-place leases which will be amortized over a period ranging from approximately 7 to 12 years. These ten properties are in addition to the two acquisitions disclosed in Note—(3) Acquisitions, which were accounted for as business combinations.

F-23


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)




The following table presents the depreciation expense related to the Company’s real estate investments for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation expense on real estate investments
$
2,873

 
$
1,974

 
$
7,916

 
$
5,581


Future Minimum Rental Revenue

The following table presents the future minimum rental revenue under the noncancelable terms of all operating leases related to our triple net lease properties, as of:
 
September 30, 2017
Remainder of 2017
$
3,280

2018
13,248

2019
13,519

2020
13,797

2021
15,161

Thereafter
60,999

Total
$
120,004


The following table presents rental revenues from residential leases at the managed properties for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Rental revenues from residential leases
$
14,274

 
$
12,685

 
$
42,005

 
$
35,231


Net Investment Income

Net investment income represents income primarily from the following sources:

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

The following table presents the components of net investment income related to our specialty insurance business recorded on the condensed consolidated statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Net investment income
2017
 
2016
 
2017
 
2016
Available for sale securities, at fair value
$
823

 
$
653

 
$
2,423

 
$
2,323

Loans, at fair value
2,698

 
1,971

 
8,330

 
4,981

Equity securities, trading, at fair value
459

 
969

 
1,912

 
1,933

Real estate, net
156

 

 
482

 

Other investments
73

 
73

 
277

 
224

Total investment income
4,209

 
3,666

 
13,424

 
9,461

Less: investment expenses
369

 
359

 
1,392

 
1,052

Net investment income
$
3,840

 
$
3,307

 
$
12,032

 
$
8,409



F-24



The following table presents the components of net realized and unrealized gains (losses) recorded on the condensed consolidated statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Net realized and unrealized gains (losses)
2017
 
2016
 
2017
 
2016
Net realized gains (losses)
$
18,817

 
$
19,948

 
$
48,150

 
$
48,423

Net unrealized gains (losses)
(11,291
)
 
6,267

 
(12,967
)
 
17,531

Net realized and unrealized gains (losses)
$
7,526

 
$
26,215

 
$
35,183

 
$
65,954


The following table presents the net gain on the sale of mortgage loans and the cumulative net unrealized gains (losses) on equity securities, trading, at fair value recorded on the condensed consolidated statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net realized gain on sale of mortgage loans (1)
$
16,476

 
$
20,045

 
$
47,237

 
$
48,412

 
 
 
 
 
 
 
 
Cumulative net unrealized gains (losses) on equity securities, trading, at fair value held at the reporting date
$
(11,125
)
 
$
1,365

 
$
(21,183
)
 
$
6,386

(1) Related to the Company’s specialty finance business.

(6) Notes and Accounts Receivable, net

The following table summarizes the total notes and accounts receivable, net:
 
As of
 
September 30, 2017
 
December 31, 2016
Premium financing program (1)
$
15,403

 
$
20,615

Notes from affiliates of partner (2)
3,862

 
3,862

Other
45

 
298

Notes receivable, net
$
19,310

 
$
24,775

Accounts and premiums receivable, net
60,763

 
45,041

Retrospective commissions receivable
65,156

 
59,175

Other receivables
33,497

 
28,509

Total
$
178,726

 
$
157,500

(1) Related to the Company’s specialty insurance business.
(2) Related to the Company’s senior living business, which owns a 75% interest in a managed property. The remaining 25% interest is owned by our joint venture partner.

Notes Receivable, net

The Company has established an allowance for uncollectible amounts against its notes receivable of $1,528 and $1,444 as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016, there were $1,848 and $2,188 in balances classified as 90 days plus past due, respectively.

Accounts and premiums receivable, net, Retrospective commissions receivable and Other receivables

Accounts and premiums receivable, net, retrospective commissions receivable and other receivables are primarily trade receivables from the specialty insurance business that are carried at their approximate fair value. The Company has established a valuation allowance against its accounts and premiums receivable of $319 and $225 as of September 30, 2017 and December 31, 2016, respectively.

F-25



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(7) Reinsurance Receivables

The following table presents the effect of reinsurance on premiums written and earned by our specialty insurance business for the following periods:
 
Direct amount
 
Ceded to other companies
 
Assumed from other companies
 
Net amount
 
Percentage of amount - assumed to net
For the Three Months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
18,375

 
$
9,587

 
$
525

 
$
9,313

 
5.6
%
Accident and health insurance   
34,034

 
23,077

 
862

 
11,819

 
7.3
%
Property and liability insurance
149,414

 
56,380

 
4,844

 
97,878

 
4.9
%
Total premiums written            
201,823

 
89,044

 
6,231

 
119,010

 
5.2
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
15,654

 
7,764

 
481

 
8,371

 
5.7
%
Accident and health insurance   
28,347

 
19,511

 
814

 
9,650

 
8.4
%
Property and liability insurance
126,847

 
52,201

 
3,406

 
78,052

 
4.4
%
Total premiums earned
$
170,848

 
$
79,476

 
$
4,701

 
$
96,073

 
4.9
%
 
 
 
 
 
 
 
 
 
 
For the Three Months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
18,246

 
$
9,668

 
$
674

 
$
9,252

 
7.3
%
Accident and health insurance   
31,553

 
21,635

 
865

 
10,783

 
8.0
%
Property and liability insurance
126,230

 
94,095

 
3,842

 
35,977

 
10.7
%
Total premiums written            
176,029

 
125,398

 
5,381

 
56,012

 
9.6
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
15,861

 
7,712

 
642

 
8,791

 
7.3
%
Accident and health insurance   
28,391

 
20,093

 
830

 
9,128

 
9.1
%
Property and liability insurance
126,902

 
98,883

 
1,671

 
29,690

 
5.6
%
Total premiums earned
$
171,154

 
$
126,688

 
$
3,143

 
$
47,609

 
6.6
%
 
 
 
 
 
 
 
 
 
 
For the Nine Months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
46,275

 
$
23,264

 
$
1,458

 
$
24,469

 
6.0
%
Accident and health insurance   
87,242

 
57,911

 
2,355

 
31,686

 
7.4
%
Property and liability insurance
406,976

 
176,477

 
15,670

 
246,169

 
6.4
%
Total premiums written            
540,493

 
257,652

 
19,483

 
302,324

 
6.4
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
45,995

 
22,685

 
1,473

 
24,783

 
5.9
%
Accident and health insurance   
82,242

 
56,736

 
2,373

 
27,879

 
8.5
%
Property and liability insurance
357,448

 
148,402

 
11,073

 
220,119

 
5.0
%
Total premiums earned
$
485,685

 
$
227,823

 
$
14,919

 
$
272,781

 
5.5
%
 
 
 
 
 
 
 
 
 
 
For the Nine Months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
49,018

 
$
25,267

 
$
1,971

 
$
25,722

 
7.7
%
Accident and health insurance   
87,446

 
59,657

 
2,507

 
30,296

 
8.3
%
Property and liability insurance
389,157

 
302,945

 
10,146

 
96,358

 
10.5
%
Total premiums written            
525,621

 
387,869

 
14,624

 
152,376

 
9.6
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
46,112

 
22,139

 
2,003

 
25,976

 
7.7
%
Accident and health insurance   
84,994

 
60,134

 
2,465

 
27,325

 
9.0
%
Property and liability insurance
377,589

 
296,523

 
4,149

 
85,215

 
4.9
%
Total premiums earned
$
508,695

 
$
378,796

 
$
8,617

 
$
138,516

 
6.2
%


F-26


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and loss adjustment expenses ("LAE") incurred:
 
Direct amount
 
Ceded to other companies
 
Assumed from other companies
 
Net amount
 
Percentage of amount - assumed to net
For the Three Months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
8,003

 
$
4,573

 
$
178

 
$
3,608

 
4.9
%
Accident and health insurance   
4,456

 
3,252

 
190

 
1,394

 
13.6
%
Property and liability insurance
48,783

 
26,571

 
544

 
22,756

 
2.4
%
Total losses incurred
61,242

 
34,396

 
912

 
27,758

 
3.3
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
3,812

 
 
 
Total policy and contract benefits
 
$
31,570

 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
8,550

 
$
4,647

 
$
378

 
$
4,281

 
8.8
%
Accident and health insurance   
5,697

 
4,863

 
205

 
1,039

 
19.7
%
Property and liability insurance
61,431

 
47,469

 
632

 
14,594

 
4.3
%
Total losses incurred
75,678

 
56,979

 
1,215

 
19,914

 
6.1
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
5,967

 
 
 
Total policy and contract benefits
 
$
25,881

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
24,527

 
$
13,558

 
$
748

 
$
11,717

 
6.4
%
Accident and health insurance   
13,200

 
10,815

 
662

 
3,047

 
21.7
%
Property and liability insurance
144,535

 
78,454

 
1,708

 
67,789

 
2.5
%
Total losses incurred
182,262

 
102,827

 
3,118

 
82,553

 
3.8
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
11,811

 
 
 
Total policy and contract benefits
 
$
94,364

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
24,962

 
$
12,957

 
$
1,061

 
$
13,066

 
8.1
%
Accident and health insurance   
14,598

 
12,203

 
700

 
3,095

 
22.6
%
Property and liability insurance
166,586

 
128,542

 
897

 
38,941

 
2.3
%
Total losses incurred
206,146

 
153,702

 
2,658

 
55,102

 
4.8
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
17,334

 
 
 
Total policy and contract benefits
 
$
72,436

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


F-27


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the components of the reinsurance receivables:
 
As of
 
September 30, 2017
 
December 31, 2016
Prepaid reinsurance premiums:
 
 
 
Life (1)
$
64,223

 
$
64,621

Accident and health (1)
55,175

 
53,999

Property (2)
122,883

 
94,091

Total
242,281

 
212,711

 
 
 
 
Ceded claim reserves:
 
 
 
Life
3,015

 
2,929

Accident and health
9,819

 
10,435

Property
57,138

 
49,917

Total ceded claim reserves recoverable
69,972

 
63,281

Other reinsurance settlements recoverable
20,770

 
20,242

Reinsurance receivables
$
333,023

 
$
296,234


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

The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from unrelated reinsurers:
 
As of
 
September 30, 2017
Total of the three largest receivable balances from unrelated reinsurers
$
78,783


At September 30, 2017, the three unrelated reinsurers from whom our specialty insurance business has the largest receivable balances were: London Life Reinsurance Corporation (A. M. Best Rating: A rated); MFI Insurance Company, LTD (A. M. Best Rating: Not rated) and London Life International Reinsurance Corporation (A. M. Best Rating: Not rated). The related receivables of these reinsurers are collateralized by assets on hand, assets held in trust accounts and letters of credit. At September 30, 2017, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the collateralization.


F-28


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(8) Goodwill and Intangible Assets, net

The following table presents identifiable finite and indefinite-lived intangible assets, accumulated amortization, and goodwill by segment:
 
As of September 30, 2017
 
As of December 31, 2016
 
Specialty insurance
 
Senior living
 
Specialty finance
 
Total
 
Specialty insurance
 
Senior living
 
Specialty finance
 
Total
Customer relationships
$
50,500

 
$

 
$

 
$
50,500

 
$
50,500

 
$

 
$

 
$
50,500

Accumulated amortization
(10,215
)
 

 

 
(10,215
)
 
(4,614
)
 

 

 
(4,614
)
Trade names
6,500

 

 
800

 
7,300

 
6,500

 

 
800

 
7,300

Accumulated amortization
(2,018
)
 

 
(180
)
 
(2,198
)
 
(1,484
)
 

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

 

 
640

 
9,140

 
8,500

 

 
640

 
9,140

Accumulated amortization
(4,817
)
 

 
(206
)
 
(5,023
)
 
(3,542
)
 

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

 

 

 
36,500

 
36,500

 

 

 
36,500

Accumulated amortization
(35,234
)
 

 

 
(35,234
)
 
(34,184
)
 

 

 
(34,184
)
Insurance licensing agreements(1)
13,749

 

 

 
13,749

 
13,000

 

 

 
13,000

Leases in place
1,317

 
44,380

 

 
45,697

 
1,317

 
32,233

 

 
33,550

Accumulated amortization
(101
)
 
(26,062
)
 

 
(26,163
)
 
(18
)
 
(20,413
)
 

 
(20,431
)
Intangible assets, net
64,681

 
18,318

 
1,054

 
84,053

 
72,475

 
11,820

 
1,183

 
85,478

Goodwill
89,854

 

 
2,913

 
92,767

 
89,854

 

 
2,913

 
92,767

Total goodwill and intangible assets, net
$
154,535

 
$
18,318

 
$
3,967

 
$
176,820

 
$
162,329

 
$
11,820

 
$
4,096

 
$
178,245

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

Goodwill

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

 
$
2,913

 
$
92,767

Balance at September 30, 2017
$
89,854

 
$
2,913

 
$
92,767


The Company conducts annual impairment tests of its goodwill as of October 1. For the three and nine months ended September 30, 2017 and 2016, respectively, no impairment was recorded on the Company’s goodwill or intangibles.

Intangible Assets, net

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

 
$
11,820

 
$
1,183

 
$
85,478

Intangible assets acquired in 2017
749

 
12,147

 

 
12,896

Less: amortization expense
(8,543
)
 
(5,649
)
 
(129
)
 
(14,321
)
Balance at September 30, 2017
$
64,681

 
$
18,318

 
$
1,054

 
$
84,053



F-29



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


During the nine months ended September 30, 2017 a subsidiary in our specialty insurance business acquired 100% of the outstanding stock of an insurance company, licensed in several states but having no operations and no net insurance exposures. The purpose of this transaction was to acquire additional licenses to expand the Company’s direct writing capabilities to New York and Wisconsin. The transaction was accounted for as an asset acquisition, resulting in $749 recorded as an indefinite life intangible asset for the cost attributed to the insurance licenses.

The following table presents the amortization expense on finite-lived intangible assets for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Amortization expense on intangible assets
$
4,359

 
$
3,702

 
$
14,321

 
$
14,246


The following table presents the amortization expense on finite-lived intangible assets for the next five years by segment:
 
As of September 30, 2017
 
Specialty insurance (VOBA)
 
Specialty insurance (other)
 
Senior living
 
Specialty finance
 
Total
Remainder of 2017
$
200

 
$
2,482

 
$
1,730

 
$
42

 
$
4,454

2018
465

 
9,187

 
3,086

 
171

 
12,909

2019
217

 
7,619

 
958

 
171

 
8,965

2020
123

 
5,137

 
958

 
171

 
6,389

2021
82

 
4,361

 
958

 
171

 
5,572

2022 and thereafter
179

 
20,880

 
10,628

 
328

 
32,015

Total
$
1,266

 
$
49,666

 
$
18,318

 
$
1,054

 
$
70,304


(9) Derivative Financial Instruments and Hedging

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

Derivatives, at fair value
Credit Derivatives
Credit derivatives are generally defined as over‑the‑counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity.
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. At inception of the investment into the CDX position, the Company was required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side subject to increase based on additional maintenance margin as a result of decreases in value. As of September 30, 2017, the required collateral balance was $6,668 posted by the Company to cover its liabilities as a seller of protection. As of September 30, 2017, there is a cash collateral balance of $1,632 held by the Company as collateral for the payments due to the Company as buyer of protection, which is netted against the overall investment position.


F-30



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


Interest Rate Lock Commitments

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

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

TBA Mortgage Backed Securities

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

Interest Rate Swaps
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included in other assets in the condensed consolidated balance sheets.
The Company uses interest rate swaps to hedge the variability of floating rate borrowings. Cash flow hedge accounting was applied to the floating rate borrowings in its specialty insurance business, and during the second quarter of 2016, the Company elected to apply cash flow hedge accounting to such transactions in its senior living business. 
The following table summarizes the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying risk:
 
As of September 30, 2017
 
As of December 31, 2016
 
Notional
values
 
Asset
derivatives
 
Liability
derivatives
 
Notional
values
 
Asset
derivatives
 
Liability
derivatives
Credit risk:
 
 
 
 
 
 
 
 
 
 
 
Credit derivatives sold protection
$
295,973

 
$
18,409

 
$

 
$
297,612

 
$
28,731

 
$

Credit derivatives bought protection
294,767

 

 
3,742

 
298,173

 

 
14,501

Sub-total
590,740

 
18,409

 
3,742

 
595,785

 
28,731

 
14,501

 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency risk:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts

 

 

 
965

 

 
3

 
 
 
 
 
 
 
 
 
 
 
 
Interest rate risk:
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
276,776

 
6,537

 

 
203,815

 
4,872

 

Forward delivery contracts
61,094

 
49

 

 
66,731

 

 
84

TBA mortgage backed securities
253,750

 
284

 
283

 
249,750

 
1,678

 
269

Interest rate swaps
133,143

 
1,284

 
426

 
134,343

 
1,388

 
1,042

Sub-total
724,763


8,154


709

 
654,639

 
7,938


1,395

Total
$
1,315,503


$
26,563


$
4,451

 
$
1,251,389

 
$
36,669


$
15,899


F-31


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. The following table presents derivative instruments that are subject to offset by a master netting agreement:
 
As of
 
September 30, 2017
 
December 31, 2016
Derivatives subject to netting arrangements:
 
 
 
Credit default swap indices sold protection
$
18,409

 
$
28,731

Credit default swap indices bought protection
(3,742
)
 
(14,501
)
Gross assets recognized
14,667

 
14,230

Cash collateral
(1,632
)
 
(1,632
)
Net assets recognized (included in other investments)
$
13,035

 
$
12,598


Derivatives Designated as Cash Flow Hedging Instruments

A subsidiary in our specialty insurance business had an IRS with a counterparty, pursuant to which the subsidiary swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This IRS was designated as a cash flow hedge and expired in June 2017.

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

The following table presents the fair value and the related outstanding notional amounts of the Company's cash flow hedging derivative instruments and indicates where the Company records each amount in its condensed consolidated balance sheets:
 
 
 
As of
 
Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
Notional value
 
 
$
133,143

 
$
134,343

Fair value of interest rate swaps
Other investments
 
$
1,284

 
$
1,388

Fair value of interest rate swaps
Other liabilities and accrued expenses
 
$
426

 
$
1,042

Unrealized gain (loss), net of tax, on the fair value of interest rate swaps
AOCI
 
$
1,606

 
$
1,759

 
 
 
 
 
 
Range of variable rates on interest rate swaps
 
 
1.23% to 1.24%
 
0.67% to 0.96%
 
 
 

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

The following table presents the pretax impact of the cash flow hedging derivative instruments on the condensed consolidated financial statements for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Gains (losses) recognized in AOCI on the derivative-effective portion
$
(33
)
 
$
156

 
$
(411
)
 
$
(515
)
 
 
 
 
 
 
 
 
(Gains) losses reclassified from AOCI into income-effective portion
$
(25
)
 
$
172

 
$
212

 
$
(56
)
 
 
 
 
 
 
 
 
Gains (losses) recognized in income on the derivative-ineffective portion
$

 
$
48

 
$
(2
)
 
$
(3
)


F-32


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the estimated amount to be reclassified to earnings from AOCI during the next 12 months. These net (gains) losses are reclassified into earnings through interest expense.
 
As of
 
September 30, 2017
Estimated (gains) losses to be reclassified to earnings from AOCI during the next 12 months
$
(199
)

(10) Assets and Liabilities of Consolidated CLOs

The CLOs are considered variable interest entities (VIE) and the Company consolidates entities when it is determined to be the primary beneficiary under current VIE accounting guidance.

On January 18, 2017, the Company sold its ownership in the subordinated notes of a CLO. As a result of the sale, the Company determined that it no longer had the controlling interest in such entity. The Company, therefore, deconsolidated its ownership in the subordinated notes of the CLO and is no longer reporting the assets and liabilities of the CLO in its condensed consolidated balance sheet as of September 30, 2017, or the revenue and expenses of the CLO in its condensed consolidated statement of operations for the three and nine months ended September 30, 2017.
On August 10, 2017, the Company’s ownership in the subordinated notes of a CLO was redeemed for cash as part of the complete liquidation of the CLO. The operations of the CLO were consolidated in the Company’s condensed consolidated financial statements through the redemption date.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s condensed consolidated balance sheets as of the dates indicated:
 
As of
 
September 30, 2017
 
December 31, 2016
Assets:
 
 
 
Cash and cash equivalents
$
20,586

 
$
45,589

Loans, at fair value (1)
343,382

 
928,240

Other assets
8,806

 
15,666

Total assets of consolidated CLOs
$
372,774

 
$
989,495

Liabilities:
 
 
 
Debt
$
326,716

 
$
912,034

Other liabilities and accrued expenses
27,621

 
19,935

Total liabilities of consolidated CLOs
$
354,337

 
$
931,969

 
 
 
 
Net
$
18,437

 
$
57,526


(1)
The unpaid principal balance for these loans is $352,958 and $952,225 and the difference between their fair value and UPB is $9,576 and $23,985 at September 30, 2017 and December 31, 2016, respectively.

The Company’s beneficial interests and maximum exposure to loss related to the consolidated CLOs are limited to (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative results in the net amount of the CLOs shown above to be equivalent to the beneficial interests retained by the Company as illustrated in the below table:
Beneficial interests:
As of
 
September 30, 2017
 
December 31, 2016
Subordinated notes and related participations in management fees
$
18,128

 
$
56,820

Accrued management fees
309

 
706

Total beneficial interests
$
18,437

 
$
57,526



F-33


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table represents revenue and expenses of the consolidated CLOs included in the Company’s condensed consolidated statements of operations for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Income:
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)
$
1,889

 
$
(1,422
)
 
$
3,457

 
$
(2,913
)
Interest income
5,327

 
13,978

 
20,567

 
37,626

Total revenue
7,216

 
12,556

 
24,024

 
34,713

Expenses:
 
 
 
 
 
 
 
Interest expense
4,580

 
8,267

 
13,629

 
22,667

Other expense
53

 
257

 
1,002

 
1,997

Total expense
4,633

 
8,524

 
14,631

 
24,664

 
 
 
 
 
 
 
 
Net income (loss) attributable to consolidated CLOs
$
2,583

 
$
4,032

 
$
9,393

 
$
10,049


As summarized in the table below, the application of the measurement alternative results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the CLOs which are eliminated upon consolidation:
Economic interests:
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Distributions received and realized and unrealized gains (losses) on the subordinated notes held by the Company, net
$
2,272

 
$
3,289

 
$
8,355

 
$
7,880

Management fee income
311

 
743

 
1,038

 
2,169

Total economic interests
$
2,583

 
$
4,032

 
$
9,393

 
$
10,049



F-34


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(11) Debt, net

The following table summarizes the balance of the Company’s debt obligations, net of discounts and deferred financing costs, excluding notes payable of consolidated CLOs (See Note—(10) Assets and Liabilities of Consolidated CLOs):
 
 
 
 
 
 
Maximum borrowing capacity as of
 
As of
Debt Type
 
Stated maturity date
 
Stated interest rate or range of rates
 
September 30, 2017
 
September 30, 2017
 
December 31, 2016
Secured corporate credit agreements
 
September 2018 - December 2019
 
LIBOR + 2.50% to 6.50%
 
$
251,250

 
$
167,000

 
$
164,000

Asset based revolving financing (1) (2)
 
September 2018 - July 2022
 
LIBOR + 2.25% to 5.75%
 
365,000

 
261,163

 
250,557

Residential mortgage warehouse borrowings (3)
 
March 2018 - August 2018
 
LIBOR + 2.50% to 2.75%
 
171,000

 
95,729

 
101,402

Real estate commercial mortgage borrowings:
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
August 2019 - July 2048
 
4.00% to 5.12%
 
99,283

 
97,433

 
82,133

Variable rate (LIBOR based)
 
October 2019 - January 2023
 
LIBOR + 2.05% to 6.95%
 
206,074

 
203,779

 
158,618

Subordinated debt
 
April 2020
 
12.50%
 
20,000

 
12,500

 
8,500

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

 
35,000

 
35,000

Preferred notes payable
 
January 2021
 
12.00%
 
 
 
1,386

 
1,232

Total debt, face value
 
 
 
 
 
 
 
873,990

 
801,442

Unamortized discount, net
 
 
 
 
 
 
 
(471
)
 
(382
)
Unamortized deferred financing costs
 
 
 
 
 
 
 
(7,890
)
 
(8,051
)
Total debt, net
 
 
 
 
 
 
 
$
865,629

 
$
793,009


(1) Asset based revolving financing is generally recourse only to specific assets and related cash flows.
(2) The weighted average coupon rate for asset based revolving financing was 3.89% and 3.53% at September 30, 2017 and December 31, 2016, respectively.
(3) The weighted average coupon rate for residential mortgage warehouse borrowings was 4.10% and 3.51% at September 30, 2017 and December 31, 2016, respectively. Includes debt having a maximum borrowing capacity of $171,000 with a stated interest rate of LIBOR + 2.50% to LIBOR +2.75% and a floor of 3.00%.

The table below presents the amount of interest expense the Company incurred on its debt for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest expense on debt
$
10,427

 
$
7,769

 
$
28,650

 
$
20,612


The following table presents the future maturities of the unpaid principal balance on the Company’s long-term debt as of:
 
September 30, 2017
Remainder of 2017
$
8,689

2018
182,173

2019
267,685

2020
121,514

2021
21,899

Thereafter
272,030

Total
$
873,990



F-35


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following narrative is a summary of certain of the terms of our debt agreements for the periods ended September 30, 2017:
Asset Backed Revolving Financing

An asset backed revolving borrowing in our asset management business entered into an amendment that changed the stated interest from LIBOR plus 2.50%, to LIBOR plus 2.25%, and extended the maturity date from July 2021 to July 2022.

An asset backed revolving borrowing in our specialty finance business increased its maximum borrowing capacity from $125,000 to $150,000 as of September 30, 2017 and also changed its maturing date from October 2019 to October 2020.

An asset backed revolving borrowing in our specialty insurance business with a maximum borrowing capacity of $15,000 matured in April 2017. A new borrowing maturing in April 2019 with an interest rate of LIBOR plus 2.60% and a maximum borrowing capacity of $25,000 was used to pay off the matured borrowing.

Residential Mortgage Warehouse Borrowings

The maximum borrowing amount for three of the six warehouse lines of credit, through subsidiaries in our specialty finance business, decreased by $18,000, from $88,000 as of December 31, 2016 to $70,000 as of September 30, 2017.

The maturity dates for warehouse lines of credit through subsidiaries in our specialty finance business were extended during the nine months ended September 30, 2017. One borrowing extended its maturity from April 2017 to March 2018, one borrowing extended its maturity from June 2017 to March 2018, and two borrowings extended their maturity from June 2017 to June 2018.

Real Estate Commercial Mortgage Borrowings

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

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

On April 18, 2017, in connection with an acquisition in the senior living business, the Company entered into a $7,000, five year mortgage borrowing. The loan carries a variable rate of LIBOR plus 3.00% and matures on May 1, 2022.

On May 31, 2017, in connection with an acquisition of seven skilled nursing facilities in the senior living business, the Company entered into a $28,800, three year mortgage borrowing. The loan carries a variable rate of LIBOR plus 6.95% and matures on May 31, 2020.

On June 14, 2017, in connection with an acquisition in the senior living business, the Company entered into a $9,150, five year mortgage borrowing. The loan carries a fixed interest rate of 4.60% and matures on July 1, 2022.

Covenant Compliance

As of September 30, 2017, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.

(12) Fair Value of Financial Instruments

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less

F-36


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note—(2) Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy.

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

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

Available for Sale Securities

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

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

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

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

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

Loans, at fair value

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


F-37



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


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

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

NPLs that have become REOs were measured at fair value on a non-recurring basis during the nine months ended September 30, 2017 and year ended December 31, 2016. The carrying value of REOs at September 30, 2017 and December 31, 2016 was $13,079 and $13,366, respectively. Upon conversion to REO, the fair value is estimated using broker price opinion (BPO). BPOs are subject to judgments of a particular broker formed by visiting a property, assessing general home values in an area, reviewing comparable listings, and reviewing comparable completed sales. These judgments may vary among brokers and may fluctuate over time based on housing market activities and the influx of additional comparable listings and sales. REO is included in real estate, net.

Derivative Assets and Liabilities

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

The following tables present the Company’s fair value hierarchies for financial assets and liabilities, including the balances associated with the consolidated CLOs, measured on a recurring basis:
 
As of September 30, 2017
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Assets:
 
 
 
 
 
 
 
Available for sale securities, at fair value:
 
 
 
 
 
 
 
Equity securities
$
615

 
$

 
$
47

 
$
662

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

 
36,354

 

 
36,354

Obligations of state and political subdivisions

 
47,633

 

 
47,633

Obligations of foreign governments

 
579

 

 
579

Certificates of deposit
896

 

 

 
896

Asset backed securities

 
24,100

 

 
24,100


F-38



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


 
As of September 30, 2017
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Corporate securities

 
53,869

 

 
53,869

Total available for sale securities
1,511

 
162,535

 
47

 
164,093

 
 
 
 
 
 
 
 
Loans, at fair value:

 


 


 


Corporate loans

 
33,427

 
129,085

 
162,512

Mortgage loans held for sale

 
114,461

 

 
114,461

Non-performing loans

 

 
44,980

 
44,980

Other loans receivable

 

 
1,169

 
1,169

 Total loans, at fair value


147,888


175,234


323,122

 
 
 
 
 
 
 
 
Equity securities, trading, at fair value
28,106

 

 

 
28,106

 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
Interest rate swaps

 
1,284

 

 
1,284

Forward delivery contracts

 
49

 

 
49

Interest rate lock commitments

 

 
6,537

 
6,537

TBA mortgage backed securities

 
284

 

 
284

Credit derivatives

 
13,035

 

 
13,035

Total derivative assets

 
14,652

 
6,537

 
21,189

CLOs

 

 
2,045

 
2,045

Debentures

 
3,957

 

 
3,957

Total other investments

 
18,609

 
8,582

 
27,191

 
 
 
 
 
 
 
 
Total financial instruments attributable to non-CLOs included in consolidated assets
29,617


329,032


183,863


542,512

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

 
132,623

 
210,759

 
343,382

Total financial instruments included in assets of consolidated CLOs

 
132,623

 
210,759

 
343,382

 
 
 
 
 
 
 
 
 Total
$
29,617


$
461,655


$
394,622


$
885,894

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
426

 
$

 
$
426

TBA mortgage backed securities

 
283

 

 
283

Foreign currency forward contracts

 

 

 

Total derivative liabilities (included in other liabilities and accrued expenses)


709




709

Contingent consideration payable

 

 
52

 
52

Preferred notes payable

 

 
1,386

 
1,386

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


709


1,438

 
2,147

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

 

 
326,716

 
326,716

Total financial instruments included in liabilities of consolidated CLOs

 

 
326,716

 
326,716

 Total
$


$
709


$
328,154


$
328,863

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

 
$

 
$
48

 
$
784


F-39



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


 
As of December 31, 2016
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies

 
26,799

 

 
26,799

Obligations of state and political subdivisions

 
56,934

 

 
56,934

Obligations of foreign governments

 
728

 

 
728

Certificates of deposit
895

 

 

 
895

Asset backed securities

 
1,460

 

 
1,460

Corporate bonds

 
58,571

 

 
58,571

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


144,492


48


146,171

 
 
 
 
 
 
 
 
Loans, at fair value:
 
 
 
 
 
 
 
Corporate loans

 
46,352

 
129,206

 
175,558

Mortgage loans held for sale

 
121,439

 

 
121,439

Non-performing loans

 

 
74,923

 
74,923

Other loans receivable

 

 
1,169

 
1,169

 Total loans, at fair value


167,791


205,298


373,089

 
 
 
 
 
 
 
 
Equity securities, trading, at fair value
48,612

 

 

 
48,612

 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
Derivative assets:

 
 
 
 
 
 
Interest rate swaps

 
1,388

 

 
1,388

Interest rate lock commitments

 

 
4,872

 
4,872

TBA mortgage backed securities

 
1,678

 

 
1,678

Credit derivatives

 
12,598

 

 
12,598

Total derivative assets

 
15,664

 
4,872

 
20,536

CLOs

 

 
974

 
974

Debentures

 
3,957

 

 
3,957

Total other investments

 
19,621

 
5,846

 
25,467

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


331,904


211,192


593,339

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

 
342,370

 
585,870

 
928,240

Total financial instruments included in assets of consolidated CLOs


342,370


585,870


928,240

Total
$
50,243


$
674,274


$
797,062


$
1,521,579

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1,042

 
$

 
$
1,042

Forward delivery contracts

 
84

 

 
84

TBA mortgage backed securities

 
269

 

 
269

Foreign currency forward contracts

 
3

 

 
3

Total derivative liabilities (included in other liabilities and accrued expenses)


1,398




1,398

Contingent consideration payable

 

 
1,852

 
1,852

Preferred notes payable

 

 
1,232

 
1,232

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


1,398


3,084


4,482

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

 

 
912,034

 
912,034

Total financial instruments included in liabilities of consolidated CLOs




912,034


912,034

 
 
 
 
 
 
 
 
Total
$


$
1,398


$
915,118


$
916,516


F-40



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table represents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:    
 
Nine Months Ended September 30,
 
2017
 
2016 (3)
 
Non-CLO assets
 
CLO assets
 
Non-CLO assets
 
CLO assets
Balance at January 1,
$
211,192

 
$
585,870

 
$
239,944

 
$
520,892

Net realized gains (losses)
7,279

 
(1,667
)
 
4,450

 
402

Net unrealized gains (losses)
2,800

 
89

 
5,482

 
15,584

Origination of IRLC
54,468

 

 
38,554

 

Purchases
41,458

 
76,122

 
101,161

 
157,144

Sales (1)
(74,010
)
 
(193,205
)
 
(56,824
)
 
(72,612
)
Issuances
590

 
676

 
1,716

 
1,546

Transfer into Level 3 (2)
9,286

 
17,601

 
23,184

 
32,858

Transfer adjustments (out of) Level 3 (2)
(7,641
)
 
(23,427
)
 
(15,280
)
 
(66,215
)
Deconsolidation of CLO due to sale
1,342

 
(251,300
)
 

 

Conversion to real estate owned
(9,793
)
 

 
(10,288
)
 

Conversion to mortgage held for sale
(53,069
)
 

 
(36,378
)
 

Warehouse transfer to CLO

 

 
(104,098
)
 
104,098

Other
(39
)
 

 

 

Balance at September 30,
$
183,863

 
$
210,759

 
$
191,623

 
$
693,697

 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) included in earnings related to assets still held at period end
$
4,790

 
$
(168
)
 
$
4,023

 
$
11,325


(1)
Included within the CLO assets amount are sales related to the liquidation of a consolidated CLO during the nine months ended September 30, 2017.
(2)
All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third-party pricing on both CLO and Non-CLO assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.
(3)
Items within the Level 3 rollforward have been restated to reflect assets purchased during a period as purchases rather than transfers. The presentation of gross origination of IRLC’s and gross conversion to mortgage held for sale have also been restated to show the break out from net realized and unrealized gains and losses, conversion to real estate owned, and transfers out of Level 3 assets. These changes have no impact on the total amount of Level 3 assets.

The following table represents additional information about liabilities that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:
 
Nine Months Ended September 30,
 
2017
 
2016
 
Non-CLO liabilities
 
CLO liabilities
 
Non-CLO liabilities
 
CLO liabilities
Balance at January 1,
$
3,084

 
$
912,034

 
$
2,498

 
$
683,827

Net unrealized (gains) losses

 
(3,071
)
 
(262
)
 
23,169

Issuances

 

 

 
222,303

Settlements (1)
(4,838
)
 
(155,194
)
 
(377
)
 

Dispositions

 
(49,010
)
 

 
(1,317
)
FV adjustment
3,192

 

 

 

Deconsolidation of CLO due to sale

 
(378,043
)
 

 

Balance at September 30,
$
1,438

 
$
326,716

 
$
1,859

 
$
927,982

 
 
 
 
 
 
 
 
Changes in unrealized (gains) losses included in earnings related to liabilities still held at period end
$
154

 
$
(6,119
)
 
$
(262
)
 
$
23,169


(1)
Included within the CLO liabilities amount are settlements related to the liquidation of a consolidated CLO during the nine months ended September 30, 2017.


F-41



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following is quantitative information about Level 3 significant unobservable inputs used in fair valuation.
 
Fair Value as of
 
 
 
 
 
Actual or Range
(Weighted average)
Assets (1)
September 30, 2017
 
December 31, 2016
 
Valuation technique
 
Unobservable input(s)
 
September 30, 2017
 
December 31, 2016
Interest rate lock commitments
$
6,537

 
$
4,872

 
Internal model
 
Pull through rate
 
45% - 95%
 
45% - 95%
NPLs
44,980

 
74,923

 
Discounted cash flow
 
See table below (2)
 
See table below
 
See table below
Total
$
51,517

 
$
79,795

 
 
 
 
 
 
 
 

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

The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our NPLs. For NPLs that are not making payments, discount rate, loan resolution time-line, value of underlying properties, holdings costs and liquidation costs are the primary inputs used to measure fair value. For NPLs that are making payments, note rate and secondary market transaction prices/UPB are the primary inputs used to measure fair value.
 
 
As of September 30, 2017
 
As of December 31, 2016
Unobservable inputs
 
High
 
Low
 
Average(1)
 
High
 
Low
 
Average(1)
Discount rate
 
30.0%
 
16.0%
 
23.2%
 
30.0%
 
16.0%
 
22.9%
Loan resolution time-line (Years)
 
2.59
 
0.48
 
1.26
 
2.3
 
0.5
 
1.2
Value of underlying properties
 
$2,400
 
$40
 
$307
 
$1,800
 
$32
 
$234
Holding costs
 
22.0%
 
5.5%
 
7.7%
 
24.1%
 
5.4%
 
8.3%
Liquidation costs
 
20.8%
 
8.1%
 
9.4%
 
25.0%
 
8.5%
 
9.6%
Note rate
 
6.0%
 
3.0%
 
5.2%
 
6.0%
 
3.0%
 
4.8%
Secondary market transaction prices/UPB
 
88.5%
 
75.5%
 
85.2%
 
88.5%
 
75.5%
 
83.7%

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

 
Fair Value as of
 
 
 
 
 
Actual or Range (Weighted average)
Liabilities (1)
September 30, 2017
 
December 31, 2016
 
Valuation technique
 
Unobservable input(s)
 
September 30, 2017
 
December 31, 2016
Contingent consideration payable - Reliance (2)
$

 
$
1,800

 
Cash Flow model (3)
 
Forecast EBITDA
 
$1,000 - $8,000
 
$951 - $6,005
 
 
 
Book value growth rate
 
N/A
 
5.0%
 
 
 
Asset volatility
 
N/A
 
1.4% - 23.7%
Contingent consideration payable - Luxury
52

 
52

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

 
1,232

 
Cash Flow model
 
Discount rate
 
12.0%
 
12.0%
Total
$
1,438


$
3,084

 
 
 
 
 
 
 
 
 
(1)
Not included in this table are the debt obligations of consolidated CLOs, measured and leveled on the basis of the fair value of the (more observable) financial assets of the consolidated CLOs. See Note—(10) Assets and Liabilities of Consolidated CLOs.
(2) Settled in Q3 2017 with Class A common shares. See Note—(17) Stockholders’ Equity.
(3) Monte Carlo simulation is run, as needed.


F-42



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value and their respective levels within the fair value hierarchy:
 
As of September 30, 2017
 
As of December 31, 2016
 
Level within
fair value
hierarchy
 
Fair value
 
Carrying value
 
Level within
fair value
hierarchy
 
Fair value
 
Carrying value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Notes and accounts receivable, net
2
 
$
19,310

 
$
19,310

 
2
 
$
28,293

 
$
28,732

Total assets
 
 
$
19,310

 
$
19,310

 
 
 
$
28,293

 
$
28,732

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Debt, net
3
 
$
876,444

 
$
872,133

 
3
 
$
798,806

 
$
799,828

Total liabilities
 
 
$
876,444

 
$
872,133

 
 
 
$
798,806

 
$
799,828

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

Debt: The carrying value represents the total debt balance at face value excluding the unamortized discount. The fair value of notes payable is determined based on contractual cash flows discounted at market rates for mortgage notes payable and either dealer quotes or contractual cash flows discounted at market rates for other notes payable. Categorized as Level 3 of the fair value hierarchy.

Additionally, the following financial assets and liabilities on the condensed consolidated balance sheets are not carried at fair value, but whose carrying amounts approximate their fair value:

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

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

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

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


F-43



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(13) Liability for Unpaid Claims and Claim Adjustment Expenses

Roll forward of Claim Liability
The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short-duration contracts for the following periods:
 
Nine Months Ended September 30,
 
2017
 
2016
Policy liabilities and unpaid claims balance as of January 1
$
103,391

 
$
80,663

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

 
61,510

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

 
19,006

 
 
 
 
Incurred (short duration) related to:
 
 
 
     Current year
78,174

 
55,461

     Prior years
2,958

 
(1,987
)
Total incurred
81,132

 
53,474

 
 
 
 
Paid (short duration) related to:
 
 
 
     Current year
57,875

 
34,822

     Prior years
20,600

 
13,992

Total paid
78,475

 
48,814

 
 
 
 
Net balance as of September 30, short duration
25,220

 
23,666

     Plus : reinsurance recoverable on unpaid losses - short duration
69,813

 
60,236

     Plus : other lines, gross
193

 
164

Gross liabilities for unpaid losses and loss adjustment expenses
95,226

 
84,066

     Plus : liabilities of policy-holder accounts balances, gross
15,652

 
17,766

     Plus : non-insurance warranty benefit claim liabilities
50

 
80

Policy liabilities and unpaid claims balance as of September 30,
$
110,928

 
$
101,912


The following schedule reconciles the total on short duration contracts per the table above to the amount of total losses incurred as presented in the condensed consolidated statement of operations, excluding the amount for member benefit claims:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total incurred
$
27,236

 
$
19,247

 
$
81,132

 
$
53,474

Other lines incurred
81

 
44

 
78

 
74

Unallocated loss adjustment expense
441

 
623

 
1,343

 
1,554

Total losses incurred
$
27,758

 
$
19,914

 
$
82,553

 
$
55,102

For the nine months ended September 30, 2017, the Company’s specialty insurance business experienced an increase in prior year case development of $2,958. This included $1,772 in non-standard auto and $1,852 in warranty. This development was partially offset by favorable development in its credit lines of business. The warranty and credit lines of business are primarily in retrospective commission arrangements that minimally impact the operating income of the Company.


F-44


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


For the nine months ended September 30, 2016, the Company’s specialty insurance business experienced a decrease in prior year case development of $1,987. This decrease was due to the favorable development in credit lines of business. This development was partially offset by increased case development of $1,644 in non-standard auto and $1,328 in warranty. The warranty and credit lines of business are primarily in retrospective commission arrangements that minimally impacts the operating income of the Company.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(14) Other Assets

The following table presents the components of other assets as reported in the condensed consolidated balance sheets:
 
As of
 
September 30, 2017
 
December 31, 2016
Due from brokers
$
1,505

 
$
2,027

Furniture, fixtures and equipment, net
5,669

 
5,936

Prepaid expenses
9,441

 
5,020

Accrued interest receivable
3,154

 
2,052

Management fee receivable
4,375

 
4,308

Other fee receivable
5,159

 
5,022

Income tax receivable
4,140

 
4,842

Other
15,101

 
8,679

Total other assets
$
48,544


$
37,886


The following table presents the depreciation expense related to furniture, fixtures and equipment for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation expense related to furniture, fixtures and equipment
$
656

 
$
667

 
$
1,883

 
$
1,978


(15) Other Liabilities and Accrued Expenses

The following table presents the components of other liabilities and accrued expenses as reported in the condensed consolidated balance sheets:
 
As of
 
September 30, 2017
 
December 31, 2016
Accounts payable and accrued expenses
$
46,544

 
$
67,837

Deferred tax liabilities, net
30,789

 
32,296

Due to brokers
7,733

 
8,457

Commissions payable
11,007

 
7,466

Accrued interest payable
2,127

 
1,729

Derivative liabilities, at fair value
709

 
1,398

Other liabilities
16,949

 
14,552

Total other liabilities and accrued expenses
$
115,858

 
$
133,735



F-45


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(16) Other Income and Other Expenses

The following table presents the components of other income as reported in the condensed consolidated statement of operations, primarily comprised of interest income and loan fee income related to both loans at fair value and loans at amortized costs, net in our specialty finance business, and management fees from our asset management business:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest income
$
5,254

 
$
4,215

 
$
14,439

 
$
13,455

Loan fee income
3,201

 
3,915

 
9,451

 
9,296

Management fee income
1,541

 
3,839

 
6,578

 
7,497

Other
1,383

 
450

 
3,352

 
1,477

Total other income
$
11,379

 
$
12,419

 
$
33,820

 
$
31,725


The following table presents the components of other expenses as reported in the condensed consolidated statement of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Professional fees
$
4,506

 
$
5,283

 
$
13,980

 
$
17,581

Acquisition and transaction costs
25

 
248

 
302

 
631

General and administrative
4,015

 
3,178

 
11,552

 
10,788

Premium taxes
2,810

 
1,637

 
8,840

 
5,480

Mortgage origination expenses
2,406

 
2,308

 
6,728

 
5,944

Property operating expenses
2,635

 
1,854

 
7,798

 
5,439

Rent and related
2,992

 
3,091

 
8,998

 
9,189

Other
3,775

 
4,087

 
15,182

 
13,299

Total other expense
$
23,164

 
$
21,686

 
$
73,380

 
$
68,351


(17) Stockholders’ Equity

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

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

On June 5, 2017, in settlement of an option, TFP delivered 1,510,920 shares of the Company’s Class A common stock to Tricadia for total consideration of approximately $8,100.

On June 21, 2017, a subsidiary of Tiptree purchased 1,000,000 shares of Class A common stock of Tiptree for aggregate consideration of $7,300. The shares acquired are accounted for as treasury shares and therefore are not outstanding for accounting or voting purposes.

On August 10, 2017, the Company settled a contingent consideration payable related to the acquisition of Reliance in 2015 with 756,046 shares of Class A common stock.


F-46


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The Company declared cash dividends per share for the following periods presented below:
 
 
 
 
 
Dividends per share for
 
Nine Months Ended September 30,
 
2017
 
2016
First Quarter
$
0.030

 
$
0.025

Second Quarter
0.030

 
0.025

Third Quarter
0.030

 
0.025

Total cash dividends declared
$
0.090

 
$
0.075


Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions

The Company's insurance company subsidiaries may pay dividends to the Company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior approval of the insurance department of the applicable state of domicile. The Company eliminated all dividends from its subsidiaries in the condensed consolidated financial statements. For the three and nine months ended September 30, 2017 and 2016, respectively, the Company’s insurance company subsidiaries did not pay any ordinary or extraordinary dividends.
 
 
 
 
 
 
 
 
The following table presents the combined statutory capital and surplus of the Company's insurance company subsidiaries, the required minimum statutory capital and surplus, as required by the laws of the states in which they are domiciled, and the combined amount available for ordinary dividends of the Company's insurance company subsidiaries for the following periods:
 
As of
 
September 30, 2017
 
December 31, 2016
Combined statutory capital and surplus of the Company's insurance company subsidiaries
$
108,666

 
$
100,920

 
 
 
 
Required minimum statutory capital and surplus
$
19,200

 
$
17,200

 
 
 
 
Amount available for ordinary dividends of the Company's insurance company subsidiaries
$
9,425

 
$
9,049


At September 30, 2017, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $9,425. The Company may seek regulatory approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company would receive regulatory approval if sought.

Under the National Association of Insurance Commissioners (NAIC) Risk-Based Capital Act of 1995, a company's Risk-Based Capital (RBC) is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The Company's insurance company subsidiaries' RBC levels, as calculated in accordance with the NAIC’s RBC instructions, exceeded all RBC thresholds as of September 30, 2017.

The following table presents the net income of the Company’s statutory insurance companies for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income of statutory insurance companies
$
391

 
$
4,199

 
$
6,745

 
$
10,326



F-47


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(18) Accumulated Other Comprehensive Income (Loss)

The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following periods:
 
Unrealized gains (losses) on
 
 
 
Amount attributable to noncontrolling interests
 
 
 
Available for sale securities
 
Interest rate swaps
 
Total AOCI
 
TFP
 
Other
 
Total AOCI to Tiptree Inc.
Balance at December 31, 2015
$
(222
)
 
$
111

 
$
(111
)
 
$

 
$

 
$
(111
)
Other comprehensive income (losses) before reclassifications
2,448

 
(357
)
 
2,091

 
(237
)
 
29

 
1,883

Amounts reclassified from AOCI
(715
)
 
(26
)
 
(741
)
 

 

 
(741
)
Period change
1,733

 
(383
)
 
1,350

 
(237
)
 
29

 
1,142

Balance at September 30, 2016
$
1,511

 
$
(272
)
 
$
1,239

 
$
(237
)
 
$
29

 
$
1,031

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
(700
)
 
$
1,759

 
$
1,059

 
$
(128
)
 
$
(376
)
 
$
555

Other comprehensive income (losses) before reclassifications
1,165

 
(296
)
 
869

 
(154
)
 
48

 
763

Amounts reclassified from AOCI
(238
)
 
143

 
(95
)
 

 

 
(95
)
Period change
927

 
(153
)
 
774

 
(154
)
 
48

 
668

Balance at September 30, 2017
$
227

 
$
1,606

 
$
1,833

 
$
(282
)
 
$
(328
)
 
$
1,223

The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the condensed consolidated statement of operations for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Affected line item in Condensed Consolidated Statement of Operations
Components of AOCI
2017
 
2016
 
2017
 
2016
Unrealized gains (losses) on available for sale securities
$
394

 
$
960

 
$
367

 
$
1,100

Net realized and unrealized gains (losses)
Related tax (expense) benefit
(138
)
 
(336
)
 
(129
)
 
(385
)
Provision for income tax
Net of tax
$
256

 
$
624

 
$
238

 
$
715


 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
$
25

 
$
(172
)
 
$
(212
)
 
$
56

Interest expense
Related tax (expense) benefit
(8
)
 
54

 
69

 
(30
)
Provision for income tax
Net of tax
$
17

 
$
(118
)
 
$
(143
)
 
$
26



(19) Stock Based Compensation

Equity Plans

2007 Manager Equity Plan
The Care Investment Trust Inc. Manager Equity Plan (Manager Plan) was adopted in June 2007. On June 6, 2017, the 134,629 remaining shares of Class A common stock available for issuance under the Manager Plan was rolled into the 2017 Equity Plan and the Manager Plan was simultaneously terminated.

2013 Omnibus Incentive Plan
The Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) was adopted on August 8, 2013. On June 6, 2017, the 7,359 remaining shares of Class A common stock available for issuance under the 2013 Equity Plan was rolled into the 2017 Equity Plan and the 2013 Equity Plan was simultaneously terminated.


F-48


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


2017 Omnibus Incentive Plan
The Company adopted the Tiptree 2017 Omnibus Incentive Plan (2017 Equity Plan) on June 6, 2017, which permits the grant of stock units, stock, and stock options up to a maximum of 6,100,000 shares of Class A common stock. The general purpose of the 2017 Equity Plan is to attract, motivate and retain selected employees and directors for the Company and its subsidiaries, to provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders. Unless otherwise extended, the 2017 Equity Plan terminates automatically on the 10th anniversary of its adoption.

The table below summarizes changes to the issuances under the Company’s 2013 and 2017 Equity Plan for the periods indicated:
2013 Equity Plan
Number of shares (1)
Available for issuance as of December 31, 2016
961,650

Shares granted
(954,291
)
Shares rolled into 2017 Equity Plan
(7,359
)
Available for issuance as of September 30, 2017

 
 
2017 Equity Plan
Number of shares (1)
Available for issuance as of December 31, 2016

Available from 2017 Equity Plan
6,100,000

Shares granted
(71,016
)
Available for issuance as of September 30, 2017
6,028,984

(1) Excludes shares granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Class A common stock.
Restricted Stock Units (RSUs)
Generally, the Tiptree RSUs shall vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the first, second and third anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period.
The following table summarizes changes to the issuances of Class A common stock and RSUs under the 2017 Equity Plan for the periods indicated:
 
 
Number of shares issuable
 
Weighted average grant date fair value
Unvested units as of December 31, 2016
 
299,817

 
$
6.27

Granted (1)
 
454,680

 
6.60

Vested
 
(155,615
)
 
6.42

Unvested units as of September 30, 2017
 
598,882

 
$
6.48

(1) Includes grants of 27,192 shares of Class A common stock to directors.
The Company values RSUs at their grant-date fair value as measured by Tiptree’s common stock price. Included in vested shares for 2017 are 16,716 shares surrendered to pay taxes on behalf of the employees with shares vesting. During the nine months ended September 30, 2017, the Company granted 427,488 RSUs to employees of the Company. 142,175 shares vest ratably over a period of three years that began in February 2017 and the remaining 285,313 shares will cliff vest in February 2020.

Subsidiary Incentive Plans

Certain of Tiptree’s subsidiaries have established RSU programs under which they are authorized to issue RSUs or their equivalents, representing equity of such subsidiaries to certain of their employees. Such awards are accounted for as equity. These RSUs are subject to performance-vesting criteria based on the performance of the subsidiary (performance vesting RSUs) and time-vesting subject to continued employment (time vesting RSUs). Following the service period, such vested RSUs may be exchanged at fair market value, at the option of the holder, for Tiptree Class A common stock under the 2017 Equity Plan.

F-49


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The Company has the option, but not the obligation to settle the exchange right in shares or cash.
The following table summarizes changes to the issuances of subsidiary RSU’s under the subsidiary incentive plans for the periods indicated:
 
 
Grant date fair value of equity shares issuable
Unvested balance as of December 31, 2016
 
$
8,089

Vested
 
(2,436
)
Grant value adjustment (1)
 
(210
)
Unvested balance as of September 30, 2017 (2)
 
$
5,443


(1) Due to the approval of the 2017 Equity Plan, Tiptree changed the classification of the subsidiary RSU’s during the three months ended September 30, 2017 from liability to equity awards, because the Company expects to settle these awards in stock.
(2) The unvested balance translates to 1,093,139 shares of Class A common stock if converted as of September 30, 2017.
Stock Options

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

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

The following table presents the assumptions used to estimate the fair values of the stock options granted for the following period:
Valuation Input
 
Nine Months Ended September 30, 2017
 
 
Assumption
 
Average
Historical volatility
 
47.20
%
 
N/A
Risk-free rate
 
2.44
%
 
N/A
Dividend yield
 
1.80
%
 
N/A
Expected term (years)
 
 
 
6.5


F-50


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the Company's stock option activity for the current period:
 
Options outstanding
 
Weighted average exercise price (in dollars per stock option)
 
Weighted average grant date value (in dollars per stock option)
 
Options exercisable
Balance, December 31, 2016
251,237

 
$
5.69

 
$
2.62

 

Granted
570,627

 
6.65

 
2.91

 

Balance, September 30, 2017
821,864

 
$
6.36

 
$
2.82

 

 
 
 
 
 
 
 
 
Weighted average remaining contractual term at September 30, 2017 (in years)
9.1

 
 
 
 
 
 

Stock-based Compensation Expense

The following table presents the total time-based and performance-based stock-based compensation expense and the related income tax benefit recognized on the condensed consolidated statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Employee compensation and benefits
$
1,135

 
$
633

 
$
4,275

 
$
1,597

Professional fees (1)

 
35

 

 
99

Income tax benefit
(401
)
 
(236
)
 
(1,509
)
 
(599
)
Net stock-based compensation expense
$
734

 
$
432

 
$
2,766

 
$
1,097


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

Additional information on total non-vested stock-based compensation is as follows:
 
As of
 
September 30, 2017
 
Stock options
 
Restricted stock awards and RSUs
Unrecognized compensation cost related to non-vested awards
$
1,798

 
$
9,176

Weighted - average recognition period (in years)
3.1

 
1.8


(20) Related Party Transactions

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

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


F-51


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


(21) Income Taxes

The following table represents the income tax expense (benefit):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Income tax expense (benefit)
$
(2,052
)
 
$
3,712
 
 
$
(2,761
)
 
$
5,298
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate (ETR)
37.8
%
(1) 
 
32.3
%
(1) 
 
27.3
%
(2) 
 
19.2
%
(3) 

(1) Bears a customary relationship to the federal statutory income tax rate.

(2) Lower than the federal statutory income tax rate, primarily due a change in fair value of a contingent consideration liability, an increase in a valuation allowance on net operating losses, and various other discrete items. The ETR for the nine months ended September 30, 2017 excluding the effect of discrete items was 28.1%, which is lower than the federal statutory income tax rate, primarily due to a state tax benefit and the effect of non-controlling interests at certain subsidiaries.

(3) Lower than the federal statutory income tax rate primarily due to $4,044 of discrete tax benefits for the period, primarily related to the tax restructuring that resulted in a consolidated corporate tax group effective January 1, 2016.

(22) Commitments and Contingencies

Contractual Obligations

The table below summarizes the Company’s contractual obligations by period that payments are due:
 
As of September 30, 2017
 
Less than one year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total
Operating lease obligations (1)
$
4,946

 
$
14,070

 
$
7,981

 
$
11,972

 
$
38,969

Total
$
4,946

 
$
14,070

 
$
7,981

 
$
11,972

 
$
38,969

(1)
Minimum rental obligations for Tiptree, Care, Siena, Luxury, Reliance and Fortegra office leases.

The following table presents rent expense for the Company’s office leases recorded on the condensed consolidated statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Rent expense for office leases
$
1,745

 
$
1,630

 
$
5,230

 
$
4,820


In August 2017, Tiptree entered into a lease for office space. The terms of the lease are $2,322 per annum for five years starting on the one year anniversary of the commencement date. Upon the six year anniversary of the commencement date, the lease escalates to $2,520 per annum for five years. The expected commencement date is July 1, 2018.
In addition, Tiptree’s subsidiary Siena issues standby letters of credit for credit enhancements that are required by its borrower’s respective businesses. As of September 30, 2017, there was $400 outstanding relating to these letters of credit.

Litigation
The Company is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015,

F-52


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


the trial court issued an Order denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability insurance policies but has not yet ruled on such motion with respect to the life insurance policies at issue.  In June, a new Special Master was appointed. No trial or hearings are currently scheduled.

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

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

(23) Earnings Per Share

The Company calculates basic net income per Class A common share based on the weighted average number of Class A common shares outstanding (inclusive of vested restricted share units). The unvested restricted share units have the non-forfeitable right to participate in dividends declared and paid on the Company’s common stock on an as vested basis and are therefore considered a participating security. The Company calculates basic earnings per share using the “two-class” method, and for the three and nine months ended September 30, 2017 and September 30, 2016, the income available to common stockholders was allocated to the unvested restricted stock units.

Diluted net income per Class A common shares for the period includes the effect of potential equity of subsidiaries as well as potential Class A common stock, if dilutive. For the three months and nine months ended September 30, 2017, the assumed exercise of all dilutive instruments were anti-dilutive and, therefore, were not included in the diluted net income per Class A common share calculation.


F-53


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents a reconciliation of basic and diluted net income per common share for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(3,378
)
 
$
7,838

 
$
(7,360
)
 
$
22,273

Less:
 
 
 
 
 
 
 
Net income (loss) attributable to non-controlling interests
(264
)
 
1,933

 
(903
)
 
4,680

Net income allocated to participating securities

 
60

 

 
148

Net income (loss) attributable to Tiptree Inc. Class A common shares - basic
$
(3,114
)
 
$
5,845

 
$
(6,457
)
 
$
17,445

Effect of Dilutive Securities:
 
 
 
 
 
 
 
Securities of subsidiaries

 
(50
)
 

 
(148
)
Adjustments to income relating to exchangeable interests, net of tax

 
1,362

 

 

Net income (loss) attributable to Tiptree Inc. Class A common shares - diluted
$
(3,114
)
 
$
7,157

 
$
(6,457
)
 
$
17,297

 
 
 
 
 
 
 
 
Weighted average number of shares of Tiptree Inc. Class A common stock outstanding - basic
29,455,462

 
29,143,470

 
28,908,195

 
32,845,124

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

 
8,087,180

 

 
67,392

Weighted average number of shares of Tiptree Inc. Class A common stock outstanding - diluted
29,455,462

 
37,230,650

 
28,908,195

 
32,912,516

 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income (loss) attributable to Tiptree Inc. Class A common shares
$
(0.11
)
 
$
0.20

 
$
(0.22
)
 
$
0.53

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Net income (loss) attributable to Tiptree Inc. Class A common shares
$
(0.11
)
 
$
0.19

 
$
(0.22
)
 
$
0.53

(24) Subsequent Events

On November 2, 2017, the Company’s board of directors declared a quarterly cash dividend of $0.03 per share to Class A stockholders with a record date of November 20, 2017, and a payment date of November 27, 2017.

On October 16, 2017, Fortegra completed a private placement offering of $125,000 of 8.50% Fixed Rate Resetting Junior Subordinated Notes due 2057 (the “Notes”). Substantially all of the net proceeds from the Notes were used to repay Fortegra’s existing credit facility, which was terminated thereafter. The Notes, which are issued under an indenture, are the unsecured obligations of Fortegra and rank in right of payment and upon liquidation, junior to all of Fortegra’s current and future senior indebtedness. The Notes are not obligations of or guaranteed by any of Fortegra’s subsidiaries or any other Tiptree entities. So long as no event of default has occurred and is continuing, Fortegra may defer all or part of the interest payments on the Notes on one or more occasions for up to five consecutive years per deferral period. The indenture governing the Notes contains customary affirmative and negative covenants and events of default.


F-54




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

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

OVERVIEW

Tiptree is a holding company focused on enhancing shareholder value by generating consistent and growing earnings at our operating companies. Our strategy employs a differentiated model, where we combine a specialty insurance underwriting platform with our broader asset management and capital allocation capabilities, which we believe distinguishes us from many other insurance companies. When considering capital allocation decisions, we take a diversified approach, looking across sectors, geographies and asset classes, all with a longer-term horizon for our businesses and investments. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital, as measured by Adjusted EBITDA and growth in book value per share plus dividends paid.

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

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

Our specialty insurance results primarily depend on the appropriateness of our pricing, underwriting, risk retention and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, the returns on and values of invested assets, and our ability to estimate policy and contract renewals and run-off. While our insurance operations have historically maintained a high percentage of fees to total revenue and a relatively stable combined ratio which support steady earnings, our initiatives to change our business mix along with economic factors could generate different results than we have historically seen. In our senior living operations, occupancy levels and operational costs could impact margins.  While the aging demographics of the U.S. population generally favor seniors housing in the long term, in the short term,  imbalances in the supply and demand for available units could dampen occupancy levels and competition for qualified employees could increase payroll costs. In our asset management segment, improving business conditions and growing corporate loan demand, especially from small to medium sized businesses has generally supported growth in AUM. Slowing economic growth and/or economic uncertainty could reduce business investment and loan demand, slowing the growth in AUM and associated fees. Risk retention rules mandated by Dodd-Frank has also impacted our formation of new CLOs, while pressure to reduce management fees in more recent CLOs has slowed management fee growth.

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


1




Our business is also impacted in various ways by changes in interest rates. In addition to the impact interest rates can have on the fair value of the assets, interest rates can also impact the volume and revenues in our specialty finance business. In addition, most of our subsidiaries use debt financing to fund their business activities, much of which is floating rate debt, and the majority of which have LIBOR floors, LIBOR floors can result in a reduction in net interest margins in a declining interest rate environment, if earnings on our assets do not have similar floors or are based on different benchmarks than LIBOR, such as treasury rates or the prime rate. Certain of our subsidiaries have also entered into interest rate swap agreements to fix all or a portion of their interest rate exposure which are currently designated as hedging relationships for accounting purposes.

All interim financial information included in the Management’s Discussion and Analysis of Financial Conditions and Results of Operations are unaudited.


RESULTS OF OPERATIONS
The following is a summary of consolidated financial results for the three and nine months ended September 30, 2017 and 2016. Management uses Adjusted EBITDA, on a consolidated and segment basis, and book value per share, as exchanged, as measurements of operating performance which are non-GAAP measures. Management believes the use of Adjusted EBITDA provides supplemental information useful to investors as it is frequently used by the financial community to analyze financial performance, and to analyze a company’s ability to service its debt and to facilitate comparison among companies. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides supplemental information useful to investors as it is frequently used by the financial community to analyze company growth on a relative per share basis.

Summary Consolidated Statements of Operations
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
GAAP:
2017
 
2016
 
2017
 
2016
Total revenues
$
164,519

 
$
132,160

 
$
486,297

 
$
395,059

Net income before non-controlling interests
(3,378
)
 
7,838

 
(7,360
)
 
22,273

Net income attributable to Tiptree Inc. Class A common stockholders
(3,114
)
 
5,905

 
(6,457
)
 
17,593

Diluted earnings per share
(0.11
)
 
0.19

 
(0.22
)
 
0.53

Cash dividends paid per common share
0.03

 
0.025

 
0.09

 
0.075

 
 
 
 
 
 
 
 
Non-GAAP: (1)
 
 
 
 
 
 
 
Adjusted EBITDA
$
4,776


$
20,128

 
$
23,333

 
$
52,882

Book Value per share, as exchanged
9.67

 
9.93

 
9.67

 
9.93

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

Consolidated Results of Operations

Revenues

For the three months ended September 30, 2017, the Company reported revenues of $164.5 million, an increase of $32.4 million, or 24.5%, from the three months ended September 30, 2016. For the nine months ended September 30, 2017, revenues were $486.3 million, an increase of $91.2 million, or 23.1%, from the nine months ended September 30, 2016. The primary drivers of the increase in revenues for the three and nine months were growth in earned premiums and net investment income in our specialty insurance segment, increases in rental income attributable to acquisitions of seniors housing properties and improved specialty finance originations margins, partially offset by reduced service and administrative fees, ceding commissions, and unrealized losses, as compared to prior period gains, in our specialty insurance segment investment portfolio.

Net Income before non-controlling interests

For the three months ended September 30, 2017, the Company incurred a net loss of $3.4 million compared to net income of $7.8 million in the 2016 period. The primary drivers of the decline were the unrealized losses in our specialty insurance investment portfolio in the three months ended September 30, 2017 compared to unrealized gains in the 2016 period, run-off in our older vintage CLOs

2




resulting in reduced management fees, and reduced CLO distributions as the Company reduced its investments over the last twelve months.

For the nine months ended September 30, 2017, the Company incurred a net loss of $7.4 million compared to net income of $22.3 million in the 2016 period, a decrease of $29.6 million. The decline was primarily a result of the unrealized losses in our specialty insurance investment portfolio in the nine months ended September 30, 2017, compared to unrealized gains in the prior period, combined with increased stock-based compensation expense in the specialty insurance segment and an increase in the fair value of the contingent earn-out liability associated with our Reliance acquisition. These drivers were partially offset by reduced losses in our senior living and improved operating results in our specialty finance segments, excluding the impact of the Reliance earn-out. Additionally, the tax provision has increased year-over-year as a result of a $4.0 million tax benefit in the three months ended March 31, 2016 which was driven by the tax reorganization effective January 1, 2016. A discussion of the changes in revenues, expenses and net income is presented below and in more detail in our segment analysis.

The following table highlights certain non-cash, key drivers impacting our results for the three and nine months ended September 30, 2017 and 2016. We believe highlighting these significant, non-cash items provides useful additional information to investors. As we mentioned above, our investments are focused on a longer term investment horizon. In addition, our equity securities holdings are relatively concentrated, and are carried at fair value and marked to market through the current reporting period. As a result, we expect our earnings relating to these securities to be relatively volatile between periods in contrast to our fixed income securities, which are marked to market through AOCI, which is more consistent with the treatment used by other insurance companies. In order for investors to be able to compare the returns of both types of investments, and to the portfolio performance of other insurance companies, we are highlighting the impact attributable to the unrealized and realized gains (losses) on equity securities in the table below.
We have also highlighted the impact of stock based compensation on the two periods below. Since a significant portion of our stock based compensation is performance based, and vests over multiple years, we believe that providing this information separately to investors allows them to evaluate the alignment of non-cash compensation to management, both at the holding company and at certain of our subsidiaries, with our overall performance trends.
In connection with our acquisition of Reliance, a portion of the purchase price was contingent on Reliance’s performance in the three years post acquisition, payable in Tiptree stock to the sellers. That contingent purchase price is carried as a liability on our balance sheet and is re-valued in each period. Increases or decreases in each period flow through the income statement, and are not deductible for tax purposes. Given Reliance’s performance over the latest performance measurement period, the contingent earn-out liability has increased, with the incremental value treated as an added expense in our financial statements for the nine months ended September 30, 2017.
Lastly, depreciation and amortization has increased, primarily as a result of additional acquisitions at Care, partially offset by the reduction in VOBA at Fortegra. Because we carry our real estate assets at original cost, and our strategy at Care is to purchase properties that require actions to improve their performance, we believe that highlighting the impact depreciation and amortization have on Tiptree’s overall results period over period, and on the carrying value of our real estate assets, is useful additional information for investors.
Key Non-Cash Drivers of Pre-tax Income and Adjusted EBITDA
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
Unrealized & realized gains (losses) on equity securities
 
$
(11,125
)
 
$
1,365

 
$
(12,490
)
 
$
(21,183
)
 
$
10,787

 
$
(31,970
)
Stock-based compensation
 
(1,135
)
 
(633
)
 
(502
)
 
(4,275
)
 
(1,597
)
 
(2,678
)
Reliance contingent earn-out liability (1)
 
422

 

 
422

 
(3,039
)
 

 
(3,039
)
Depreciation and amortization (1)
 
(7,775
)
 
(6,437
)
 
(1,338
)
 
(23,781
)
 
(21,899
)
 
(1,882
)
(1)
Added back to Adjusted EBITDA. For a reconciliation of Adjusted EBITDA to GAAP financials, see “—Non-GAAP Reconciliations.”

Net Income (Loss) Available to Class A Common Stockholders

For the three months ended September 30, 2017, net loss available to Class A common stockholders was $3.1 million, a decrease of $9.0 million from the prior year period. For the nine months ended September 30, 2017, net income available to Class A common stockholders was $6.5 million, a decrease of $24.1 million from the prior year period. The key drivers of net income available to Class A common stockholders were the same factors which impacted the net income before non-controlling interests.

Adjusted EBITDA

3





Total Adjusted EBITDA for the three months ended September 30, 2017 was $4.8 million compared to $20.1 million for the 2016 period, a decrease of $15.3 million, or 76.0%. Total Adjusted EBITDA for the nine months ended September 30, 2017 was $23.3 million compared to $52.9 million for the 2016 period, a decrease of $29.5 million, or 55.8%. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our net income, excluding the increase in the Reliance earn-out and the year-over-year change in the tax provision. See “Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

Book Value per share, as exchanged

As exchanged book value per share for the period ended September 30, 2017 was $9.67, down from $9.93 as of September 30, 2016. The key drivers of the year-over-year impact were increases from trailing twelve month diluted earnings per share and re-purchases of 1.0 million shares at an average 28% discount to book value. Those increases were more than offset by cumulative dividends paid of $0.115, officer and director compensation share issuances over the last twelve months and the exercise of the Tricadia Option in June 2017 resulting in 1.5 million shares being issued at $5.36 per share. Given the strike price of the option, the impact was a $0.19 reduction to book value per share.

Results by Segment
Effective December 31, 2016, Tiptree realigned the principal investments formerly reported in the corporate and other segment into their new reportable segments to align with the Company’s operating strategy. The table below reflects the credit and equity investments contributed to our insurance subsidiary in the specialty insurance segment and the CLO subordinated notes and related warehouse income in the asset management segment for the three and nine months ended September 30, 2017 and 2016.

Pre-tax Income by Segment
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Specialty insurance
$
(2,345
)
 
$
10,659

 
$
1,724

 
$
35,627

Asset management
2,973

 
6,475

 
13,083

 
14,672

Senior living
(1,535
)
 
(473
)
 
(5,359
)
 
(5,487
)
Specialty finance
2,595

 
4,181

 
2,629

 
5,510

Corporate and other
(7,118
)
 
(9,292
)
 
(22,198
)
 
(22,751
)
Pre-tax income
$
(5,430
)
 
$
11,550

 
$
(10,121
)
 
$
27,571


Adjusted EBITDA by Segment - Non-GAAP (1) 
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Specialty insurance
$
2,318

 
$
14,220

 
$
15,566

 
$
45,556

Asset management
2,973

 
6,475

 
13,083

 
14,672

Senior living
2,859

 
2,869

 
8,293

 
7,194

Specialty finance
2,382

 
4,479

 
6,288

 
6,327

Corporate and other
(5,756
)
 
(7,915
)
 
(19,897
)
 
(20,867
)
Adjusted EBITDA
$
4,776

 
$
20,128

 
$
23,333

 
$
52,882

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

Specialty Insurance

Fortegra is a specialty insurance company that offers asset protection products through niche commercial and personal lines of insurance. We also offer administration and fronting services for our self-insured clients who own captive producer owned reinsurance companies (“PORCs”).

Our specialty insurance business generates income from insurance underwriting operations and an investment portfolio. Insurance underwriting operations revenues are primarily generated from net premiums, service and administrative fees and ceding commissions. We measure insurance underwriting operations performance by as adjusted underwriting margin, combined ratio and Adjusted

4




EBITDA. The investment portfolio income consists of investment income, gains and losses and is measured by net portfolio income which is the equivalent of Adjusted EBITDA.

Operating Results
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Net earned premiums
$
96,073

 
$
47,609

 
$
272,781

 
$
138,516

Service and administrative fees
24,018

 
25,842

 
70,861

 
84,421

Ceding commissions
2,513

 
1,397

 
6,801

 
22,645

Net investment income
3,840

 
3,307

 
12,032

 
8,409

Net realized and unrealized gains (losses)
(8,554
)
 
3,745

 
(13,618
)
 
12,767

Other income
824

 
730

 
2,874

 
1,985

Total revenues
$
118,714

 
$
82,630

 
$
351,731

 
$
268,743

Expenses:
 
 
 
 
 
 
 
Policy and contract benefits
31,570

 
25,881

 
94,364

 
72,436

Commission expense
63,066

 
24,032

 
176,405

 
91,906

Employee compensation and benefits
10,073

 
9,180

 
30,800

 
28,065

Interest expense
3,499

 
2,322

 
10,534

 
6,018

Depreciation and amortization expenses
3,134

 
3,032

 
9,625

 
10,414

Other expenses
9,717

 
7,524

 
28,279

 
24,277

Total expenses
$
121,059

 
$
71,971

 
$
350,007

 
$
233,116

Pre-tax income (loss)
$
(2,345
)
 
$
10,659

 
$
1,724

 
$
35,627


Results

Our specialty insurance segment is currently expanding product lines in an effort to increase the duration of our products and increase investable assets. As part of this process, the business is investing in products and people to grow warranty and program products, while maintaining a leading position in the credit protection space. That, combined with the earnings performance of the investment portfolio, are key drivers in comparing 2017 versus 2016 results. The combination of unearned premiums and deferred revenue on the balance sheet are key indicators of volume growth and contract duration extension which over the trailing twelve months has increased by 12.7% from $469.3 million as of September 30, 2016 to $529.0 million as of September 30, 2017.

In the fourth quarter of 2016, our captive reinsurance subsidiary replaced a third party as reinsurer of certain credit protection products, thus avoiding reinsurance costs and gaining additional investment flexibility. This transaction was consistent with our strategy to grow underwriting and investment profits at our specialty insurance subsidiaries. As a result, several income statement line items increased for the three and nine months ended September 30, 2017 when compared to prior periods including earned premiums, commission expense and policy and contract benefits, partially offset by the decline in ceding commissions.

The application of push-down accounting to the acquisition of Fortegra resulted in purchase price accounting adjustments (Value of Business Acquired or “VOBA”) whereby deferred service and administrative fees and costs associated with deferred commission expense on acquired contracts were recognized differently from those related to newly originated contracts. For the nine months ended September 30, 2017 and 2016, the VOBA impacts on pre-tax income were modest at $1.0 million and $1.5 million, respectively. Where significant to the period over period comparisons of revenue and expense, VOBA impacts are discussed separately below.

For the three months ended September 30, 2017, the specialty insurance segment incurred a pre-tax loss of $2.3 million, a decrease of $13.0 million over the prior year operating results. The primary drivers of the decline in results were associated with our investment portfolio including a period-over-period reduction in net realized and unrealized gains and losses of $12.3 million, increases in interest expense of $1.2 million primarily associated with asset-based interest expense in the investment portfolio, partially offset by increases in net investment income of $0.5 million. From insurance operations, underwriting margins were up $3.1 million compared to prior year partially offset by increases in employee payroll and compensation of $0.9 million and increases in other expenses of $2.2 million related to premium tax related to the growth in written premiums.

Pre-tax income was $1.7 million for the nine months ended September 30, 2017, a decrease of $33.9 million, or 95.2%, over the prior year operating results. The primary drivers of the decline in results were associated with our investment portfolio including period-over-period reductions in net realized and unrealized gains and losses of $26.4 million, increases in interest expense of $4.5 million primarily associated with asset-based interest expense in the investment portfolio, partially offset by increases in net investment

5




income of $3.6 million. Insurance operations results were down versus prior year driven primarily by increases in stock-based compensation expense of $2.7 million and increased other expenses of $4.0 million primarily related to premium tax, which was partially offset by increased underwriting margin of $2.4 million.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues

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

Total revenues were $118.7 million for the three months ended September 30, 2017, up $36.1 million, or 43.7%, over the prior year period. The increase was primarily driven by an increase in earned premiums of $48.5 million, or 101.8%, which were partially offset by decreases in service and administrative fees of $1.8 million, or 7.1%, and ceding commissions of $1.1 million. For the nine months ended September 30, 2017, total revenues were $351.7 million, up $83.0 million, or 30.9%, over the prior year period. The increase was primarily driven by an increase in earned premiums of $134.3 million, or 96.9%, and other income of $0.9 million, which were partially offset by decreases in service and administrative fees of $13.6 million, or 16.1%, and ceding commissions of $15.8 million. For both periods, the increase in earned premiums was driven by growth in our credit protection and warranty products with the primary driver being our captive reinsurance subsidiary replacing a third party as reinsurer of certain credit protection products. Ceding commissions declines are consistent with this strategy to retain a higher portion of written business which results in less revenues from experience refunds. Service and administrative fees are lower year-over-year primarily from a reduction in fee-related revenues on our mobile protection and roadside assistance products.

The revenues on the investment portfolio, including net investment income and realized and unrealized gains, were a loss of $4.7 million for the three months ended September 30, 2017 compared to income of $7.1 million in the 2016 period, a decrease of $11.8 million. For the nine months ended September 30, 2017, revenues on the investment portfolio, including net investment income and realized and unrealized gains, were a loss of $1.6 million compared to $21.2 million of income in the 2016 period, a decrease of $22.8 million. See “—Specialty Insurance Investment Portfolio” for further discussion of the investment results.

Expenses

Total expenses include policy and contract benefits, commissions expense and operating expenses. For the three months ended September 30, 2017, total expenses were $121.1 million compared to $72.0 million in the 2016 period. For the nine months ended September 30, 2017, total expenses were $350.0 million compared to $233.1 million in the 2016 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2016 period.

There are two types of expenses for claims payments under insurance and warranty service contracts which are included in policy and contract benefits: member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in car club and warranty protection service contracts. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering claims for credit life and other insurance lines, such as non-standard auto. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements. For the three months ended September 30, 2017, policy and contract benefits were $31.6 million, up $5.7 million from the prior year. For the nine months ended September 30, 2017, policy and contract benefits were $94.4 million, up $21.9 million from the prior year primarily as a result of increased retention in our credit protection and program products.

Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to distributors and retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions and retention levels. Total commission expense for three months ended September 30, 2017 was $63.1 million compared to $24.0 million in 2016. Total commission expense for nine months ended September 30, 2017 was $176.4 million compared to $91.9 million in 2016. The primary drivers of the increase were the commission expense associated with the higher retention rate on our credit protection products along with VOBA purchase accounting impacts.

6





Operating expenses are composed of employee compensation and benefits, interest expense, depreciation and amortization expenses and other expenses. For the three months ended September 30, 2017, operating expenses were $26.4 million compared to $22.1 million in the 2016 period. For the nine months ended September 30, 2017, operating expenses were $79.2 million compared to $68.8 million in the 2016 period. The increases for the three and nine months were driven primarily by increased stock-based compensation, increased premium taxes as written premiums grow, and increased interest expense on asset based borrowings within the insurance investment portfolio. For the nine months ended September 30, 2017 total employee compensation and benefits were $30.8 million, up $2.7 million from 2016 primarily as a result of increased stock based compensation expense. Interest expense of $10.5 million in nine months ended September 30, 2017 increased by $4.5 million versus the prior year, primarily from increased asset based borrowings on certain investments within the investment portfolio. Other expenses for the nine months ended September 30, 2017 were $28.3 million, up $4.0 million from 2016 primarily as a result of increased premium taxes as written and earned premiums grew. Depreciation and amortization expense was lower year-over-year as a result of the decline in VOBA purchase accounting impact from the amortization of the fair value attributed to the insurance policies and contracts acquired, which was $0.2 million for the nine months ended September 30, 2017 versus $3.0 million for the prior year period. This was partially offset by amortization of other intangibles including customer relationships and trade names.

Insurance Operating Ratios

We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and other income. Investors use this ratio to evaluate our ability to profitably underwrite the risks we assume over time and manage our operating costs. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Since VOBA purchase accounting adjustments impact revenues and expenses related to acquired contracts differently from newly originated, we also show the combined ratio on an as adjusted basis, eliminating the accounting effects of VOBA. Management believes showing an as adjusted combined ratio provides useful information to investors to compare period-over-period operating results. Following is a summary of these performance metrics for the three and nine months ended September 30, 2017 and 2016.

Operating Ratios
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Insurance operating ratios:
2017
 
2016
 
2017
 
2016
Combined ratio
92.6
%

87.9
%
 
93.2
%
 
86.3
%
As adjusted Combined ratio - Non-GAAP (1)
92.8
%

89.4
%
 
93.6
%

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

The as adjusted combined ratios were 92.8% and 93.6% for the three and nine months ended September 30, 2017, compared to 89.4% and 88.5% for the corresponding prior year periods. The increases across both the three and nine months were driven primarily by the higher retention impacting underwriting margins and higher premium tax, combined with the increased stock based compensation mentioned above. These factors caused the combined ratio to deteriorate modestly in the nine month period.

Key Operating Metrics and Non-GAAP Operating Results

Adjusted EBITDA

Adjusted EBITDA was $2.3 million and $15.6 million for the three and nine months ended September 30, 2017, compared to $14.2 million and $45.6 million for the comparable prior year periods. Net portfolio income from the investment portfolio was a loss of $6.4 million and $6.7 million for the three and nine months ended September 30, 2017, compared to income of $6.4 million and $19.5 million in the respective prior year periods. Adjusted EBITDA from insurance underwriting operations was $8.7 million and $22.3 million for the three and nine months ended September 30, 2017 compared to $7.9 million and $26.1 million for the respective prior year periods. The increase for the three months and decrease for the nine months were driven by the same factors discussed above under “Results.” See “Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Gross & Net Written Premiums

Gross written premiums represents total premiums from insurance policies and warranty service contracts that we write during a reporting period based on the effective date of the individual policy. Net written premiums are gross written premiums less that portion of premiums that we cede to third party reinsurers or the PORCs under reinsurance agreements. The amount ceded to each reinsurer

7




is based on the contractual formula contained in the individual reinsurance agreements. Net earned premiums are the earned portion of our net written premiums. We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy.

Product Underwriting Margin - Non-GAAP

The following tables present product specific revenue and expenses within the specialty insurance segment for the three and nine months ended September 30, 2017 and 2016. As mentioned above, we generally limit the underwriting risk we assume through the use of both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid adjust based on the actual underlying losses incurred), which manage and mitigate our risk. Period-over-period comparisons of revenues are often impacted by the PORCs and distribution partners choice as to whether to retain risk, specifically with respect to the relationship between service and administration expenses and ceding commissions, both components of revenue, and the offsetting policy and contract benefits and commissions paid to our partners and reinsurers. Generally, when losses are incurred, the risk which is retained by our partners and reinsurers is reflected in a reduction in commissions paid. In order to better explain to investors the net financial impact of the risk retained by the Company of the insurance contracts written and the impact on profitability, we use the Non-GAAP metric - As Adjusted Underwriting Margin. For the same reasons that we adjust our combined ratio for the effects of purchase accounting, VOBA impacts can also mask the actual relationship between revenues earned and the offsetting reductions in commissions paid, and thus the period-over-period net financial impact of the risk retained by the Company. As such, we believe that presenting underwriting margin provides useful information to investors and aligns more closely to how management measures the underwriting performance of the business.

Written Premium Metrics and As Adjusted Underwriting Margin - Non-GAAP

Three Months Ended September 30,
($ in thousands)
Credit Protection

Warranty

Programs

Services and Other

Insurance Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
Gross written premiums
$
149,115

$
132,111


$
25,530

$
16,618


$
34,512

$
32,674


$
11

$
8


$
209,168

$
181,411

Net written premiums
96,375

30,987


17,217

13,142


5,418

11,884





119,010

56,013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As Adjusted Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earned premiums
$
78,951

$
29,173

 
$
10,900

$
9,139

 
$
6,222

$
9,297

 
$

$

 
$
96,073

$
47,609

Service and administrative fees
10,434

10,865

 
9,409

11,788

 
2,721

2,504

 
1,690

1,819

 
24,254

26,976

Ceding commissions
2,523

1,465

 

1

 


 


 
2,523

1,466

Other income
135

71

 

(22
)
 

5

 
689

676

 
824

730

Less product specific expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy and contract benefits
14,420

7,918

 
11,694

10,099

 
5,456

7,900

 

(36
)
 
31,570

25,881

Commission expense
59,949

18,386

 
2,287

5,979

 
1,178

1,611

 
190

176

 
63,604

26,152

As Adjusted underwriting margin (1)
$
17,674

$
15,270

 
$
6,328

$
4,828

 
$
2,309

$
2,295

 
$
2,189

$
2,355

 
$
28,500

$
24,748


Total gross written premiums for the three months ended September 30, 2017 were $209.2 million, an increase of $27.8 million, or 15.3%, from the prior year period. The amount of business retained was 56.9%, up from 30.9% in the prior year period as the Company retained more risk in 2017 than 2016. Total net premiums written were $119.0 million, up $63.0 million over prior year, or 112.5%. Credit protection net premiums written for the three months ended September 30, 2017 were $96.4 million, higher than the prior year period by $65.4 million. The increase in retention and net written premiums was consistent with the Company’s strategy and was largely driven by our captive reinsurer retaining credit protection products as discussed above. Warranty product net written premiums were $17.2 million, up $4.1 million and program products were $5.4 million, down $6.5 million from prior year period, primarily driven by the run-off of certain non-standard auto programs.

As adjusted underwriting margin for the three months ended September 30, 2017 was $28.5 million, up from $24.7 million in 2016. Credit protection increased by $2.4 million primarily from increased product retention over 2016. Warranty increased by $1.5 million driven by increased policies written for furniture, appliances and auto products. The amount of warranty product ceded year-over-year increased as we enter new products and continue to build our underwriting performance and relationships with distributors. Programs written premiums declined as we continue to run-off non-core specialty programs that did not meet underwriting performance standards. We believe there are additional opportunities to expand our warranty and programs insurance business model to other niche products and markets.

8





Nine Months Ended September 30,
($ in thousands)
Credit Protection

Warranty

Programs

Services and Other

Insurance Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
Gross written premiums
371,123

364,842


83,075

44,078


106,348

131,306


23

21


560,569

540,247

Net written premiums
238,658

90,212


44,641

35,045


19,025

27,120





302,324

152,377

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As Adjusted Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earned premiums
$
221,080

$
88,192


$
31,525

$
27,394


$
20,176

$
22,930


$

$


$
272,781

$
138,516

Service and administrative fees
31,204

33,975


27,330

41,093


8,108

8,577


4,961

5,752


71,603

89,397

Ceding commissions
6,847

23,018



2






1


6,847

23,021

Other income
338

199



64



5


2,536

1,717


2,874

1,985

Less product specific expenses:














Policy and contract benefits
44,226

21,727


32,406

30,529


17,548

20,172


184

8


94,364

72,436

Commission expense
165,990

76,707


7,919

20,280


3,747

4,036


641

377


178,297

101,400

As Adjusted underwriting margin (1)
$
49,253

$
46,950


$
18,530

$
17,744


$
6,989

$
7,304


$
6,672

$
7,085


$
81,444

$
79,083

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

Total gross written premiums for the nine months ended September 30, 2017 were $560.6 million, which represented an increase of $20.3 million, or 3.8%, from the prior year period. The amount of business retained was 53.9%, up from 28.2% in the prior year period. Total net premiums written for the nine months ended September 30, 2017 were $302.3 million, up $149.9 million, or 98.4%. Credit protection net premiums written for the nine months ended September 30, 2017 were $238.7 million, higher than the prior year period by $148.4 million. For the nine months ended September 30, 2017, warranty product net written premiums were $44.6 million, up $9.6 million from 2016 and program products were $19.0 million, down $8.1 million from the 2016 period. The factors that drove the variances were the same for the three and nine months.

As adjusted underwriting margin for the nine months ended September 30, 2017 was $81.4 million, up from $79.1 million in 2016. Credit protection as adjusted underwriting margin was $49.3 million, an increase from 2016 results by $2.3 million, or 4.9%. As adjusted underwriting margin for warranty products was $18.5 million for 2017, up $0.8 million, or 4.4%, from 2016. The effects experienced in previous periods from our mobile protection products has slowed, and was more than offset by growth in furniture, appliances, and auto warranty business. Programs as adjusted underwriting margin for 2017 was $7.0 million, down 4.3% from 2016, as certain non-standard auto programs were exited over the last year. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion. Services and other contributed $6.7 million in 2017, down $0.4 million from 2016 as certain business processing services are in run-off.

Policy and contract benefits, which include net losses, loss adjustments and member benefit claims, were $94.4 million for the nine months ended September 30, 2017, up $21.9 million period-over-period. The increase in net losses over the prior year period was a function of growth in earned premiums, including the contract assumptions mentioned above, partially offset by lower claims in mobile devices consistent with the decline in written premiums.

Commission expense, excluding the impacts of VOBA, was $178.3 million for the nine months ended September 30, 2017, up $76.9 million, driven primarily by the increase in retention of credit insurance products, partially offset by declines in commissions related to the mobile protection and other warranty products.

Specialty Insurance Investment Portfolio

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

In managing our investment portfolio we analyze net investments and net portfolio income, which are non-GAAP measures. Our presentation of net investments equals total investments plus cash and cash equivalents minus asset based financing related to certain investments. Our presentation of net portfolio income equals net investment income plus realized and unrealized gains and losses and minus interest expense associated with asset based financing of investments. Net investments and net portfolio income are used to calculate average annualized yield, which is one of the measures management uses to analyze the profitability of our investment portfolio. Management believes this information on a cumulative basis is useful since it allows investors to evaluate the performance of our investment portfolio based on the capital at risk and on a non-consolidated basis. Our calculation of net investments and net

9




portfolio income may differ from similarly titled non-GAAP financial measures used by other companies. Net investments and net portfolio income are not measures of financial performance or liquidity under GAAP and should not be considered a substitute for total investments or net investment income. See “Non-GAAP Reconciliations” for a reconciliation to GAAP total investments and investment income.
Specialty Insurance Investment Portfolio - Non-GAAP
($ in thousands)
 
 
As of September 30,

 
 
 
 
2017

2016
Cash and cash equivalents (1)
 
 
 

$
60,199


$
4,402

Available for sale securities, at fair value
 
 
 

164,093


137,195

Equity securities, trading, at fair value
 
 
 

28,106


44,670

Loans, at fair value (2)
 
 
 

84,493


101,383

Real estate, net
 
 
 

23,106


10,233

Other investments
 
 
 

3,956


4,012

Net investments
 
 
 

$
363,953


$
301,895

 
 
 
 
 
 
 
 
(1) Cash and cash equivalents, plus restricted cash, net of due from/due to brokers on consolidated loan funds, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
(2) Loans, at fair value, net of asset based debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
 
Specialty Insurance Net Investment Portfolio Income - Non-GAAP








($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017

2016
 
2017

2016
Net investment income
$
3,840


$
3,307


$
12,032

 
$
8,409

Realized gains (losses)
1,462


1,056


6,425


4,187

Unrealized gains (losses)
(10,016
)

2,689


(20,042
)

8,580

Interest expense
(1,678
)

(697
)

(5,143
)

(1,708
)
Net portfolio income
$
(6,392
)

$
6,355


$
(6,728
)

$
19,468

Average Annualized Yield % (1)
(7.2
)%

8.3
%

(3.7
)%

8.5
%
(1) Average Annualized Yield % represents the ratio of annualized net investment income, realized and unrealized gains (losses) less investment portfolio interest expense to the average of the prior two quarters total investments less investment portfolio debt plus cash, but does not reflect the cumulative return on the portfolio.

Net investments of $364.0 million have grown 20.6% from September 30, 2016 through a combination of internal growth, increased retention of premiums written, and assets contributed by the Company to further capitalize Fortegra.

Our net investment income includes interest, dividends and rental income, net of investment expenses, on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We report net unrealized gains (losses) on securities classified as available-for-sale separately within accumulated other comprehensive income on our balance sheet. For loans, at fair value, and equity securities classified as trading securities, we report unrealized gains (losses) within net realized gains (losses) on investment on the condensed consolidated statement of income. The treatment of loans at fair value, primarily related to our credit asset investments and non-performing loans, and equity securities, is currently different from most other insurance companies.

For the three months ended September 30, 2017, the net investment portfolio loss was $6.4 million compared to $6.4 million of income in the comparable 2016 period. The decline was driven by $10.0 million of unrealized losses in the 2017 period compared to $2.7 million of unrealized gains in the 2016 period of which $11.1 million of unrealized losses were attributable to fair market valuations on publicly traded equity positions. This decline was partially offset by increases in net investment income of $0.5 million as the loans, equities and real estate continue to yield positive interest, dividend and rental income, along with increases in realized gains of $0.4 million primarily from gains on sales of our non-performing residential loans.

For the nine months ended September 30, 2017, the net investment portfolio loss was $6.7 million compared to $19.5 million of income in the comparable 2016 period. The average annualized yield for the nine months declined from 8.5% in 2016 to (3.7)% in 2017 as a result of year to date unrealized losses of $20.0 million compared to unrealized gains of $8.6 million in 2016. For the nine month period, fair market valuation on equities resulted in $21.2 million of unrealized losses. In addition, interest expense increased by $3.4 million as a result of increased borrowings on credit asset investments and non-performing loans. Those factors were partially offset by increases in net investment income of $3.6 million, as interest and dividend payments improved year-over-year, and realized

10




gains improved by $2.2 million, from gains on sales of our non-performing residential loans.

Asset Management

The Company’s asset management segment earns revenues from CLOs under management, including management fees, distributions and realized and unrealized gains on the Company’s holdings of CLO subordinated notes. Also included in the segment are the management fees, investment earnings and costs associated with our legacy tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. As of September 30, 2017, total fee earning AUM was $1.6 billion, which was down from $1.9 billion as of September 30, 2016 as the run-off in our older CLOs have not been replaced with new AUM. Total investment in CLO subordinated notes and management fee participation rights, at fair market value, as of September 30, 2017 was $20.2 million, down from $52.4 million as of September 30, 2016. In January 2017, the Company sold its investment in Telos 5 for consideration of $15.9 million which resulted in deconsolidation for the 2017 period. In August 2017, the Company liquidated Telos 7 for $21.9 million which resulted in deconsolidation of the assets and liabilities. Many of the Telos 7 assets were sold to a refinanced Telos 3. For risk retention purposes, we purchased a vertical tranche of Telos 3 in the insurance investment portfolio.

Operating Results
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)
$
(349
)
 
$
695

 
$
839

 
$
226

Management fee income
1,541

 
3,839

 
6,578

 
7,497

Other income
256

 
212

 
822

 
3,031

Total revenue
$
1,448

 
$
4,746

 
$
8,239

 
$
10,754


 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Employee compensation and benefits
889

 
2,267

 
3,953

 
4,861

Interest expense
5

 

 
7

 
746

Other expenses
164

 
36

 
589

 
524

Total expenses
$
1,058

 
$
2,303

 
$
4,549

 
$
6,131

Net income attributable to consolidated CLOs
2,583

 
4,032

 
9,393

 
10,049

Pre-tax income (loss)
$
2,973

 
$
6,475

 
$
13,083

 
$
14,672


Results

For the three months ended September 30, 2017, pre-tax income was $3.0 million, down from $6.5 million in the prior year period. This decline was driven by reduced income from consolidated CLOs, primarily related to reductions in distributions on the subordinated notes as a result of sales and liquidation, and reduced management and incentive fees from our older vintage CLOs. This was partially offset by favorable realized gains on the liquidation of Telos 7 (which is embedded in the net income attributable to consolidated CLOs) and reduced incentive compensation expense.

Pre-tax income was $13.1 million for the nine months ended September 30, 2017 compared to $14.7 million for the 2016 period, a decrease of $1.6 million primarily driven by declining management fees on older vintage CLOs and reduced subordinated note distributions as our investments declined. Expenses for the 2017 period were $4.5 million compared to $6.1 million for the 2016 period, primarily driven by decreases in interest expense associated with the Telos 7 warehouse and decreases in employee incentive compensation as management and incentive fees decreased period-over-period. Net income attributable to consolidated CLOs was down $0.7 million primarily due to reductions in subordinated note distributions, partially offset by favorable fair value marks on our CLO subordinated notes in the 2017 period as compared to the 2016 period.

Operating Results - Non-GAAP

As Adjusted Revenues

Asset management as adjusted revenues include revenues from CLOs, legacy tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. The Company earns revenues from CLOs under management, whether consolidated or deconsolidated, which include fees earned for managing the CLOs, distributions received from the Company’s holdings of subordinated notes issued by the CLOs and realized and unrealized gains and losses from the Company’s holdings of subordinated notes. The revenue associated with the management fees and distributions earned and gains and losses on the subordinated notes attributable to the consolidated CLOs are reported as “net income (loss) attributable to the consolidated CLOs” in the Company’s financial statements.

11




The table below shows the Company’s share of the results attributable to the CLOs which were consolidated, on a deconsolidated basis. This presentation is a non-GAAP measure. Management believes this information is helpful for period-over-period comparative purposes as certain of our CLOs were consolidated for only some of the periods presented below. In addition, the Non-GAAP presentation allows investors the ability to calculate management fees as a percent of AUM, a common measure used by investors to evaluate asset managers, and which is one of the performance measures upon which management is compensated. While consolidation versus deconsolidation impacts the presentation of revenues, it does not impact expenses or pre-tax income. See “Non-GAAP Reconciliations” for a reconciliation to GAAP revenues.

As Adjusted Revenues (1) 
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
As Adjusted Revenues:
 
 
 
 
 
 
 
Management fees
$
1,852


$
4,582

 
$
7,616

 
$
9,666

Distributions
2,168


4,368

 
6,560

 
11,058

Realized and unrealized gains (losses)
11


(339
)
 
3,443

 
(2,824
)
Other income


167

 
13

 
2,903

Total as adjusted revenues
$
4,031


$
8,778

 
$
17,632

 
$
20,803

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

Fee earning AUM has declined as older CLO vintages run-off, which has resulted in reduced base management fees. Incentive fees have decreased as performance fees within the Telos 1 and 2 CLOs run-off. Our investments in subordinated notes of the CLOs have also declined, which resulted in lower distributions period-over-period. Realized and unrealized gains were favorable as a result of the gain on sale of Telos 5 and Telos 7, and unrealized mark to market gains on our remaining CLO subordinated notes and other investments for year to date 2017 as compared to an unrealized loss in the 2016 period. Other income includes legacy tax-exempt securities, CLO warehouse facilities and our credit hedging strategies which declined year-over-year as those products were in place in the 2016 period and not in the 2017 period.

For the three months ended September 30, 2017, as adjusted revenues were $4.0 million compared to $8.8 million for the same period in 2016. The decrease was driven primarily by reductions in base management and incentive fees of $2.7 million, and lower distributions of $2.2 million and other income of $0.2 million, partially offset by improved realized and unrealized gains on CLO subordinated notes and other investments of $0.4 million.

For the nine months ended September 30, 2017, as adjusted revenues were $17.6 million compared to $20.8 million for the same period in 2016. The decrease was driven primarily by reductions in base management and incentive fees of $2.1 million, and lower distributions of $4.5 million and other income of $2.9 million, partially offset by favorable realized and unrealized gains on CLO subordinated notes and other investments of $6.3 million.

Adjusted EBITDA

Adjusted EBITDA was $3.0 million and $13.1 million for the three and nine months ended September 30, 2017, respectively, compared to $6.5 million and $14.7 million for the comparable prior year periods. The decrease for both the quarter and for the year to date was driven by the same factors discussed above under “Results.” See “Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Senior Living

We operate our senior living segment through Care which is focused on investing in seniors housing properties including senior apartments, independent living, assisted living, memory care and to a lesser extent, skilled nursing facilities. As of September 30, 2017, Care’s portfolio consists of 40 properties across 10 states primarily in the Mid-Atlantic and Southern United States comprised of 22 Triple Net Lease (“NNN”) Properties and 18 Managed Properties. Additionally, Care manages one property within our specialty insurance investment portfolio on behalf of Fortegra.

In Triple Net Lease Properties, we own between 90-100% of the real estate and enter into a long term lease with an operator who is typically responsible for bearing operating costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements. The operations of the Triple Net Lease Properties are not consolidated since we do not manage or own the underlying operations. For Triple Net Lease Properties’ operations, we recognize primarily rental income from the lease since substantially all expenses are passed through to the tenant. In Managed Properties, we generally own between 65-90% of both the real estate and the operations with affiliates of the management company owning the remainder. We therefore consolidate all of the assets, liabilities,

12




income and expense of the Managed Properties operations in segment reporting. For the three and nine months ended September 30, 2017 and 2016, operating results include amounts attributable to non-controlling interests related to our Managed Properties.

Operating Results
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)
$

 
$
51

 
$

 
$

Rental and related revenue
19,170

 
15,371

 
54,819

 
43,389

Other income
413

 
273

 
1,108

 
815

Total revenue
$
19,583

 
$
15,695

 
$
55,927

 
$
44,204

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Employee compensation and benefits
7,723

 
6,270

 
22,499

 
17,661

Interest expense
3,609

 
2,271

 
9,309

 
6,220

Depreciation and amortization expenses
4,369

 
3,094

 
13,350

 
10,634

Other expenses
5,417

 
4,533

 
16,128

 
15,176

Total expenses
$
21,118

 
$
16,168

 
$
61,286

 
$
49,691

Pre-tax income (loss)
$
(1,535
)
 
$
(473
)
 
$
(5,359
)
 
$
(5,487
)

Results

In 2017, twelve properties were acquired (two Managed Properties and ten Triple Net Lease Properties) for an aggregate purchase price of $80.7 million, bringing our total purchase price of the 40 properties to $407.6 million, excluding transaction costs. Ten of those properties were acquired in the second quarter of 2017. For the three months ended September 30, 2017, our senior living segment incurred a pre-tax loss of $1.5 million compared with a pre-tax loss of $0.5 million for the same period in 2016. For the nine months ended September 30, 2017, we incurred a pre-tax loss of $5.4 million compared with a pre-tax loss of $5.5 million for the same period in 2016. The properties acquired in the last twelve months have generated higher rental and related revenue year-over-year, however the higher revenues have been offset by additional expenses as a consequence of the acquisition of these properties. For the three months ended September 30, 2017, the additional operating costs, interest expense, and depreciation and amortization outpaced the incremental revenues from the acquired properties. For the nine months ended September 30, 2017, the primary driver of the lower loss compared to 2016 was an unrealized expense of $1.4 million related to interest rate swaps in the first quarter of 2016.

Revenues

Revenues were $19.6 million for the three months ended September 30, 2017, compared with $15.7 million for the 2016 period, an increase of $3.9 million, or 24.8%. The increase in rental and related revenue was primarily due to the fourteen properties acquired over the last twelve months (three Managed Properties, eleven Triple Net Leases). For the nine months ended September 30, 2017, revenues were $55.9 million compared with $44.2 million for the 2016 period, an increase of $11.7 million, or 26.5%. The increase in rental and related revenue was primarily due to the facilities acquired since the first quarter of 2016, including twelve properties acquired in 2017 and four properties acquired in 2016. The three and nine month revenues increases as a result of acquisitions were partially offset by declining rental and related income resulting from reduced occupancy levels in 2016 at properties undergoing renovations and capital upgrades. These upgrades were completed in the first quarter of 2017, but occupancy and rental income has not yet recovered to stabilized levels.

Expenses

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

Expenses for the three months ended September 30, 2017 were $21.1 million, compared with $16.2 million for 2016, an increase of $5.0 million, or 30.6%. The primary increases period-over-period primarily related to acquired properties and include property operating expenses of $2.1 million (including employee compensation and benefits and other expenses at the managed properties), interest expense of $1.3 million, depreciation and amortization expenses of $1.3 million, and payroll and other costs of $0.2 million. The increase in property operating expenses was primarily attributable to consolidation of the expenses of the three Managed Properties acquired in the last twelve months.


13




Expenses for the nine months ended September 30, 2017 were $61.3 million, compared with $49.7 million for 2016, an increase of $11.6 million, or 23.3%. The primary increases period-over-period include property operating expenses of $7.0 million (including employee compensation and benefits and other expenses at the managed properties), interest expense of $3.1 million and depreciation and amortization expenses of $2.7 million. The increase in property operating expenses was primarily attributable to consolidation of the expenses of the two Managed Properties acquired in the first quarter of 2016 and the three Managed Properties acquired in the last fifteen months.

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

Operating Results - Non-GAAP

Segment NOI

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

Product NOI - Non-GAAP (1) 
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Triple Net Leases
$
3,371

 
$
1,844

 
$
8,218

 
$
5,533

Managed Properties
4,071

 
3,927

 
12,024

 
10,256

Segment NOI
$
7,442

 
$
5,771

 
$
20,242

 
$
15,789

 
 
 
 
 
 
 
 
Managed Property NOI Margin % (2)
25.8
%
 
29.0
%
 
25.8
%
 
27.1
%
(1)  
For further information relating to the Senior Living NOI, including a reconciliation to GAAP pre-tax income, see “—Non-GAAP Reconciliations.”
(2)
NOI Margin % is the relationship between Managed Property segment NOI and Rental and related revenue.

NOI was $7.4 million for the three months ended September 30, 2017, compared with $5.8 million in the prior year period, an increase of $1.7 million, or 29.0%. For the nine months ended September 30, 2017, NOI was $20.2 million, compared with $15.8 million in the prior year period, an increase of $4.5 million, or 28.2%. The primary drivers of improvement in NOI in both periods was an increase in rental revenue from newly acquired properties partially offset by the associated increase in property operating expenses. Several of our recent acquisitions included properties that the Company and its operating partners are enhancing through renovation projects and other capital upgrades in an effort to grow revenue and to allow them to operate more efficiently. As indicated in the table above, NOI margins on Managed Properties declined from 29.0% to 25.8% for the three months year-over-year and 27.1% to 25.8% for the nine months year-over-year. This decline was a result of dampened revenues as occupancy declined during these periods of renovation and capital upgrades, with the resulting ramp up of leasing revenues post-upgrade not yet completed. As the more recently acquired facilities ramp up and stabilize, we expect our results to reflect additional NOI margin improvements.

Adjusted EBITDA

Adjusted EBITDA was $2.9 million and $8.3 million for the three and nine months ended September 30, 2017, respectively, compared to $2.9 million and $7.2 million in the three and nine months ended September 30, 2016, driven primarily by increases in NOI partially offset by increased interest expense on new acquisitions. See “Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.



14




Specialty Finance

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

Operating Results
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,

 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)
 
$
16,700

 
$
21,682

 
$
48,029

 
$
49,499

Other income
 
8,276

 
7,331

 
22,296

 
18,291

Total revenue
 
$
24,976

 
$
29,013

 
$
70,325

 
$
67,790


 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
14,631

 
16,865

 
42,434

 
41,801

Interest expense
 
1,949

 
1,932

 
4,743

 
4,352

Depreciation and amortization expenses
 
209

 
248

 
620

 
665

Other expenses
 
5,592

 
5,787

 
19,899

 
15,462

Total expenses
 
$
22,381

 
$
24,832

 
$
67,696

 
$
62,280

Pre-tax income (loss)
 
$
2,595

 
$
4,181

 
$
2,629

 
$
5,510


Results

For the three months ended September 30, 2017, the specialty finance segment contributed pre-tax income of $2.6 million compared with pre-tax income of $4.2 million for the comparable 2016 period. For the nine months ended September 30, 2017, pre-tax income was $2.6 million compared with $5.5 million for the comparable 2016 period. Expenses decreased by $2.5 million for the three months ended September 30, 2017 as result of lower mortgage production volumes which impacted employee compensation and benefits. In the nine months ended September 30, 2017, expenses increased by $5.4 million driven primarily by the $3.0 million increase in fair value of the contingent earn-out liability in connection with our acquisition of Reliance, which in turn was driven by their improved performance. In addition, since the contingent earn-out is payable in Tiptree stock, its fair value increases as Tiptree’s stock price improves. This was partially offset by improved underlying performance driven by increased net revenue margins on mortgage originations volume and higher earning assets in the commercial lending businesses.

Revenues

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

Revenues decreased from $29.0 million in three months ended September 30, 2016 to $25.0 million in the comparable 2017 period. Mortgage origination volume declined 23.8% from $565.8 million for the three months ended September 30, 2016 to $431.2 million for three months ended September 30, 2017, which was partially offset by 31.2 basis points improvement in net revenue margins year-over-year. Commercial lending grew with average earning assets of $138.7 million in the three months ended September 30, 2017, compared with $90.6 million in the three months ended September 30, 2016, an increase of 53.1%.

Revenues increased from $67.8 million in nine months ended September 30, 2016 to $70.3 million in the 2017 period, primarily driven by higher margins on relatively stable mortgage volume and increased commercial lending originations volume. Mortgage origination volume declined 10.9% from $1.3 billion for the nine months ended September 30, 2016 to $1.2 billion for nine months ended September 30, 2017 which was more than offset by 53.1 basis points improvement in net revenue margins year-over-year. This was primarily a result of the change in product mix towards higher margin government and agency products. In addition, commercial asset-based lending grew with average earning assets of $117.1 million in the nine months ended September 30, 2017, compared with $72.8 million in the prior year period, an increase of 60.9%. The improvement in commercial asset-based lending was driven by increased loan originations and higher utilization rates of facilities by borrowers which increased interest income and loan fees, reported in other income.


15




Expenses

Lower revenues were offset by lower expenses, which decreased from $24.8 million for the three months ended September 30, 2016 to $22.4 million for three months ended September 30, 2017. Higher revenues in the nine months ended September 30, 2017 were offset by higher expenses which increased from $62.3 million for the nine months ended September 30, 2016 to $67.7 million in the comparable period in 2017. Expenses are composed of payroll and employee commissions, interest expense, professional fees, fair value changes to the contingent earn-out liability in connection with our acquisition of Reliance and other expenses. In addition to the Reliance earn-out increase, expenses were higher in the nine month 2017 period from higher payroll and employee commissions as underlying business performance improved.

Operating Results - Non GAAP

Adjusted EBITDA

Adjusted EBITDA was $2.4 million and $6.3 million for the three and nine months ended September 30, 2017, respectively, compared to $4.5 million and $6.3 million for the comparable prior year periods. The decrease in the three month period was driven by the same factors discussed above under “Results”, combined with the add-back of the change in fair value for earn-out liability at Reliance in each respective period. See “Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Corporate and Other

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

Operating Results
($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)
$
(271
)
 
$
42

 
$
(67
)
 
$
3,462

Other income
69

 
34

 
142

 
106

Total revenue
$
(202
)
 
$
76

 
$
75

 
$
3,568


 
 
 
 

 

Expenses:
 
 
 
 

 

Employee compensation and benefits
3,280

 
4,185

 
9,751

 
9,787

Interest expense
1,299

 
1,314

 
3,851

 
3,434

Depreciation and amortization expenses
63

 
63

 
186

 
186

Other expenses
2,274

 
3,806

 
8,485

 
12,912

Total expenses
$
6,916

 
$
9,368

 
$
22,273

 
$
26,319

Pre-tax income (loss)
$
(7,118
)
 
$
(9,292
)
 
$
(22,198
)
 
$
(22,751
)

Results

For the three months ended September 30, 2017, the Company recorded a loss of $7.1 million compared with a loss of $9.3 million for the 2016 period, an increase in pre-tax income of $2.2 million. For the nine months ended September 30, 2017, the Company recorded a loss of $22.2 million compared with a loss of $22.8 million for the 2016 period, a lower pre-tax loss of $0.6 million. The key drivers of year-over-year improvement in the nine month period were decreases in total corporate expenses of $4.0 million primarily related to reduced professional fees, partially offset by $3.5 million of reduced revenues in the 2016 period from realized gains on the sale of certain legacy principal investments which did not repeat in 2017.

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

Employee compensation and benefits were $3.3 million in the three months ended September 30, 2017, compared to $4.2 million for the 2016 period. For the nine months ended September 30, 2017, employee compensation and benefits were $9.8 million compared to $9.8 million in the nine months ended September 30, 2016, as corporate staff increased from our efforts to improve our reporting and controls infrastructure, which was offset by lower accrued incentive compensation.


16




Interest expense was $1.3 million in the three months ended September 30, 2017, compared to $1.3 million in the 2016 period. Interest expense was $3.9 million in the nine months ended September 30, 2017, compared to $3.4 million in the nine months ended September 30, 2016. The increase in interest expense for the nine months was related to increased borrowings on the Fortress credit facility year-over-year.

Other expenses were $2.3 million in the three months ended September 30, 2017 as compared to $3.8 million in the 2016 period. For the nine months ended September 30, 2017, other expenses were $8.5 million as compared to $12.9 million in 2016. The year-over-year decrease of $4.4 million in the nine months was driven by reduced audit fee accruals and external consulting spend as a result of our improved reporting and controls infrastructure. Included within the year-to-date 2017 results were approximately $1.0 million of expenses primarily related to the delayed filing of the first quarter Form 10-Q.

Operating Results - Non-GAAP

Adjusted EBITDA

Adjusted EBITDA was a loss of $5.8 million and $19.9 million for the three and nine months ended September 30, 2017, respectively, compared to a loss of $7.9 million and $20.9 million in the comparable prior year periods. The improvement in Adjusted EBITDA for the three and nine month periods were driven by the same factors that impacted pre-tax income. See “Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Provision for income taxes

The total income tax benefit of $2.8 million and expense of $5.3 million for the nine months ended September 30, 2017 and 2016, respectively, is reflected as a component of net income. Below is a table that breaks down the components of the Company’s effective tax rate (“ETR”).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
Impact of state tax and permanent items
3.8

 
(2.2
)
 
4.0

 
(0.9
)
Impact of non-controlling interests
(0.7
)
 
(1.2
)
 
2.9

 
(0.6
)
Impact of restructuring

 

 

 
(14.7
)
Impact of Reliance contingent liability valuation
4.5

 

 
(10.5
)
 

Impact of other discrete
(4.8
)
 
0.7

 
(4.1
)
 
0.4

ETR
37.8
 %
 
32.3
 %
 
27.3
 %
 
19.2
 %

For the three months ended September 30, 2017, the Company’s ETR was equal to 37.8%, which does bear a customary relationship to the federal statutory income tax rate. For the three months ended September 30, 2016, the Company’s ETR was equal to 32.3%, which does bear a customary relationship to the federal statutory income tax rate.

For the nine months ended September 30, 2017, the Company’s ETR was equal to 27.3% which is lower than the federal statutory income tax rate, primarily due a change in fair value of a contingent consideration liability, an increase in a valuation allowance on net operating losses, and various other discrete items. The ETR for the nine months ended September 30, 2017 excluding the effect of discrete items was 28.1%, which is lower than the federal statutory income tax rate, primarily due to a state tax benefit and the effect of non-controlling interests at certain subsidiaries. For the nine months ended September 30, 2016, the Company’s ETR was equal to approximately 19.2%, which is lower than the federal statutory income tax rate primarily due to the impact of tax restructuring to create the consolidated group.

Balance Sheet Information - as of September 30, 2017 compared to the year ended December 31, 2016

Tiptree’s total assets were $2.4 billion as of September 30, 2017, compared to $2.9 billion as of December 31, 2016. The $441.2 million decrease in assets is primarily attributable to decreases in assets of consolidated CLOs, due to the deconsolidation of two CLOs during the nine months ended September 30, 2017 as a result of selling the subordinated notes. Additionally, loans at fair value and equity securities decreased, partially offset by increases in real estate from acquisitions in our senior living segment, notes and accounts receivable and reinsurance receivable in our specialty insurance segment. In addition, the combination of unearned premiums and deferred revenues increased as a result of growth in written premiums and extending contract durations in the insurance business.

Total stockholders’ equity of Tiptree was $292.0 million as of September 30, 2017 compared to $293.4 million as of December 31, 2016, primarily driven by the losses in the period, partially offset by the net increase in equity outstanding as a result of the Tricadia

17




Option, net of the share re-purchase. As of September 30, 2017 there were 29,793,481 shares of Tiptree Class A common stock outstanding, net of Treasury shares held at a subsidiary, as compared to 28,387,616 as of December 31, 2016, presented on the same basis.

NON-GAAP RECONCILIATIONS

EBITDA and Adjusted EBITDA

The Company defines EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated income taxes and consolidated depreciation and amortization expense as presented in its financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of its subsidiaries’ business operations, (ii) adjust for the effect of purchase accounting, (iii) add back significant acquisition related costs, (iv) adjust for significant relocation costs and (v) any significant one-time expenses.
($ in thousands)
Three Months Ended September 30,

Nine Months Ended September 30,

2017
 
2016

2017

2016
Net income (loss) available to Class A common stockholders
$
(3,114
)

$
5,905


$
(6,457
)

$
17,593

Add: net (loss) income attributable to noncontrolling interests
(264
)

1,933


(903
)

4,680

Income (loss)
$
(3,378
)

$
7,838


$
(7,360
)

$
22,273

Consolidated interest expense
10,361


7,839


28,444


20,770

Consolidated income taxes
(2,052
)

3,712


(2,761
)

5,298

Consolidated depreciation and amortization expense
7,775


6,437


23,781


21,899

EBITDA
$
12,706


$
25,826


$
42,104


$
70,240

Consolidated non-corporate and non-acquisition related interest expense(1)
(7,340
)

(4,989
)

(19,510
)

(13,223
)
Effects of Purchase Accounting (2)
(306
)

(957
)

(1,205
)

(4,446
)
Non-cash fair value adjustments (3)
(309
)



3,378


1,416

Significant acquisition expenses (4)
25


248


302


631

Separation expense adjustments (5)




(1,736
)

(1,736
)
Adjusted EBITDA of the Company
$
4,776


$
20,128


$
23,333


$
52,882

(1)
The consolidated non-corporate and non-acquisition related interest expense is subtracted from EBITDA to arrive at Adjusted EBITDA. This includes interest expense associated with asset-specific debt at subsidiaries in the specialty insurance, asset management, senior living and specialty finance segments.
(2)
Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with deferred revenues were less favorably stated. Thus, the purchase accounting effect related to Fortegra increased EBITDA above what the historical basis of accounting would have generated. The impact of this purchase accounting adjustments have been reversed to reflect an adjusted EBITDA without such purchase accounting effect. The impact for the three months ended September 30, 2017 and 2016 was an effective increase to pre-tax earnings of $307 thousand and $408 thousand, respectively.
(3)
For our senior living segment, Adjusted EBITDA excludes the impact of the change of fair value of interest rate swaps hedging the debt at the property level. For Reliance, within our specialty finance segment, Adjusted EBITDA excludes the impact of changes in contingent earn-outs. For our specialty insurance segment, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA.
(4)
Acquisition costs include legal, taxes, banker fees and other costs associated with senior living acquisitions in 2017 and 2016.
(5)
Consists of payments pursuant to a separation agreement, dated as of November 10, 2015.

Segment EBITDA and Adjusted EBITDA

The tables below present EBITDA and Adjusted EBITDA by our four reporting segments specialty insurance, asset management, senior living and specialty finance. Corporate and other contains corporate expenses no allocated to the operating business.

Three Months Ended September 30,
($ in thousands)
Specialty insurance
Asset management
Senior living
Specialty finance
Corporate and other
Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
Pre-tax income/(loss)
$
(2,345
)
$
10,659


$
2,973

$
6,475


$
(1,535
)
$
(473
)

$
2,595

$
4,181


$
(7,118
)
$
(9,292
)

$
(5,430
)
$
11,550

Add back:



















Interest expense
3,499

2,322


5



3,609

2,271


1,949

1,932


1,299

1,314


10,361

7,839

Depreciation and amortization expenses
3,134

3,032





4,369

3,094


209

248


63

63


7,775

6,437

Segment EBITDA
$
4,288

$
16,013


$
2,978

$
6,475


$
6,443

$
4,892


$
4,753

$
6,361


$
(5,756
)
$
(7,915
)

$
12,706

$
25,826



















EBITDA adjustments:

















Asset-specific debt interest
(1,777
)
(836
)

(5
)


(3,609
)
(2,271
)

(1,949
)
(1,882
)




(7,340
)
(4,989
)
Effects of purchase accounting
(306
)
(957
)













(306
)
(957
)
Non-cash fair value adjustments
113









(422
)





(309
)

Significant acquisition expenses






25

248








25

248

Separation expenses

















Segment Adjusted EBITDA
$
2,318

$
14,220


$
2,973

$
6,475


$
2,859

$
2,869


$
2,382

$
4,479


$
(5,756
)
$
(7,915
)

$
4,776

$
20,128



18




 
Nine Months Ended September 30,
($ in thousands)
Specialty insurance

Asset management

Senior living

Specialty finance

Corporate and other

Total

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016

2017
2016
Pre-tax income/(loss)
$
1,724

$
35,627


$
13,083

$
14,672


$
(5,359
)
$
(5,487
)

$
2,629

$
5,510


$
(22,198
)
$
(22,751
)

$
(10,121
)
$
27,571

Add back:

















Interest expense
10,534

6,018


7

746


9,309

6,220


4,743

4,352


3,851

3,434


28,444

20,770

Depreciation and amortization expenses
9,625

10,414





13,350

10,634


620

665


186

186


23,781

21,899

Segment EBITDA
$
21,883

$
52,059

 
$
13,090

$
15,418

 
$
17,300

$
11,367

 
$
7,992

$
10,527

 
$
(18,161
)
$
(19,131
)
 
$
42,104

$
70,240



















EBITDA adjustments:

















Asset-specific debt interest
(5,451
)
(2,057
)

(7
)
(746
)

(9,309
)
(6,220
)

(4,743
)
(4,200
)




(19,510
)
(13,223
)
Effects of purchase accounting
(1,205
)
(4,446
)













(1,205
)
(4,446
)
Non-cash fair value adjustments
339







1,416


3,039






3,378

1,416

Significant acquisition expenses






302

631








302

631

Separation expenses












(1,736
)
(1,736
)

(1,736
)
(1,736
)
Segment Adjusted EBITDA
$
15,566

$
45,556


$
13,083

$
14,672


$
8,293

$
7,194


$
6,288

$
6,327


$
(19,897
)
$
(20,867
)

$
23,333

$
52,882


Book Value per share, as exchanged - Non-GAAP

Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides supplemental information useful to investors as book value is frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares, as of September 30, 2017 and September 30, 2016.
 ($ in thousands, except per share information)
Nine Months Ended September 30,

2017
 
2016
Total stockholders’ equity
$
391,138

 
$
381,341

Less non-controlling interest - other
25,081

 
19,939

Total stockholders’ equity, net of non-controlling interests - other
$
366,057

 
$
361,402

Total Class A shares outstanding (1)
29,793

 
28,351

Total Class B shares outstanding
8,049

 
8,049

Total shares outstanding
37,842

 
36,400

Book value per share, as exchanged
$
9.67

 
$
9.93

(1) As of September 30, 2017, excludes 5,209,523 shares of Class A common stock held by a consolidated subsidiary of the Company. See Note 23—Earnings per Share, for further discussion of potential dilution from warrants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specialty Insurance - As Adjusted Underwriting Margin - Non-GAAP

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

19




 
Three Months Ended September 30,
($ in thousands)
GAAP

Non-GAAP adjustments

Non-GAAP - As Adjusted
Revenues:
2017

2016

2017

2016

2017

2016
Net earned premiums
$
96,073


$
47,609


$


$


$
96,073


$
47,609

Service and administrative fees
24,018


25,842


236


1,134


24,254


26,976

Ceding commissions
2,513


1,397


10


69


2,523


1,466

Other income
824


730






824


730

Less underwriting expenses:











Policy and contract benefits
31,570


25,881






31,570


25,881

Commission expense
63,066


24,032


538


2,120


63,604


26,152

Underwriting Margin - Non-GAAP
$
28,792


$
25,665


$
(292
)

$
(917
)

$
28,500


$
24,748

Less operating expenses:











Employee compensation and benefits
10,073


9,180






10,073


9,180

Other expenses
9,717


7,524


31


40


9,748


7,564

Combined Ratio
92.6
%

87.9
%

%

%

92.8
%

89.4
%
Plus investment revenues:











Net investment income
3,840


3,307






3,840


3,307

Net realized and unrealized gains
(8,554
)

3,745






(8,554
)

3,745

Less other expenses:











Interest expense
3,499


2,322






3,499


2,322

Depreciation and amortization expenses
3,134


3,032


(16
)

(549
)

3,118


2,483

Pre-tax income (loss)
$
(2,345
)

$
10,659


$
(307
)

$
(408
)

$
(2,652
)

$
10,251



Nine Months Ended September 30,
($ in thousands)
GAAP

Non-GAAP adjustments

Non-GAAP - As Adjusted
Revenues:
2017

2016

2017

2016

2017

2016
Net earned premiums
$
272,781

 
$
138,516


$


$


$
272,781


$
138,516

Service and administrative fees
70,861

 
84,421


742


4,976


71,603


89,397

Ceding commissions
6,801

 
22,645


46


376


6,847


23,021

Other income
2,874

 
1,985






2,874


1,985

Less underwriting expenses:
 
 









Policy and contract benefits
94,364

 
72,436






94,364


72,436

Commission expense
176,405

 
91,906


1,892


9,494


178,297


101,400

Underwriting Margin - Non-GAAP
$
82,548

 
$
83,225


$
(1,104
)

$
(4,142
)

$
81,444


$
79,083

Less operating expenses:

 









Employee compensation and benefits
30,800

 
28,065






30,800


28,065

Other expenses
28,279

 
24,277


120


304


28,399


24,581

Combined Ratio
93.2
%
 
86.3
%





93.6
%

88.5
%
Plus investment revenues:

 









Net investment income
12,032

 
8,409






12,032


8,409

Net realized and unrealized gains
(13,618
)
 
12,767






(13,618
)

12,767

Less other expenses:

 









Interest expense
10,534

 
6,018






10,534


6,018

Depreciation and amortization expenses
9,625

 
10,414


(182
)

(2,977
)

9,443


7,437

Pre-tax income (loss)
$
1,724

 
$
35,627


$
(1,042
)

$
(1,469
)

$
682


$
34,158


Specialty Insurance Investment Portfolio - Non-GAAP

The following table provides a reconciliation between segment total investments and net investments for the following periods:
($ in thousands)
As of September 30,
 
2017

2016
Total Investments
$
426,753


$
398,505

Investment portfolio debt (1)
(122,999
)

(101,012
)
Cash and cash equivalents
62,790


16,555

Restricted cash (2)
3,637


6,683

Receivable due from brokers (3)
1,505



Liability due to brokers (3)
(7,733
)

(18,836
)
Net investments - Non-GAAP
$
363,953


$
301,895

(1) Consists of asset-based financing on loans, at fair value including certain credit investments and NPLs, net of deferred financing costs, see Note 11 - Debt, net for further details.
(2) Restricted cash available to invest within certain credit investment funds which are consolidated under GAAP.
(3) Receivable due from and Liability due to brokers for unsettled trades within certain credit investment funds which are consolidated under GAAP.


20




Senior Living Product NOI - Non-GAAP

The following table provides a reconciliation between segment NOI and pre-tax income (loss) for the following periods:
($ in thousands)
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
NNN Operations
 
Managed Properties
 
Senior Living Total
 
NNN Operations
 
Managed Properties
 
Senior Living Total
 
NNN Operations
 
Managed Properties
 
Senior Living Total
 
NNN Operations
 
Managed Properties
 
Senior Living Total
Rental and related revenue
$
3,371


$
15,799


$
19,170

 
$
1,844


$
13,526


$
15,370

 
$
8,218

 
$
46,600

 
$
54,818

 
$
5,533

 
$
37,856

 
$
43,389

Less: Property operating expenses


11,728


11,728

 


9,599


9,599

 

 
34,576

 
34,576

 

 
27,600

 
27,600

Segment NOI
$
3,371


$
4,071


$
7,442

 
$
1,844


$
3,927


$
5,771

 
$
8,218

 
$
12,024

 
$
20,242

 
$
5,533

 
$
10,256

 
$
15,789

Segment NOI Margin % (1)
 
 
25.8
%
 
 
 
 
 
29.0
%
 
 
 
 
 
25.8
%
 
 
 
 
 
27.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income
 
 
 
 
$
414

 
 
 
 
 
$
324

 
 
 
 
 
$
1,109

 
 
 
 
 
$
815

Less: Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
3,609

 
 
 
 
 
2,271

 
 
 
 
 
9,309

 
 
 
 
 
6,220

Payroll and employee commissions
 
 
 
 
790

 
 
 
 
 
617

 
 
 
 
 
2,323

 
 
 
 
 
1,900

Depreciation and amortization
 
 
 
 
4,369

 
 
 
 
 
3,095

 
 
 
 
 
13,350

 
 
 
 
 
10,635

Other expenses
 
 
 
 
623

 
 
 
 
 
583

 
 
 
 
 
1,728

 
 
 
 
 
3,335

Pre-tax income (loss)
 
 
 
 
$
(1,535
)
 
 
 
 
 
$
(471
)
 
 
 
 
 
$
(5,359
)
 
 
 
 
 
$
(5,486
)
(1) NOI Margin % is the relationship between segment NOI and rental and related revenue.

Asset Management As Adjusted Revenues

The following table provides a reconciliation between asset management segment revenues and non-GAAP, as adjusted revenues for the following periods:
 
Three Months Ended September 30,
($ in thousands)
GAAP

Non-GAAP adjustments

Non-GAAP - As Adjusted
Revenues:
2017
 
2016

2017
 
2016

2017
 
2016
Management fee income
$
1,541


$
3,839


$
311


$
743


$
1,852


$
4,582

Distributions




2,168


4,368


2,168


4,368

Net realized and unrealized gains (losses)
(349
)

695


360


(1,034
)

11


(339
)
Other income
256


212


(256
)

(45
)



167

Total revenues
$
1,448


$
4,746


$
2,583


$
4,032


$
4,031


$
8,778

 
Nine Months Ended September 30,
($ in thousands)
GAAP

Non-GAAP adjustments

Non-GAAP - As Adjusted
Revenues:
2017
 
2016

2017
 
2016

2017
 
2016
Management fee income
$
6,578


$
7,497


$
1,038


$
2,169


$
7,616


$
9,666

Distributions




6,560


11,058


6,560


11,058

Net realized and unrealized gains (losses)
839


226


2,604


(3,050
)

3,443


(2,824
)
Other income
822


3,031


(809
)

(128
)

13


2,903

Total revenues
$
8,239


$
10,754


$
9,393


$
10,049


$
17,632


$
20,803

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIQUIDITY AND CAPITAL RESOURCES

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

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

As of September 30, 2017, we had cash and cash equivalents, excluding restricted cash, of $111.8 million, compared to $63.0 million at December 31, 2016, an increase of $48.7 million.

21





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

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

Corporate Debt
($ in thousands)
 
Debt outstanding as of September 30,
 
Interest expense for the three months ended September 30,
 
Interest expense for the nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Specialty insurance
 
$
145,000

 
$
145,850

 
$
1,721

 
$
1,516

 
$
5,082

 
$
3,961

Corporate and other
 
57,000

 
59,000

 
1,258

 
1,209

 
3,810

 
3,329

Total
 
$
202,000

 
$
204,850

 
$
2,979

 
$
2,725

 
$
8,892

 
$
7,290


Our intermediate holding company has a credit facility with Fortress to provide working capital. Loans under the Fortress credit agreement bear interest at LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 6.50% per annum. We are required to make quarterly principal payments of $0.5 million, subject to adjustment based on the Net Leverage Ratio (as defined in the Fortress credit agreement) at the end of each fiscal quarter. The outstanding debt under the Fortress credit agreement was $57.0 million as of September 30, 2017 compared to $58.5 million as of December 31, 2016. All remaining principal, and any unpaid interest, under the Fortress credit agreement is payable on maturity at September 18, 2018. We intend to extend or refinance the Fortress credit agreement but we may not be able to do so on terms satisfactory to us. If we are unable to extend or refinance, we expect to use available cash, asset sales and/or distributions from our operating subsidiaries to make the required payments.

On October 16, 2017, Fortegra completed an offering of $125 million Junior Subordinated Notes due 2057. Substantially all of the net proceeds from the Notes were used to repay Fortegra’s existing credit facility, which was terminated. We believe these funds will reposition Fortegra’s balance sheet, strengthen the Company’s positioning with industry rating agencies, and generate a source of long term capital. See Note—(11) Debt, net for additional information of our debt and that of our subsidiaries.


22




Consolidated Comparison of Cash Flows

Summary Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2017 and September 30, 2016
($ in thousands)
Nine Months Ended September 30,
 
2017
 
2016
Net cash (used in) provided by:
 
 
 
Operating activities
 
 
 
Operating activities - (excluding VIEs)
$
27,214


$
(27,156
)
Operating activities - VIEs
(2,684
)
 
(3,505
)
Total cash provided by (used in) operating activities
24,530

 
(30,661
)
 
 
 
 
Investing activities
 
 
 
Investing activities - (excluding VIEs)
(38,266
)

(157,745
)
Investing activities - VIEs
224,107

 
(96,834
)
Total cash provided by (used in) investing activities
185,841

 
(254,579
)
 
 
 
 
Financing activities
 
 
 
Financing activities - (excluding VIEs)
61,763


61,108

Financing activities - VIEs
(223,393
)
 
220,727

Total cash provided by (used in) financing activities
(161,630
)
 
281,835

 
 
 
 
Net increase (decrease) in cash
$
48,741

 
$
(3,405
)
Nine Months Ended September 30, 2017
Operating Activities
Cash provided by operating activities (excluding VIEs) was $27.2 million for the nine months ended September 30, 2017. The primary sources of cash from operating activities included mortgage sales outpacing originations in our specialty finance segment and, increases in unearned premiums, reinsurance payable and policy liabilities in our specialty insurance segment. The primary uses of cash from operating activities including increases in reinsurance receivables, notes and account receivable and decreases in accrued expenses in our specialty insurance segment.

Cash used in operating activities - VIEs was $2.7 million for the nine months ended September 30, 2017.

Investing Activities

Cash used in investing activities (excluding VIEs) was $38.3 million for the nine months ended September 30, 2017. The primary uses of cash from investing activities were investments in senior living real estate properties in our senior living business. The primary sources of cash from investing activities were proceeds from sales and maturities of investments exceeding purchases of investments, specifically the sale of NPLs and corporate loans.

Cash provided by investing activities - VIEs was $224.1 million for the nine months ended September 30, 2017. The primary drivers of the cash from investing activities - VIEs were sales of investments and loan prepayments in Telos 7.

Financing Activities

Cash provided by financing activities (excluding VIEs) was $61.8 million for the nine months ended September 30, 2017. The primary sources of cash from financing activities were new borrowings in our senior living segment to fund our investments in real estate, new borrowings exceeding principal paydowns on debt facilities in our specialty finance segments, and origination of new borrowings in our specialty insurance segment.

Cash used in financing activities - VIEs was $223.4 million for the nine months ended September 30, 2017 driven primarily by principal payments on debt in Telos 7.


23




Nine Months Ended September 30, 2016

Operating Activities

Cash used in operating activities (excluding VIEs) was $27.2 million for the nine months ended September 30, 2016. The primary uses of cash from operating activities included increases in notes and accounts receivable and decreases in deferred revenue and reinsurance payables in our specialty insurance business. The primary sources of cash from operating activities included mortgage sales outpacing originations and increases in unearned premiums and policy liabilities in our specialty insurance business.

Cash used in operating activities - VIEs was $3.5 million for the nine months ended September 30, 2016. The primary uses of cash from operating activities - VIEs were due to the increases in accrued interest receivable on loans.

Investing Activities

Cash used in investing activities (excluding VIEs) was $157.7 million for the nine months ended September 30, 2016. The primary uses of cash from investing activities included investments in NPLs and other investments, investments in real estate properties in our senior living business and increase in loans in our specialty finance business.

Cash used in investing activities - VIEs was $96.8 million for the nine months ended September 30, 2016. The primary driver of the cash used in investing activities - VIEs was the purchase of loans in Telos 7 during the ramp up period as it converted from a warehouse to a CLO during the second quarter of 2016.

Financing Activities

Cash used in financing activities (excluding VIEs) was $61.1 million for the nine months ended September 30, 2016. The primary drivers of the cash used included paydown of the Telos 7 warehouse debt and repurchases of common stock. The sources of cash were from borrowings in our senior living business to fund its investments in real estate, borrowings in our specialty finance business to fund loan growth, increase in debt in our specialty insurance business for working capital, and an increase in borrowings in our specialty insurance business to grow our corporate loan portfolio and fund additional investments in NPLs.

Cash provided by financing activities - VIEs was $220.7 million for the nine months ended September 30, 2016 driven primarily by the senior notes issued upon the conversion of Telos 7 from a warehouse to a CLO.

Contractual Obligations

The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of September 30, 2017:
($ in thousands)
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total 
Notes payable CLOs (1)
$

 
$

 
$

 
$
334,900

 
$
334,900

Credit agreement/Revolving line of credit
101,173

 
178,164

 
247,247

 

 
526,584

Mortgage notes payable and related interest (2)
18,073

 
125,181

 
118,774

 
97,513

 
359,541

Trust Preferred Securities

 

 

 
35,000

 
35,000

Operating lease obligations (3)
4,946

 
14,070

 
7,981

 
11,972

 
38,969

Total
$
124,192

 
$
317,415

 
$
374,002

 
$
479,385

 
$
1,294,994

(1)
Non-recourse CLO notes payable principal is payable at stated maturity, 2027 for Telos 6.
(2)
See Note —(11) Debt, net, in the accompanying consolidated financial statements for additional information.
(3)
Minimum rental obligation for Tiptree, Care, MFCA, Siena, Reliance, Luxury and Fortegra office leases. The total rent expense for the Company for the nine months ended September 30, 2017 and 2016 was $5.2 million and $4.8 million, respectively.

Critical Accounting Policies and Estimates

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


24




Recently Adopted and Issued Accounting Standards

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

OFF-BALANCE SHEET ARRANGEMENTS

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

Further disclosure on our off-balance sheet arrangements as of September 30, 2017 is presented in the “Notes to Consolidated Financial Statements” in “Part I. Item 1. Financial Statements (Unaudited)” of this filing as follows:

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our 2016 Annual Report on Form 10-K described our Quantitative and Qualitative Disclosures About Market Risk. There were no material changes to the assumptions or risks during the nine months ended September 30, 2017.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

In management’s opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards,

25




bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot reasonably estimate a range of loss.

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

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 10, 2017, Tiptree issued 756,046 shares of Class A common stock as additional earn-out consideration pursuant to the Securities Purchase Agreement, dated as of November 24, 2014, among Tiptree and certain of its subsidiaries and the former equity holders of Reliance First Capital, LLC.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Form 10-Q:
 
 
 
Financial Statements (Unaudited):
 
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period ended September 30, 2017 and 2016
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016
 
 
Exhibits:
 
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page, is incorporated herein by reference and is filed as part of this Form 10-Q.
 

26




SIGNATURES

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



27




EXHIBIT INDEX
Exhibit No.
Description
31.1
31.2
31.3
32.1
32.2
32.3
 
 
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*

*
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets for September 30, 2017 and December 31, 2016, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the period ended September 30, 2017, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 and (vi) the Notes to the Condensed Consolidated Financial Statements.







28