10-K 1 tfi201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
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 Incorporation of Organization)
(IRS Employer Identification No.)
 
 
780 Third Avenue, 21st Floor, New York, New York
10017
(Address of Principal Executive Offices)
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.001 per share
Nasdaq Capital Market

Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes   x     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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.
Large accelerated filer ¨                        Accelerated filer x
Non-accelerated filer ¨                     Smaller reporting company ¨
Emerging Growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
As of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $197,215,232, based upon the closing sales price of $6.80 per share as reported on the Nasdaq Capital Market. For purposes of this calculation, all of the registrant’s directors and executive officers were deemed to be affiliates of the registrant.
As of March 11, 2019, there were 34,505,782 shares, par value $0.001, of the registrant’s Common Stock outstanding.

Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relating to the registrant’s 2019 Annual Meeting of Stockholders is incorporated by reference into Part III.


TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2018


ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2018



3

PART I

Forward-Looking Statements

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

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” and elsewhere in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K, references to:
“1940 Act” means the Investment Company Act of 1940, as amended.
“A.M. Best” means A.M. Best Company, Inc.
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CFPB” means the Consumer Financial Protection Bureau.
“CLOs” means collateralized loan obligations.
“Code” means the Internal Revenue Code of 1986, as amended.
“Common Stock” or “Common Shares” means Tiptree’s Class A common stock $0.001 par value for periods prior to June 7, 2018 and thereafter the common stock $0.001 par value.
“consolidated CLOs” means, for the year ended December 31, 2014: Telos 1, Telos 2, Telos 3, Telos 4, Telos 5 and Telos 6; for the year ended December 31, 2015: Telos 2, Telos 4, Telos 5 and Telos 6; and for the years ended December 31, 2016 and 2017, Telos 5, Telos 6 and Telos 7. During 2017 the Company exited all consolidated CLOs.
“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“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.
“GSE” means government-sponsored enterprise
“Invesque” means Invesque Inc.
“Luxury” means Luxury Mortgage Corp.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.

4

“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.
“TAMCO” means Tiptree Asset Management Company, LLC.
“Tax Act” means Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act
“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, Tiptree Inc. and its consolidated subsidiaries.
“Transition Services Agreement” means the Transition Services Agreement among TAMCO, Tricadia and Operating Company (as assignee of TFP), dated as of June 30, 2012.
“Tricadia” means collectively, Tricadia Holdings, L.P., Tricadia Capital Management, LLC, Tricadia Holdings GP, LLC, Tricadia Holdings and Tricadia GP Holdings LLC.

Item 1. Business

OVERVIEW

Our Business

Tiptree is a holding company that combines insurance operations with investment management capabilities. Our principal operating subsidiary is a leading provider of specialty insurance products and related services. We also allocate capital across a broad spectrum of businesses, assets and other investments.

Our business is comprised of the following types of operations and investments:

•
Specialty Insurance
◦
Operations - Our insurance operations underwrite and administer programs and products for our clients, including credit protection insurance, warranty and service contract products, and niche commercial and consumer insurance programs.
◦
Investments - The funds in our insurance investment portfolio are generated by our underwriting activities, with a majority of the portfolio invested in high quality corporate, government and municipal bonds to support our claims paying activities. Benefiting from our investment management capabilities, our insurance portfolio from time to time, includes investments that are generated from the activities of Tiptree Capital and other alternative investments.

•
Tiptree Capital - Our non-insurance capital is typically allocated across four broad sectors where we have developed a track record of investment expertise - asset management, mortgage operations, real assets and credit-related investments. Today, Tiptree Capital consists of our investment in Invesque, asset management operations, mortgage operations, dry bulk shipping operations and other investments.

Our Executive Committee, which is composed of our Executive Chairman and CEO, is responsible for allocating capital between insurance operations, insurance investments and Tiptree Capital. In addition, the Executive Committee also uses its investment expertise to assist in the selection of alternative investments in our insurance company portfolio.

Our strategic objectives are focused on:
•
expanding our insurance operations, while continuing to be a leading provider of specialty insurance products and maintaining our strong underwriting performance;
•
continuing to grow and expand the businesses and investments within Tiptree Capital; and
•
generating enhanced, risk adjusted investment returns.



5

Our financial goals are to generate consistent and growing earnings and cash flow and to enhance shareholder value as measured by growth in book value per share plus dividends.

As of December 31, 2018, Tiptree and its consolidated subsidiaries had 972 employees (of which 946 were full time employees), 27 of which were at Tiptree’s corporate headquarters and are full time employees.
 
Significant Developments

On February 1, 2018, we sold our senior living operations to Invesque in exchange for 16.6 million common shares of Invesque. Tiptree’s increase to book value as a result of the sale was $1.16 per share, inclusive of a pre-tax $10.7 million earnout gain related to Invesque’s December 2018 sale of specified properties formerly owned by Care.

On April 10, 2018, we completed a corporate reorganization that eliminated Tiptree’s dual class stock structure.

Effective January 1, 2019, we began re-positioning our asset management platform, by agreeing to invest $75 million to seed new investment funds in exchange for management control of and a profit participation in Tricadia.

In 2018, we returned $19.2 million to investors through $14.2 million of share buy-backs and $5.0 million of dividends paid. Through March 11, 2019, we repurchased 1.4 million shares for $9.1 million resulting in Common Shares outstanding of 34.5 million as of March 11, 2019.


Our Competitive Advantage

We believe our structure as a public company gives us the ability to have a long-term focus on maximizing returns to our shareholders. We believe this long-term perspective provides us the flexibility when investing our capital to focus on strategy and profitability through multiple market cycles, including those that may negatively impact GAAP earnings and/or the book value of our holdings in the short term.

Competition

Our businesses face competition, as discussed below. In addition, we are subject to competition for acquisitions and investment opportunities. Our competitors include commercial and investment banks, mortgage companies, specialty finance companies, insurance companies, asset managers, private equity funds, hedge funds, family offices, real estate investment trusts, limited partnerships, business development companies and special purpose acquisition vehicles. Many of our competitors are significantly larger, have greater access to capital and other resources and may possess other competitive advantages.

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


Specialty Insurance

Overview

Our specialty insurance segment is conducted through Fortegra Financial Corporation (together with its subsidiaries, “Fortegra”), an insurance holding company incorporated in 1981. Our insurance business underwrites and administers specialty insurance programs and products, primarily in the United States, and is a leading provider of credit and asset protection products and administration services. Our programs are provided across a diverse range of products and services including credit protection insurance, warranty and service contract products, and underwriting of niche personal and commercial lines of insurance.

Products and Services

Credit Protection Insurance Products - Our credit protection insurance products are designed to offer consumers protection from life events that limit a borrower’s ability to make payments on outstanding loan balances. These products offer consumers the option to protect credit card and installment loan balances or payments in the event of death, involuntary unemployment or disability.


6

Warranty and Service Contract Products - Our warranty and service contract products provide consumers with coverage on automobiles, mobile devices, consumer electronics, appliances, and furniture and bedding, protecting them from certain covered losses. These products offer replacement, service or repair coverage in the event of mechanical breakdown, accidental damage, theft and water damage. Our warranty and service contract products are extensions of warranty coverage originally provided by original equipment manufacturers.

Other Specialty Programs - We also offer programs focused on fronting and underwriting certain niche light commercial and personal lines insurance coverages for general agents and other program managers that require broad licensure, an “A-” or better A.M. Best rating, and specialized knowledge and expertise to distribute their products. We grant these general agents and program managers’ authority to produce, underwrite and administer policies subject to our underwriting and pricing guidelines. We typically transfer all or a substantial portion of the underwriting risk on these programs to third-party reinsurers for which we are paid a fee. We have a particular focus on “short-duration” lines of business where the time between the issuance of a policy or contract and reporting and payment of the claim tends to be shorter.

Services and Other - We have several other products which provide value-add services to Fortegra customers, including premium finance and business processing services.

Marketing and Distribution

We distribute our credit and warranty products through distribution partnerships with our clients, including consumer finance companies, retailers, automobile dealers, credit card issuers, credit unions and regional and community banks. We leverage our clients’ brand and customer base to distribute multiple products and services. Our specialty light commercial and personal program insurance products are generally marketed through a network of independent insurance brokers and managing general agencies. In each case, we pay a commission-based fee to our marketing partners.

We generally target markets that are niche and specialty in nature, which we believe are underserved by competitors and have high barriers to entry. We focus on establishing quality client relationships and emphasizing customer service. This focus, along with our ability to help clients enhance revenue and reduce costs, has enabled us to develop and maintain numerous long-term client relationships.

A significant portion of our marketing partnership commission agreements are on a retrospective commission basis, which allows us to adjust commissions on the basis of claims experience. Under these types of arrangements, the compensation to our marketing partners is based upon the actual losses incurred compared to premiums earned. We believe these types of contractual arrangements align their economic interests with ours, help us to better manage our risk exposure and deliver more consistent profit margins with respect to these types of arrangements.

Investment Portfolio

Our investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations. We rely on conservative underwriting practices to generate investable funds while minimizing our underwriting risk. We invest a majority of our investable assets in high quality corporate, government and municipal bonds with relatively short durations, designed to deliver sufficient liquidity to meet claims as incurred. The balance of our investable assets are invested in asset classes that we believe will produce higher risk- adjusted returns over the long term, a significant portion of which are managed by us.

Risk Management

Consistent with standard industry practice for most insurance companies, we use reinsurance to manage our underwriting risk and efficiently utilize capital. For example, a significant portion of our distribution partners of credit protection insurance and warranty products have created captive reinsurance companies to assume the insurance risk on the products they distribute. These captive reinsurance companies are known as producer owned reinsurance companies (“PORC”) and in many instances each PORC assumes almost all of the underwriting risk associated with the insurance products they distribute. In these instances we act in a fronting and administrative capacity on behalf of each PORC, providing underwriting and claims management services. We receive an administration fee that compensates us for our expenses associated with underwriting and servicing the underlying policies and provide us with stable margins for these services. We generally require cash collateral to secure the reinsurance recoverable in the event that a PORC is unable to pay the claims it has assumed. In our niche light commercial and personal insurance program business, our reinsurers tend to be highly rated, well-capitalized professional third-party reinsurers.


7

Our Competitive Strengths

Specialty Focus

We have a history of operating in niche insurance markets that require specialized knowledge, administrative capabilities and expertise to profitably service and/or underwrite policies or insurance coverages. Our expertise and focus, developed over Fortegra’s 35-year history, has contributed to our position as one of the leading providers of credit insurance products in the United States. In addition, our “A-” (Excellent) (stable outlook) rating by A.M. Best and broad licensure provide us the opportunity to write niche commercial and personal lines insurance programs through managing general agents and other program managers to whom we have granted authority to produce, underwrite and administer policies that meet our underwriting and pricing guidelines. In the markets we serve, we focus on underwriting small premium policies and contracts where we can utilize our technology and refined administration processes to manage efficiently the high volume of policies and claims that result from serving large numbers of small policyholders and contract holders. We believe these markets tend to have fewer competitors and higher barriers to entry than other segments of the insurance market, providing us with greater flexibility on pricing and terms, and better, more consistent underwriting margins. We expect to continue to expand into other niche markets where we believe we can capitalize on opportunities presented by our underwriting expertise and operating platform.

Broad Service Delivery Expertise

Over the years, we have invested resources and developed the expertise to provide a variety of products and services for our marketing and distribution partners, including policy underwriting and issuance, back office processing and administration and claims management. Integrated, proprietary technology delivers low cost, highly automated services to our clients, while our scalable technology infrastructure affords us the opportunity to add new clients and services without significant additional expense. The breadth of our capabilities enables us to provide multiple services to each client, thus creating the opportunity to generate more revenue and establish more entrenched relationships with clients. We believe our broad capabilities and consistent service delivery are key drivers of our high client retention rates. In our credit protection insurance products, our annual renewal rates are consistently in excess of 90%, which we believe is among the highest in the industry and distinguishes us from many of our peers.

Significant Fee-based Revenue

We seek to complement our underwriting income with substantial fee-based revenues from the various value-added services we provide our marketing and distribution partners. A significant portion of our revenues are derived from fees and are not solely dependent upon the underwriting performance of our insurance products, resulting in more diversified and consistent earnings. Our fee based revenues are primarily generated in both our regulated insurance entities as well as non-regulated service companies. We believe fees generated outside of regulated insurance entities afford us greater financial flexibility than traditional insurance carriers.

Investment Capabilities

Our investment management operations provide access to broad investment expertise and a range of investment opportunities. We believe our ability to source investments provides us access to a broader universe of investment opportunities, providing us the opportunity to generate superior risk-adjusted investment returns over the long term compared to what a traditional insurer might produce on its own, which we believe distinguishes us from many other insurance companies.

Market Opportunity

Credit Insurance

We are one of the leading providers of credit insurance protection products in the United States and believe we are well positioned to increase our market share both organically and through acquisition. We believe our capabilities and reputation have allowed us to better position ourselves competitively for business as we compete for new business and renewals in the marketplace. We also believe our market position, capabilities and reputation will make us a preferred acquisition partner for smaller competitors that may choose to exit the market or desire a partner with more resources.

Warranty Products

We believe we can significantly increase our market presence in the warranty sector. We entered the warranty market as a natural extension of our business given that it possesses similar attributes and distribution channels as our credit-insurance products. In 2012, our insurance business acquired a provider of wireless-device protection plans and mobile services. Our warranty market gross premiums grew to $123.7 million in the year ended December 31, 2018, a $13.4 million or 12.2% increase from the year ended

8

December 31, 2017. We believe the demand from consumers for products such as automobile, furniture, and electronics warranties and mobile device protection will continue to drive long-term growth opportunities for us.

International Markets

We are in the process of selectively expanding our product offerings to international markets such as Asia, Europe and Canada, where we believe profitable opportunities exist. In March 2018, we expanded into Europe with the establishment of a Malta insurance company. We believe our existing product offerings can be successfully distributed in these markets while maintaining similar levels of underwriting performance as our core United States markets.

Competition

We operate in several markets, and believe that no single competitor competes against us in all of our business lines. The competition in the markets in which we operate is a function of many factors, including price, industry knowledge, quality of client service, sales force effectiveness, technology platforms and processes, the security and integrity of information systems, financial strength ratings, breadth of products and services, brand recognition and reputation. Our credit protection products and warranty service contracts compete with similar products of insurance companies, warranty companies and other insurance service providers. Many of our competitors are significantly larger, have greater access to capital and may possess other competitive advantages. These products compete with several multi-national and regional insurance companies that may have expertise in our niche products. Our competitors include: The Warranty Group, Inc., Assurant, Inc., eSecuritel Holdings, LLC, Asurion, LLC, AmTrust Financial Services, Inc., State National Companies Inc. and several smaller regional companies.

Regulation

We are subject to federal, state, local and foreign regulation and supervision. Our insurance subsidiaries are generally restricted by the insurance laws of their respective domiciles as to the amount of dividends they may pay without the prior approval of the respective regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior regulatory approval is limited to a stated percentage of that subsidiary’s statutory surplus as of a certain date, or net income of the subsidiary for the preceding year.

Our insurance company subsidiaries are domiciled in California, Delaware, Georgia, Kentucky, Louisiana and Wisconsin. The regulation, supervision and administration by state departments of insurance relate, among other things, to: standards of solvency that must be met and maintained, restrictions on the payment of dividends, changes in control of insurance companies, the licensing of insurers and their agents and other producers, the types of insurance that may be written, privacy practices, the ability to enter and exit certain insurance markets, the nature of and limitations on investments and premium rates, or restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, payment of sales compensation to third parties, approval of policy forms and the regulation of market conduct, including underwriting and claims practices. As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts and operations of insurance companies that are domiciled in their states.

Our insurance company subsidiaries are also subject to certain state regulations which require diversification of our investment portfolios and concentration limits among asset classes. Failure to comply with these regulations would cause non-conforming investments to be treated as non-admitted assets in the states in which we are licensed to sell insurance policies for purposes of measuring statutory surplus and, in some instances, would require us to sell those investments. Such investment laws are generally permissive with respect to federal, state and municipal obligations, and more restrictive with respect to corporate obligations, particularly non-investment grade obligations, foreign investment, equity securities and real estate investments. Each insurance company is therefore limited by the investment laws of its state of domicile from making excessive investments in any given security (such as single issuer limitations) or in certain classes or riskier investments (such as aggregate limitation in non-investment grade bonds).

The NAIC provides model insurance laws and regulations for adoption by the states and standardized insurance industry accounting and reporting guidance. However, model insurance laws and regulations are only effective when adopted by the states, and statutory accounting and reporting principles continue to be established by individual state laws, regulations and permitted practices. The NAIC has adopted a model act with risk-based capital (“RBC”) formulas to be applied to insurance companies to measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. State insurance regulators use RBC standards to determine appropriate actions relating to insurers that show signs of weak or deteriorating conditions. The domiciliary states of our insurance company subsidiaries have adopted laws substantially similar to the NAIC’s RBC model act.

9


Fortegra is subject to the respective state insurance holding company statutes which may require prior regulatory approval or non-disapproval of material transactions between an insurance company and an affiliate or of an acquisition of control of a domestic insurer and payments of extraordinary dividends or distributions.

Our reinsurance companies that are domiciled in Turks and Caicos must satisfy local regulatory requirements, such as filing annual financial statements, filing annual certificates of compliance and paying annual fees.

We are also subject to federal and state laws and regulations related to the administration of insurance products on behalf of other insurers. In order for us to process and administer insurance products of other companies, we are required to maintain licenses of a third party administrator in the states where those insurance companies operate. We are also subject to the related federal and state privacy laws and must comply with federal and state data protection and privacy laws. We are also subject to laws and regulations related to call center services.

Seasonality

Our financial results historically have been, and we expect to continue to be, affected by seasonal variations. Revenues may fluctuate seasonally based on consumer spending, which has historically been higher in September and December, corresponding to the back-to-school and holiday seasons. Accordingly, our revenues have historically been higher in the third and fourth quarters than in the first half of the year. Member benefit claims on mobile device protection are typically more frequent in the summer months, and accordingly, claims expense from those products have historically been higher in the second and third quarters than other times of the year.

Intellectual Property

We own or license a number of trademarks, patents, trade names, copyrights, service marks, trade secrets and other intellectual property rights that relate to our services and products. Although we believe that these intellectual property rights are, in the aggregate, of material importance to our business, we also believe that our business is not materially dependent upon any particular trademark, trade name, copyright, service mark, license or other intellectual property right. Our insurance subsidiaries have entered into confidentiality agreements with their clients that impose restrictions on client use of our proprietary software and other intellectual property rights.

Employees

At December 31, 2018, our specialty insurance segment employed 393 employees of which 391 were on a full time basis.

Tiptree Capital

Tiptree allocates its non-insurance capital across a broad spectrum of businesses, assets and other investments which is comprised of our non-reportable operating segments and other businesses, which we refer to as Tiptree Capital. We manage Tiptree Capital on a total return basis, balancing current cash flow and long term value appreciation.

When assessing potential acquisitions and investments, we look for opportunities that:
•
have strong and experienced management teams;
•
generate attractive and stable cash returns;
•
complement existing businesses or strategies; and
•
have sustainable and scalable business models.

Tiptree has historically focused its capital allocated to Tiptree Capital in four major sectors described below. However, we anticipate the nature, mix and type of investments could change over time.

•
Asset Management - Our asset management activities have historically specialized in managing credit related assets, on behalf of pension funds, hedge funds, other asset management firms, banks, insurance companies and other types of institutional investors. We earn management fees based on the amount of AUM that we manage, incentive income based on the performance of our funds or investment vehicles, and investment income from investments we make in our own funds and investment vehicles. Today, our asset management operations are conducted through TAMCO, an SEC-registered investment adviser. As of December 31, 2018, we managed $1.7 billion of fee earning AUM, including CLOs and a credit opportunity fund.


10

•
Specialty Finance - Our Specialty Finance activities have been focused broadly within the sector, including commercial credit, consumer credit and mortgage origination. Historically, we have realized on our invested capital allocated to an asset backed commercial lender, and a jumbo mortgage originator. Today, we own Reliance, which originates conforming and government single family, residential mortgage loans, primarily sold to secondary market investors. Reliance also owns a small servicing portfolio, subserviced by a third party. Revenues are generated from gain on sale of loans, net interest income and loan fee income, and to a lesser extent, servicing fee income.

•
Real Assets - Historically, our capital in this sector has been allocated to real estate, primarily in commercial real estate and seniors housing. Today, we own 16.6 million common shares of Invesque, a real estate investment company that specializes in health care and senior living property investment throughout North America, which we received as consideration when we sold our senior living business in February 2018. In addition, we have $50.1 million of capital allocated to dry bulk vessels managed by a third party.

•
Credit Investments - Historically, we have owned subordinated notes in the CLO’s we managed, and have engaged in select hedging strategies. Today, the credit investments we own and manage are held in our insurance portfolio in the form of the ownership of vertical slices of CLO liabilities and a leveraged credit opportunities fund.

Competitive Strengths

The depth and breadth of experience of our Executive Committee and management team enables us to source, structure, execute and manage the capital allocated to our non-insurance businesses and investments. In addition, in each of our non-insurance businesses, we benefit by partnering with experienced management teams and third party managers, which we have hired or chosen based on their depth of experience in their respective sectors.

Competition

In the sectors in which Tiptree Capital participates, the markets are highly competitive, There are a large number of competitors offering similar products and services, including many that operate on a international scale, and which are often affiliated with major multi-national companies, commercial financial institutions or investment banks. Many of these organizations have substantially more personnel and greater financial and commercial resources than we do. Some of these competitors have proprietary products and distribution capabilities that may make it more difficult for us to compete with them. Some competitors also have greater name recognition, have managed their businesses for longer periods of time, have greater experience over a wider range of products or have other competitive advantages.

Regulation

In the sectors in which Tiptree Capital participates, we are subject to extensive regulation by international, federal, state and local governmental authorities, including the SEC, CFPB, the Federal Trade Commission, the European Union, the UK and various state agencies. Our asset manager is registered with the SEC as an investment advisor and is subject to various federal and state laws and regulations and rules of various securities regulators and exchanges. These laws and regulations primarily are intended to protect clients and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations.

Our dry bulk shipping business and the operation of our vessels are regulated under international conventions, classification societies, national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration, that mandate safety and environmental protection policies. Government regulation of vessels, particularly environmental regulations, have become more stringent and may require us to incur significant capital expenditures on our vessels. Our international operations and activities also expose us to risks associated with trade and economic sanctions, prohibitions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the European Union and its member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may subject us to fines and other penalties. In our international activities, we are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and regulations in various jurisdictions in which we conduct business, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. We operate in countries known to present heightened risks for corruption, and our dry bulk shipping and related operations requires us to interact with government officials, including port officials, harbor masters, maritime regulators, customs officials and pilots.


11

Our mortgage operations must comply with a number of federal, state and local consumer protection and privacy laws including laws that apply to loan origination, fair lending, debt collection, use of credit reports, safeguarding of non-public personally identifiable information about customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers.

Employees

At December 31, 2018, Tiptree Capital’s combined operations had 552 employees of which 528 were on a full time basis.

AVAILABLE INFORMATION

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC.

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

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

Item 1A. Risk Factors

We are subject to certain risks and uncertainties in our business operations which are described below. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties that are not presently known or are currently deemed immaterial may also impair our business, results of operations and financial condition.

Risks Related to our Businesses

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

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

Our investment in Invesque shares is subject to transfer restrictions, market volatility and the risk that Invesque changes its dividend policy.

As of December 31, 2018, we owned 16.6 million shares, or approximately 31%, of Invesque, a real estate investment company that specializes in health care real estate and senior living property investment throughout North America.
    
Pursuant to the Investor Rights Agreement, as of February 1, 2019, 50% of our Invesque shares are no longer subject to transfer restrictions. The transfer restrictions will lapse on another 25% of our Invesque shares on May 1, 2019 and all remaining transfer restrictions will lapse by August 1, 2019. The value of our Invesque shares will be reported at fair market value on a quarterly basis and may fluctuate. Invesque has historically paid monthly dividends but there can be no assurance that Invesque will continue to pay dividends in the same frequency or amount.
    
A loss in the fair market value of our Invesque shares or a reduction or discontinuation in the dividends paid on our Invesque shares could have a material adverse effect on our financial condition and results of operations. To the extent we determine to sell all or a portion of our Invesque shares, there can be no assurance that we will be able to do so on a timely basis or at acceptable prices.


12

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

We operate in highly competitive markets for business opportunities in each of our areas of focus. Many of our competitors have financial, personnel and other resource advantages relative to us and may be better able to react to market conditions. These factors may place us at a competitive disadvantage in successfully competing for future business opportunities and personnel, which could impede our growth and negatively impact our business, financial condition and results of operations.

We are exposed to risks associated with acquiring or divesting businesses or business operations.

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

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

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

We have also divested, and may in the future divest, businesses or business operations. Any divestitures may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of the affected business or business operations. Failure to timely complete or to consummate a divestiture may negatively affect the valuation of the affected business or business operations or result in restructuring charges.

The amount of statutory capital and reserve requirements applicable to our insurance subsidiaries can increase due to factors outside of our control.

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

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

Our insurance subsidiaries maintain reserves to cover their estimated ultimate exposure for claims with respect to reported claims, and incurred, but not reported, claims as of the end of each accounting period. Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of exposure. Instead, they represent our insurance subsidiaries’ best estimates, generally involving actuarial projections, of the ultimate settlement and administration costs for a claim or group of claims, based on our assessment of facts and circumstances known at the time of calculation. The adequacy of reserves will be impacted by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by external factors such as changes in the economic cycle, unemployment, inflation, judicial trends, legislative changes, as well as changes in claims handling procedures. Many of these items are not directly quantifiable, particularly on a prospective basis. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement of income of the period in which such estimates are updated. Because the establishment of reserves is an inherently uncertain process involving estimates of future losses, we can give no assurances that ultimate losses will not exceed existing claims reserves. In general, future loss development could require reserves to be increased, which could have a material adverse effect on our insurance subsidiaries’ business, results of operations and financial condition.

We may need to raise additional capital in the future or may need to refinance existing indebtedness, but there is no

13

assurance that such capital will be available on a timely basis, on acceptable terms or at all.

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

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

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

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

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

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

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

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

Claims paying ability ratings, sometimes referred to as financial strength ratings, indicate a rating agency’s view of an insurance company’s ability to meet its obligations to its policy holders. These ratings are therefore key factors underlying the competitive position of insurers. Some distributors of insurance products may choose not to do business with insurance companies that are rated below certain financial strength ratings. Our insurance subsidiaries currently have a rating of “A-” from A.M. Best Company, Inc. Rating agencies can be expected to continue to monitor our insurance subsidiaries’ financial strength and claims paying ability, and no assurances can be given that future ratings downgrades will not occur, whether due to changes in their performance,

14

changes in rating agencies’ industry views or ratings methodologies, or a combination of such factors. A ratings downgrade or the potential for such a downgrade in a rating could, to the extent applicable to a particular type of policy, adversely affect relationships with distributors of insurance products, reduce new policy sales and adversely affect our ability to compete in the insurance industry.

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

Our insurance subsidiaries use reinsurance to reduce the severity and incidence of claims costs, and to provide relief with regard to certain reserves. Under these reinsurance arrangements, other insurers assume a portion of our losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, reinsurance arrangements do not eliminate our obligation to pay claims and we assume credit risk with respect to our ability to recover amounts due from reinsurers. The inability or unwillingness of any reinsurer to meet its financial obligations could negatively affect our financial condition and results of operations.

Our insurance business’s reinsurance facilities are generally subject to annual renewal. Our insurance business may not be able to maintain its current reinsurance facilities and its clients may not be able to continue to operate their captive reinsurance companies. As a result, even where highly desirable or necessary, our insurance business may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. If our insurance business is unable to renew its expiring facilities or to obtain or structure new reinsurance facilities, either its net exposures would increase or, if it is unwilling to bear an increase in net exposures, it may have to reduce the level of its underwriting commitments. Either of these potential developments could have a material adverse effect on our results of operations and financial condition.

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

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

A significant decrease of the market values of our vessels could cause us to incur an impairment loss.

We review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the vessels may not be recoverable. Such indicators include declines in the fair market value of vessels, decreases in market charter rates, vessel sale and purchase considerations, fleet utilization, vessels’ useful lives, scrap values, regulatory changes in the drybulk shipping industry or changes in business plans or overall market conditions that may adversely affect cash flows. We may be required to record an impairment charge with respect to our vessels and any such impairment charge may have a material adverse effect on our business, financial condition and results of operations.

Charter hire rates for dry bulk vessels are volatile.

The dry bulk shipping industry is cyclical with high volatility in charter hire rates and profitability.  The degree of charter hire rate volatility among different types of dry bulk vessels has varied widely. Fluctuations in charter rates result from changes in the supply of and demand for vessel capacity and changes in the supply of and demand for the major commodities carried by vessels internationally. Demand is a function of world economic conditions and the consequent requirement for commodities, production and consumption patterns, as well as events, which interrupt production, trade routes, and consumption. The factors affecting the supply of and demand for vessels are outside of our control and are unpredictable. We may not be able to employ our vessels at charter rates as favorable to us as historical rates or operate our vessels profitably. Significant declines in dry bulk charter rates could adversely affect our revenues and profitability.

Our vessels may suffer damage and we may face unexpected drydocking costs.

If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and can be substantial. The loss of earnings while a vessel is being repaired and repositioned, as well as the actual cost of these repairs not covered by our insurance, would decrease our earnings and available cash. While we carry insurance on our vessels, that insurance may not be sufficient to cover all or any of the costs or losses for damages to our vessels and may have to pay drydocking costs not covered by our insurance.

15


The operation of drybulk vessels has certain unique operational risks.

With a drybulk vessel, the cargo itself and its interaction with the vessel may create operational risks. By their nature, drybulk cargoes are often heavy, dense and easily shifted, and they may react badly to water exposure. In addition, drybulk vessels are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach while at sea. Breaches of a drybulk vessel’s hull may lead to the flooding of the vessel’s holds. If a drybulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel. If we do not adequately maintain our vessels, we may be unable to prevent these events. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

Acts of piracy on ocean-going vessels occur and may increase in frequency.

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean and in the Gulf of Aden off the coast of Somalia. Although the frequency of sea piracy worldwide has generally decreased since 2013, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Sulu Sea and the Gulf of Guinea, with dry bulk vessels and tankers particularly vulnerable to such attacks. Acts of piracy could result in harm or danger to the crews that man our vessels.

If these piracy attacks occur in regions in which our vessels are deployed that insurers characterized as “war risk” zones or Joint War Committee “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including the employment of onboard security guards, could increase in such circumstances. Furthermore, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold payment until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and is therefore entitled to cancel the charter. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, any detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels, could have a material adverse impact on our business, financial condition and earnings.

Our investable assets include NPLs, which have inherent risks that may be exacerbated due to geographic concentrations and reliance on third parties.

We acquire NPLs where the borrower has failed to make timely payments of principal and/or interest. We purchase these loans at a discount to face value of the loan, relying on the underlying value of the property as collateral for recovery of our investment. If actual results are different from our assumptions in determining the prices for such loans, particularly if the market value of the underlying property decreases significantly, we may incur a loss.
  
Our portfolio of NPLs may be concentrated by geography and borrower demographics, increasing the risk of loss to us if the particular concentration in our NPL portfolio is subject to greater risks or undergoes adverse developments. A material decline in the demand for housing in the areas where we will own assets may materially and adversely affect us.

In addition, we rely on various third parties to help us effectively run our NPL business. For example, we use a third party asset manager to identify, evaluate and coordinate our NPL acquisitions as well as to manage our NPL portfolio, including loan modifications and conversion to REO. Furthermore, we rely on third party servicers to service our NPLs, including managing collections. If the servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments. We also rely on our servicers to provide all of our property management and renovation management services associated with the real properties we acquire upon conversion of NPLs to REO. If our agreements with any such third party terminates and we are unable to obtain a suitable replacement at attractive costs, our ability to acquire, resolve or dispose of our NPLs could be adversely affected.

Changes in CLO spreads and an adverse market environment could make it difficult for us to launch new CLOs thereby reducing management fees paid to Telos, which could adversely affect our profitability.

Telos generates management and advisory fees based on the amount of assets managed, and, in certain cases, on the returns generated by the assets managed. The ability to issue new CLOs is dependent, in part, on the amount of excess interest earned on a new CLO’s investments over interest payable on its debt obligations. If the spread is not attractive to potential CLO equity investors

16

we may not be able to sponsor the issuance of new CLOs, which could have a material adverse impact on Telos’ business. A reduction in fees paid to Telos, due to an inability to issue new CLOs at attractive terms, termination of existing management agreements, reduction in assets managed (for example, as a result of exercise of optional call provisions by subordinated noteholders) or lower than expected returns could adversely affect our results of operations.

In advance of issuing and managing a new CLO, we expect to enter into warehouse agreements which may expose us to substantial risks.

In connection with our potential investment in and management of new CLOs, we expect to enter into warehouse lending agreements with warehouse loan providers to finance the purchase of investments that will be ultimately included in a CLO. We typically select the investments in the warehouse subject to the approval of the warehouse provider. If the relevant CLO transaction is not issued, the warehouse investments may be liquidated, and we may experience a loss if the aggregate sale price of the collateral is less than the warehouse loan amount. In addition, regardless of whether the CLO is issued or consummated, if any of the warehoused investments are sold before such issuance or consummation, we may have to bear any resulting loss on the sale. The amount at risk in connection with a warehouse agreement will vary and may not be limited to the amount, if any, that we invest in the related CLO upon its issuance. Although we would expect to complete the issuance of a particular CLO within six to nine months after establishing a related warehouse, we may not be able to complete the issuance within such expected time period or at all.

Some of our investments are made jointly with other persons or entities, which may limit our flexibility with respect to such jointly owned investments and could, thereby, have a material adverse effect on our business, results of operations and financial condition and our ability to sell these investments.

Some of our current investments are, and future investments may be, made jointly with other persons or entities when circumstances warrant the use of such structures and we may continue to do so in the future. Our participation in such joint investments is subject to the risks that:

•
we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes;
•
our partners could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments;
•
our partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as partners, which may require us to infuse our own capital into such venture(s) on behalf of the partner(s) despite other competing uses for such capital;
•
our partners may have competing interests in our markets that could create conflict of interest issues;
•
any sale or other disposition of our interest in such a venture may require consents which we may not be able to obtain;
•
such transactions may also trigger other contractual rights held by a partner, lender or other third party depending on how the transaction is structured; and
•
there may be disagreements as to whether consents and/or approvals are required in connection with the consummation of a particular transaction with a partner, lender and/or other third party, or whether such transaction triggers other contractual rights held by a partner, lender and/or other third party, and in either case, those disagreements may result in litigation.

The volume of our mortgage loan originations is subject to a variety of factors, which include the level of interest rates, overall conditions in the housing market and general economic trends.
Changes in interest rates and the level of interest rates are key drivers that impact the volatility of our mortgage loan originations.  The historically low interest rate environment over the last several years has created strong demand for mortgages. The Federal Reserve recently raised rates and has indicated an intention to continue raising rates in the near future. Further increases in interest rates could result in us having lower revenue or profitability. The overwhelming majority of our mortgage loan originations have historically been refinancing existing homeowner’s mortgage loans. With rates at or near historically low levels, we have been able to continue to grow our mortgage loan originations by focusing on refinances. With rising interest rates, we may not be able to continue to do so in the future.

Our mortgage business is highly dependent upon programs administered by GSEs, such as Fannie Mae and Freddie Mac, and Ginnie Mae, to generate revenues through mortgage loan sales to institutional investors. Any changes in existing U.S. government-sponsored mortgage programs could materially and adversely affect our mortgage businesses, financial condition and results of operations.

There is uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will continue to be in existence, the extent of their roles in the market and what forms they will have. The future roles of Fannie Mae and

17

Freddie Mac could be reduced or eliminated and the nature of their guarantees could be limited or eliminated relative to historical measurements. The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could adversely affect our mortgage businesses, financial condition and results of operations. Furthermore, any discontinuation of, or significant reduction in, the operation of these GSEs and Ginnie Mae, or any significant adverse change in the level of activity of these agencies in the primary or secondary mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect our business, financial condition and results of operations.

We may be unable to obtain sufficient capital to meet the financing requirements of our mortgage business.
We fund substantially all of the loans which we originate through borrowings under warehouse financing and repurchase facilities.  Our borrowings are in turn repaid with the proceeds we receive from selling such loans through whole loan sales.  As we expand our operations, we will require increased financing.
There can be no assurance that such financing will be available on terms reasonably satisfactory to us or at all.  An event of default, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit-similar to the market conditions experienced in recent years-may increase our cost of funds and make it difficult for us to obtain new, or retain existing, warehouse financing facilities.  If we fail to maintain, renew or obtain adequate funding under these warehouse financing facilities or other financing arrangements, or there is a substantial reduction in the size of or increase in the cost of such facilities, we would have to curtail our mortgage loan production activities, which could have a material adverse effect on our business, financial condition and operating results in our mortgage business.
In our mortgage business, we may sustain losses and/or be required to indemnify or repurchase loans we originated, or will originate, if, among other things, our loans fail to meet certain criteria or characteristics.
The contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:

•
our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;
•
we fail to secure adequate mortgage insurance within a certain period after closing;
•
a mortgage insurance provider denies coverage; or
•
we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment.

We maintain reserves that we believe are appropriate to cover potential loan repurchase or indemnification losses, but there can be no assurance that such reserves will, in fact, be sufficient to cover future repurchase and indemnification claims. If we are required to indemnify or repurchase loans that we originate and sell that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.

Furthermore, in the ordinary course of our mortgage business, we are subject to claims made against us by borrowers and private investors arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and agents (including our appraisers), incomplete documentation and our failure to comply with various laws and regulations applicable to our business.
In addition, should the mortgage loans we originate sustain higher levels of delinquencies and/or defaults, we may lose the ability to originate and/or sell FHA loans, or to do so profitably and investors to whom we currently sell our mortgage loans may refuse to continue to do business with us, or may reduce the prices they are willing to purchase our mortgage loans and it may be difficult or impossible to sell any of our mortgage loans in the future. Any of the foregoing risks could adversely affect our business, financial condition and results of operations in our mortgage business.    

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

18

our ability to use prior net operating losses to offset future taxable income would be subject to a limitation if we experience an ownership change.

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

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

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

Some of our assets, including our direct investments, are subject to credit risk, interest rate risk, market risk, credit spread risk, selection risk, call and redemption risk and refinancing risk.

Credit risk is the risk that the obligor will be unable to pay scheduled principal and/or interest payments. Defaults by third parties in the payment or performance of their obligations could reduce our income and realized gains or result in the recognition of losses. The fair value of our assets may be materially and adversely affected by increases in interest rates, downgrades in our direct investments and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the fair value of our assets.

Interest rate risk is the risk that general interest rates will rise or that the risk spread used in our financings will increase. Although interest rates have been at historically low levels for the last several years, the Federal Reserve recently raised rates and has indicated an intention to continue raising rates in the coming months, and a period of sharply rising interest rates could have an adverse impact on our business by negatively impacting demand for mortgages, corporate loans and value of our CLO holdings and increasing our cost of borrowing to finance operations.
Market risk is the risk that one or more markets to which the assets relate will decline in value, including the possibility that such markets will deteriorate sharply and unpredictably, which will likely impair the market value of the related instruments.

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

Call and redemption risk is the risk that fixed income investments will be called or redeemed prior to maturity at a time when yields on other debt instruments in which the call or redemption proceeds could be invested are lower than the yield on the called or redeemed instrument.

Refinancing risk is the risk that we will be unable to refinance some or all of our indebtedness or that any refinancing will not be on terms as favorable as those of our existing indebtedness, which could increase our funding costs, limit our ability to borrow, or result in a sale of the leveraged asset on disadvantageous terms. Any one of these risks may materially and adversely affect the value of our assets, our results of operations and our financial condition.

Our risk mitigation or hedging strategies could result in our experiencing significant losses that may materially adversely affect us.
We may pursue risk mitigation and hedging strategies to seek to reduce our exposure to losses from adverse credit events, interest rate changes, market risk and other risks. These strategies may include short Treasury positions, interest rate swaps, foreign exchange derivatives, credit derivatives, freight forward agreements, fuel oil swaps and other derivative hedging instruments. Since we account for derivatives at fair market value, changes in fair market value are reflected in net income other than derivative hedging instruments which are reflected in accumulated other comprehensive income in stockholders’ equity. Some of these strategies could result in our experiencing significant losses that may materially adversely affect our business, financial condition and results of operations.

19

The values we record for certain investments and liabilities are based on estimates of fair value made by our management, which may cause our operating results to fluctuate and may not be indicative of the value we can realize on a sale.
Some of our investments and liabilities are not actively traded and the fair value of such investments and liabilities are not readily determinable. Each of these carrying values is based on an estimate of fair value by our management. Management reports the estimated fair value of these investments and liabilities quarterly, which may cause our quarterly operating results to fluctuate. Therefore, our past quarterly results may not be indicative of our performance in future quarters. In addition, because such valuations are inherently uncertain, in some cases based on internal models and unobservable inputs, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments and liabilities existed. As such, we may be unable to realize the carrying value upon a sale of these investments.

The accounting rules applicable to certain of our transactions are highly complex and require the application of significant judgment and assumptions by our management. In addition, changes in accounting interpretations or assumptions could impact our financial statements.

Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets, securitization transactions and other aspects of our operations are highly complex and require the application of judgment and assumptions by our management. In addition, changes in accounting rules, interpretations or assumptions could materially impact the presentation, disclosure and usability of our financial statements. For more information see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates”.

Risks Related to our Structure

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

We are a holding company and do not have any significant operations of our own, other than our principal investments. Our ability to meet our obligations will depend on distributions from our subsidiaries and income from assets. The amount of dividends and other distributions that our subsidiaries may distribute to us may be subject to restrictions imposed by state law, restrictions that may be imposed by state regulators and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur. Such restrictions would also affect our ability to pay dividends to stockholders, if and when we choose to do so.

Our insurance business Junior Subordinated Notes due 2057 restrict dividends to us based on the leverage ratio of our insurance business and its subsidiaries. Our regulated insurance company subsidiaries are required to satisfy minimum capital and surplus requirements according to the laws and regulations of the states in which they operate, which regulate the amount of dividends and distributions we receive from them. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which varies by state. Some states have an additional stipulation that dividends may only be paid out of earned surplus. States also regulate transactions between our insurance company subsidiaries and us or our other subsidiaries, such as those relating to shared services, and in some instances, require prior approval of such transactions within the holding company structure. If insurance regulators determine that payment of an ordinary dividend or any other payments by our insurance company subsidiaries to us or our other subsidiaries (such as payments for employee or other services) would be adverse to policyholders or creditors, the regulators may block or otherwise restrict such payments that would otherwise be permitted without prior approval. In addition, there could be future regulatory actions restricting the ability of our insurance company subsidiaries to pay dividends or share services.

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

As a public company, we incur significant legal, accounting and other costs. In addition, the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” the Dodd-Frank Act, and the rules of the SEC and Nasdaq, impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to these compliance activities. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming.

Furthermore, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our Common Stock could decline and we could be subject to potential delisting by Nasdaq and review by such exchange, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our stockholders could lose confidence in our financial reporting, which would harm our business and the

20

market price of our Common Stock.

Some provisions of our charter may delay, deter or prevent takeovers and business combinations that stockholders consider in their best interests.

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

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

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

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

Our bylaws contain a provision exempting from the control share statute any and all acquisitions by any person of our shares of stock. Our board of directors has also adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the business combination statute, provided that the business combination is first approved by the board of directors. However, our board of directors may amend or eliminate this provision in our bylaws regarding the control share statute or amend or repeal this resolution regarding the business combination statute. If our board takes such action in the future, the control share and business combination statutes may prevent or discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our Common Stock or otherwise be in the best interest of our stockholders.

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

Tiptree holds and manages multiple lines of business. Analysts, investors and lenders may have difficulty analyzing and valuing a company with multiple lines of business, which could adversely impact the market price of our Common Stock and our ability to raise equity and debt capital at a holding company level. Moreover, our management is required to make decisions regarding the allocation of capital among the different lines of business, and such decisions could materially and adversely affect our business or one or more of our lines of business.

Risks Related to Regulatory and Legal Matters

Maintenance of our 1940 Act exemption imposes limits on our operations.

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

If we fail to maintain an exemption, exception or other exclusion from registration as an investment company, we could,

21

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

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

A change in state or U.S. federal tax laws could materially affect our insurance businesses. Currently, our insurance business does not collect sales or other related taxes on its services. Whether sales of our insurance business’s services are subject to state sales and use taxes is uncertain, due in part to the nature of its services and the relationships through which its services are offered, as well as changing state laws and interpretations of those laws. One or more states may seek to impose sales or use tax or other tax collection obligations on our insurance business, whether based on sales by our insurance business or its resellers or clients, including for past sales. A successful assertion that our insurance business should be collecting sales or other related taxes on its services could result in substantial tax liabilities for past sales, discourage customers from purchasing its services, discourage clients from offering or billing for its services, or otherwise cause material harm to its business, financial condition and results of operations.

With regard to our insurance business’s payment protection products, there are federal and state laws and regulations that govern the disclosures related to lenders’ sales of those products. Our insurance business’s ability to offer and administer these products on behalf of financial institutions is dependent upon their continued ability to sell such products. To the extent that federal or state laws or regulations change to restrict or prohibit the sale of these products, our insurance business’s revenues would be adversely affected. For example, the CFPB’s enforcement actions have resulted in large refunds and civil penalties against financial institutions in connection with their marketing of payment protection and other products. Due to such regulatory actions, some lenders may reduce their sales and marketing of payment protection and other ancillary products, which may adversely affect our insurance business’s revenues. The full impact of the CFPB’s oversight is unpredictable and continues to evolve. With respect to the property and casualty insurance policies our insurance business underwrites, federal legislative proposals regarding national catastrophe insurance, if adopted, could reduce the business need for some of the related products that our insurance business provides.

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

We are subject to extensive laws and regulations administered and enforced by a number of different federal and state governmental authorities in the industries in which we operate. Regulation of such industries may increase. In the past several years, there has been significant legislation affecting financial services, insurance and health care, including the Dodd-Frank Act and the Patient Protection and Affordable Care Act. In addition, the New York Department of Financial Services has adopted Cybersecurity regulations applicable to our insurance and mortgage operations in New York. Accordingly, we cannot predict the impact that any new laws and regulations will have on us. The costs to comply with these laws and regulations may be substantial and could have a significant negative impact on us and limit our ability to pursue business opportunities. We can give no assurances that with changes to laws and regulations, our businesses can continue to be conducted in each jurisdiction in the manner as we have in the past.

Our insurance subsidiaries are subject to regulation by state and, in some cases, foreign insurance authorities with respect to statutory capital, reserve and other requirements. The laws of the various states in which our insurance businesses operate establish insurance departments and other regulatory agencies with broad powers to preclude or temporarily suspend our insurance subsidiaries from carrying on some or all of their activities or otherwise fine or penalize them in any jurisdiction in which they operate. Such regulation or compliance could reduce our insurance businesses’ profitability or limit their growth by increasing the costs of compliance, limiting or restricting the products or services they sell, or the methods by which they sell their services and products, or subjecting their business to the possibility of regulatory actions or proceedings.

While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulatory actions taken by the CFPB may affect the sales practices related to these products and thereby potentially affect our insurance business or the clients that it serves. In 2017, the CFPB issued rules under its unfair, deceptive and abusive acts and practices rulemaking authority relating to consumer installment loans, among other things. Such CFPB rules regarding consumer installment loans could adversely impact our insurance business’s volume of insurance products and services and cost structure. Due to such regulatory actions, some lenders may reduce their sales and marketing of payment protection and other ancillary products, which may adversely affect our insurance business’s revenues.

22


Due to the highly regulated nature of the residential mortgage industry, our mortgage subsidiaries are required to comply with a wide array of federal, state and local laws and regulations that regulate licensing, allowable fees and loan terms, permissible servicing and debt collection practices, limitations on forced-placed insurance, special consumer protections in connection with default and foreclosure, and protection of confidential, nonpublic consumer information. In addition, mortgage servicers must comply with U.S. federal, state and local laws and regulations that regulate, among other things, the manner in which they service our NPL mortgage loans and manage our real property. These laws and regulations are constantly changing and the volume of new or modified laws and regulations has increased in recent years as states and local cities and counties continue to enact laws that either restrict or impose additional obligations in connection with certain loan origination, acquisition and servicing activities in those cities and counties. These laws and regulations are complex and vary greatly among different states and localities, and in some cases, these laws are in conflict with each other or with U.S. federal law. A failure by us or our servicers to comply with applicable laws or regulations could subject our mortgage businesses and/or our mortgage servicers to lawsuits or governmental actions, which could result in the loss or suspension of our licenses in the applicable jurisdictions where such violations occur and/or monetary fines or changes in our mortgage operations.   If we were to determine to change servicers, there is no assurance that we could find servicers that satisfy our requirements or with whom we could enter into agreements on satisfactory terms. Any of these outcomes could materially and adversely affect our mortgage businesses.

Changes to consumer protection laws or changes in their interpretation may impede collection efforts in connection with our investments in NPLs, delaying and/or reducing our returns on these investments. The CFPB has specifically focused on servicing and foreclosure practices, especially as it relates to the servicing of delinquent loans. Many of these laws and regulations are focused on sub-prime borrowers and are intended to curtail or prohibit some industry standard practices. While we believe that our practices are in compliance with these changes and enhanced regulations, certain of our collections methods could be prohibited in the future, forcing us to revise our practices and implement more costly or less effective policies and procedures. Federal or state bankruptcy or debtor relief laws could offer additional protection to borrowers seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to us. As a result, some of these changes in laws and regulations could impact our expected returns and/or ability to recover some of our investment.
TAMCO is an asset management holding company registered with the SEC as an investment advisor and is subject to various federal and state laws and regulations and rules of various securities regulators and exchanges. These laws and regulations primarily are intended to protect clients and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. Possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser, censures and fines.

Our drybulk shipping business and the operation of our vessels are regulated under international conventions, classification societies, national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration, that mandate safety and environmental protection policies. Government regulation of vessels, particularly environmental regulations, have become more stringent and may require us to incur significant capital expenditures on our vessels.

For example, various jurisdictions have regulated management of ballast waters to prevent the introduction of non-indigenous species that are considered invasive which requires us to make changes to the ballast water management plans we currently have in place and to install new equipment on board our vessels. Various jurisdictions have also regulated or are considering the further regulation of greenhouse gases from vessels and emissions of sulfur and nitrogen oxides which may increase the cost of new vessels and require retrofitting equipment on existing vessels.

These requirements can also affect the resale prices or useful lives of our vessels or require reductions in cargo capacity, ship modifications or operational changes or restrictions. Failure to comply with these requirements could lead to decreased availability of, or more costly insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations and claims for natural resource, personal injury and property damages in the event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations. Violations of, or liabilities under, environmental regulations can result in substantial penalties, fines and other sanctions, including, in certain instances, seizure or detention of our vessels. In addition, we are subject to the risk that we, our affiliated entities, or our or their respective officers, directors, shore employees, crew on board and agents may take actions determined to be in violation of such environmental regulations and laws and our environmental policies. Any such actual or alleged environmental laws regulations and policies violation, under negligence, willful misconduct or fault, could result in substantial fines, civil and/or criminal penalties or curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating

23

and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management. Events of this nature could have a material adverse effect on our business, financial condition and results of operations.

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

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

Our international activities increase the compliance risks associated with economic and trade sanctions imposed by the United States, the European Union and other jurisdictions.

Our international operations and activities expose us to risks associated with trade and economic sanctions, prohibitions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the European Union and its member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may subject us to fines and other penalties.

We could be materially adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and anti-corruption laws in other applicable jurisdictions.

We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and regulations in various jurisdictions in which we conduct business, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. We operate in countries known to present heightened risks for corruption and our dry bulk shipping and related operations requires us to interact with government officials, including port officials, harbor masters, maritime regulators, customs officials and pilots.

Non-compliance with anti-corruption, anti-bribery or anti-money laundering laws could subject us to whistleblower complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences, remedial measures and legal expenses, all of which could materially and adversely affect our business, results of operations, financial condition and reputation.

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

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

24


Cyberattacks targeting Tiptree’s process control networks or other digital infrastructure could have a material adverse impact on the company’s business and results of operations. 

There are numerous and evolving risks to cybersecurity and privacy from cyber threat actors, including criminal hackers, state-sponsored intrusions, industrial espionage and employee malfeasance. These cyber threat actors are becoming more sophisticated and coordinated in their attempts to access the Company’s information technology (“IT”) systems and data, including the IT systems of cloud providers and third parties with which the Company conducts business. Although the Company devotes significant resources to prevent unwanted intrusions and to protect its systems and data, whether such data is housed internally or by external third parties, the Company has experienced immaterial cyber incidents and will continue to experience cyber incidents of varying degrees in the conduct of its business. Cyber threat actors could compromise the Company’s process control networks or other critical systems and infrastructure, resulting in disruptions to its business operations, access to its financial reporting systems, or loss, misuse or corruption of its critical data and proprietary information, including without limitation its business information and that of its employees, customers, partners and other third parties.  Cyber events could result in significant financial losses, legal or regulatory violations, reputational harm, and legal liability and could ultimately have a material adverse effect on the Company’s business and results of operations.

Item 1B. Unresolved Staff Comments
None.

Item 2. Properties

Our principal executive office is located at 780 Third Avenue, 21st Floor, New York, New York 10017. We and our subsidiaries lease properties throughout the United States, all of which are used as administrative offices. We believe that the terms of their leases at each of our subsidiaries are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.

As of December 31, 2018, the Company owned 45 single family properties in our insurance segment consisting of REO properties resulting from our investments in non-performing residential mortgage loans.

Item 3. Legal Proceedings

Litigation
Fortegra is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability insurance policies. In January 2018, in response to a Plaintiffs’ Motion the court vacated its November 2017 order granting Fortegra’s Motion for Summary Judgment as to the life certificates at issue with leave to refile. No trial or additional hearings are currently scheduled.

Tiptree 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 Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.

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.

Item 4. Mine Safety Disclosures

Not applicable.

25


PART II

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

Market Information
Tiptree’s Common Stock has traded on the Nasdaq Capital Market under the ticker symbol “TIPT” since August 9, 2013.

Holders
As of December 31, 2018, there were 72 Common Stockholders of record. This number does not include beneficial owners whose shares are held by nominees in street name.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity for the three months ended December 31, 2018 was as follows:
Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs(1)(2)
October 1, 2018 to October 31, 2018
Tiptree Inc.
—

$
—

—

$
—

November 1, 2018 to November 30, 2018
Tiptree Inc.
—

$
—

—

$
—

December 1, 2018 to December 31, 2018: Open Market Purchases
Tiptree Inc.
66,658

$
5.46

66,658

$
19,636,118

 
Total
66,658

$
5.46

66,658

$
19,636,118


(1)
On December 7, 2018, Tiptree engaged a broker in connection with a share repurchase program for the repurchase of up to $10 million of its outstanding Common Stock. The Company expects the share purchases to be made from time to time in the open market or through privately negotiated transactions, or otherwise, subject to applicable laws and regulations.
(2)
On December 7, 2018, the Board of Directors of Tiptree separately authorized Tiptree to make block repurchases of up to $10 million in the aggregate from time to time in the open market or through privately negotiated transactions, or otherwise, subject to Tiptree’s Executive Committee’s discretion. As of December 31, 2018, Tiptree has $10 million remaining on this authority.



26

Item 6. Selected Financial Data

The following tables set forth our consolidated selected financial data for the periods and as of the dates indicated and are derived from our audited Consolidated Financial Statements. The following consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in ITEM 7 of this Form 10-K and the consolidated financial statements and related notes included in Item 8 of this Form 10-K. All amounts pertaining to our results of operations and financial condition are presented on a continuing operations basis. All acquisitions by Tiptree during the five years ended December 31, 2018 are included in results of operations since their respective dates of acquisition.
Consolidated Statement of Operations Data:
 
For the Years Ended December 31,
(in thousands, except shares and per share amounts)
 
2018(1)
 
2017(1)
 
2016(1)
 
2015(1)(3)
 
2014(1)(2)(3)
Total revenues
 
$
625,826

 
$
581,798

 
$
506,423

 
$
392,331

 
$
51,032

Total expenses
 
645,622

 
595,585

 
477,537

 
388,346

 
72,940

Net income (loss) attributable to consolidated CLOs
 
—

 
10,457

 
20,254

 
(6,889
)
 
19,525

Income (loss) before taxes from continuing operations
 
(19,796
)
 
(3,330
)
 
49,140

 
(2,904
)
 
(2,383
)
Less: provision (benefit) for income taxes
 
(5,909
)
 
(12,562
)
 
12,515

 
(753
)
 
5,317

Net income (loss) from continuing operations
 
(13,887
)
 
9,232

 
36,625

 
(2,151
)
 
(7,700
)
Net income (loss) from discontinued operations
 
43,770

 
(3,998
)
 
(4,287
)
 
10,953

 
12,284

Net income (loss) before non-controlling interests
 
29,883

 
5,234

 
32,338

 
8,802

 
4,584

Less: net income (loss) attributable to non-controlling interests
 
5,950

 
1,630

 
7,018

 
3,023

 
6,294

Net income (loss) attributable to Common Stockholders
 
$
23,933

 
$
3,604

 
$
25,320

 
$
5,779

 
$
(1,710
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per Common Share:
 
 
 
 
 
 
 
 
 
 
Basic, continuing operations, net
 
$
(0.38
)
 
$
0.22

 
$
0.88

 
$
(0.01
)
 
$
(0.58
)
Basic, discontinued operations, net
 
1.07

 
(0.10
)
 
(0.09
)
 
0.18

 
0.48

Basic earnings per share
 
0.69

 
0.12

 
0.79

 
0.17

 
(0.10
)
 
 
 
 
 
 
 
 
 
 
 
Diluted, continuing operations, net
 
(0.38
)
 
0.21

 
0.86

 
(0.01
)
 
(0.58
)
Diluted, discontinued operations, net
 
1.07

 
(0.10
)
 
(0.08
)
 
0.18

 
0.48

Diluted earnings per share
 
$
0.69

 
$
0.11

 
$
0.78

 
$
0.17

 
$
(0.10
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of Common Shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
34,715,852

 
29,134,190

 
31,721,449

 
33,202,681

 
16,771,980

Diluted
 
34,715,852

 
37,306,632

 
31,766,674

 
33,202,681

 
16,771,980

 
 
 
 
 
 
 
 
 
 
 
Cash dividends paid per common share
 
$
0.135

 
$
0.12

 
$
0.10

 
$
0.10

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31,
Consolidated Balance Sheet Data: (in thousands)
 
2018
 
2017
 
2016
 
2015
 
2014
Total assets (4)
 
$
1,864,918

 
$
1,989,742

 
$
2,890,050

 
$
2,494,970

 
$
8,202,447

Debt, net (5)
 
354,083

 
346,081

 
554,870

 
502,255

 
254,072

Total stockholders’ equity
 
$
399,259

 
$
396,774

 
$
390,144

 
$
397,694

 
$
401,621

Total Tiptree Inc. stockholders’ equity
 
387,101

 
300,077

 
293,431

 
312,840

 
284,462


(1)
Care revenues of $6.5 million, $76.0 million, $60.7 million, $46.1 million, and $29.3 million and net income (loss) of $43.8 million, $(4.0) million, $(4.3) million, $(11.7) million, and $4.3 million for the years ended December 31, 2018, 2017, 2016, 2015, and 2014, respectively, are included in Net income (loss) from discontinued operations, net.
(2)
2014 results reflects the impact of the acquisition of Fortegra in December 2014.
(3)
Philadelphia Financial Group, Inc. revenues of $40.5 million and $78.7 million and net income of $7.0 million and $7.9 million for the years ended December 31, 2015 and December 31, 2014, respectively, and gain on sale of $15.6 million for the year ended December 31, 2015 are included in Net income (loss) from discontinued operations, net.
(4)
Total assets on December 31, 2016, 2015, and 2014 include $989.5 million, $728.8 million, and $1,978.1 million of assets held by consolidated CLO entities, respectively.
(5)
Excludes debt of discontinued operations.


27

Item 7. 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 that combines insurance operations with investment management capabilities. Our principal operating subsidiary is a leading provider of specialty insurance products and related services. We also allocate capital across a broad spectrum of businesses, assets and other investments, which we refer to as Tiptree Capital. When considering capital allocation decisions, we take a diversified approach with a longer-term investment horizon. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital, as measured by Adjusted EBITDA, Operating EBITDA and growth in book value per share plus dividends.

During 2018 and early 2019, we executed on several strategic initiatives:

Overall:
•
Delivered total annual return of 9.6% for 2018, as measured by growth in book value per share plus dividends paid.
•
On April 10, 2018, we completed a corporate reorganization that eliminated Tiptree’s dual class stock structure.
•
In 2018, we returned $19.2 million to investors through $14.2 million of share buy-backs and $5.0 million of dividends paid.
•
As of March 11, 2019, the Company purchased and retired 1,472,730 shares of its Common Stock for $9.1 million through open market purchases and block purchases.

Insurance:
•
Specialty Insurance continued to grow as gross written premiums for 2018 were $868.1 million, up 13.0%. Net written premiums were $466.8 million, up 11.7%, driven by growth in credit and other specialty products.
•
On March 28, 2018, we expanded into Europe with the creation of Fortegra Europe Insurance Company Limited (“FEIC”).

Tiptree Capital:
•
On February 1, 2018, we sold our senior living assets to Invesque in exchange for a net 16.6 million shares of Invesque common stock. Tiptree’s increase to book value was $1.16 per share including a pre-tax $10.7 million earnout gain recognized in December 2018.
•
Consistent with our total return objectives, throughout 2018 we invested $50.0 million in shipping sector at what we believe is a favorable point in the cycle.
•
In 2019, began re-positioning our asset management platform, by agreeing to invest $75 million to seed new investment funds in exchange for management control of and a profit participation in Tricadia.

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”. Generally, our businesses are positively affected by a healthy U.S. consumer, stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely, rising unemployment, volatile markets, rapidly rising interest rates, changing regulatory requirements and slowing business conditions can have a material adverse effect on our results of operations or financial condition.

Our specialty insurance business generally focuses on products which have low severity but high frequency loss experiences and are short-duration. Our insurance business has historically generated significant fee based revenues. In general, the types of products we offer tend to have limited aggregation risk, and thus, limited exposure to catastrophic and residual risk. We mitigate our underwriting risk through a combination of reinsurance and retrospective commission structures with our distribution partners and/or third-party reinsurers. Our insurance results primarily depend on our pricing, underwriting, risk retention and the accuracy of reserves, reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. While our insurance operations have historically maintained 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 experienced. We believe there are additional growth opportunities to expand our warranty and programs insurance business model to other niche products and markets.


28

Our insurance company investment portfolio primarily serves as a source to pay claims and secondarily as a source of income for our operations. Our investments include fixed maturity securities, loans, credit investment funds, equity securities, real estate and CLOs. Many of our investments are held at fair value. Changes in fair value for loans, credit investment funds, equity securities and CLO assets and liabilities 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. 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. 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. In addition, both as part of our insurance company investments and separately in Tiptree Capital, as of February 1, 2018, common shares of Invesque represent a significant asset on our balance sheet. Any change in the fair value of Invesque’s common stock or Invesque’s dividend policy could have a significant impact on our financial condition and results of operations.

The shipping industry is highly competitive and fragmented. Demand is a function of world economic conditions and the consequent requirement for commodities, production and consumption patterns, as well as events, which interrupt production, trade routes, and consumption. The shipping industry is cyclical with high volatility in charter hire rates and profitability. General market conditions, along with company and industry specific factors, can impact the fair value of our vessels and their operating results.

Our business can also be impacted in various ways by changes in interest rates which can result in fluctuations in fair value of our investments, revenues associated with floating rate loans, volume and revenues in our mortgage business and interest expense associated with floating rate debt used to fund many of our operations.

RESULTS OF OPERATIONS
The following is a summary of our consolidated financial results for the year ended December 31, 2018, 2017 and 2016. In addition to GAAP results, management uses the Non-GAAP measures Operating EBITDA, Adjusted EBITDA and book value per share as measurements of operating performance. Management believes these measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze financial performance, debt service and comparison among companies. Management uses Operating EBITDA as part of its capital allocation process and to assess comparative returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive officers. The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted to add (i) corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) adjust for the effect of purchase accounting, (iii) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses. Operating EBITDA represents Adjusted EBITDA plus stock based compensation expense, less realized and unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income.

Selected Key Metrics
($ in thousands)
Year Ended December 31,
GAAP:
2018

2017

2016
Total revenues
$
625,826

 
$
581,798

 
$
506,423

Net income (loss) before non-controlling interests
29,883

 
5,234

 
32,338

Net income (loss) attributable to Common Stockholders
23,933

 
3,604

 
25,320

Diluted earnings per share
0.69

 
0.11

 
0.78

Cash dividends paid per common share
0.135

 
0.12

 
0.10

 
 
 
 
 
 
Non-GAAP: (1)
 
 
 
 
 
Operating EBITDA
54,943

 
60,872

 
60,547

Adjusted EBITDA
28,759

 
37,988

 
78,916

Book value per share (2)
10.79

 
9.97

 
10.14

(1) For further information relating to the Company’s Operating EBITDA, Adjusted EBITDA and book value per share, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) For periods prior to April 10, 2018, book value per share assumed full exchange of the limited partners units of TFP for Common Stock.

Revenues

For the year ended December 31, 2018, revenues were $625.8 million, which increased $44.0 million, or 7.6%, over the prior year period. The increase was driven by growth in earned premiums and service and administrative fees. Earned premiums were $427.8 million for the year ended December 31, 2018, up from $371.7 million in the comparable 2017 period driven by growth in net written

29

premiums. The combination of unearned premiums and deferred revenues on the balance sheet grew by $115.0 million, or 20.5%, from December 31, 2017 to December 31, 2018 as a result of an increase in credit protection and other specialty programs written premiums.

The increase in revenues from 2016 to 2017 was $75.4 million, or 14.9%, driven by growth in earned premiums and net investment income in our insurance operations, partially offset by reduced service and administrative fees, ceding commissions, and unrealized losses on equities in our specialty insurance investment portfolio, as compared to prior period gains. In addition to the growth in revenues, the combination of unearned premiums and deferred revenues on the balance sheet grew by $93.0 million or 19.9%.

Income (loss) before taxes (from continuing and discontinued operations)

The table below highlights key drivers impacting our consolidated results on a pre-tax basis. Many of our investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these investments to be relatively volatile between periods in contrast to our fixed income securities, which are marked to market through accumulated other comprehensive income (“AOCI”) in stockholders equity. On February 1, 2018, we sold our senior living operations to Invesque in exchange for a net of 16.6 million shares of Invesque common stock which resulted in a pretax gain on sale of $56.9 million. During 2017, we made a strategic decision to decrease our overall exposure to CLO subordinated notes, which resulted in deconsolidation of the CLOs we manage and decreased our earnings from CLO distributions when comparing the year ended December 31, 2018 versus the prior year periods.
($ in thousands)
Year Ended December 31,

2018

2017

2016
Net realized and unrealized gains (losses)(1)
$
(34,817
)

$
(18,592
)

$
18,133

Discontinued operations (Care)(2)
$
57,484


$
(6,222
)

$
(5,824
)
Tiptree Capital - credit investments
$
(628
)

$
10,731


$
20,470

(1) Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs. Includes $20.7 million of unrealized losses attributable to Invesque shares for the year ended December 31, 2018 from the date of the sale (February 1, 2018).
(2) Includes Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.

Net Income (Loss) before non-controlling interests

For the year ended December 31, 2018, net income before non-controlling interests was $29.9 million compared to income of $5.2 million in the 2017 period, an increase of $24.7 million. The increase was primarily driven by improved insurance operating performance and $43.8 million of income from discontinued operations, including the net gain on sale of Care. These factors were partially offset by unrealized mark-to-market losses on Invesque common shares and 2017 results contained a one-time net tax benefit of $15.2 million from remeasurement of our net deferred tax liabilities as a result of the Tax Act’s change in federal income tax rate from 35% to 21%.

For the year ended December 31, 2017, net income before non-controlling interests was $5.2 million compared to net income of $32.3 million in the 2016 period, a decrease of $27.1 million, or 83.8%. The decline was primarily a result of the unrealized losses on equities in our insurance investment portfolio, compared to unrealized gains in the prior period. Increased stock-based compensation expense in specialty insurance and increased earn-out expense associated with our Reliance acquisition also contributed to the decline. We reduced our exposure to CLO subordinated notes throughout 2017 which resulted in less distributions compared to 2016. Those factors were partially offset by decreases in corporate expenses and a net tax benefit of $15.2 million described above.

Net Income (Loss) Available to Common Stockholders

For the year ended December 31, 2018, net income available to Common Stockholders was $23.9 million, an increase of $20.3 million from the prior year period. For the year ended December 31, 2017, net income available to Common Stockholders was $3.6 million, a decrease of $21.7 million from the prior year period. The key drivers of net income available to Common Stockholders were the same factors which impacted the net income before non-controlling interests.

Operating and Adjusted EBITDA - Non-GAAP

Operating EBITDA for the year ended December 31, 2018 was $54.9 million compared to $60.9 million for the 2017 period, a decrease of $6.0 million, or 9.7%. Operating EBITDA for the year ended December 31, 2017 was $60.9 million an increase of $0.3 million, or 0.1%. The key drivers of the change for both periods were driven by increased Operating EBITDA from specialty insurance operations, which were more than offset by lower distributions on credit investments within Tiptree Capital.


30

Adjusted EBITDA includes the impact of realized and unrealized gains and losses, stock based compensation and non-controlling interests. Adjusted EBITDA for the year ended December 31, 2018 was $28.8 million compared to $38.0 million for the 2017 period driven by improved specialty insurance operations, which was offset by unrealized mark-to-market on Invesque common shares and lower investment income and realized gains on credit related investments. Adjusted EBITDA for the year ended December 31, 2017 was $38.0 million compared to $78.9 million for the 2016 period, a decrease of $40.9 million, or 51.8%. The key drivers of the change in Adjusted EBITDA from 2016 to 2017 were the same as those which impacted our net income before non controlling interests, excluding the increase in the Reliance earn-out expense, the change in the tax provision and non-recurring expenses which were added back to Adjusted EBITDA in 2017. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

Book Value per share - Non-GAAP

Total stockholders’ equity was $399.3 million as of December 31, 2018 compared to $396.8 million as of December 31, 2017, primarily driven by 2018 net income, net of share repurchases and dividends paid. Book value per share for the period ended December 31, 2018 was $10.79, an increase from book value per share, as exchanged, of $9.97 as of December 31, 2017. The key drivers of the period-over-period impact were 2018 earnings per share and the purchase of 2.2 million shares at an average 39% discount to book value. Those increases were partially offset by dividends paid of $0.135 per share and officer compensation share issuances. In 2018, Tiptree returned $19.2 million to shareholders through share repurchases and dividends paid.

Total stockholders’ equity was $396.8 million as of December 31, 2017 compared to $390.1 million as of December 31, 2016. As exchanged book value per share for the period ended December 31, 2017 was $9.97, a decrease from $10.14 as of December 31, 2016. The key drivers of the period-over-period impact were increases in net income that drove 2017 diluted earnings per share of $0.11 and the purchase of 1.0 million shares at an average 28% discount to book value. Those increases were more than offset by dividends paid of $0.12, officer compensation share issuances, and the exercise of an option in June 2017, the latter of which resulted in 1.5 million shares being issued at $5.36 per share. In 2017, Tiptree returned $11.8 million to shareholders through share repurchases and dividends paid.

Results by Segment
Tiptree is a holding company that combines insurance operations with investment management capabilities. Our principal operating subsidiary is a leading provider of specialty insurance products and related services. We also allocate capital across a broad spectrum of businesses, assets and other investments, which we refer to as Tiptree Capital. As such, we classify our business into one reportable segment, specialty insurance, with the remainder of our non-insurance operations aggregated into Tiptree Capital. For the year ended December 31, 2018, Mortgage and Asset Management, which previously were reportable segments, no longer meet the quantitative threshold for disclosure. Those are now reported in Other, which we refer to as Tiptree Capital. Prior year segments have been conformed to the current year presentation. Corporate activities include holding company interest expense, employee compensation and benefits, and other expenses. The following table presents the components of total pre-tax income including continuing and discontinued operations.

Pre-tax Income
($ in thousands)
Year Ended December 31,

2018

2017

2016
Specialty Insurance
$
18,560


$
5,404


$
46,804

Tiptree Capital
(7,805
)

20,336


37,142

Corporate
(30,551
)

(29,070
)

(34,806
)
Pre-tax income (loss) from continuing operations
$
(19,796
)

$
(3,330
)

$
49,140

Pre-tax income (loss) from discontinued operations (1)
$
57,484


$
(6,222
)

$
(5,824
)
(1)
Includes Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.

Invested Capital, Total Capital and Operating EBITDA - Non-GAAP (1) 

Management evaluates the return on Invested Capital and Total Capital, which are non-GAAP financial measures, when making capital investment decisions. Invested Capital represents its total equity investment, including any re-investment of earnings, and acquisition costs, net of tax. Total Capital represents Invested Capital plus Corporate Debt. Management believes the use of these financial measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze how the Company has allocated capital over-time and provide a basis for determining the return on capital to shareholders. Management uses both of these measures when making capital investment decisions, including reinvesting cash, and evaluating the relative performance of its businesses and investments. The following tables present the components of Invested Capital, Total Capital, Operating EBITDA and Adjusted EBITDA.

31


As of December 31,
($ in thousands)
Invested Capital
 
Total Capital

2018

2017

2016

2018

2017

2016
Specialty Insurance
$
296,346


$
281,317


$
269,690


$
456,346


$
441,317


$
410,190

Tiptree Capital
182,033


161,825


215,262


182,033


161,825


215,262

Corporate
(43,889
)

9,465


(58,108
)

28,201


37,965


393

Total Tiptree
$
434,490


$
452,607


$
426,844


$
666,580


$
641,107


$
625,845


($ in thousands)
Year Ended December 31,

2018

2017

2016
Specialty Insurance
$
64,536


$
53,310


$
49,334

Tiptree Capital (2)
13,726


29,792


41,509

Corporate
(23,319
)

(22,230
)

(30,296
)
Operating EBITDA
$
54,943


$
60,872


$
60,547

Stock-based compensation expense
(6,657
)

(6,559
)

(2,584
)
Vessel depreciation, net of capital expenditures
(898
)

—


—

Realized and unrealized gains (losses) (3)
(18,629
)

(18,592
)

18,133

Third party non-controlling interests (4)
—


2,266


2,820

Adjusted EBITDA
$
28,759


$
37,987


$
78,916

(1)  
For further information relating to the Company’s Invested Capital, Total Capital, Operating EBITDA and Adjusted EBITDA, including a reconciliation to GAAP total stockholders equity and pre-tax income, see “—Non-GAAP Reconciliations.”
(2)
Includes discontinued operations related to Care. As of February 1, 2018, invested capital from Care discontinued operations is represented by our investment in Invesque common shares. For more information, see “Note—(3) Dispositions, Assets Held for Sale and Discontinued Operations.”
(3)
Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs.
(4)
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.

Specialty Insurance

Our principal operating subsidiary is a provider of specialty insurance products and related services, including credit protection insurance, warranty products, and insurance programs which underwrite niche personal and commercial lines of insurance. We also offer fee-based administration and fronting services for our self-insured clients who own captive producer owned reinsurance companies (“PORCs”). We generate income from insurance underwriting operations and our investment portfolio. Insurance underwriting revenues are primarily generated from net earned premiums, service and administrative fees and ceding commissions. We measure insurance underwriting operations performance by adjusted underwriting margin, combined ratio and Operating EBITDA. The investment portfolio income consists of investment income, gains and losses and is measured by net portfolio income.

The following tables present the specialty insurance segment results for the year ended December 31, 2018, 2017 and 2016.


32

Operating Results
($ in thousands)
Year Ended December 31,
 
2018

2017

2016
Gross written premiums
$
868,051


$
768,272


$
708,287

Net written premiums
466,820


418,022


337,170

Revenues:
 
 
 
 
 
Net earned premiums
$
427,837

 
$
371,700

 
$
229,436

Service and administrative fees
102,315

 
95,160

 
109,348

Ceding commissions
9,651

 
8,770

 
24,784

Net investment income
19,179

 
16,286


12,981

Net realized and unrealized gains (losses)
(11,664
)
 
(16,503
)
 
14,762

Other income
2,554

 
3,552

 
2,859

Total revenues
$
549,872

 
$
478,965

 
$
394,170

Expenses:
 
 
 
 

Policy and contract benefits
152,095

 
123,959

 
106,784

Commission expense
262,460

 
241,835

 
147,253

Employee compensation and benefits
45,838

 
41,300

 
37,937

Interest expense
18,201

 
15,072

 
9,244

Depreciation and amortization expenses
10,778

 
12,799

 
13,184

Other expenses
41,940

 
38,596

 
32,964

Total expenses
$
531,312

 
$
473,561

 
$
347,366

Pre-tax income (loss)
$
18,560

 
$
5,404

 
$
46,804


Results

Our specialty insurance operations are currently expanding product lines in an effort to increase written premiums, and commensurately grow the insurance portfolio. As part of this process, the business is investing to grow warranty and programs, while maintaining a leading position in our credit protection markets. That, combined with the earnings performance of the investment portfolio, are key drivers in comparing 2018 versus 2017 results. The growth in written premiums, combined with higher retention in select products, has resulted in an increase of unearned premiums and deferred revenue on the balance sheet of 20.5% from $560.2 million as of December 31, 2017 to $675.2 million as of December 31, 2018.

Pre-tax income was $18.6 million for the year ended December 31, 2018, an increase of $13.2 million, over the prior year period. The primary drivers of the increase were lower net realized and unrealized losses of $11.7 million in the 2018 period versus $16.5 million of losses in the 2017 period primarily related to equities and loans held at fair value in the portfolio. Insurance operations results also improved versus the prior year period, driven primarily by increased underwriting margin of $14.4 million, which was partially offset by increased other expenses of $3.3 million primarily associated with increased premium taxes and pursuing acquisition opportunities. Interest expense increased by $3.1 million from the prior year period, primarily associated with the issuance of the Junior Subordinated Notes in late 2017.

Pre-tax income was $5.4 million for the year ended December 31, 2017, a decrease of $41.4 million, over the prior year period. The primary drivers of the decline were reductions in net realized and unrealized gains and losses of $31.3 million related to equities held in the portfolio, increases in interest expense of $5.8 million primarily associated with asset-based interest expense in the investment portfolio, partially offset by increases in net investment income of $3.3 million. Insurance operations results declined versus prior year driven primarily by increases in stock-based compensation expense of $2.8 million and increased other expenses of $5.6 million primarily related to premium taxes which increased consistent with growth in written premiums, which was partially offset by increased underwriting margin of $4.4 million.

Revenues

Revenues are generated by the sale of the following products: credit protection, warranty, other specialty programs, services and other. Credit protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include auto service contracts, furniture and appliance service contracts and mobile device protection. Other specialty programs are primarily personal and commercial lines and other property-casualty products.

For the year ended December 31, 2018, total revenues were $549.9 million, up $70.9 million, or 14.8%, primarily driven by an increase in earned premiums of $56.1 million and increases in service and administrative fees of $7.2 million. The increase in earned premiums

33

was driven by growth in credit, warranty and other specialty product lines. For the year ended December 31, 2018, revenues on the investment portfolio contributed income of $7.5 million compared to losses of $0.2 million in the 2017 period, an increase of $7.7 million. The improved performance was driven by a combination of higher net investment income of $2.9 million and lower net realized and unrealized investment losses of $4.8 million. See “—Specialty Insurance Investment Portfolio” for further discussion of the investment results.

For the year ended December 31, 2017, total revenues were $479.0 million, up $84.8 million, or 21.5%, over the prior year period. The increase was primarily driven by an increase in earned premiums of $142.3 million, which was partially offset by decreases in service and administrative fees of $14.2 million and ceding commissions of $16.0 million. For the year ended December 31, 2017, revenues on the investment portfolio, including net investment income and realized and unrealized gains, were a loss of $0.2 million compared to $27.7 million of income in the 2016 period, a decrease of $28.0 million. This was primarily driven by unrealized losses on equities of $23.8 million in 2017 compared to unrealized gains of 7.3 million in 2016. 

Expenses

Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31, 2018, total expenses were $531.3 million compared to $473.6 million in the 2017 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2017 period.

There are two types of expenses for claims under insurance and warranty service contracts included in policy and contract benefits which are member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in warranty protection and car club 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. 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. Loss occurrences in our insurance products are characterized by low severity and high frequency. Factors affecting loss frequency and loss severity include the volume of underwritten contracts, changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.

For the year ended December 31, 2018, policy and contract benefits were $152.1 million, up $28.1 million, primarily as a result of growth in earned premiums. Losses as a percentage of underwriting revenues increased over the prior year period which was driven by specialty programs, and offset by reduced commissions paid to our distribution partners.

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, warranty and mobile device protection service contracts, and motor club memberships. 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 the year ended December 31, 2018 was $262.5 million compared to $241.8 million in the 2017 period. The primary drivers of the increase were the commission expense associated with the growth in written premiums and higher retention rate on our credit protection and warranty products.

Operating expenses include employee compensation and benefits, interest expense, depreciation and amortization expenses and other expenses. For the year ended December 31, 2018, total employee compensation and benefits were $45.8 million, up $4.5 million, driven by increased compensation associated with warranty and program products. Interest expense of $18.2 million in 2017 increased by $3.1 million versus the prior year, primarily from interest expense related to the Junior Subordinated Notes partially offset by reduced asset based borrowings on certain investments within the investment portfolio. Other expenses for the year ended December 31, 2018 were $41.9 million, up $3.3 million from 2017 primarily from a combination of expenses of pursuing acquisition opportunities, and premium taxes, the latter of which increased consistent with growth in written premiums. Depreciation and amortization expense was lower period-over-period 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.

For the year ended December 31, 2017, total expenses were $473.6 million compared to $347.4 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. Total commission expense for year ended December 31, 2017 was $241.8 million compared to $147.3 million in 2016. The primary drivers of the increase were the commission expense associated with the higher retention rate on our credit protection products. Commission expense, excluding the impacts of VOBA, was $244.1 million for 2017, up $86.1 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.

For 2017, total employee compensation and benefits were $41.3 million, up $3.4 million from 2016 primarily as a result of increased stock based compensation expense. Interest expense of $15.1 million in 2017 increased by $5.8 million versus the prior year, primarily from one quarter of interest expense on the Junior Subordinated Notes and increased asset based borrowings on certain investments

34

within the investment portfolio. Other expenses for the year ended December 31, 2017 were $38.6 million, up $5.6 million from 2016 primarily as a result of increased premium taxes as written and earned premiums grew. Depreciation and amortization expense was lower period-over-period 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 year ended December 31, 2017 versus $3.3 million for the prior year period. This was partially offset by increases in amortization of other intangibles including customer relationships, trade names and software licensing.

Key Operating Metrics and Non-GAAP Operating Results

Gross & Net Written Premiums

Gross written premiums represents total premiums from insurance policies and warranty service contracts written during a reporting period. Net written premiums are gross written premiums less that portion of premiums ceded to third-party reinsurers or PORCs. The amount ceded is based on the individual reinsurance agreements. Net earned premiums are the earned portion of our net written premiums. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy.

Written Premium Metrics
 
Year Ended December 31,
 
Gross Written Premiums
 
Net Written Premiums
Insurance Products:
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Credit protection
$
557,926

 
$
513,681

 
$
488,183

 
$
354,812

 
$
328,938

 
$
257,600

Warranty
123,748

 
110,309

 
62,433

 
61,016

 
60,330

 
46,076

Other specialty programs
186,377

 
144,253

 
157,649

 
50,992

 
28,754

 
33,494

Services and other
—

 
29

 
22

 
—

 
—

 
—

Total
$
868,051


$
768,272


$
708,287

 
$
466,820


$
418,022


$
337,170

Total gross written premiums for the year ended December 31, 2018 were $868.1 million, which represented an increase of $99.8 million, or 13.0%, from the prior year period. The amount of business retained was 53.8%, down slightly from 54.5% in the prior year period. Total net premiums written for 2017 were $466.8 million, up $48.8 million, or 11.7%, driven primarily by growth in credit and specialty programs. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion.

Total gross written premiums for the year ended December 31, 2017 were $768.3 million, which represented an increase of $60.0 million, or 8.5%, from the prior year period. The amount of business retained was 54.4%, up from 47.6% in the prior year period. Total net premiums written for 2017 were $418.0 million, up $80.9 million, or 24.0%. The increase in retention and net written premiums was consistent with our strategy and largely driven by our captive reinsurer retaining credit protection products that were ceded to third party reinsurers prior to 2016. 

Product Underwriting Margin - Non-GAAP

The following table presents product specific revenue and expenses within the specialty insurance segment. We generally limit the underwriting risk we assume using both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid are adjusted based on the actual underlying losses incurred), which manage and mitigate our risk. Period-over-period comparisons of revenues and expenses are often impacted by the PORCs and distribution partners choice as to whether to retain risk, specifically service and administration expenses and ceding commissions, both components of revenue, and 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 - Underwriting Margin.


35

Underwriting Revenues and Underwriting Margin - Non-GAAP(1)
 
Year Ended December 31,
 
Underwriting Revenues
 
Underwriting Margin
Insurance products:
2018
 
2017
 
2016
 
2018

2017

2016
Credit protection
$
384,372

 
$
352,760

 
$
231,938

 
$
77,024

 
$
67,356

 
$
64,769

Warranty(2)
89,597

 
79,628

 
87,928

 
28,570

 
25,710

 
28,504

Other specialty programs
59,674

 
36,880

 
42,001

 
13,086

 
9,841

 
9,095

Services and other(3)
8,714

 
9,914

 
10,612

 
9,122

 
10,481

 
10,022

Total
$
542,357

 
$
479,182

 
$
372,479

 
$
127,802

 
$
113,388

 
$
112,390

(1) For further information relating to the Company’s underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) For the year ended December 31, 2016, Warranty underwriting margin was higher by $4.7 million due to the impacts of VOBA purchase accounting.
(3) For the year ended December 31, 2018 and 2017, Services and other underwriting margin was higher by $0.9 million and $1.5 million due to the impacts of VOBA purchase accounting.

Underwriting margin for the year ended December 31, 2018 was $127.8 million, up from $113.4 million in 2017. Credit protection underwriting margin was $77.0 million, an increase from 2017 of $9.7 million, or 14.4%. Credit protection products continue to provide opportunities for steady growth through a combination of expanded product offerings and new clients. Underwriting margin for warranty products was $28.6 million for the 2018 period, up $2.9 million, or 11.1%, from 2017. The improvement was driven primarily by growth in furniture, appliances, and auto warranty businesses. Specialty programs underwriting margin for the 2018 period was $13.1 million, up 33.0% from 2017, as new programs take hold. Services and other contributed $9.1 million in 2018, down $1.3 million from 2017 as certain business processing services continue to run-off. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion.

Underwriting margin for the year ended December 31, 2017 was $113.4 million, up from $112.4 million in 2016. Credit protection adjusted underwriting margin was $67.4 million, an increase from 2016 results by $2.6 million, or 4.0%. Underwriting margin for warranty products was $25.7 million for 2017, down $0.8 million, from 2016 driven by $5.0 million of VOBA purchase accounting impacts in the 2016 period. The period-over-period declines experienced from our mobile protection products slowed, and was more than offset by growth in furniture, appliances, and auto warranty business. Specialty programs underwriting margin for 2017 was $9.8 million, up 8.2% from 2016, as certain non-standard auto programs were exited over the last year. Services and other contributed $10.5 million in 2017.

Invested Capital, Total Capital, Operating EBITDA and Insurance Operating Ratios

We use the combined ratio as an operating metric to evaluate our insurance 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. The below table outlines the insurance operating ratios, capital invested and the drivers of Operating EBITDA split between underwriting and investments as management evaluates the return on the investment portfolio separately from the returns from underwriting activities.

Invested Capital, Total Capital, Operating EBITDA and Operating Ratios - Non-GAAP(1) 
($ in thousands)
Year Ended December 31,
 
2018

2017

2016
Invested Capital(1)
$
296,346

 
$
281,317

 
$
269,690

Total Capital(1)
$
456,346

 
$
441,317

 
$
410,190

 
 
 
 
 
 
Operating EBITDA drivers:
 
 
 
 
 
Underwriting
$
45,904

 
$
37,737

 
$
37,046

Investments
18,632

 
15,573

 
12,288

Specialty Insurance Operating EBITDA(1)
$
64,536

 
$
53,310

 
$
49,334

Insurance operating ratios:
 
 
 
 
 
Combined ratio
92.5
%

92.9
%

87.9
%
(1) For further information relating to the Company’s Operating EBITDA, Invested and Total Capital, adjusted combined ratio, and Net Portfolio Income (Loss), including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”


36

The combined ratio was 92.5% for the year ended December 31, 2018, compared to 92.9% for the prior year period. The improvement was a combination of improved product underwriting margins offset partially by expenses associated with the pursuit of acquisitions and stock-based compensation expense in the 2018 period. The combined ratio from 2015-2017 averaged 90.3%. The increase from our three-year average in recent quarters has been driven primarily by our investment in new products and geographies which we believe will result in premium growth in future periods.

For the year ended December 31, 2018, Underwriting Operating EBITDA was $45.9 million, an increase of $8.2 million from the respective prior year period, driven by the same factors discussed above under “Results.” Operating EBITDA from investments was $18.6 million, an increase of $3.1 million over 2017. See “—Specialty Insurance Investment Portfolio” for further discussion of the investment results and “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Insurance Investment Portfolio

Our investment portfolio is 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. Unrealized gains and losses on equity securities and loans held at fair value impact current period net income, while unrealized gains and losses on available for sale securities impact AOCI.

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, excluding unrealized gains and losses on securities which are taken to AOCI, 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 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 December 31,

2018
 
2017
 
2016
Cash and cash equivalents (1)
$
53,333

 
$
53,904

 
$
31,723

Available for sale securities, at fair value
283,563

 
182,448

 
146,171

Equity securities
29,425

 
25,536

 
48,612

Loans, at fair value (2)
78,440

 
83,869

 
103,937

Real estate, net
10,019

 
35,282

 
23,579

Other investments
8,507

 
15,438

 
3,957

Net investments
$
463,287

 
$
396,477

 
$
357,979

 
 
 
 
 
 
(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)
Year Ended December 31,
 
2018
 
2017
 
2016
Net investment income
$
19,179

 
$
16,286

 
$
12,981

Realized gains (losses)
5,600


5,815

 
4,720

Unrealized gains (losses)
(17,264
)

(22,318
)
 
10,042

Interest expense
(4,696
)

(6,625
)
 
(3,155
)
Net portfolio income (loss)
$
2,819


$
(6,842
)
 
$
24,588

Average Annualized Yield % (1)
0.7
%

(1.9
)%
 
8.0
%
(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.

37


Net investments of $463.3 million have grown 16.9% from December 31, 2017 through a combination of organic growth in written premiums and increased retention.

Our net investment income includes interest, dividends and rental income, net of investment expenses, on our invested assets. Our loans, at fair value, are generally floating rate and therefore earn LIBOR plus a spread. Generally, our interest income on those loans will increase in a rising interest rate environment, or decrease in a declining rate environment, subject to any LIBOR floors. Our held to maturity investments generally carry fixed coupons, which can impact our returns on investment. 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, we report unrealized gains (losses) within net realized gains (losses) on investment on the consolidated statement of income.

For the year ended December 31, 2018, the net investment portfolio income was $2.8 million compared to a loss of $6.8 million in the comparable 2017 period. Net investment income was $19.2 million, up $2.9 million, or 17.8% from 2017 driven primarily by increases in total investments and increases in LIBOR on floating rate loans. For the year ended December 31, 2018, fair market value changes on equities resulted in unrealized and realized losses of $9.5 million ($3.6 million from Invesque common shares) compared to $23.8 million in 2017. The late-year sell-off in the U.S. leveraged loan market drove unrealized losses of $7.0 million compared to $1.0 million of realized gains in 2017. The average annualized yield for the year improved from (1.9)% in 2017 to 0.7% in 2018. The improvement was a result of increased net investment income, lower asset-based interest expense, and reduced realized and unrealized losses compared to the prior year.

For the year ended December 31, 2017, the net investment portfolio loss was $6.8 million compared to $24.6 million of income in the comparable 2016 period. The average annualized yield declined from 8.0% in 2016 to (1.9)% in 2017 as a result of unrealized losses of $22.3 million, primarily related to investments in equities, compared to unrealized gains of $10.0 million in 2016. For 2017, fair market valuation on equities resulted in $23.8 million of unrealized losses compared to $7.3 million of unrealized gains in 2016. In addition, interest expense increased by $3.5 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 $3.3 million, as interest income improved period-over-period, and realized gains improved by $1.1 million, primarily from gains on sales of our non-performing residential loans.

Tiptree Capital

Tiptree Capital consists of our non-insurance operating businesses and investments. As of December 31, 2018, Tiptree Capital includes our asset management, mortgage and shipping operations, and other investments (including our Invesque shares). We manage Tiptree Capital on a total return basis, balancing current cash flow and long-term value appreciation.

The following table summarizes the total revenues, pre-tax income from continuing and discontinued operations from Tiptree Capital.

Operating Results
($ in thousands)
Year Ended December 31,
 
2018
 
2017
 
2016
Total revenues
$
75,954

 
$
102,833

 
$
112,253

Pre-tax income (loss) from continuing operations
$
(7,805
)
 
$
20,336

 
$
37,142

Pre-tax income (loss) from discontinued operations
$
57,484


$
(6,222
)

$
(5,824
)
 
 
 
 
 
 

38

Drivers of pre-tax income from continuing and discontinued operations
($ in thousands)
Year Ended December 31,
 
2018
 
2017
 
2016
Asset management fees, net
$
2,136

 
$
3,514

 
$
4,794

Credit investments
(628
)
 
10,731

 
20,470

Shipping
(1,724
)
 
—

 
—

Specialty finance and other
321

 
6,091

 
11,878

Senior Living:
 
 
 
 
 
Invesque(1)
(7,910
)
 
—

 
—

Care - discontinued operations(2)
57,484


(6,222
)

(5,824
)
(1) Includes $9.2 million of dividends and $17.1 million of unrealized losses within Tiptree Capital.
(2) Includes discontinued operations related to Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.

Results from Continuing Operations

Tiptree Capital earns revenues from net interest income; mortgage gains and fees; management fees from CLOs under management; distributions, realized and unrealized gains on the Company’s investment holdings (primarily Invesque, and, historically, CLO subordinated notes).

Revenues for the year ended December 31, 2018 were $76.0 million, a decrease of $26.9 million from the prior year period. In the 2018 period, the results from our investment in Invesque shares include dividends received and unrealized gains and losses impacting our financial results. The decline was primarily driven by $17.1 million of unrealized losses on our Invesque equity securities, the loss of income from the sale of our commercial lending business in October 2017 and declines in mortgage gains. This was partially offset by dividends from our ownership of Invesque common shares.

Pre-tax income from continuing operations for the year ended December 31, 2018 was a loss of $7.8 million compared to income of $20.3 million in the 2017 period. For the year ended December 31, 2018, we received $9.2 million of dividends from Invesque. This was more than offset by unrealized losses of $17.1 million, which were a result of a lower Invesque stock price at December 31, 2018 versus the Invesque stock acquisition date of February 1, 2018. During 2017, we reduced exposure to subordinated notes by selling our interests, which contributed a one-time $10.7 million increase in pre-tax income in 2017. Lastly, pre-tax income from our mortgage originator contributed a lower amount of pre-tax income period over period driven by declines in volumes and gain on sale margins.

Results from Discontinued Operations

Discontinued Operations includes the results from Care, previously reported in the Senior Living segment. For the year ended December 31, 2018, the pre-tax income was $57.5 million compared to a loss of $6.2 million in the 2017 period. The increase was driven by a $56.9 million pre-tax gain on sale of Care, including $10.7 million of earnout consideration, which was recognized in December 2018 related to Invesque’s sale of properties previously owned by Care.

Tiptree Capital - Invested Capital and Operating EBITDA - Non-GAAP(1) 
($ in thousands)
Invested Capital(1)
 
Operating EBITDA(1)
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Asset management fees, net (2)
$
(565
)
 
$
2,247

 
$
4,308

 
$
2,136

 
$
3,514

 
$
4,794

Credit investments
1,485

 
2,730

 
68,865

 
841

 
6,865

 
17,894

Senior living (Invesque) (3)
105,284

 
119,504

 
100,801

 
9,848

 
9,166

 
9,069

Shipping
48,683

 
—

 
—

 
(826
)
 
—

 
—

Specialty finance and other
27,146

 
37,344

 
41,288

 
1,727

 
10,247

 
9,752

Tiptree Capital
$
182,033

 
$
161,825

 
$
215,262

 
$
13,726

 
$
29,792

 
$
41,509

(1) For further information relating to Invested Capital and Operating EBITDA, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) Includes management and incentive fees net of operating expenses including compensation.
(3) Includes discontinued operations related to Care. For more information, see “Note—(3) Dispositions, Assets Held for Sale and Discontinued Operations.”

Invested Capital

Invested Capital increased from $161.8 million as of December 31, 2017 to $182.0 million as of December 31, 2018. On February 1, 2018, we completed the sale of Care to Invesque. We received consideration of 16.6 million shares of which 13.7 million shares are held as equity securities in Tiptree Capital, and 2.9 million shares are held in the insurance investment portfolio. Care was classified as held for sale and a discontinued operation as of December 31, 2017. In 2018, we invested approximately $50 million into three

39

unlevered vessels which are reported in other investments. As a result of the investments in Tiptree Capital and capital returned to shareholders in 2018, cash held at Tiptree corporate decreased from $66.1 million as of December 31, 2017 to $27.7 million as of December 31, 2018.

Invested Capital decreased from $215.3 million as of December 31, 2016 to $161.8 million as of December 31, 2017. The primary driver was reduced exposure to subordinated notes which were sold in 2017. Also, in the fourth quarter 2017, we sold our interest in our commercial lending business and signed a definitive agreement to sell our interest in our jumbo mortgage business, currently in assets held for sale.

Operating EBITDA

For the year ended December 31, 2018, Operating EBITDA declined from $29.8 million in the 2017 period to $13.7 million in the 2018 period. From 2016 to 2017, Operating EBITDA declined by $11.7 million. The decline in both periods was primarily driven by reduced credit investment distributions (from CLO subordinated notes) and lower incentive fees on older CLOs under management. Specialty finance and other declined from 2017 to 2018 as a result of the sale of our commercial lending business (including the related $2.0 million gain on sale in 2017), along with reduced Operating EBITDA from our mortgage origination business as margins and volumes declined from the prior year periods. In 2018, we received $9.2 million of dividends from our ownership of Invesque, which was partially offset by losses associated with our shipping investments.

Corporate
($ in thousands)
Year Ended December 31,
 
2018

2017

2016
Employee compensation and benefits
$
6,973

 
$
6,812

 
$
4,714

Employee incentive compensation expense
7,471

 
7,366

 
8,686

Interest expense
5,012

 
4,812


4,730

Depreciation and amortization expenses
248

 
248


248

Other expenses
10,847

 
9,832


16,428

Total expenses
$
30,551

 
$
29,070


$
34,806

Results

Corporate expenses include expenses of the holding company for interest, employee compensation and benefits, and other costs. Corporate employee compensation and benefits 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, including incentive compensation expense, increased $0.2 million for the year ended December 31, 2018 compared to the 2017 period driven by employee benefit expenses. Interest expense for the year ended December 31, 2018 was $5.0 million, an increase of $0.2 million driven by higher LIBOR and increased average borrowings. As of December 31, 2018, the outstanding borrowings were $72.1 million compared to $28.5 million at December 31, 2017. Other expenses were $10.8 million for 2018 as compared to $9.8 million in 2017. The period-over-period increase was driven by increased rent and one-time deal related expenses.

Employee compensation and benefits increased $0.8 million from 2016 to 2017 as corporate staff increased as a result of improvements to our reporting and controls infrastructure, which was partially offset by lower accrued incentive compensation. Interest expense remained flat period-over-period as reduced borrowings were partially offset by increases in LIBOR. Other expenses were $9.8 million for 2017 as compared to $16.4 million in 2016, a reduction of $6.6 million, or 40.2%. The period-over-period decrease was driven by reduced audit fees and external consulting expenses as a result of our improved reporting and controls infrastructure.

Provision for income taxes

Provision for income taxes - Total Operations

The total income tax expense of $7.8 million for the year ended December 31, 2018 and total income tax benefit of $14.8 million for the year ended December 31, 2017 is reflected as a component of net income (loss). For the year ended December 31, 2018, the Company’s effective tax rate was equal to 20.6%, lower than the statutory rate of 21.0% primarily due to the dividends received deduction and other discrete items. For the year ended December 31, 2017, the Company’s effective tax rate was equal to 154.8%, which was significantly higher than the statutory rates due to the revaluation of deferred tax attributes following US federal tax reform.

Provision for income taxes - Continuing Operations

40


The Company had a tax benefit from continuing operations of $5.9 million for the year ended December 31, 2018 as compared to a tax benefit of $12.6 million for the year ended December 31, 2017. The effective tax rate on income from continuing operations for the year ended December 31, 2018 was approximately 29.9% compared to 377.2% for the year ended December 31, 2017. Differences from the U.S. federal statutory income tax rate of 21% for the year ended December 31, 2018 are primarily the result of the dividends received deduction offset by other discrete items.

For the year ended December 31, 2017, the Company’s effective tax rate on income from continuing operations was equal to 377.2%, which does not bear a customary relationship to the U.S. federal statutory income tax rate. The effective tax rate for the year ended December 31, 2017 was higher than the U.S. federal statutory income tax rate of 35.0% due to the revaluation of deferred tax attributes following federal tax reform.

 
 
 
 
 
 
Balance Sheet Information - as of December 31, 2018 compared to the year ended December 31, 2017

Tiptree’s total assets were $1.9 billion as of December 31, 2018, compared to $2.0 billion as of December 31, 2017. The $124.7 million decrease in assets is primarily attributable to the sale of Care on February 1, 2018. Loans at fair value and amortized cost and assets held for sale decreased, partially offset by increases in equity securities, notes and accounts receivable and reinsurance receivable. 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 was $399.3 million as of December 31, 2018 compared to $396.8 million as of December 31, 2017, primarily driven by net income offset by the stock repurchases and dividends for the year ended December 31, 2018.

We completed a corporate reorganization in April 2018 that eliminated Tiptree’s dual class stock structure. As of December 31, 2018 there were 35,870,348 shares of Common Stock outstanding as compared to 35,003,004 as of December 31, 2017.

The following table is a summary of certain balance sheet information:
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
Specialty Insurance
 
Tiptree Capital
 
Corporate
 
Total
Total assets
$
1,514,084

 
$
318,420

 
$
32,414

 
$
1,864,918

 
 
 
 
 
 
 
 
Corporate debt
$
160,000

 
$
—

 
$
72,090

 
$
232,090

Asset based debt
86,092

 
46,091

 
—

 
132,183

 
 
 
 
 
 
 
 
Tiptree Inc. stockholders’ equity
$
249,139

 
$
182,033

 
$
(44,071
)
 
$
387,101

Non-controlling interests - Other
10,086

 
2,072

 
—

 
12,158

Total stockholders’ equity
$
259,225

 
$
184,105

 
$
(44,071
)
 
$
399,259

 
 
 
 
 
 
 
 

NON-GAAP RECONCILIATIONS

Adjusted EBITDA and Operating EBITDA - Non-GAAP

The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted to add (i) corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) adjust for the effect of purchase accounting, (iii) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses. Operating EBITDA represents Adjusted EBITDA plus stock based compensation expense, less realized and unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income.
($ in thousands)
Year Ended December 31,

2018

2017

2016
Net income (loss) attributable to Common Stockholders
$
23,933


$
3,604


$
25,320

Add: net (loss) income attributable to noncontrolling interests
5,950


1,630


7,018

Less: net income from discontinued operations
43,770


(3,998
)

(4,287
)
Income (loss) from continuing operations
$
(13,887
)

$
9,232


$
36,625


41

($ in thousands)
Year Ended December 31,

2018

2017

2016
Corporate Debt related interest expense(1)
18,162


12,838


10,518

Consolidated income tax expense (benefit)
(5,909
)

(12,562
)

12,515

Depreciation and amortization expense(2)
11,614


12,408


9,248

Non-cash fair value adjustments(3)
(391
)

3,547


1,277

Non-recurring expenses(4)
2,358


1,944


(1,736
)
Adjusted EBITDA from continuing operations
$
11,947


$
27,407


$
68,447

Add: Stock-based compensation expense
6,657


6,559


2,584

Add: Vessel depreciation, net of capital expenditures
898

 
—

 
—

Less: Realized and unrealized gain (loss)(5)
(34,817
)

(18,591
)

18,133

Less: Third party non-controlling interests(6)
—


851


1,420

Operating EBITDA from continuing operations
$
54,319


$
51,706


$
51,478







Income (loss) from discontinued operations
$
43,770


$
(3,998
)

$
(4,287
)
Consolidated income tax expense (benefit)
13,714


(2,224
)

(1,537
)
Consolidated depreciation and amortization expense
—


15,645


14,166

Non-cash fair value adjustments (3)
(40,672
)

—


—

Non-recurring expenses (4)
—


1,158


2,127

Adjusted EBITDA from discontinued operations
$
16,812


$
10,581


$
10,469

Less: Realized and unrealized gain (loss) (5)
16,188


—


—

Less: Third party non-controlling interests(6)
—


1,415


1,400

Operating EBITDA from discontinued operations
$
624


$
9,166


$
9,069

Total Adjusted EBITDA
$
28,759


$
37,988


$
78,916

Total Operating EBITDA
$
54,943


$
60,872


$
60,547

_______________________________
(1)
Corporate Debt interest expense includes Secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in specialty insurance, asset management, mortgage and other operations is not added-back for Adjusted EBITDA and Operating EBITDA.
(2)
Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at the Insurance Company. 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 our Insurance company increased EBITDA above what the historical basis of accounting would have generated.
(3)
For Reliance, within our mortgage operations, Adjusted EBITDA excludes the impact of changes in contingent earn-outs. For our specialty insurance operations, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA. For Care (Discontinued Operations), the reduction in EBITDA is related to accumulated depreciation and amortization, and certain operating expenses, which were previously included in Adjusted EBITDA in prior periods.
(4)
Acquisition, start-up and disposition costs including legal, taxes, banker fees and other costs. Includes payments pursuant to a separation agreement, dated November 10, 2015.
(5)
Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs as those are recurring in nature and align with those business models.
(6)
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.


42

Adjusted EBITDA and Operating EBITDA - Non-GAAP

The tables below present Adjusted EBITDA and Operating EBITDA by business component.

Year Ended December 31, 2018
($ in thousands)
Specialty Insurance

Tiptree Capital (1)

Corporate Expenses

Total
Pre-tax income/(loss) from continuing ops
$
18,560


$
(7,805
)

$
(30,551
)

$
(19,796
)
Pre-tax income/(loss) from discontinued ops
—


57,484


—


57,484

Adjustments:







Corporate Debt related interest expense(2)
13,149

 
—

 
5,013

 
18,162

Depreciation and amortization expenses(3)
9,796


1,570


248


11,614

Non-cash fair value adjustments(4)
66


(41,129
)

—


(41,063
)
Non-recurring expenses(5)
3,159


—


(801
)

2,358

Adjusted EBITDA
$
44,730


$
10,120


$
(26,091
)

$
28,759

Add: Stock-based compensation expense
3,759


126


2,772


6,657

Add: Vessel depreciation, net of capital expenditures
—


898


—


898

Less: Realized and unrealized gain (loss)(6)
(16,047
)

(2,582
)

—


(18,629
)
Less: Third party non-controlling interests(7)
—


—


—


—

Operating EBITDA
$
64,536


$
13,726


$
(23,319
)

$
54,943


Year Ended December 31, 2017
($ in thousands)
Specialty Insurance

Tiptree Capital (1)

Corporate Expenses

Total
Pre-tax income/(loss) from continuing ops
$
5,404


$
20,336


$
(29,070
)

$
(3,330
)
Pre-tax income/(loss) from discontinued ops
—


(6,222
)

—


(6,222
)
Adjustments:







Corporate Debt related interest expense(2)
8,026

 
—


4,812

 
12,838

Depreciation and amortization expenses(3)
11,366

 
16,439


248

 
28,053

Non-cash fair value adjustments(4)
508


3,039


—


3,547

Non-recurring expenses(5)
1,657


1,837


(392
)

3,102

Adjusted EBITDA
$
26,961


$
35,429


$
(24,402
)

$
37,988

Add: Stock-based compensation expense
3,934


$
453


2,172


6,559

Less: Realized and unrealized gain (loss)(6)
(22,415
)

3,824


—


(18,591
)
Less: Third party non-controlling interests(7)
—


2,266


—


2,266

Operating EBITDA
$
53,310


$
29,792


$
(22,230
)

$
60,872


Year Ended December 31, 2016
($ in thousands)
Specialty Insurance

Tiptree Capital (1)

Corporate Expenses

Total
Pre-tax income/(loss) from continuing ops
$
46,804


$
37,142


$
(34,806
)

$
49,140

Pre-tax income/(loss) from discontinued ops
—


(5,824
)

—


(5,824
)
Adjustments:






—

Corporate Debt related interest expense(2)
5,592


196


4,730


10,518

Depreciation and amortization expenses(3)
8,130


15,036


248


23,414

Non-cash fair value adjustments(4)
—


2,693


—


2,693

Non-recurring expenses(5)
—


711


(1,736
)

(1,025
)
Adjusted EBITDA
$
60,526


$
49,954


$
(31,564
)

$
78,916

Add: Stock-based compensation expense
1,108


208


1,268


2,584

Less: Realized and unrealized gain (loss)(6)
12,300


5,833


—


18,133

Less: Third party non-controlling interests(7)
—


2,820


—


2,820

Operating EBITDA
$
49,334


$
41,509


$
(30,296
)

$
60,547

_______________________________
The footnotes below correspond to the tables above, under “—Adjusted EBITDA and Operating EBITDA - Non-GAAP”
(1)
Includes discontinued operations related to Care. For more information, see “Note—(3) Dispositions, Assets Held for Sale & Discontinued Operations.”
(2)
Corporate Debt interest expense includes Secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in specialty insurance, asset management, mortgage and other operations is not added-back for Adjusted EBITDA and Operating EBITDA.
(3)
Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at the Insurance Company. 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 our Insurance company increased EBITDA above what the historical basis of accounting would have generated.
(4)
For Reliance, within our mortgage operations, Adjusted EBITDA excludes the impact of changes in contingent earn-outs. For our specialty insurance operations, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA. For Care (Discontinued Operations), the reduction in EBITDA is related to accumulated depreciation and amortization, and certain operating expenses, which were previously included in Adjusted EBITDA in prior periods.
(5)
Acquisition, start-up and disposition costs including legal, taxes, banker fees and other costs. Includes payments pursuant to a separation agreement, dated November 10, 2015.
(6)
Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs as those are recurring in nature and align with those business models.
(7)
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.


43

Book Value per share - Non-GAAP

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.
 ($ in thousands, except per share information)
As of December 31,

2018

2017
 
2016
Total stockholders’ equity
$
399,259

 
$
396,774

 
$
390,144

Less non-controlling interest - other
12,158

 
19,203

 
20,636

Total stockholders’ equity, net of non-controlling interests - other
$
387,101

 
$
377,571

 
$
369,508

Total Common shares outstanding
35,870

 
29,805

 
28,388

Total Class B shares outstanding
—

 
8,049

 
8,049

Total shares outstanding
35,870

 
37,854

 
36,437

Book value per share(1)
$
10.79

 
$
9.97


$
10.14

(1) For periods prior to April 10, 2018, book value per share assumes full exchange of the limited partners units of TFP for Common Stock.

Invested & Total Capital - Non-GAAP

Invested Capital represents its total cash investment, including any re-investment of earnings, and acquisition costs, net of tax. Total Capital represents Invested Capital plus Corporate Debt.
($ in thousands)
As of December 31,
 
2018

2017
 
2016
Total stockholders’ equity
$
399,259

 
$
396,774

 
$
390,144

Less non-controlling interest - other
12,158

 
19,203

 
20,636

Total stockholders’ equity, net of non-controlling interests - other
$
387,101

 
$
377,571

 
$
369,508

Plus Specialty Insurance accumulated depreciation and amortization, net of tax
43,228

 
36,088

 
28,497

Plus Care accumulated depreciation and amortization - discontinued operations, net of tax and NCI
—

 
30,521

 
21,528

Plus acquisition costs
4,161

 
8,427

 
7,311

Invested Capital
$
434,490

 
$
452,607

 
$
426,844

Plus corporate debt
232,090

 
188,500

 
199,000

Total Capital
$
666,580

 
$
641,107

 
$
625,844


Specialty Insurance - Underwriting Margin - Non-GAAP

Underwriting margin is a measure of the underwriting profitability of our specialty insurance operations. 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 underwriting margin and pre-tax income for the following periods:
 
 
 
 
 
 
 
 
 
 
 
 

44

($ in thousands)
Year Ended December 31,
Revenues:
2018

2017

2016
Net earned premiums
$
427,837


$
371,700


$
229,436

Service and administrative fees
102,315


95,160


109,348

Ceding commissions
9,651


8,770


24,784

Other income
2,554


3,552


2,859

Underwriting Revenues - Non-GAAP
$
542,357


$
479,182


$
366,427

Less underwriting expenses:





Policy and contract benefits
152,095


123,959


106,784

Commission expense
262,460


241,835


147,253

Underwriting Margin - Non-GAAP
$
127,802


$
113,388


$
112,390

Less operating expenses:





Employee compensation and benefits
45,838


41,300


37,937

Other expenses
41,940


38,596


32,964

Combined Ratio
92.5
%

92.9
%

87.9
%
Plus investment revenues:





Net investment income
19,179


16,286


12,981

Net realized and unrealized gains
(11,664
)

(16,503
)

14,762

Less other expenses:





Interest expense
18,201


15,072


9,244

Depreciation and amortization expenses
10,778


12,799


13,184

Pre-tax income (loss)
$
18,560


$
5,404


$
46,804


Specialty Insurance Investment Portfolio - Non-GAAP

The following table provides a reconciliation between total investments and net investments for the following periods:
($ in thousands)
As of December 31,
 
2018

2017
 
2016
Total Investments
$
489,980

 
$
454,032

 
$
472,800

Investment portfolio debt (1)
(80,026
)
 
(111,459
)
 
(146,544
)
Cash and cash equivalents
50,647

 
38,095

 
26,020

Restricted cash (2)
2,873

 
24,219

 
12,133

Receivable due from brokers (3)
299

 
259

 
2,027

Liability due to brokers (3)
(486
)
 
(8,669
)
 
(8,457
)
Net investments - Non-GAAP
$
463,287

 
$
396,477

 
$
357,979

(1) Consists of asset-based financing on loans, at fair value including certain credit investments and NPLs, net of deferred financing costs, see Note—(10) 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.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to fund our operations and 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 December 31, 2018, cash and cash equivalents, excluding restricted cash, were $86.0 million, compared to $110.7 million at December 31, 2017, a decrease of $24.7 million.

Our mortgage business relies 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—(10) Debt, net for additional information regarding our mortgage warehouse borrowings.

45


For purposes of determining enterprise value and Adjusted EBITDA, we consider 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 at the insurance company and corporate level.

Corporate Debt
($ in thousands)
 
Corporate Debt outstanding as of December 31,
 
Interest expense for the year ended December 31,
 
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Specialty insurance
 
$
160,000

 
$
160,000

 
$
140,500

 
$
13,149

 
$
8,026

 
$
5,592

Corporate
 
72,090

 
28,500

 
58,500

 
5,013

 
4,812

 
4,730

Total
 
$
232,090

 
$
188,500

 
$
199,000

 
$
18,162

 
$
12,838

 
$
10,322


Our credit facility with Fortress carries a rate of LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 5.50% per annum. We are required to make quarterly principal payments of approximately $1.0 million, subject to adjustment based on the Net Leverage Ratio (as defined in the credit agreement) at the end of each fiscal quarter. The outstanding debt under the Fortress credit agreement was $72.1 million as of December 31, 2018 compared to $28.5 million as of December 31, 2017. On May 4, 2018, we amended the Fortress credit agreement to increase the amount outstanding, while extending the maturity date to September 18, 2020 and lowering the interest rate margin from 6.50% to 5.50%.

On October 16, 2017, Fortegra completed an offering of $125 million Junior Subordinated Notes due 2057. The Junior Subordinated Notes contain customary financial covenants that require, among other items, maximum leverage and limitations on restricted payments under certain circumstances.  As a result, in certain adverse circumstances, such limitations could restrict our ability to grow, or limit the dividends to the holding company to pay our obligations. Substantially all of the net proceeds from the Junior Subordinated Notes were used to repay existing indebtedness. 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 (10) Debt, net for additional information of our debt and that of our subsidiaries.

Consolidated Comparison of Cash Flows

Summary Consolidated Statements of Cash Flows - Year Ended December 31, 2018, December 31, 2017, and December 31, 2016
($ in thousands)
Year ended December 31,
 
2018
 
2017
 
2016
Operating activities
 
 
 
 
 
Operating activities - (excluding VIEs)
$
57,724


$
49,873

 
$
45,274

Operating activities - VIEs
—

 
(2,954
)
 
(8,631
)
Total cash provided by (used in) operating activities
57,724

 
46,919

 
36,643

 
 
 
 
 
 
Investing activities
 
 
 
 
 
Investing activities - (excluding VIEs)
(109,107
)

(12,542
)
 
(238,797
)
Investing activities - VIEs
—

 
225,317

 
(75,494
)
Total cash provided by (used in) investing activities
(109,107
)
 
212,775

 
(314,291
)
 
 
 
 
 
 
Financing activities
 
 
 
 
 
Financing activities - (excluding VIEs)
(2,003
)

28,987

 
77,525

Financing activities - VIEs
—

 
(223,393
)
 
199,427

Total cash provided by (used in) financing activities
(2,003
)
 
(194,406
)
 
276,952

 
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(53,386
)
 
$
65,288

 
$
(696
)

46

Year Ended December 31, 2018
Operating Activities
Cash provided by operating activities (excluding VIEs) was $57.7 million for the year ended December 31, 2018. The primary sources of cash from operating activities included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums, deferred revenues and policy liabilities in our specialty insurance segment and mortgage sales outpacing originations in our loan origination business. The primary uses of cash from operating activities including increases in reinsurance receivables and notes and account receivable in our specialty insurance segment.

Investing Activities

Cash used in investing activities (excluding VIEs) was $109.1 million for the year ended December 31, 2018. The primary uses of cash from investing activities were purchases of investments exceeding proceeds from sales and maturities of investments in our specialty insurance segment and investments in vessels within Tiptree Capital. The primary sources of cash from investing activities were proceeds from the sale of Care and proceeds from the sale of our commercial lending business.

Financing Activities

Cash used in financing activities (excluding VIEs) was $2.0 million for the year ended December 31, 2018. The primary uses of cash from financing activities were share repurchases and dividends paid. The primary source of cash from financing activities was related to borrowings from our secured corporate credit agreements and new borrowings which exceeded principal paydowns on residential mortgage warehouse borrowings, partially offset by principal paydowns on asset based revolving financing.

Year Ended December 31, 2017

Operating Activities

Cash provided by operating activities (excluding VIEs) was $49.9 million for the year ended December 31, 2017. The primary sources of cash from operating activities included mortgage loan sales outpacing originations in our mortgage business, and increases in unearned premiums, reinsurance payables and policy liabilities in our specialty insurance business. The primary uses of cash from operating activities included an increase in reinsurance receivables and accounts and premiums receivables in our specialty insurance business.

Cash used in operating activities - VIEs was $3.0 million for the year ended December 31, 2017.

Investing Activities

Cash used in investing activities (excluding VIEs) was $12.5 million for the year ended December 31, 2017. The primary uses of cash from investing activities included investments in real estate properties in our senior living business. The primary sources of cash from investing activities were the sales and maturities of investments exceeding purchases of investments, specifically the sale of NPLs and corporate loans, as well as the sales and redemption of our subordinated note investments in our consolidated CLOs.

Cash provided by investing activities - VIEs was $225.3 million for the year ended December 31, 2017 driven primarily by loan payments and sales of investments in a consolidated CLO.

Financing Activities

Cash provided by financing activities (excluding VIEs) was $29.0 million for the year ended December 31, 2017. The primary sources of cash from financing activities were from new borrowings in our senior living business to fund investments in real estate, new borrowings on mortgage warehouse facilities exceeding principal payments, and originations of new borrowings in our specialty insurance business.

Cash used in financing activities - VIEs was $223.4 million for the year ended December 31, 2017 driven primarily by payments on debt in a consolidated CLO.

Year Ended December 31, 2016

Operating Activities

Cash provided by operating activities (excluding VIEs) was $45.3 million for the year ended December 31, 2016. The primary sources

47

of cash from operating activities included mortgage sales outpacing originations in our loan origination business, and increases in unearned premiums and policy liabilities in our specialty insurance business. The primary uses of cash from operating activities included increases in notes and accounts receivable and reinsurance receivables, and decreases in deferred revenue and reinsurance payables in our specialty insurance business.

Cash used in operating activities - VIEs was $8.6 million for the year ended December 31, 2016 driven primarily by increases in accrued interest receivable on loans.

Investing Activities

Cash used in investing activities (excluding VIEs) was $244.5 million for the year ended December 31, 2016. The primary uses of cash from investing activities included investments in NPLs and corporate loans in our specialty insurance business, investments in real estate properties in our senior living business and increase in loans in our loan origination business.

Cash used in investing activities - VIEs was $75.5 million for the year ended December 31, 2016 driven primarily by the purchase of loans in a consolidated CLO during the ramp up period as it converted from a warehouse to a CLO during the second quarter of 2016.

Financing Activities

Cash provided by financing activities (excluding VIEs) was $77.5 million for the year ended December 31, 2016. The primary sources of cash from financing activities were from borrowings in our senior living business to fund investments in real estate, borrowings in our loan origination business to fund loan growth, increased 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. The primary drivers of the cash used included paydown of a consolidated CLO warehouse debt and repurchases of common stock.

Cash provided by financing activities - VIEs was $199.4 million for the year ended December 31, 2016 driven primarily by the senior notes issued upon the conversion of a consolidated CLO 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 December 31, 2018:
($ in thousands)
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total 
Corporate Debt
$
—

 
$
72,090

 
$
—

 
$
160,000

 
$
232,090

Asset Based Debt
50,840

 
—

 
81,343

 
—

 
132,183

Total Debt
$
50,840

 
$
72,090

 
$
81,343

 
$
160,000

 
$
364,273

Operating lease obligations (2)
5,483

 
12,428

 
9,305

 
15,898

 
43,114

Total
$
56,323

 
$
84,518

 
$
90,648

 
$
175,898

 
$
407,387

(1)
See Note (10) Debt, net, in the accompanying consolidated financial statements for additional information.
(2)
Minimum rental obligation for office leases. The total rent expense for the Company for the year ended December 31, 2018 and 2017 was $7.5 million and $6.8 million, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s significant accounting policies are described in Note—(2) Summary of Significant Accounting Policies. As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult , subjective and complex judgments. Further information can be found in the notes to the consolidated financial statements related to the following: valuation of assets where quoted market prices are not available can be found under “Fair Value Measurement” in Note—(2) Summary of Significant Accounting Policies; policies related to goodwill and intangible assets can be found in Note—(2) Summary of Significant Accounting Policies—Goodwill and Identifiable Intangible Assets, Net; and additional information on income taxes can be found under Note—(19) Income Taxes. The consolidated financial statements are prepared under GAAP for all periods presented. All intercompany items have been eliminated for these periods.

48

Fair Value of Financial Instruments
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, defines fair value, describes the framework for measuring fair value, and addresses fair value measurement disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC Topic 820 establishes a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:

Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities that Tiptree has the ability to access at the measurement date.
    
Level 2 - Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of financial assets and liabilities carried at Level 2 are valued based on one or more of the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in nonactive markets;
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

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

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Tiptree’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset. From time to time, Tiptree’s assets and liabilities will transfer between one level to another level. It is Tiptree’s policy to recognize transfers between different levels at the end of each reporting period.

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

Reserves

Insurance Reserves

Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported (“IBNR”). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other Fortegra product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables or a combination of these factors.

In arriving at the unpaid claims reserves, the Company conducts an actuarial analysis on a basis gross of reinsurance. The same

49

estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method.

The unpaid claims reserves represent the Company's best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented.

Deferred Acquisition Costs

The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s specialty insurance segment.

Insurance Policy Related

Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These capitalized costs are amortized as the related premium is earned.

The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable insurance related deferred acquisition costs were recognized during the years ended December 31, 2018, 2017 and 2016, respectively.

Non-insurance Policy Related

Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned.

The Company evaluates whether deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended December 31, 2018, 2017 and 2016, respectively.

Revenue Recognition

The Company earns revenues from a variety of sources:

Earned Premiums, net

Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance policies by the Company's distributors and premiums written for insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including PORCs, earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.

Service and Administrative Fees

The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated with transaction volume and are recognized as revenue as they become both realized and earned.
 
 Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software

50

development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended December 31, 2018, 2017 and 2016, respectively, the Company did not incur a loss with respect to a specific significant service fee contract.

Administrative Fees. Administrative fee revenue includes the administration of premium associated with our producers and their PORCs. In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.

Ceding Commissions

Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy.  The adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.

Commissions Payable and Expense

Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue.  Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of the retrospective commission calculation is negative.

Share-Based Compensation

The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the quoted price of our Common Stock at the time of grant. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes the enactment date. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting guidance requires these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner.

The Company establishes valuation allowances for deferred tax assets when, in its judgment, it concludes that it is more likely than not that the deferred tax assets will not be realized. These judgments are based on projections of future income, including

51

tax-planning strategies, by individual tax jurisdictions. Changes in economic conditions and the competitive environment may impact the accuracy of the Company’s projections. On a quarterly basis, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to the Company’s valuation allowance is appropriate. As a result of this assessment, as of December 31, 2018, the consolidated valuation allowance for Tiptree was $3.1 million. The increase and/or decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2018, the Company recorded a net decrease of valuation allowances of $1.2 million as compared to an increase of $2.3 million in 2017.

Acquisition Accounting

In connection with our acquisitions, assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values as of the acquisition date. In measuring the fair value of net tangible and identified intangible assets acquired, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. The determination of fair value involved the use of significant judgment and estimation.

Goodwill and Intangible Assets

The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill (and indefinite-lived intangible assets) are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.

GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit might be less than its carrying value. No such events or circumstances have occurred during the years ended December 31, 2018, 2017 and 2016, respectively.

During the fourth quarter of 2016, the Company changed the date of its annual impairment test of goodwill from December 31 to October 1. The Company believes the change in goodwill impairment date does not result in a material change in the method of applying the accounting principle. This change provides the Company additional time to complete the annual impairment test of goodwill in advance of our year end reporting. The Company will continue to perform interim impairment testing should circumstances or events require. This change does not result in a delay, acceleration, or avoidance of an impairment charge. This change was applied prospectively in 2017 because it was impracticable to apply it retrospectively due to the difficulty in making estimates and assumptions without using hindsight.

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

Significant Accounting Policies Related to Dispositions, Assets Held for Sale and Discontinued Operations

Reserves

Loan Reserves (commercial lending business)

Certain loans originated by the Company within its commercial lending business are asset backed loans held for investment and are carried at amortized cost. An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when the Company believes the uncollectibility of a loan balance is confirmed. Management reviews its methodology for its calculation of its loss provision as deemed necessary which is at least on an annual basis.

Although we sell substantially all of the loans we originate in our mortgage business, we remain subject to claims for repurchases or indemnities related to mortgage loans we originate in the event of early payment defaults or breaches of representations and warranties regarding loan quality, compliance and certain other loan characteristics. A reserve estimated for probable claims are based on historical experience and is calculated as a reduction to gain on sale on all of the loans we originate. Management

52

reviews its methodology annually or more often if representation and warranty claims patterns change.

Revenue Recognition

Rental Revenue (Care)

Rental revenue from residents in Managed Properties are recognized monthly as services are provided, as lease periods for residents are short-term in nature. The Company recognizes rental revenue from triple net lease properties on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher than those in the primary term are excluded from the calculation of straight-line rent if the renewals are not reasonably assured. The Company commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards see Note—(2) Summary of Significant Accounting Policies, in 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 December 31, 2018 is presented in the “Notes to Consolidated Financial Statements” in “Part II. Item 8. Financial Statements and Supplementary Data” of this filing as follows:

•
Note (9) Derivative Financial Instruments and Hedging
•
Note (20) Commitments and Contingencies

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to interest rate risk related to borrowings in various businesses. These risks result primarily from changes in LIBOR rates and the spread over LIBOR rates related to the credit risks of our businesses.

For fixed rate debt, interest rate fluctuations generally affect the fair value of our liabilities, but do not impact our earnings. Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until such obligations mature or until we elect to prepay and refinance such obligations. If interest rates have risen at the time our fixed rate debt matures or is refinanced, our future earnings could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of maturity or refinancing may lower our overall interest expense. As of December 31, 2018, the Company had $125 million of a general purpose fixed-rate debt outstanding maturing in 2057.

For general purpose floating rate debt, interest rate fluctuations primarily affect interest expense and cash flows. If market interest rates rise, our earnings could be adversely affected by an increase in interest expense. In contrast, lower interest rates may reduce our interest expense and improve our earnings, except to the extent that our borrowings are subject to interest rate floors. The floating interest rate risk of asset-based financing is generally offset as the financing and the purchased financial asset are generally subject to the same interest rate risk. For floating rate risk of other asset-based financing such as borrowings to finance acquisitions of real estate, we generally hedge our exposure to the variability of the benchmark index with an interest rate swap.

As of December 31, 2018, we had $72.1 million of general purpose floating rate debt with a weighted average rate of 7.9%. A 100 basis point change in interest rates would increase interest expense by $0.7 million and decrease interest rate expense by $0.7 million (including the effect of applicable floors) on an annualized basis. As of December 31, 2017, we had $28.5 million of general purpose floating rate debt with a weighted average rate of 7.9%. A 100 basis point change in interest rates would increase interest expense by $0.3 million and decrease interest rate expense by $0.0 million (including the effect of applicable floors) on an annualized basis.

53


We also invest in bonds, loans or other interest bearing instruments. The fair values of such investments fluctuate in response to changes in market interest rates. Increases and decreases in interest rates generally translate into decreases and increases in fair values of these instruments. Some of these investments bear a floating rate of interest which subjects the company to cash flow risk based upon changes in the underlying interest rate index. As noted above in the discussion of risks related to floating rate borrowings, the Company mitigates a significant amount of our floating rate risk by matching the funding of such investments with borrowings based upon the same interest rate index. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

As of December 31, 2018, we had $420 million invested in interest bearing instruments, which represents 60% of the total investments portfolio. The estimated effects of a hypothetical increase in interest rates of 100 bps would result in a decrease to the fair value of the portfolio by $7.1 million.

Credit Risk
We are exposed to credit risk related to the following loan investments held within the Specialty business:
 
 
As of December 31,
Investments in Loans
 
2018
 
2017
Corporate loans
 
$
130,910

 
$
157,661

Non-performing loans
 
27,556

 
37,666

Total
 
$
158,466

 
$
195,327

An increase in the default rate by 1% of investments in such loans would result in estimated credit losses, net of anticipated recoveries of approximately $0.6 million and $0.8 million as of December 31, 2018 and 2017, respectively. Non-performing loans are collateralized by residential property values which are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions and local real estate market conditions. Our specialty insurance business also has exposure to credit risk in the form of fixed income securities which are primarily invested in high-grade government, municipal and corporate debt securities.
In addition, our mortgage business also underwrites mortgage loans for the purpose of selling them into the secondary market. Due to the relatively short holding period, the credit risk associated with mortgage loans held for sale is not expected to be significant.
See Note—(5) Investments to the consolidated financial statements for more information regarding our investments in loans by type.
We are exposed to credit risk related to the following debt investments held within the Specialty Insurance business:
 
 
       As of December 31,
Investments in debt securities (1)
 
2018
 
2017
Corporate securities
 
$
95,725

 
$
61,975

Asset backed securities
 
40,652

 
23,493

Obligations of foreign governments
 
6,751

 
570

Other investments
 
8,507

 
4,163

Total
 
$
151,635

 
$
90,201


(1) The Company also holds interests in U.S. Treasury securities and obligations of U.S. government authorities and agencies, and state and political subdivisions of $139,194 and $94,926 as of December 31, 2018 and 2017, respectively.
Credit risk related to other credit related investments within the portfolio is the exposure to the adverse changes in the creditworthiness of individual investment holdings, issuers, groups of issuers, industries, and countries. A widening of credit spreads by 100 bps for debt securities (excluding other investments) would result in a decrease of $4.3 million to the fair value of the portfolio as of December 31, 2018. As of December 31, 2018 and 2017, 93% and 93% of the debt securities had an investment grade ratings.


54

Market Risk
We are primarily exposed to market risk related to the following investments:
 
 
       As of December 31, 2018
 
       As of December 31, 2017
 
 
Specialty Insurance
 
Tiptree Capital
 
Total
 
Specialty Insurance
 
Tiptree Capital
 
Total
Invesque Inc.
 
$
19,584

 
$
93,554

 
$
113,138

 
$
—

 
$
—

 
$
—

Other equity securities
 
9,841

 
—

 
9,841

 
25,536

 
—

 
25,536

Total equity securities
 
$
29,425

 
$
93,554

 
$
122,979

 
$
25,536

 
$
—

 
$
25,536


A 10% increase or decrease in the fair value of such investments would result in $12.3 million and $2.6 million of unrealized gains and losses as of December 31, 2018 and 2017, respectively.
As of December 31, 2018, we owned 16.6 million shares of common stock, or approximately 31%, of Invesque, a real estate investment company that specializes in health care real estate and senior living property investment throughout North America. The Company’s investment in Invesque is subject to certain contractual and functional sale restrictions. The functional restriction period is sequential to the contractual restriction period. As of December 31, 2018, the weighted average estimated contractual sale restriction period was 3 months, with 70% of the shares restricted from sale for a period from 1 to 7 months. In addition, as of December 31, 2018 the weighted average estimated functional restriction period was 0.8 months, with 70% of the shares restricted for a period from 0.75 to 2.25 months. The value of our Invesque shares will be reported at fair market value on a quarterly basis and may fluctuate. Invesque has historically paid monthly dividends but there can be no assurance that Invesque will continue to pay dividends in the same frequency or amount. A loss in the fair market value of our Invesque shares or a reduction or discontinuation in the dividends paid on our Invesque shares could have a material adverse effect on our financial condition and results of operations.
See “Risk Factors — Risks Related to our Business - Our investment in Invesque shares is subject to transfer restrictions, market volatility and the risk that Invesque changes its dividend policy”.
Counterparty Risk
We are subject to counterparty risk to the extent that we engage in derivative activities for hedging or other purposes. As of December 31, 2018 and 2017, the total fair value of derivatives assets subject to counterparty risk, including the effect of any legal right of offset, totaled $3.5 million and $5.0 million. We generally manage our counterparty risk to derivative counterparties by entering into contracts with counterparties of high credit quality.
Reinsurance receivables were $420.4 million and $353.0 million as of December 31, 2018 and 2017, respectively. Of those amounts, $270 million and $203 million relates to contracts where we hold collateral or receive letters of credit in excess of the receivables balance. The remainder is held with high quality reinsurers, substantially all of which have a rating of A or better by A.M. Best. As of December 31, 2018, 5 counterparties constituted more than 10% of the uncollateralized reinsurance receivable exposure, ranging from 11% to 16%, with ratings ranging from A- to A+.
We were also exposed to counterparty risk of approximately $84.5 million and $68.1 million as of December 31, 2018 and 2017, respectively, related to our retrospective commission arrangements; associated risks are offset by the Company’s contractual ability to withhold future commissions against the retrospective balances. In addition, we are exposed to counterparty risk of approximately $13.1 million and $12.2 million as of December 31, 2018 and 2017, respectively, related to our premium financing business. The risk associated with such arrangements is mitigated by the fact that we have the contractual ability to cancel the insurance policy and have premiums refunded to us by the insurer in the event of a counterparty default.


55



Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Tiptree Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tiptree Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
March 13, 2019
We have served as the Company's auditor since 2017.







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Tiptree Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Tiptree Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated March 13, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte and Touche LLP
New York, New York
March 13, 2019



Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders
Tiptree Inc.:

We have audited the accompanying consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the year ended December 31, 2016 of Tiptree Inc. and subsidiaries and the schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Tiptree Inc. and subsidiaries for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

                                                     

/s/ KPMG LLP
New York, New York
March 13, 2017, except for Note 3C, as to which the date is March 14, 2018




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

 
As of December 31,
 
2018
 
2017
Assets:
 
 
 
Investments:
 
 
 
Available for sale securities, at fair value
$
283,563

 
$
182,448

Loans, at fair value
215,383

 
258,173

Equity securities
122,979

 
25,536

Other investments
75,002

 
59,142

Total investments
696,927

 
525,299

Cash and cash equivalents
86,003

 
110,667

Restricted cash
10,521

 
31,570

Notes and accounts receivable, net
223,105

 
186,422

Reinsurance receivables
420,351

 
352,967

Deferred acquisition costs
170,063

 
147,162

Goodwill
91,562

 
91,562

Intangible assets, net
52,121

 
64,017

Other assets
46,034

 
31,584

Assets held for sale
68,231

 
448,492

Total assets
$
1,864,918

 
$
1,989,742


 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Debt, net
$
354,083

 
$
346,081

Unearned premiums
599,444

 
503,446

Policy liabilities and unpaid claims
131,611

 
112,003

Deferred revenue
75,754

 
56,745

Reinsurance payable
117,597

 
90,554

Other liabilities and accrued expenses
124,190

 
121,321

Liabilities held for sale
62,980

 
362,818

Total liabilities
$
1,465,659

 
$
1,592,968


 
 
 
Stockholders’ Equity: (1)
 
 
 
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
$
—

 
$
—

Common Stock: $0.001 par value, 200,000,000 shares authorized, 35,870,348 and 35,003,004 shares issued and outstanding, respectively
36

 
35

Common stock - Class B: $0.001 par value, none and 50,000,000 shares authorized, none and 8,049,029 shares issued and outstanding, respectively
—

 
8

Additional paid-in capital
331,892

 
295,582

Accumulated other comprehensive income (loss), net of tax
(2,058
)
 
966

Retained earnings
57,231

 
38,079

Common Stock held by subsidiaries, 0 and 5,197,551 shares, respectively
—

 
(34,585
)
Class B common stock held by subsidiaries, none and 8,049,029 shares, respectively
—

 
(8
)
Total Tiptree Inc. stockholders’ equity
387,101

 
300,077

Non-controlling interests - TFP
—

 
77,494

Non-controlling interests - Other
12,158

 
19,203

Total stockholders’ equity
399,259

 
396,774

Total liabilities and stockholders’ equity
$
1,864,918

 
$
1,989,742

(1) See Note (1) Organization and Note (16) Stockholders’ Equity for information related to changes in the Company’s equity capitalization.

See accompanying notes to consolidated financial statements.


F- 5
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)


 
Year Ended December 31,
 
2018
 
2017
 
2016
Revenues:
 
 
 
 
 
Earned premiums, net
$
427,837

 
$
371,700

 
$
229,436

Service and administrative fees
102,315

 
95,160

 
109,348

Ceding commissions
9,651

 
8,770

 
24,784

Net investment income
19,179

 
16,286

 
12,981

Net realized and unrealized gains (losses)
28,782

 
47,607

 
87,300

Other revenue
38,062

 
42,275

 
42,574

Total revenues
625,826

 
581,798

 
506,423

Expenses:
 
 
 
 
 
Policy and contract benefits
152,095

 
123,959

 
106,784

Commission expense
262,460

 
241,835

 
147,253

Employee compensation and benefits
113,557

 
115,949

 
115,612

Interest expense
27,013

 
25,562

 
21,010

Depreciation and amortization
12,596

 
13,841

 
14,302

Other expenses
77,901

 
74,439

 
72,576

Total expenses
645,622

 
595,585

 
477,537

Other income:
 
 
 
 
 
Income attributable to consolidated CLOs
—

 
24,903

 
53,577

Expenses attributable to consolidated CLOs
—

 
14,446

 
33,323

Net income (loss) attributable to consolidated CLOs
—

 
10,457

 
20,254

Total other income
—

 
10,457

 
20,254

Income (loss) before taxes from continuing operations
(19,796
)
 
(3,330
)
 
49,140

Less: provision (benefit) for income taxes
(5,909
)
 
(12,562
)
 
12,515

Net income (loss) from continuing operations
(13,887
)
 
9,232

 
36,625

Discontinued operations:
 
 
 
 
 
Income (loss) before taxes from discontinued operations
624

 
(6,222
)
 
(5,824
)
Gain on sale of discontinued operations
56,860

 
—

 
—

Less: Provision (benefit) for income taxes
13,714

 
(2,224
)
 
(1,537
)
Net income (loss) from discontinued operations
43,770

 
(3,998
)
 
(4,287
)
Net income (loss) before non-controlling interests
29,883

 
5,234

 
32,338

Less: net income (loss) attributable to non-controlling interests - TFP
5,500

 
748

 
6,432

Less: net income (loss) attributable to non-controlling interests - Other
450

 
882

 
586

Net income (loss) attributable to Common Stockholders
$
23,933

 
$
3,604

 
$
25,320

 
 
 
 
 
 
Net income (loss) per Common Share:
 
 
 
 
 
Basic, continuing operations, net
$
(0.38
)
 
$
0.22

 
$
0.88

Basic, discontinued operations, net
1.07

 
(0.10
)
 
(0.09
)
Basic earnings per share
$
0.69

 
$
0.12

 
$
0.79

 
 
 
 
 
 
Diluted, continuing operations, net
(0.38
)
 
0.21

 
0.86

Diluted, discontinued operations, net
1.07

 
(0.10
)
 
(0.08
)
Diluted earnings per share
$
0.69

 
$
0.11

 
$
0.78

 
 
 
 
 
 
Weighted average number of Common Shares:
 
 
 
 
 
Basic
34,715,852

 
29,134,190

 
31,721,449

Diluted
34,715,852

 
37,306,632

 
31,766,674

 
 
 
 
 
 
Dividends declared per Common Share
$
0.14

 
$
0.12

 
$
0.10


See accompanying notes to consolidated financial statements.

F- 6
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)



 
Year Ended December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Net income (loss) before non-controlling interests
$
29,883

 
$
5,234

 
$
32,338

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(2,919
)
 
806

 
289

Related tax (expense) benefit
662

 
(284
)
 
(103
)
Reclassification of (gains) losses included in net income
819

 
(435
)
 
(1,026
)
Related tax expense (benefit)
(171
)
 
153

 
362

Unrealized gains (losses) on available-for-sale securities, net of tax
(1,609
)
 
240

 
(478
)
 
 
 
 
 
 
Interest rate swaps (cash flow hedges):
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
1,111

 
282

 
2,210

Related tax (expense) benefit
(276
)
 
(92
)
 
(658
)
Reclassification of (gains) losses included in net income (1)
(3,845
)
 
184

 
121

Related tax expense (benefit)
936

 
(59
)
 
(25
)
Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
(2,074
)
 
315

 
1,648

 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(3,683
)
 
555

 
1,170

Comprehensive income (loss)
26,200

 
5,789

 
33,508

Less: Comprehensive income (loss) attributable to non-controlling interests - TFP
5,278

 
842

 
6,560

Less: Comprehensive income (loss) attributable to non-controlling interests - Other
13

 
932

 
962

Comprehensive income (loss) attributable to Common Stockholders
$
20,909

 
$
4,015

 
$
25,986

(1) Deconsolidated as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.





















See accompanying notes to consolidated financial statements.

F- 7
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except shares)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Shares held by subsidiaries
 
Total stockholders’ equity to Tiptree Inc.
 
Non-controlling
interests - TFP
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Common Stock
 
Class B
 
Common Stock
 
Class B
 
 
 
 
Common Stock
 
Common Stock 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
197,296

 
—

 
—

 
—

 
2,102

 
—

 
—

 
—

 
—

 
—

 
—

 
2,102

 
—

 
—

 
2,102

Shares issued to settle contingent consideration
101,845

 
—

 
—

 
—

 
550

 
—

 
—

 
—

 
—

 
—

 
—

 
550

 
—

 
—

 
550

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
666

 
—

 
—

 
—

 
—

 
—

 
666

 
128

 
376

 
1,170

Non-controlling interest contributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,452

 
6,452

Non-controlling interest distributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(803
)
 
(2,195
)
 
(2,998
)
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
—

 
—

 
—

 
—

 
(1,094
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,094
)
 
1,042

 
(159
)
 
(211
)
Dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(3,191
)
 
—

 
—

 
—

 
—

 
(3,191
)
 
—

 
—

 
(3,191
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
25,320

 
—

 
—

 
—

 
—

 
25,320

 
6,432

 
586

 
32,338

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
—

 
—

 
—

 
—

 
2,139

 
—

 
—

 
—

 
—

 
—

 
—

 
2,139

 
—

 
3,346

 
5,485

Vesting of share-based incentive compensation
19,388

 
—

 
—

 
—

 
(588
)
 
—

 
—

 
131,483

 
854

 
—

 
—

 
266

 
—

 

 
266

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
—

 
—

 
—

 
—

 
—

 
411

 
—

 
—

 
—

 
—

 
—

 
411

 
94

 
50

 
555

Non-controlling interest contributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 

 
2,464

 
2,464

Non-controlling interest distributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(966
)
 
(2,002
)
 
(2,968
)
Shares acquired by subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,000,000
)
 
(7,300
)
 
—

 
—

 
(7,300
)
 
—

 
—

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

 
—

 
—

 
—

 
(1,913
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,913
)
 
1,541

 
(6,173
)
 
(6,545
)
Dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(3,499
)
 
—

 
—

 
—

 
—

 
(3,499
)
 
—

 
—

 
(3,499
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
3,604

 
—

 
—

 
—

 
—

 
3,604

 
748

 
882

 
5,234


F- 8
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except shares)

 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Shares held by subsidiaries
 
Total stockholders’ equity to Tiptree Inc.
 
Non-controlling
interests - TFP
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Common Stock
 
Class B
 
Common Stock
 
Class B
 
 
 
 
Common Stock
 
Common Stock Amount
 
Class B Shares
 
Class B Amount
 
 
 
 
Balance at December 31, 2017
35,003,004

 
8,049,029

 
$
35

 
$
8

 
$
295,582

 
$
966

 
$
38,079

 
(5,197,551
)
 
$
(34,585
)
 
(8,049,029
)
 
$
(8
)
 
$
300,077

 
$
77,494

 
$
19,203

 
$
396,774

Amortization of share-based incentive compensation
—

 
—

 
—

 
—

 
2,465

 
—

 
—

 
—

 
—

 
—

 
—

 
2,465

 
—

 
3,889

 
6,354

Vesting of share-based incentive compensation
31,527

 
—

 
—

 
—

 
(907
)
 
—

 
—

 
161,574

 
1,050

 
—

 
—

 
143

 
—

 
—

 
143

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
(2,683
)
 
—

 
—

 
—

 
—

 
—

 
(2,683
)
 
(563
)
 
(437
)
 
(3,683
)
Non-controlling interest contributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,150

 
3,150

Non-controlling interest distributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(241
)
 
—

 
(241
)
Shares purchased under stock purchase plan
(2,177,235
)
 
—

 
(2
)
 
—

 
(14,109
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(14,111
)
 
—

 
—

 
(14,111
)
Net changes in non-controlling interest
—

 
—

 
—

 
—

 
(132
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(132
)
 
—

 
(14,097
)
 
(14,229
)
Reorganization merger (1)
8,049,029

 
(8,049,029
)
 
8

 
(8
)
 
82,523

 
(341
)
 
—

 
—

 
—

 
8,049,029

 
8

 
82,190

 
(82,190
)
 
—

 
—

Cancellation of treasury shares
(5,035,977
)
 
—

 
(5
)
 
—

 
(33,530
)
 
—

 
—

 
5,035,977

 
33,535

 
—

 
—

 
—

 
—

 
—

 
—

Dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(4,781
)
 
—

 
—

 
—

 
—

 
(4,781
)
 
—

 
—

 
(4,781
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
23,933

 
—

 
—

 
—

 
—

 
23,933

 
5,500

 
450

 
29,883

Balance at December 31, 2018
35,870,348

 
—

 
$
36

 
$
—

 
$
331,892

 
$
(2,058
)
 
$
57,231

 
—

 
$
—

 
—

 
$
—

 
$
387,101

 
$
—

 
$
12,158

 
$
399,259


(1) Includes the exchange of 424,399 units of TFP for 1,187,468 shares of Common Stock.












See accompanying notes to consolidated financial statements.

F- 9
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)


 
Year ended December 31,
 
2018
 
2017
 
2016
Operating Activities:
 
 
 
 
 
Net income (loss) attributable to Common Stockholders
$
23,933

 
$
3,604

 
$
25,320

Net income (loss) attributable to non-controlling interests - TFP
5,500

 
748

 
6,432

Net income (loss) attributable to non-controlling interests - Other
450

 
882

 
586

Net income (loss)
29,883

 
5,234

 
32,338

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
 
Net realized and unrealized (gains) losses
(28,782
)
 
(47,607
)
 
(87,300
)
Net (gain) on sale of subsidiary
(56,860
)
 
(1,944
)
 
—

Net unrealized loss (gain) on interest rate swaps
—

 
—

 
22

Realized (gain) on cash flow hedge
—

 
(877
)
 
—

Change in fair value of contingent consideration
—

 
3,192

 
(313
)
Non cash compensation expense
6,657

 
6,826

 
2,778

Amortization/accretion of premiums and discounts
1,029

 
1,316

 
1,386

Depreciation and amortization expense
12,596

 
29,992

 
28,543

Bad debt expense
243

 
1,019

 
1,719

Amortization of deferred financing costs
934

 
2,770

 
2,037

Loss on extinguishment of debt
428

 
1,163

 
—

Deferred tax expense (benefit)
4,011

 
(11,249
)
 
6,447

Changes in operating assets and liabilities:
 
 
 
 
 
Mortgage loans originated for sale
(1,533,365
)
 
(1,592,726
)
 
(1,767,622
)
Proceeds from the sale of mortgage loans originated for sale
1,590,546

 
1,658,646

 
1,833,273

(Increase) decrease in notes and accounts receivable
(35,256
)
 
(48,085
)
 
(13,692
)
(Increase) decrease in reinsurance receivables
(67,384
)
 
(53,256
)
 
(35,185
)
(Increase) decrease in deferred acquisition costs
(22,901
)
 
(20,554
)
 
(3,540
)
(Increase) decrease in other assets
(12,400
)
 
(4,849
)
 
(253
)
Increase (decrease) in unearned premiums
95,998

 
87,880

 
25,261

Increase (decrease) in policy liabilities and unpaid claims
19,608

 
5,729

 
22,728

Increase (decrease) in deferred revenue
19,009

 
4,082

 
(7,182
)
Increase (decrease) in reinsurance payable
27,043

 
19,966

 
4,748

Increase (decrease) in other liabilities and accrued expenses
6,687

 
3,205

 
(919
)
Operating activities from consolidated CLOs
—

 
(2,954
)
 
(8,631
)
Net cash provided by (used in) operating activities
57,724

 
46,919

 
36,643

 
 
 
 
 
 
Investing Activities:
 
 
 
 
 
Purchases of investments
(327,617
)
 
(221,096
)
 
(275,573
)
Proceeds from sales and maturities of investments
190,942

 
296,855

 
205,141

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

 
(37,166
)
 
(62,024
)
Proceeds from the sale of real estate
17,705

 
14,035

 
5,376

Purchases of fixed assets
(3,749
)
 
(1,747
)
 
(1,480
)
Proceeds from the sale of subsidiaries
15,709

 
14,089

 
—

Proceeds from notes receivable
29,234

 
50,175

 
36,891

Issuance of notes receivable
(31,331
)
 
(41,861
)
 
(44,860
)
Business and asset acquisitions, net of cash and deposits
—

 
(85,826
)
 
(102,268
)
Investing activities from consolidated CLOs
—

 
225,317

 
(75,494
)
Net cash provided by (used in) investing activities
(109,107
)
 
212,775

 
(314,291
)
 
 
 
 
 
 
Financing Activities:
 
 
 
 
 
Dividends paid
(4,781
)
 
(3,499
)
 
(3,191
)
Non-controlling interest contributions
3,150

 
2,464

 
3,339

Non-controlling interest distributions
(241
)
 
(2,224
)
 
(2,998
)
Payment of debt issuance costs
(1,143
)
 
(9,588
)
 
(3,830
)

F- 10
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)


 
Year ended December 31,
 
2018
 
2017
 
2016
Proceeds from borrowings and mortgage notes payable
1,632,469

 
1,857,571

 
2,085,142

Principal paydowns of borrowings and mortgage notes payable
(1,617,346
)
 
(1,816,537
)
 
(1,957,183
)
Proceeds from the exercise of options for Common Stock
—

 
8,100

 
—

Repurchases of Common Stock
(14,111
)
 
(7,300
)
 
(43,754
)
Financing activities from consolidated CLOs
—

 
(223,393
)
 
199,427

Net cash provided by (used in) financing activities
(2,003
)
 
(194,406
)
 
276,952

Net increase (decrease) in cash, cash equivalents and restricted cash
(53,386
)
 
65,288

 
(696
)
Cash, cash equivalents and restricted cash – beginning of period
142,237

 
74,258

 
79,455

Cash, cash equivalents and restricted cash – beginning of period - held for sale
10,533

 
13,224

 
8,723

Cash, cash equivalents and restricted cash – end of period (1)
99,384

 
152,770

 
87,482

Less: Reclassification of cash to assets held for sale
2,860

 
10,533

 
13,224

Cash, cash equivalents and restricted cash– end of period
$
96,524

 
$
142,237

 
$
74,258

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
Cash paid during the period for interest expense
$
25,976

 
$
34,113

 
$
27,164

Cash (received) paid during the period for income taxes
$
(5,088
)
 
$
5,049

 
$
6,176

 
 
 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
 
 
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
$
7,367

 
$
15,033

 
$
15,132

Equity securities acquired through the sale of a subsidiary and asset sales
$
135,675

 
$
—

 
$
—

Acquisition of non-controlling interest
$
82,190

 
$
—

 
$
—

Cancellation of treasury shares
$
33,535

 
$
—

 
$
—

Assets of consolidated CLOs deconsolidated due to sale and redemption
$
—

 
$
765,603

 
$
—

Liabilities of consolidated CLOs deconsolidated due to sale and redemption
$
—

 
$
729,597

 
$
—

Real estate acquired through asset acquisition
$
—

 
$
8,178

 
$
—

Seller provided financing related to the sale of subsidiary
$
—

 
$
11,000

 
$
—

Intangible assets related to in-place leases acquired through asset acquisition
$
—

 
$
2,049

 
$
—

Settlement of contingent consideration payable with Common Stock
$
—

 
$
4,838

 
$
—

Debt assumed through acquisitions
$
—

 
$
7,586

 
$
—

 
 
 
 
 
 
 
As of December 31,
Reconciliation of cash, cash equivalents and restricted cash shown in the statement of cash flows
2018
 
2017
 
2016
Cash and cash equivalents
$
86,003

 
$
110,667

 
$
49,786

Restricted cash
10,521

 
31,570

 
24,472

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
96,524

 
142,237

 
74,258


(1) Includes cash in assets held for sale



See accompanying notes to consolidated financial statements.

F- 11
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



(1) Organization

Tiptree Inc. (together with its consolidated subsidiaries, collectively, Tiptree, the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree’s Common Stock trades on the Nasdaq Capital Market under the symbol “TIPT”. Tiptree is a holding company that combines specialty insurance operations with investment management capabilities. We allocate our capital across our insurance operations and other investments. As such, we classify our business into one reportable segment: Specialty Insurance. Our non-insurance operations, assets and other investments, which is comprised of our non-reportable segments and other business activities, we refer to as Tiptree Capital.

On April 10, 2018, Tiptree completed a reorganization merger whereby Tiptree Financial Partners, L.P. (TFP) merged with and into Tiptree, with Tiptree continuing as the surviving company. Prior to the merger Tiptree owned approximately 84% of TFP, with the remaining portion accounted for as non-controlling interest. See Note (16) Stockholders’ Equity for additional information.

In this report “Common Stock” means Class A common stock $0.001 par value for periods prior to June 7, 2018 and thereafter the common stock $0.001 par value. See Note (16) Stockholders’ Equity for more information.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying 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 consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company.

Tiptree consolidates those entities in which it has an investment 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. Tiptree’s consolidated VIEs are entities which Tiptree is considered the primary beneficiary through its controlling financial interests.

Non-controlling interests on the 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.

As a result of changes in presentation, certain prior year amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations.

As a result of the adoption of ASU 2016-01, an immaterial amount of equity securities classified as available for sale as of December 31, 2017 were reclassified to equity securities, at fair value as of March 31, 2018. The net unrealized loss was immaterial. The adoption of ASU 2016-18 resulted in reclassification of restricted cash balances into cash, cash equivalents and restricted cash on the consolidated statements of cash flows for the years ended December 31, 2018, 2017 and 2016.

Use of Estimates

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

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

F- 12
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


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

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

Business Combination Accounting

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

Dispositions, Assets Held for Sale and Discontinued Operations

The results of operations of a business that has either been disposed of or are classified as held for sale are reported in discontinued operations if the disposal of the business represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The Company carries assets and liabilities held for sale at the lower of carrying value on the date the asset is initially classified as held for sale or fair value less costs to sell. At the time of reclassification to held for sale, the Company ceases the recording of depreciation and amortization on assets transferred.

Accounting policies specific to our dispositions, assets held for sale and discontinued operations are described in more detail in (3) Dispositions, Assets Held for Sale and Discontinued Operations.

Fair Value Measurement

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

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

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

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


F- 13
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


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 consolidated statements of operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are reported separately in our consolidated balance sheets from those instruments using another accounting method.

Derivative Financial Instruments and Hedging

From time to time, derivative instruments are used in the overall strategy to manage exposure to market risks primarily related to fluctuations in interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments are measured at fair value on a recurring basis and are included in other investments or other liabilities and accrued expenses in the consolidated balance sheets.

Derivative Instruments Designated as Cash Flow Hedging Instruments

The Company uses cash flow hedges to reduce the exposure to variability of cash flows from floating rate borrowings. If a derivative instrument meets certain cash flow hedge accounting criteria, it is recorded on the consolidated balance sheet at its fair value, as either an asset or a liability, with offsetting changes in fair value recognized in accumulated other comprehensive income (AOCI). The effective portion of the changes in fair value of derivatives are reported in AOCI and amounts previously recorded in AOCI are recognized in earnings in the period in which the hedged transaction affects earnings. Any ineffective portions of the change in fair value of the derivative are recognized in current earnings.

Stock Based Compensation

The Company accounts for equity‑based compensation issued to employees, directors, and affiliates of the Company using the current fair value based methodology.

The Company initially measures the cost of restricted stock unit and restricted stock awards at fair value on the date of grant and subsequently recognizes the cost of such awards over the vesting period using the straight-line method. The compensation costs are charged to expense over the vesting period with a corresponding credit to additional paid-in capital.

Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. Compensation cost is recognized over the required service period, generally defined as the vesting period.

Grants of subsidiary Restricted Stock Units (RSUs) exchangeable into Common Stock of the Company were initially accounted for as liabilities based upon their expected settlement method. Changes in fair value of the awards were recognized in earnings for the relative amount of cumulative compensation cost. The Company used the straight-line method to recognize compensation expense for the time vesting RSUs over the requisite service periods, beginning on the grant date. In June of 2017 when sufficient shares were made available, we accounted for these RSUs under the fair value method and ceased marking the shares to market. The Company uses the graded-vesting method to recognize compensation expense for the performance vesting RSUs. Changes in fair value of shares underlying liability awards are recognized in earnings to the extent of the accumulated amortization. Compensation expense will be recognized to the extent that it is probable that the performance condition will be achieved. The Company reassesses the probability of satisfaction of the performance condition for the performance vesting RSUs for each reporting period.

F- 14
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



Income Taxes

Deferred tax assets and liabilities are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are established for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to reverse. A valuation allowance is established when necessary to reduce a deferred tax asset to the amount expected to be realized. Several of the Company’s subsidiaries, file state tax returns on a standalone basis. Two of our subsidiaries file federal and state tax returns on a stand alone basis, one of which is held for sale. These U.S. federal and state income tax returns, when filed, will be subject to examination by the Internal Revenue Service and state departments of revenue. See Note —(19) Income Taxes.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more likely than not” of being sustained by the applicable tax authority. The Company’s tax benefit or tax expense is adjusted accordingly for tax positions not deemed to meet the more likely than not threshold. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.

Earnings Per Share

The Company presents both basic and diluted earnings per Common Share in its consolidated financial statements and footnotes thereto. Basic earnings per Common Share (Basic EPS) excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding, including vested restricted share units, for the period. Diluted earnings per Common Share (Diluted EPS) reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares where such exercise or conversion would result in a lower earnings per share amount.

The Company calculates EPS using the two-class method, which is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested restricted share units contain non-forfeitable rights to distributions or distribution equivalents (whether paid or unpaid) and are participating securities that are included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive distributions. The participating securities do not have a contractual obligation to absorb losses and are only allocated in periods where there is income from continuing operations.

See Note—(21) Earnings Per Share, for EPS computations.

Investments

The Company records all investment transactions on a trade‑date basis. Realized gains (losses) are determined using the specific-identification method. The Company classifies its investments in debt securities as available-for-sale or held-to-maturity based on the Company’s intent and ability to hold the debt security to maturity. The Company did not have any held-to-maturity securities at December 31, 2018 and 2017.

Available for Sale Securities, at Fair Value (AFS)

AFS are securities that are not classified as trading or held-to-maturity and are intended to be held for indefinite periods of time. AFS securities include those debt securities that management may sell as part of its asset/liability management strategy or in response to changes in interest rates, resultant prepayment risk or other factors. AFS securities are held at fair value on the consolidated balance sheet with changes in fair value, net of related tax effects, recorded in the accumulated other comprehensive income (AOCI) component of stockholders’ equity in the period of change. Upon the disposition of an AFS security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to net realized and unrealized gains (losses) on the consolidated statements of operations.

The Company regularly reviews AFS securities, held-to-maturity and cost investments with unrealized losses in order to evaluate whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI) is recognized in earnings in the consolidated statements of operations for debt securities that the Company has an intent to sell or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis. For those securities that the Company does not intend to sell nor expect to be required to sell, credit-related impairment is recognized in

F- 15
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


earnings, with the non-credit-related impairment recorded in accumulated other comprehensive income (AOCI). An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses for AFS securities that are determined to be temporary in nature are recorded, net of tax, in AOCI.

Management’s estimate of OTTI includes, among other things: (i) the duration of time and the relative magnitude to which fair value of the security has been below cost; (ii) the financial condition and near‑term prospects of the issuer of the investment; (iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer of the investment; (iv) the Company’s ability and intent to hold an equity security for a period of time sufficient to allow for any anticipated recovery; (v) whether it is more likely than not that the Company will sell a security before recovery of its amortized cost basis; (vi) whether a debt security exhibits cash flow deterioration; and (vii) whether the security’s decline is attributable to specific conditions, such as conditions in an industry or in a geographic location.

Loans, at Fair Value

Loans, at fair value is substantially comprised of (i) non-performing residential loans (NPLs), (ii) middle market leveraged loans held by the Company and (iii) loans originated by the Company’s mortgage finance business. Changes in their fair value are reported within net realized and unrealized gains (losses) in our consolidated statements of operations.

Corporate Loans

Corporate loans are comprised of diversified portfolio of middle market leveraged loans which are carried at fair value. In general, the fair value of leveraged loans are obtained from an independent pricing service which provides coverage of secondary market participants. The values represent a composite of mark-to-market bid/offer prices. In certain circumstances the Company will make its own determination of fair value of leveraged loans based on internal models and other unobservable inputs.

Mortgage Loans Held for Sale

Mortgage loans held for sale represent loans originated and held until sold to secondary market investors. Such loans are typically warehoused for a period after origination or purchase before sale into the secondary market. Loans are sold either servicing released, or in select instances, servicing maintained into the secondary loan market. The Company has elected to measure all mortgage loans held for sale at fair value. These loans are considered sold when the Company surrenders control to the purchaser. The gains or losses on sales of such loans, net of any accrual for standard representations and warranties, are reported in operating results as a component of net realized and unrealized gains (losses) in the consolidated statement of operations in the period when the sale occurs.

Non-Performing Loans (NPLs)

The Company has purchased portfolios of NPLs which consist of residential mortgage loans. Such loans are carried at fair value, which is measured on an individual loan basis. We seek to either (i) convert such loans into real estate owned property (REO) through foreclosure or another resolution process that can then be sold, or (ii) modify and resell them at higher prices if circumstances warrant.

The Company has elected the fair value option for NPLs as we have concluded that fair value timely reflects the results of our investment performance. As substantially all of our loans were non-performing when acquired, we generally look to the estimated fair value of the underlying property collateral to assess the recoverability of our investments. We primarily utilize the local broker price opinion (BPO) but also consider any other comparable home sales or other market data, as considered necessary, in estimating a property’s fair value. For further discussion on the observable and unobservable inputs to the model and determination of fair value of NPLs, see Note—(11) Fair Value of Financial Instruments.

Certain non-performing loans are loans that are delinquent on obligated payments of principal and interest. Certain other non-performing loans are making some payments, generally as a result of a modification or a workout plan.

The fair value of NPLs are determined using a discounted cash flow model. As such, both the changes in fair value and the net periodic cash flows related to NPLs are recorded in net realized and unrealized gains (losses) in the consolidated statement of operations.

Equity Securities, at Fair Value

F- 16
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



Equity securities, at fair value are investments consisting of equity securities that are purchased principally for the purpose of selling them in the near term. Changes in fair value are recorded in net realized and unrealized gains (losses) on investments on the consolidated statements of operations in the period of change.

Other Investments

Foreclosed Residential Real Estate Property (REO)

NPLs are reclassified to REO once the Company has obtained legal title to the property upon completion of a foreclosure sale or the borrower has conveyed all interest in the property to satisfy that loan through completion of a deed in lieu of foreclosure. Because the company elected the fair value option for NPLs, upon recognition as REO the property fair value is estimated using market values and, if the property meets held-for-sale criteria, it is initially recorded at fair value less costs to sell as its new cost basis. Subsequently, the property is carried at (i) the fair value of the asset minus the estimated costs to sell the asset or (ii) the initial REO value, whichever is lower. Adjustments to the carrying value of REOs are recorded in net realized and unrealized gains (losses).

Vessels, net

Investments in vessels, net are carried at cost (inclusive of capitalized acquisition costs, where applicable) less accumulated depreciation. Subsequent expenditures are also capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels; otherwise, these amounts are charged to expense as incurred. Vessels acquired are recognized at their fair value as at the date of the acquisition.

Depreciation is computed using the straight-line method over the vessel’s estimated remaining useful life, after considering the estimated salvage value. A vessel’s salvage value is equal to the product of its lightweight tonnage and estimated scrap rate. Vessels are depreciated from the date of their acquisition through their remaining estimated useful life.

Vessels are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. Potential impairment indicators are primarily based upon a comparison of the market value of a vessel to its carrying value. Market values are based upon quoted prices from industry-recognized sources. The company evaluates market quotes of vessels for reasonableness by comparison to available market transactions or internal valuation models. An impairment charge would be recognized if the estimated undiscounted future net cash flows expected to result from the operation and subsequent disposal of the vessel are less than the vessel’s carrying amount.

The Company’s estimate of future revenue is based upon time charter equivalent (TCE) rates using current market rates. The Company uses average historical rates for periods beyond those for which rates are available. Estimated cash flows are net of brokerage and address commissions, vessel operating expenses, and estimated costs of drydocking and include an inflation factor, as appropriate. The projected undiscounted future cash flows are comprised of the net of these inflows and outflows, plus an estimated salvage value.

As of December 31, 2018 the undiscounted future cash flows were higher than the carrying amount of each of the vessels in the Company’s fleet and, as such, no loss on impairment was recognized.

Cash and Cash Equivalents

The Company considers all highly liquid investments of sufficient credit quality purchased with an initial maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand, cash held in banks and investments in money market funds.

Restricted Cash

The Company’s restricted cash primarily consists of cash for unremitted premiums received from agents and insurers, fiduciary cash for reinsurers and pledged assets for the protection of policy holders in various state jurisdictions. Restricted cash also includes cash posted as collateral under credit facilities to maintain borrowing base sufficiency and for quarterly waterfall payments, borrower escrow funds for taxes, insurance, rate-lock fees and servicing related escrow funds and collateral on warehouse borrowings.

F- 17
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



Notes and Accounts Receivable, Net     

Notes Receivable, Net    

The Company’s notes receivable, net includes receivables related to the specialty insurance business for its premium financing programs.

The Company accrues interest income on its notes receivable based on the contractual terms of the respective note. The Company monitors all notes receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. In addition to allowances for bad debt for specific notes receivable, a general provision for bad debt is estimated for the Company’s notes receivable based on history. Account balances are generally charged against the allowance when the Company believes it is probable that the note receivable will not be recovered, and has exhausted its contractual and legal remedies.

Generally, receivables overdue more than 120 days are written off when the Company determines it has exhausted reasonable collection efforts and remedies, see Note—(6) Notes and Accounts Receivable, net.

Accounts and Premiums Receivable, Net

Accounts and premiums receivable, net are primarily trade receivables from the specialty insurance business that are carried at their approximate fair value. Accounts and premiums receivable from the Company’s specialty insurance business consist primarily of advance commissions and agents' balances in course of collection and billed but not collected policy premiums, presented net of the allowance for doubtful accounts. For policy premiums that have been billed but not collected, the Company records a receivable on its balance sheet for the full amount of the premium billed, with a corresponding liability, net of its commission, to insurance carriers. The Company earns interest on the premium cash during the period of time between receipt of the funds and payment of these funds to insurance carriers. The Company maintains an allowance for doubtful accounts based on an estimate of uncollectible accounts.

Retrospective commissions receivable, Trust receivables and Other receivables

Accounts and premiums receivable, net, retrospective commissions receivable, trust receivables and other receivables are primarily trade receivables from the specialty insurance business that are carried net of allowance at their approximate fair value.

Reinsurance Receivables

Through the specialty insurance business, the Company has various reinsurance agreements in place whereby the amount of risk in excess of its retention goals is reinsured by unrelated domestic and foreign insurance companies. The Company is required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Reinsurance receivables include amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based upon estimates and are reported on the consolidated balance sheets separately as assets, as reinsurance does not relieve the Company of its legal liability to policyholders. Management continually monitors the financial condition and agency ratings of the Company’s reinsurers and believes that the reinsurance receivables accrued are collectible. Balances recoverable from reinsurers and amounts ceded to reinsurers relating to the unexpired portion of reinsured policies are presented as assets. Experience refunds from reinsurers are recognized based on the underwriting experience of the underlying contracts.

Deferred Acquisition Costs

The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s specialty insurance business. Amortization of deferred acquisition costs was $246,330, $221,362 and $142,337 for the years ended December 31, 2018, 2017 and 2016, respectively.

Insurance Policy Related

Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These capitalized costs are amortized as the related premium is earned.

F- 18
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable insurance related deferred acquisition costs were recognized during the years ended December 31, 2018, 2017 and 2016, respectively.

Non-insurance Policy Related

Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned.

The Company evaluates whether deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended December 31, 2018, 2017 and 2016, respectively.

Goodwill and Intangible Assets, Net

The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill and indefinite-lived intangible assets are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The Company carries intangible assets, which represent customer and agent relationships, trade names, insurance licenses (certificates of authority granted by individual state departments of insurance), the value of in-force insurance policies acquired, software acquired or internally developed, and leases in-place. Management has deemed the insurance licenses to have indefinite useful life. Costs incurred to renew or maintain insurance licenses are recorded as operating costs in the period in which they arise. See Note —(8) Goodwill and Intangible Assets, net.

Other Assets

Other assets primarily consists of prepaid expenses, income tax receivable, and furniture, fixtures and equipment, net. See Note—(14) Other Assets and Other Liabilities and Accrued Expenses.

Debt, net

Debt is carried on the consolidated balance sheets at an amount equal to the unpaid principal balance, net of any remaining unamortized discount or premium and direct and any incremental costs attributable to issuance. Discounts, premiums and direct and incremental costs are amortized as a component of interest expense in the consolidated statements of operations over the life of the debt.

Unearned Premiums

Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial methods as appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2018 and December 31, 2017, no deficiency reserves were recorded.

Policy Liabilities and Unpaid Claims

Policyholder account balances relate to investment-type individual annuity contracts in the accumulation phase. Policyholder account balances are carried at accumulated account values, which consist of deposits received, plus interest credited, less withdrawals and assessments. Minimum guaranteed interest credited to these contracts ranges from 3.0% to 4.0%.

The Company’s claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. The Company’s actuaries apply a variety of generally accepted actuarial methods to the historical loss development patterns, to derive cumulative development factors. These cumulative development factors are applied to reported losses for each accident quarter

F- 19
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


to compute ultimate losses. The indicated required reserve is the difference between the ultimate losses and the reported losses. The actuarial methods used include but are not limited to the chain ladder method, the Bornhuetter-Ferguson method, and the expected loss ratio method. The actuarial analyses are performed on a basis gross of ceded reinsurance, and the resulting factors and estimates are then used in calculating the net loss reserves which take into account the impact of reinsurance. The Company has not made any changes to its methodologies for determining claim reserves in the periods presented.

Credit life and accidental death and dismemberment (AD&D) unpaid claims reserves include claims in the course of settlement and incurred but not reported (IBNR). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves include case reserves for reported claims and bulk reserves for IBNR claims. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, reported incurred losses, target loss ratios, and in-force amounts or a combination of these factors.

Anticipated future loss development patterns form a key assumption underlying these analyses. Generally, unpaid claims reserves, and associated incurred losses, are impacted by loss frequency, which is the 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 may include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.

The unpaid claims reserves represent the Company's best estimates at a given time, based on the projections and analyses discussed above. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented.

In accordance with applicable statutory insurance company regulations, the Company’s recorded unpaid claims reserves are evaluated by appointed independent third-party actuaries, who perform this function in compliance with the Standards of Practice and Codes of Conduct of the American Academy of Actuaries. The independent actuaries perform their actuarial analyses annually and prepare opinions, statements, and reports documenting their determinations. For December 31, 2018 and 2017, our appointed independent third-party actuaries found the Company’s reserves to be adequate.

Deferred Revenue

Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships, mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred revenues and anticipated investment income. As of December 31, 2018 and 2017, respectively, no deficiency reserves were recorded.

Other Liabilities

Other liabilities primarily consists of accounts payable and accrued expenses, deferred tax liabilities, net, commissions payable and accrued interest payable. See Note—(14) Other Assets and Other Liabilities and Accrued Expenses.


Revenue Recognition

The Company earns revenues from a variety of sources:

Earned Premiums, Net

Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance policies by the Company's distributors and premiums written for insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods.

F- 20
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including producer owned reinsurance companies (PORCs), earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.

Service and Administrative Fees

The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated with transaction volume and are recognized as revenue as they become both realized and earned.
 
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended December 31, 2018, 2017 and 2016, respectively, the Company did not incur a loss with respect to a specific significant service fee contract.

Administrative Fees. Administrative fee revenue includes the administration of premium associated with our producers and their PORCs. In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.

Ceding Commissions

Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. The adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.

Management Fee Income

The Company earns management and incentive fees from the CLOs it manages. These management fees are paid periodically in accordance with the terms of the individual management agreements for as long as the Company manages the funds. Management fees typically consist of fees based on the amount of assets held in the CLOs. Management fees are recognized as revenue when earned. The Company does not recognize incentive fees until all contractual contingencies have been removed. Management fee income is recorded in other revenue.

Policy and Contract Benefits

Member Benefit Claims

Member benefit claims represent claims paid on behalf of contract holders directly to third party providers for roadside assistance and for the repair or replacement of covered products.  Claims can also be paid directly to contract holders as a reimbursement payment, provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when incurred.

Net Losses and Loss Adjustment Expenses

Net losses and loss adjustment expenses represent losses and related claim adjudication and processing costs on insurance contract claims, net of amounts ceded. Net losses include actual claims paid and the change in unpaid claim reserves.


F- 21
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Commissions Payable and Expense

Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue.  Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of the retrospective commission calculation is negative. Commissions payable are included in other liabilities and accrued expenses.

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In the first quarter of 2018 the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and applicable amendments, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. These standards establish a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.

A substantial majority of the Company’s non-investment related revenues are comprised of revenues from insurance contracts that are accounted for under Financial Services-Insurance (Topic 944) or certain financial services products (e.g. gains upon the origination of mortgages) that are not within the scope of the new standard. The Company’s remaining revenues that are within the scope of Topic 606 are primarily comprised of revenues from contracts with customers for monthly membership dues for motor clubs, monthly administration fees for services provided for premiums, claims and reinsurance processing revenues, vehicle service contracts and warranty coverage revenues for household goods and appliances (collectively, remaining contracts). The Company has chosen the modified-retrospective method of adopting Topic 606, and has assessed these contracts and concluded that changes in accounting and revenue recognition upon adoption of Topic 606 was not material to the Company’s financial position as of January 1, 2018, and did not have a material impact on the Company’s consolidated financial statements. No cumulative effect adjustment was made due to the adoption of this standard. See Note (13) Revenue From Contracts with Customers for disclosures required under ASU 2014-09 and others related to Topic 606.

In January 2016, the FASB issued ASU 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 was effective for the Company as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, 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. ASU 2016-05 was effective for the Company for the annual and interim periods beginning after December 15, 2016. The adoption of this standard did not have a material

F- 22
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. The standard was effective for the Company for the annual and interim periods beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’s 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 adoption of this standard did not have a material impact on the Company’s 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. The adoption of ASU 2016-18 resulted in reclassification of restricted cash balances into cash, cash equivalents and restricted cash on the consolidated statements of cash flows in the first quarter of 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including the treatment of acquisitions, disposals, goodwill, and consolidation. There are no disclosures required for a change in accounting principle at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company elected to early adopt this standard, effective for transactions on or after October 1, 2016. The adoption of this standard did not have a material impact on the Company’s 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 adoption of this standard did not have a material impact on the Company’s 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

F- 23
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. The Company elected to early adopt this standard as of December 31, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In 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 adopted the standard in the first quarter of 2019. The adoption of ASU 2016-02 will result in an gross up within the consolidated balance sheet of a Right of use asset and Lease liability, with no impact to retained earnings. The Company does not believe the adoption of this standard will have a material impact on the Company’s 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 ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 does not change the qualitative assessment; however, it removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Therefore, as the FASB notes in the ASU’s Basis for Conclusions, the goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units. The amendments in ASU 2017-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect on its consolidated financial

F- 24
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


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 believes that the adoption of ASU 2017-08 will not have a material impact on its consolidated financial statements.

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 consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits companies to reclassify stranded tax effects caused by Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act) from accumulated other comprehensive income (AOCI) to retained earnings. Deferred tax assets (DTA) related to available for sale (AFS) securities unrealized gains and losses that were revalued as of December 31, 2017 created stranded tax effects in accumulated other comprehensive income (AOCI) due to the enactment of the tax act, due to the nature of existing GAAP requiring recognition of tax rate change effects on the DTA revaluation related to AFS securities as an adjustment to provision for income taxes. Specifically, ASU 2018-02 permits a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. Additionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company believes that the adoption of ASU 2018-02 will not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. The modifications include the removal of certain requirements, modifications to exiting requirements and additional requirements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect on its consolidated financial statements.

(3) Dispositions, Assets Held for Sale and Discontinued Operations

A. Dispositions

The Company completed the sale of Care, as well as two senior living properties held in our specialty insurance business, on February 1, 2018. The pre-tax comprehensive income on the sale was approximately $54.9 million, which consists of $56.9 million gain on sale of subsidiary, $1.8 million of realized gain on the sale of the specialty insurance properties, offset by the reclassification of the interest rate swap from AOCI of $3.8 million. The gain on sale of subsidiary includes $10.7 million of earnout consideration recognized in December 2018 as a result of a disposition by Invesque of a portfolio specified in the closing document.

Total consideration received for the sale of Care was $150.7 million, including approximately 16.6 million shares of Invesque Inc. (Invesque), resulting in an ownership of approximately 34% of the acquiring company at the time of sale. The Company has elected to apply the fair value option to the investment in Invesque. As such, these shares are held at fair value within equity securities.

When the Company entered into a purchase agreement on November 16, 2017 to sell Care, the Company concluded that the sale met the requirements to be classified as a discontinued operation. As a result, the Company reclassified the income and expenses attributable to Care to net income (loss) from discontinued operations for the years ended December 31, 2017 and

F- 25
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


2016. The Company continued to present income and expenses attributable to Care within net income (loss) from discontinued operations through the completion of the sale.

The Company has entered into a definitive agreement to sell Luxury, which is pending a regulatory review, and is classified as held for sale at December 31, 2018 and 2017. The agreement did not meet the requirements to be classified as a discontinued operation.

On January 18, 2017 and November 7, 2017, the Company sold its ownership in the subordinated notes in two CLOs (collectively, the Disposed CLOs). As a result of the sales, the Company determined that it no longer had the controlling interest in such entities. The Company, therefore, deconsolidated its ownership in the subordinated notes of the Disposed CLOs and is no longer reporting the assets and liabilities of the Disposed CLOs in its consolidated balance sheet as of December 31, 2017. The operations of the Disposed CLOs were consolidated in the results of the Company through the respective dates.

On August 10, 2017, the Company’s ownership in the subordinated notes of an additional CLO was redeemed for cash as part of the complete liquidation of the CLO. The operations of the redeemed CLO were consolidated in the results of the Company through the redemption date.

The Company sold its interest in its commercial lending business on October 1, 2017. Consideration consisted of $2,500 in cash and $11,000 of seller provided financing at the time of sale. The financing had an interest rate of 10% and was settled in cash in December of 2018. The operations of this business were consolidated in the results of the Company through the sale date.

As of December 31, 2018 and December 31, 2017, the Company did not record any impairments with respect to assets held for sale or discontinued operations.

B. Assets Held for Sale

The following table represents detail of assets and liabilities held for sale in the consolidated balance sheets for the following periods:
 
As of
 
December 31, 2018(1)
 
December 31, 2017
Assets
Luxury
 
Care
Luxury
Total
Investments:
 
 
 
 
 
Loans, at fair value
$
63,340

 
$
—

$
57,255

$
57,255

Loans at amortized cost, net
—

 
700

—

700

Real estate, net of accumulated depreciation of $0 and $26,823
—

 
347,303

—

347,303

Other investments
798

 
1,853

677

2,530

Total Investments
64,138

 
349,856

57,932

407,788

Cash and cash equivalents
2,860

 
8,316

2,217

10,533

Notes and accounts receivable, net
230

 
5,318

263

5,581

Intangible assets, net of accumulated amortization of $0 and $26,944
—

 
17,417

—

17,417

Other assets
1,003

 
6,508

665

7,173

Assets held for sale
$
68,231

 
$
387,415

$
61,077

$
448,492

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Debt, net
$
61,381

 
$
296,868

$
53,835

$
350,703

Other liabilities and accrued expenses
1,599

 
10,693

1,422

12,115

Liabilities held for sale
$
62,980

 
$
307,561

$
55,257

$
362,818


(1) Reflects the closing of the sale of Care discussed above. The reduction in net assets and liabilities held for sale included approximately $13.4 million related to non-controlling interest.

F- 26
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


C. Discontinued Operations

The following table represents detail of revenues and expenses of discontinued operations in the consolidated statements of operations for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Revenues:

 

 
 
Rental and related revenue
$
6,476

 
$
74,386

 
$
59,636

Other revenue
149

 
1,583

 
1,095

Total revenues
6,625

 
75,969

 
60,731

Expenses:
 
 
 
 
 
Employee compensation and benefits
2,788

 
30,215

 
24,000

Interest expense
1,252

 
13,068

 
8,691

Depreciation and amortization
—

 
15,645

 
14,166

Other expenses
1,961

 
23,263

 
19,698

Total expenses
6,001

 
82,191

 
66,555

Net income (loss) before taxes from discontinued operations
624

 
(6,222
)
 
(5,824
)
Gain on sale of discontinued operations
56,860

 
—

 
—

Less: provision (benefit) for income taxes
13,714

 
(2,224
)
 
(1,537
)
Net income (loss) from discontinued operations
$
43,770

 
$
(3,998
)
 
$
(4,287
)
The following table represents a summary of cash flows related to discontinued operation included in the consolidated statements of cash flows for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(2,095
)
 
$
16,805

 
$
15,595

Investing activities
(592
)
 
(74,325
)
 
(96,679
)
Financing activities
(123
)
 
50,569

 
74,155

Net cash flows provided by discontinued operations
$
(2,810
)
 
$
(6,951
)
 
$
(6,929
)

D. Significant Accounting Policies Related to Dispositions and Discontinued Operations

Except as noted below, Care, Luxury and our commercial lending business adhered to the Significant Accounting Policies as described in Note 2.

Investments

Loans, at Amortized Cost, Net

Certain loans originated by our former commercial lending business, which was sold in 2017, were sold were asset backed loans held for investment and were carried at amortized cost. The Company periodically reviewed these loans for impairment. Impairment losses were taken for impaired loans based on the fair value of collateral on an individual loan basis. When it was probable that the Company would be unable to collect all amounts contractually due, the loan was considered impaired.

An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses were charged against the allowance when the Company believed the uncollectibility of a loan balance was confirmed. Management reviewed its methodology for its calculation of its loss provision as deemed necessary which was at least on an annual basis.

Interest income related to loans at amortized cost was generally recognized using the effective interest method or on a basis approximating a level rate of return over the term of the loan. Nonaccrual loans were those on which the accrual of interest was suspended. Loans were placed on nonaccrual status and considered nonperforming when full payment of principal and interest was in doubt, or when principal or interest was 90 days or more past due and collateral, if any, was insufficient to cover principal and interest. Interest accrued but not collected at the date a loan was placed on nonaccrual status was reversed against interest income. In addition, the amortization of net deferred loan fees was suspended. Interest income on nonaccrual loans was recognized

F- 27
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


only to the extent it was received in cash. However, when there was doubt regarding the ultimate collectability of loan principal, cash receipts on such nonaccrual loans were applied to reduce the carrying value of such loans. Nonaccrual loans were returned to accrual status when repayment was reasonably assured and there had been demonstrated performance under the terms of the loan or, if applicable, the restructured terms of such loan.

The Company deferred nonrefundable loan origination and commitment fees collected on originated loans and amortized the net amount as an adjustment of the interest income over the contractual life of the loan. If a loan was prepaid, the net deferred amount was recognized in loan fee income within the consolidated statements of operations in the period. Loan fee income included prepayment fees and late charges collected.

Real Estate, Net

Investments in real estate, net were carried at cost less accumulated depreciation. Depreciation was calculated on a straight-line basis using estimated useful lives not to exceed 40 years for buildings and 9 years for building improvements and other fixed assets. Real estate associated with our Care business is classified as a discontinued operation.

Real estate properties were reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If such reviews indicated that the asset was impaired, the asset’s carrying amount was written down to its fair value. There were no material impairments on the Company’s real estate investments for the years ended December 31, 2017 and 2016, respectively.

Revenue Recognition

Rental and Related Revenue

Rental revenue from residents in properties owned by Care but managed by a management company pursuant to a management agreement (Managed Properties) were recognized monthly as services were provided, as lease periods for residents were short-term in nature. The Company recognized rental revenue from triple net leases on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis was more representative of the time pattern in which the use benefit was derived from the leased property. Renewal options in leases with rental terms that were higher than those in the primary term were excluded from the calculation of straight-line rent if the renewals were not reasonably assured. The Company commenced rental revenue recognition when the tenant took control of the leased space. The Company recognized lease termination payments as a component of rental revenue in the period received, provided that there were no further obligations under the lease. Revenue related to rental revenue was primarily attributable to services provided to the occupants of our senior living properties.

(4) Operating Segment Data

Tiptree is a holding company that combines specialty insurance operations with investment management expertise. We allocate our capital across our insurance operations and other investments. As such, we classify our business into one reportable segment – Specialty Insurance. Our non-insurance operations, assets and other investments which is comprised of our non-reportable operating segments and other business activities, we refer to as Tiptree Capital. Corporate activities include holding company interest expense, employee compensation and benefits, and other expenses.

Our 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. For the year ended December 31, 2018, Mortgage and Asset Management, which previously were reportable segments, no longer meet the quantitative threshold for disclosure. Those are now reported in Other, which we refer to as Tiptree Capital. Prior year segments have been conformed to the current year presentation. Intercompany transactions are eliminated.

A description of our reportable segment and of Tiptree Capital are as follows:

Insurance:
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 range of products and services include credit protection insurance, warranty

F- 28
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


and service contract products, and other specialty insurance programs which underwrite niche personal and commercial lines of insurance. We also offer various other insurance related products and services throughout the U.S. through our non-regulated subsidiaries.
Tiptree Capital:
Tiptree Capital includes assets and operations of other non-insurance activities which include:
•
Asset Management operations which are primarily conducted through Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. Results prior to deconsolidation include net income (loss) from consolidated CLOs.
•
Mortgage operations which are conducted through Reliance. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs and FHA/VA.
•
Additional operations include the investment in Invesque not held in Specialty Insurance, as well as the operations of our dry bulk vessels, and certain assets classified as held for sale.

The tables below present the components of revenue, expense, pre-tax income (loss), and assets for our reportable segment as well as Tiptree Capital for the following periods:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2018
 
Specialty Insurance
 
Tiptree Capital
 
Total
Total revenue
$
549,872

 
$
75,954

 
$
625,826

Total expense
(531,312
)
 
(83,759
)
 
(615,071
)
Corporate expense
—

 
—

 
(30,551
)
Net income (loss) before taxes from continuing operations
$
18,560

 
$
(7,805
)
 
$
(19,796
)
Less: provision (benefit) for income taxes
 
 
 
 
(5,909
)
Net income (loss) from discontinued operations
 
 
 
 
43,770

Net income (loss) before non-controlling interests
 
 
 
 
$
29,883

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
5,950

Net income (loss) attributable to Common Stockholders
 
 
 
 
$
23,933

 
Year Ended December 31, 2017
 
Specialty Insurance
 
Tiptree Capital
 
Total
Total revenue
$
478,965

 
$
102,833

 
$
581,798

Total expense
(473,561
)
 
(92,954
)
 
(566,515
)
Net income attributable to consolidated CLOs
—

 
10,457

 
10,457

Corporate expense
—

 
—

 
(29,070
)
Net income (loss) before taxes from continuing operations
$
5,404

 
$
20,336

 
$
(3,330
)
Less: provision (benefit) for income taxes
 
 
 
 
(12,562
)
Net income (loss) from discontinued operations
 
 
 
 
(3,998
)
Net income (loss) before non-controlling interests
 
 
 
 
$
5,234

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
1,630

Net income (loss) attributable to Common Stockholders
 
 
 
 
$
3,604

 
Year Ended December 31, 2016
 
Specialty Insurance
 
Tiptree Capital
 
Total
Total revenue
$
394,170

 
$
112,253

 
$
506,423

Total expense
(347,366
)
 
(95,365
)
 
(442,731
)
Net income (loss) attributable to consolidated CLOs
—

 
20,254

 
20,254

Corporate expense
—

 
—

 
(34,806
)
Net income (loss) before taxes from continuing operations
$
46,804

 
$
37,142

 
$
49,140


F- 29
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


 
Year Ended December 31, 2016
Less: provision (benefit) for income taxes
 
 
 
 
12,515

Net income (loss) from discontinued operations
 
 
 
 
(4,287
)
Net income (loss) before non-controlling interests
 
 
 
 
$
32,338

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
7,018

Net income (loss) attributable to Common Stockholders
 
 
 
 
$
25,320


The following table summarizes sources of revenue from Tiptree Capital:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net realized and unrealized gains (losses) (1)
$
40,446

 
$
64,110

 
$
72,538

Other investment income (2)
25,541

 
26,261

 
26,096

Management fee income
6,694

 
8,314

 
9,400

Other
3,273

 
4,148

 
4,219

Total Revenue
$
75,954

 
$
102,833

 
$
112,253

(1) See Note (5) Investments for the components of Net realized and unrealized gains (losses) related to Tiptree Capital.
(2) See Note (5) Investments for the components of Other investment income.


The following table presents the reportable segment and Tiptree Capital assets for the following periods:
 
As of December 31, 2018
 
Specialty Insurance
 
Tiptree Capital
 
Corporate
 
Total
Total assets
$
1,514,084

 
$
318,420

 
$
32,414

 
$
1,864,918

 
 
 
As of December 31, 2017
 
Specialty Insurance
 
Tiptree Capital
 
Corporate
 
Total
Total assets
$
1,367,437

 
$
544,852

 
$
77,453

 
$
1,989,742


(5) Investments

The following table presents the Company's investments related to insurance operations (Specialty Insurance) and investments from other Tiptree investing activities (Tiptree Capital), measured at fair value as of the following periods:
 
As of December 31, 2018
 
As of December 31, 2017
 
Specialty Insurance
 
Tiptree Capital
 
Total
 
Specialty Insurance
 
Tiptree Capital
 
Total
Available for sale securities, at fair value
$
283,563

 
$
—

 
$
283,563

 
$
182,448

 
$
—

 
$
182,448

Loans, at fair value
158,466

 
56,917

 
215,383

 
195,327

 
62,846

 
258,173

Equity securities
29,425

 
93,554

 
122,979

 
25,536

 
—

 
25,536

Other investments
18,526

 
56,476

 
75,002

 
50,720

 
8,422

 
59,142

Total investments
$
489,980

 
$
206,947

 
$
696,927

 
$
454,031

 
$
71,268

 
$
525,299



F- 30
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Available for Sale Securities, at fair value

All of the Company’s investments in available for sale securities (AFS) as of December 31, 2018 and December 31, 2017 are held by subsidiaries in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
 
As of December 31, 2018
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
71,945

 
$
266

 
$
(463
)
 
$
71,748

Obligations of state and political subdivisions
67,624

 
280

 
(458
)
 
67,446

Corporate securities
96,888

 
78

 
(1,241
)
 
95,725

Asset backed securities
41,912

 
14

 
(1,274
)
 
40,652

Certificates of deposit
1,241

 
—

 
—

 
1,241

Obligations of foreign governments
6,750

 
12

 
(11
)
 
6,751

Total
$
286,360

 
$
650

 
$
(3,447
)
 
$
283,563

 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
48,399

 
$
20

 
$
(474
)
 
$
47,945

Obligations of state and political subdivisions
47,211

 
190

 
(420
)
 
46,981

Corporate securities
62,125

 
195

 
(345
)
 
61,975

Asset backed securities
23,369

 
182

 
(58
)
 
23,493

Certificates of deposit
896

 
—

 
—

 
896

Equity securities
595

 
10

 
(17
)
 
588

Obligations of foreign governments
562

 
9

 
(1
)
 
570

Total
$
183,157

 
$
606

 
$
(1,315
)
 
$
182,448


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
 
December 31, 2018
 
December 31, 2017
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
30,920

 
$
30,836

 
$
26,399

 
$
26,363

Due after one year through five years
167,201

 
166,366

 
86,287

 
85,852

Due after five years through ten years
32,805

 
32,185

 
41,442

 
41,085

Due after ten years
13,522

 
13,524

 
5,065

 
5,067

Asset-backed securities
41,912

 
40,652

 
23,369

 
23,493

Total
$
286,360

 
$
283,563

 
$
182,562

 
$
181,860



F- 31
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(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 December 31, 2018
 
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
$
14,844

 
$
(70
)
 
51

 
$
19,495

 
$
(393
)
 
128

Obligations of state and political subdivisions
15,830

 
(30
)
 
41

 
21,594

 
(428
)
 
115

Corporate securities
47,976

 
(393
)
 
352

 
28,517

 
(848
)
 
404

Asset-backed securities
37,613

 
(1,262
)
 
35

 
614

 
(12
)
 
5

Obligations of foreign governments
2,313

 
(6
)
 
15

 
1,301

 
(5
)
 
8

Total
$
118,576

 
$
(1,761
)
 
494

 
$
71,521

 
$
(1,686
)
 
660

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
37,918

 
$
(291
)
 
115

 
$
7,584

 
$
(183
)
 
56

Obligations of state and political subdivisions
24,165

 
(135
)
 
96

 
7,294

 
(285
)
 
48

Corporate securities
37,573

 
(179
)
 
295

 
6,568

 
(166
)
 
127

Asset-backed securities
1,297

 
(58
)
 
2

 
—

 
—

 
—

Equity securities
295

 
(15
)
 
3

 
63

 
(2
)
 
2

Obligations of foreign governments
371

 
(1
)
 
1

 
—

 
—

 
—

Total
$
101,619

 
$
(679
)
 
512

 
$
21,509

 
$
(636
)
 
233

The Company does not intend to sell the investments that were in an unrealized loss position as of December 31, 2018, 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. The unrealized losses were attributable to changes in interest rates and not credit-related issues. As of December 31, 2018 and December 31, 2017, based on the Company's review, none of the fixed maturity 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.

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 December 31,
 
2018
 
2017
Fair value of restricted investments for special deposits required by state insurance departments
$
9,398

 
$
6,101

Fair value of restricted investments in trust pursuant to reinsurance agreements
24,931

 
10,175

Total fair value of restricted investments
$
34,329

 
$
16,276



F- 32
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


The following table presents additional information on the Company’s available for sale securities:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Purchases of available for sale securities
$
192,288

 
$
117,735

 
$
24,652

 
 
 
 
 
 
Proceeds from maturities, calls and prepayments of available for sale securities
$
30,089

 
$
32,157

 
$
27,859

 
 
 
 
 
 
Gains (losses) realized on maturities, calls and prepayments of available for sale securities
$
(30
)
 
$
5

 
$
87

 
 
 
 
 
 
Gross proceeds from sales of available for sale securities
$
56,191

 
$
48,252

 
$
66,891

 
 
 
 
 
 
Gains (losses) realized on sales of available for sale securities
$
(789
)
 
$
430

 
$
938


Loans, at fair value

The following tables present the Company’s investments in loans measured at fair value and the Company’s investments in loans, measured at fair value pledged as collateral:
 
As of December 31, 2018
 
As of December 31, 2017
 
Fair value
 
Unpaid principal balance (UPB)
 
Fair value exceeds / (below) UPB
 
Pledged as Collateral
 
Fair value
 
Unpaid principal balance (UPB)
 
Fair value exceeds / (below) UPB
 
Pledged as Collateral
Specialty Insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate loans (1)
$
130,910

 
$
136,475

 
$
(5,565
)
 
$
120,202

 
$
157,661

 
$
157,834

 
$
(173
)
 
$
154,279

Non-performing loans (2)
27,556

 
33,887

 
(6,331
)
 
—

 
37,666

 
52,872

 
(15,206
)
 
30,703

Tiptree Capital:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale
56,917

 
54,679

 
2,238

 
56,441

 
62,846

 
60,764

 
2,082

 
62,212

Total loans, at fair value
$
215,383

 
$
225,041

 
$
(9,658
)
 
$
176,643

 
$
258,173

 
$
271,470

 
$
(13,297
)
 
$
247,194

(1) The UPB of these loans approximates cost basis.
(2) The cost basis of NPLs was approximately $21,555 and $32,398 at December 31, 2018 and December 31, 2017, respectively.

As of December 31, 2018 and December 31, 2017, there were no mortgage loans held for sale 90 days or more past due.

Equity securities

Equity securities, at fair value, represents the carrying amount of the Company's basis in equity investments. Included within the equity securities balance are 16.6 million shares of Invesque Inc. for which the company has elected to apply the fair value option as described in Note—(3) Dispositions, Assets Held for Sale and Discontinued Operations. The following table contains information regarding the Company’s equity securities related to insurance operations and other Tiptree investing activity as of the following periods:
 
As of December 31, 2018
 
As of December 31, 2017
 
Specialty Insurance
 
Tiptree Capital
 
Total
 
Specialty Insurance
 
Tiptree Capital
 
Total
Invesque Inc.
$
19,584

 
$
93,554

 
$
113,138

 
$
—

 
$
—

 
$
—

Other equity securities
9,841

 
—

 
9,841

 
25,536

 
—

 
25,536

Total equity securities
$
29,425

 
$
93,554

 
$
122,979

 
$
25,536

 
$
—

 
$
25,536



F- 33
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Other Investments

The following table contains information regarding the Company’s other investments as of the following periods:
 
December 31, 2018
 
December 31, 2017
 
Specialty Insurance
 
Tiptree Capital
 
Total
 
Specialty Insurance
 
Tiptree Capital
 
Total
Vessels, net (1)
$
—

 
$
50,125

 
$
50,125

 
$
—

 
$
—

 
$
—

Real estate (2)
10,019

 
—

 
10,019

 
35,282

 
—

 
35,282

Other
8,507

 
6,351

 
14,858

 
15,438

 
8,422

 
23,860

Total other investments
$
18,526

 
$
56,476

 
$
75,002

 
$
50,720

 
$
8,422

 
$
59,142

(1) Net of accumulated depreciation of $898 and $0, respectively.
(2) Includes real estate, net and foreclosed residential real estate property. Real estate, net of $19,226 as of December 31, 2017 was disposed of as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.

Net Investment Income - Specialty Insurance

Net investment income represents investment income and expense from investments related to insurance operations as disclosed within net investment income on the consolidated statements of operations. The following tables present the components of net investment income by source of income:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Interest:
 
 
 
 
 
Available for sale securities, at fair value
$
6,560

 
$
3,490

 
$
3,075

Loans, at fair value
10,809

 
11,073

 
7,999

Other investments
1,350

 
566

 
390

Dividends from equity securities
2,092

 
2,043

 
2,981

Other
97

 
800

 
78

Subtotal
20,908

 
17,972

 
14,523

Less: investment expenses
1,729

 
1,686

 
1,542

Net investment income
$
19,179

 
$
16,286

 
$
12,981


Other Investment Income - Tiptree Capital

Other investment income represents other income from other Tiptree non-insurance activities as disclosed within other revenue on the consolidated statements of operations, see Note (15) Other Revenue, Other Expenses and Other Income. The following tables present the components of other investment income by type:

 
Year Ended December 31,
 
2018
 
2017
 
2016
Interest income:
 
 
 
 
 
Loans, at fair value
$
4,343

 
$
3,555

 
$
4,094

Loans at amortized cost, net
—

 
8,368

 
8,440

Other
175

 
184

 
—

Dividends from equity securities
9,224

 
—

 
—

Loan fee income:
 
 
 
 
 
Loans, at fair value
7,827

 
10,596

 
8,651

Loans at amortized cost, net
—

 
3,558

 
4,911

Charter revenue from vessels
3,972

 
—

 
—

Other investment income
$
25,541

 
$
26,261

 
$
26,096


Net realized and unrealized gains (losses)

The following table presents the components of net realized and unrealized gains (losses) recorded on the consolidated statements

F- 34
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


of operations. Net unrealized gains (losses) on available for sale securities are included within other comprehensive income, and as such, are not included in this table:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net realized gains (losses)
 
 
 
 
 
Specialty Insurance:
 
 
 
 
 
 Reclass of unrealized gains (losses) on AFS from OCI
$
(819
)
 
$
435

 
$
1,026

 Net gain (loss) on loans
2,071

 
5,380

 
1,380

 Net gain (loss) on equity securities
2,721

 
—

 
—

 Other
1,627

 
—

 
—

Tiptree Capital:
 
 
 
 
 
 Gain on sale of loans
61,147

 
64,296

 
66,999

 Other
(2,084
)
 
(5,686
)
 
1,406

Subtotal
64,663

 
64,425

 
70,811

Net unrealized gains (losses)
 
 
 
 
 
Specialty Insurance:
 
 
 
 
 
 Net change in unrealized gains (losses) on loans
(4,730
)
 
1,435

 
5,063

 Net unrealized gains (losses) on equity securities held at year end
(9,815
)
 
(23,753
)
 
7,293

 Reclass of unrealized (gains) losses from prior periods for equity securities sold
(2,291
)
 
—

 
—

 Other
(428
)
 
—

 
—

Tiptree Capital:
 
 
 
 
 
 Net change in unrealized gains (losses) on loans
194

 
286

 
(638
)
 Net unrealized gains (losses) on equity securities held at year end
(17,134
)
 
—

 
—

 Other
(1,677
)
 
5,214

 
4,771

Subtotal
(35,881
)
 
(16,818
)
 
16,489

Total net realized and unrealized gains (losses)
$
28,782

 
$
47,607

 
$
87,300


(6) Notes and Accounts Receivable, net

The following table summarizes the total notes and accounts receivable, net:
 
As of December 31,
 
2018
 
2017
Notes receivable, net - premium financing program
$
13,057

 
$
12,225

Accounts and premiums receivable, net
50,880

 
59,946

Retrospective commissions receivable
84,488

 
68,064

Trust receivables
53,424

 
29,060

Other receivables
21,256

 
17,127

Total
$
223,105

 
$
186,422


Notes Receivable, net

The Company has established an allowance for uncollectible amounts against its notes receivable of $97 and $66 as of December 31, 2018 and December 31, 2017, respectively. As of December 31, 2018 and December 31, 2017, there were $368 and $416 in balances classified as 90 days plus past due, respectively. Bad debt expense totaled $195, $374 and $932 for the years ended December 31, 2018, 2017 and 2016, respectively.

Accounts and premiums receivable, net

The Company has established a valuation allowance against its accounts and premiums receivable of $217 and $196 as of December 31, 2018 and December 31, 2017, respectively. Bad debt expense totaled $39, $48 and $36 for the years ended December 31, 2018, 2017 and 2016, respectively.

F- 35
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(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 Year Ended December 31, 2018
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
69,516

 
$
38,239

 
$
1,874

 
$
33,151

 
5.7
%
Accident and health insurance   
126,951

 
85,136

 
3,229

 
45,044

 
7.2
%
Property and liability insurance
616,135

 
277,856

 
50,346

 
388,625

 
13.0
%
Total premiums written            
812,602

 
401,231

 
55,449

 
466,820

 
11.9
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
64,346

 
32,865

 
1,766

 
33,247

 
5.3
%
Accident and health insurance   
118,482

 
80,258

 
3,262

 
41,486

 
7.9
%
Property and liability insurance
552,792

 
231,093

 
31,405

 
353,104

 
8.9
%
Total premiums earned
$
735,620

 
$
344,216

 
$
36,433

 
$
427,837

 
8.5
%
 
 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2017
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
63,196

 
$
32,358

 
$
2,011

 
$
32,849

 
6.1
%
Accident and health insurance   
119,227

 
79,278

 
3,247

 
43,196

 
7.5
%
Property and liability insurance
553,111

 
238,614

 
27,480

 
341,977

 
8.0
%
Total premiums written            
735,534

 
350,250

 
32,738

 
418,022

 
7.8
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
61,780

 
30,567

 
1,942

 
33,155

 
5.9
%
Accident and health insurance   
111,124

 
76,549

 
3,198

 
37,773

 
8.5
%
Property and liability insurance
486,913

 
201,576

 
15,435

 
300,772

 
5.1
%
Total premiums earned
$
659,817

 
$
308,692

 
$
20,575

 
$
371,700

 
5.5
%
 
 
 
 
 
 
 
 
 
 
For the Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
65,152

 
$
34,044

 
$
2,522

 
$
33,630

 
7.5
%
Accident and health insurance   
116,861

 
79,396

 
3,335

 
40,800

 
8.2
%
Property and liability insurance
505,147

 
257,677

 
15,270

 
262,740

 
5.8
%
Total premiums written            
687,160

 
371,117

 
21,127

 
337,170

 
6.3
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
61,921

 
30,015

 
2,543

 
34,449

 
7.4
%
Accident and health insurance   
112,847

 
79,754

 
3,262

 
36,355

 
9.0
%
Property and liability insurance
496,418

 
343,820

 
6,034

 
158,632

 
3.8
%
Total premiums earned
$
671,186

 
$
453,589

 
$
11,839

 
$
229,436

 
5.2
%


F- 36
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(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 Year Ended December 31, 2018
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
36,488

 
$
21,037

 
$
886

 
$
16,337

 
5.4
%
Accident and health insurance   
18,986

 
15,666

 
686

 
4,006

 
17.1
%
Property and liability insurance
227,512

 
141,184

 
28,181

 
114,509

 
24.6
%
Total losses incurred
282,986

 
177,887

 
29,753

 
134,852

 
22.1
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
17,243

 
 
 
Total policy and contract benefits
 
$
152,095

 
 
 
 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2017
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
33,068

 
$
18,388

 
$
879

 
$
15,559

 
5.6
%
Accident and health insurance   
17,512

 
14,421

 
752

 
3,843

 
19.6
%
Property and liability insurance
198,484

 
118,262

 
8,915

 
89,137

 
10.0
%
Total losses incurred
249,064

 
151,071

 
10,546

 
108,539

 
9.7
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
15,420

 
 
 
Total policy and contract benefits
 
$
123,959

 
 
 
 
 
 
 
 
 
 
 
 
For the Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
Losses Incurred
 
 
 
 
 
 
 
 
 
Life insurance                  
$
32,574

 
$
16,945

 
$
1,184

 
$
16,813

 
7.0
%
Accident and health insurance   
19,250

 
16,339

 
871

 
3,782

 
23.0
%
Property and liability insurance
219,538

 
158,520

 
3,337

 
64,355

 
5.2
%
Total losses incurred
271,362

 
191,804

 
5,392

 
84,950

 
6.3
%
 
 
 
 
 
 
 
 
 
 
 
Member benefit claims (1)
 
21,834

 
 
 
Total policy and contract benefits
 
$
106,784

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

The following table presents the components of the reinsurance receivables:
 
As of December 31,
 
2018
 
2017
Prepaid reinsurance premiums:
 
 
 
Life (1)
$
69,436

 
$
65,218

Accident and health (1)
61,606

 
56,729

Property
178,498

 
131,735

Total
309,540

 
253,682

 
 
 
 
Ceded claim reserves:
 
 
 
Life
3,424

 
2,988

Accident and health
11,039

 
9,575

Property
75,748

 
61,406

Total ceded claim reserves recoverable
90,211

 
73,969

Other reinsurance settlements recoverable
20,600

 
25,316

Reinsurance receivables
$
420,351

 
$
352,967

(1) Including policyholder account balances ceded.
 

F- 37
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from non-affiliated reinsurers:
 
As of
 
December 31, 2018
Total of the three largest receivable balances from non-affiliated reinsurers
$
101,905


As of December 31, 2018, the non-affiliated reinsurers from whom our specialty insurance business has the largest receivable balances were: MFI Insurance Company, LTD (A. M. Best Rating: Not rated), Freedom Insurance Company, LTD (A. M. Best Rating: Not rated) and Frandisco Property and Casualty Insurance Company (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. As of December 31, 2018, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the collateralization.

(8) Goodwill and Intangible Assets, net

The following table presents identifiable finite and indefinite-lived intangible assets, accumulated amortization, and goodwill by operating segment and/or reporting unit, as appropriate:
 
As of December 31, 2018
 
As of December 31, 2017
 
Specialty Insurance
 
Other (1)
 
Total
 
Specialty Insurance
 
Other (1)
 
Total
Customer relationships
$
50,500

 
$
—

 
$
50,500

 
$
50,500

 
$
—

 
$
50,500

Accumulated amortization
(18,913
)
 
—

 
(18,913
)
 
(12,081
)
 
—

 
(12,081
)
Trade names
6,500

 
800

 
7,300

 
6,500

 
800

 
7,300

Accumulated amortization
(2,727
)
 
(280
)
 
(3,007
)
 
(2,182
)
 
(200
)
 
(2,382
)
Software licensing
8,500

 
640

 
9,140

 
8,500

 
640

 
9,140

Accumulated amortization
(6,942
)
 
(320
)
 
(7,262
)
 
(5,242
)
 
(228
)
 
(5,470
)
Insurance policies and contracts acquired
36,500

 
—

 
36,500

 
36,500

 
—

 
36,500

Accumulated amortization
(35,898
)
 
—

 
(35,898
)
 
(35,433
)
 
—

 
(35,433
)
Insurance licensing agreements(2)
13,761

 
—

 
13,761

 
13,761

 
—

 
13,761

Leases in place (3)
—

 
—

 
—

 
2,324

 
—

 
2,324

Accumulated amortization
—

 
—

 
—

 
(142
)
 
—

 
(142
)
Intangible assets, net
51,281

 
840

 
52,121

 
63,005

 
1,012

 
64,017

Goodwill
89,854

 
1,708

 
91,562

 
89,854

 
1,708

 
91,562

Total goodwill and intangible assets, net
$
141,135

 
$
2,548

 
$
143,683

 
$
152,859

 
$
2,720

 
$
155,579

(1) Other is primarily comprised of mortgage operations.
(2) Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
(3) Disposed of as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.

Goodwill

The following table presents the activity in goodwill, by operating segment and/or reporting unit, as appropriate, 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:

F- 38
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


 
Specialty Insurance
 
Other
 
Total
Balance at December 31, 2015
$
89,854

 
$
2,913

 
$
92,767

Balance at December 31, 2016
$
89,854

 
$
2,913

 
$
92,767

Goodwill divested (1)
—

 
(1,205
)
 
(1,205
)
Balance at December 31, 2017
$
89,854

 
$
1,708

 
$
91,562

Balance at December 31, 2018
$
89,854

 
$
1,708

 
$
91,562

 
 
 
 
 
 
Accumulated impairments
$
—

 
$
699

 
$
699

(1) Related to the sale of our commercial lending business. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.

The Company conducts annual impairment tests of its goodwill as of October 1. The Company’s impairment testing for each period did not indicate any goodwill impairment, as each of the Company’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value. For the years ended December 31, 2018, 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 operating segment and/or reporting unit, as appropriate, 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
 
Other
 
Total
Balance at December 31, 2015
82,677

 
1,354

 
84,031

Intangible assets acquired in 2016
1,317

 
—

 
1,317

Less: amortization expense
(11,519
)
 
(171
)
 
(11,690
)
Balance at December 31, 2016
$
72,475

 
$
1,183

 
$
73,658

Intangible assets acquired in 2017
1,768

 
—

 
1,768

Less: amortization expense
(11,238
)
 
(171
)
 
(11,409
)
Balance at December 31, 2017
$
63,005

 
$
1,012

 
$
64,017

Intangible assets divested
(2,167
)
 
—

 
(2,167
)
Less: amortization expense
(9,557
)
 
(172
)
 
(9,729
)
Balance at December 31, 2018
$
51,281

 
$
840

 
$
52,121


The following table presents the amortization expense on finite-lived intangible assets for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Amortization expense on intangible assets
$
9,729

 
$
11,409

 
$
11,690


The following table presents the amortization expense on finite-lived intangible assets for the next five years by operating segment and/or reporting unit, as appropriate:
 
As of December 31, 2018
 
Specialty Insurance
 
Other
 
Total
2019
$
7,726

 
$
171

 
$
7,897

2020
5,150

 
171

 
5,321

2021
4,333

 
171

 
4,504

2022
3,649

 
126

 
3,775

2023
3,212

 
80

 
3,292

2024 and thereafter
13,450

 
121

 
13,571

Total
$
37,520

 
$
840

 
$
38,360


F- 39
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



(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 it’s 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
Interest Rate Lock Commitments

The Company enters into interest rate lock commitments (IRLCs) with customers 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 and TBA Mortgage Backed Securities
 
The Company enters into forward delivery contracts with loan aggregators and other investors as one of the tools to manage the interest rate risk associated with IRLCs and loans held for sale. In addition, 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.

The following table summarizes the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying risk:
 
As of December 31, 2018
 
As of December 31, 2017
 
Notional
values
 
Asset
derivatives
 
Liability
derivatives
 
Notional
values
 
Asset
derivatives
 
Liability
derivatives
Interest rate risk:
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
$
122,477

 
$
3,460

 
$
—

 
$
190,645

 
$
4,808

 
$
—

Forward delivery contracts
41,383

 
5

 
52

 
71,152

 
30

 
—

TBA mortgage backed securities
129,000

 
39

 
824

 
197,000

 
175

 
117

Total
$
292,860


$
3,504


$
876

 
$
458,797

 
$
5,013


$
117

 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments

The following table presents the fair value and the related outstanding notional amounts of the Company's cash flow hedging derivative instruments and indicates where the Company records each amount in its consolidated balance sheets:
 
 
 
As of
 
Balance Sheet Location
 
December 31, 2018 (1)
 
December 31, 2017
Unrealized gain (loss), net of tax, on the fair value of interest rate swaps
AOCI
 
$
—

 
$
2,074

(1) Deconsolidated of as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.

The following table presents the pretax impact of the cash flow hedging derivative instruments on the consolidated financial

F- 40
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


statements for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Gains (losses) recognized in AOCI on the derivative-effective portion
$
1,111

 
$
282

 
$
2,210

 
 
 
 
 
 
(Gains) losses reclassified from AOCI into income-effective portion
$
(3,845
)
 
$
184

 
$
121

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

 
$
—

 
$
240


(10) Debt, net

The following table summarizes the balance of the Company’s debt obligations, net of discounts and deferred financing costs.
 
 
 
 
Stated interest rate or range of rates
 
Maximum borrowing capacity as of
 
As of December 31,
Debt Type
 
Stated maturity date
 
 
December 31, 2018
 
2018
 
2017
Corporate debt
 
 
 
 
 
 
 
 
 
 
Secured corporate credit agreements
 
April 2019 - September 2020
 
LIBOR + 1.00% to 5.50%
 
$
132,090

 
$
72,090

 
$
28,500

Junior subordinated notes
 
October 2057
 
8.50%
 
125,000

 
125,000

 
125,000

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

 
35,000

 
35,000

Total corporate debt
 
 
 
 
 
 
 
232,090

 
188,500

Asset based debt (1)
 
 
 
 
 
 
 
 
 
 
Asset based revolving financing (2)
 
April 2019 - August 2023
 
LIBOR + 2.00% to 2.60%
 
130,000

 
86,092

 
118,794

Residential mortgage warehouse borrowings (3)
 
May 2019 - August 2019
 
LIBOR + 2.00% to 3.00%
 
76,000

 
46,091

 
48,810

Total asset based debt
 
 
 
 
 
 
 
132,183

 
167,604

Total debt, face value
 
 
 
 
 
 
 
364,273

 
356,104

Unamortized discount, net
 
 
 
 
 
 
 
(504
)
 
(191
)
Unamortized deferred financing costs
 
 
 
 
 
 
 
(9,686
)
 
(9,832
)
Total debt, net
 
 
 
 
 
 
 
$
354,083

 
$
346,081


(1) Asset based debt is generally recourse only to specific assets and related cash flows.
(2) The weighted average coupon rate for asset based revolving financing was 4.30% and 4.17% at December 31, 2018 and December 31, 2017, respectively.
(3) The weighted average coupon rate for residential mortgage warehouse borrowings was 4.66% and 4.27% at December 31, 2018 and December 31, 2017, respectively.

The table below presents the amount of interest expense the Company incurred on its debt for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Interest expense - corporate debt
$
18,162

 
$
12,838

 
$
10,322

Interest expense - asset based debt
8,851

 
12,759

 
10,591

Interest expense on debt
$
27,013

 
$
25,597

 
$
20,913



F- 41
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


The following table presents the future maturities of the unpaid principal balance on the Company’s debt as of:
 
December 31, 2018
2019
$
50,840

2020
72,090

2021
—

2022
—

2023
81,343

Thereafter
160,000

Total
$
364,273


The following narrative is a summary of certain of the terms of our debt agreements for the period ended December 31, 2018:
Corporate Debt

Secured Corporate Credit Agreements
On May 4, 2018, the Company entered into a Fifth Amendment to the Credit Agreement with Fortress providing for an additional $47,000 borrowing for a total principal amount outstanding of $75,000 as of the borrowing date. The Fifth Amendment extends the maturity date of all term loans under the Credit Agreement from September 18, 2018 to September 18, 2020. The amended facility also has a new interest rate at a variable rate equal to one-month LIBOR with a LIBOR floor of 1.25%, plus a margin of 5.50% per annum. As of December 31, 2018 and December 31, 2017, a total of $72,090 and $28,500, respectively, was outstanding under the agreement.

On December 21, 2017, a subsidiary in our specialty insurance business entered into a $30,000 revolving line of credit which
bears interest at a rate equal to the 30-day LIBOR rate plus 1.00% and has a $30,000 accordion feature. The facility is secured by substantially all the assets of the subsidiary and had a maturity date of December 20, 2018, and was renewed with a new maturity date of April 28, 2019. It contains terms and conditions typical for a transaction of this type, such as maximum debt incurrence and restricted payments. As of December 31, 2018 and December 31, 2017, nothing was outstanding under the agreement.

Junior Subordinated Notes
On October 16, 2017, a subsidiary in our specialty insurance business issued $125,000 of 8.50% Fixed Rate Resetting Junior Subordinated Notes due October 2057. Substantially all of the net proceeds were used to repay the existing secured credit agreement, which was terminated thereafter. The notes are unsecured obligations of the subsidiary and rank in right of payment and upon liquidation, junior to all of the subsidiaries current and future senior indebtedness. The notes are not obligations of or guaranteed by any subsidiaries of the subsidiary, or any other Tiptree entities. So long as no event of default has occurred and is continuing, all or part of the interest payments on the notes can be deferred on one or more occasions for up to five consecutive years per deferral period. This credit agreement contains customary Financial covenants that require, among other items, maximum leverage and limitations on restricted payments under certain circumstances.

Preferred Trust Securities
A subsidiary in our specialty insurance business has $35,000 of preferred trust securities due June 15, 2037. Interest is payable quarterly at an interest rate of LIBOR plus 4.10%. The Company may redeem the preferred trust securities, in whole or in part, at a price equal to the full outstanding principal amount of such preferred trust securities outstanding plus accrued and unpaid interest.

Asset Based Debt

Asset Backed Revolving Financing
The $11,917 balance as of December 31, 2017 of the NPL financing in our specialty insurance business was paid off and the borrowing was extinguished in 2018.

The Company has financed purchases of certain investments in corporate loans with asset-based leverage. These investments are held in our specialty insurance business. Such borrowings are generally recourse only to the specific investments. Repayment is based upon a specific maturity date of August 2023 with a maximum borrowings of $105,000 (reduced from $150,000 in

F- 42
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


November 2018) and an interest rate of LIBOR plus 2.00%. As of December 31, 2018 and December 31, 2017, a total of $81,343 and $101,428, respectively, was outstanding under the financing agreement.

An asset backed revolving borrowing in our specialty insurance premium finance 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. As of December 31, 2018 and December 31, 2017, a total of $4,749 and $5,449, respectively, was outstanding under the financing agreement.

Residential Mortgage Warehouse Borrowings
The Company, through a subsidiary in its mortgage business has three warehouse borrowings with a total borrowing capacity
at December 31, 2018 of $76,000. Such warehouse facilities are recourse to the assets of the subsidiary and are secured by liens on cash escrow and the loans held for sale in the warehouse. These credit agreements contain customary financial covenants that require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios, and minimum liquid assets. As of December 31, 2018 and 2017, a total of $46,091 and $48,810, respectively, was outstanding under such financing agreements.

Luxury has three warehouse borrowings with a total borrowing capacity at December 31, 2018 of $95,000. As of December 31, 2018 and 2017, a total of $61,381and $53,835, respectively, was outstanding under such financing agreements. At December 31, 2018 and December 31, 2017 the debt for this subsidiary was included within liabilities held for sale.

As of December 31, 2018, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.

(11) Fair Value of Financial Instruments

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note (2) Summary of Significant Accounting Policies 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

F- 43
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


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 or Level 3 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, at fair value

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.

The Company’s investment in Invesque is subject to certain contractual and functional sale restrictions. The functional restriction period is sequential to the contractual restriction period. As of December 31, 2018, the weighted average estimated contractual sale restriction period was 3 months, with 70% of the shares restricted from sale for a period from 1 to 7 months. In addition, as of December 31, 2018 the weighted average estimated functional restriction period was 0.8 months, with 70% of the shares restricted for a period from 0.75 to 2.25 months. The fair value of the Invesque shares is based on the market price adjusted for the impact of these restrictions, and as a result of the discount on the Invesque investment, the fair value measurement falls under Level 2 of the fair value hierarchy.

Loans, at fair value

Corporate Loans: 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. To determine fair value, the Company uses quoted prices which include those provided from pricing vendors, where available. We perform internal price verification procedures to ensure that the prices and quotes provided from the independent pricing vendors are reasonable. Such verification procedures include comparison of pricing sources and analysis of variances among pricing sources. 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.

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.

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 at the time of transfer during the year ended December 31, 2018 and the year ended December 31, 2017. The carrying value of REOs at December 31, 2018 and December 31, 2017 was $10,019 and $16,056, respectively. Upon conversion to REO, the fair value is estimated using broker price opinion

F- 44
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


(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 other investments. Subsequent to conversion, REOs are carried at lower of cost or market.

Derivative Assets and Liabilities

Derivatives are comprised of interest rate lock commitments (IRLC) and to be announced mortgage backed securities (TBA). 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. Our mortgage origination subsidiaries issue IRLCs to its customers, which are carried at estimated fair value on the Company’s consolidated balance sheet. The estimated fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the IRLC net of costs to produce and an expected fall out assumption. The fair values of these commitments generally result in a Level 3 classification. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors. For loans not locked with investors under a forward delivery commitment, the Company enters into hedge instruments, primarily TBAs, to protect against movements in interest rates. The fair values of TBA mortgage backed securities and forward delivery contracts generally result in a Level 2 classification.

The following tables present the Company’s fair value hierarchies for financial assets and liabilities, measured on a recurring basis:
 
As of December 31, 2018
 
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:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
—

 
$
71,748

 
$
—

 
$
71,748

Obligations of state and political subdivisions
—

 
67,446

 
—

 
67,446

Obligations of foreign governments
—

 
6,751

 
—

 
6,751

Certificates of deposit
1,241

 
—

 
—

 
1,241

Asset backed securities
—

 
39,144

 
1,508

 
40,652

Corporate securities
—

 
95,725

 
—

 
95,725

Total available for sale securities, at fair value
1,241

 
280,814

 
1,508

 
283,563

 
 
 
 
 
 
 
 
Loans, at fair value:

 


 


 


Corporate loans
—

 
22,697

 
108,213

 
130,910

Mortgage loans held for sale
—

 
56,917

 
—

 
56,917

Non-performing loans
—

 
—

 
27,556

 
27,556

Total loans, at fair value
—


79,614


135,769


215,383

 
 
 
 
 
 
 
 
Equity securities, at fair value
9,323

 
113,138

 
518

 
122,979

 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
Forward delivery contracts
—

 
5

 

 
5

Interest rate lock commitments
—

 
—

 
3,460

 
3,460

TBA mortgage backed securities
—

 
39

 
—

 
39

Total derivative assets
—

 
44

 
3,460

 
3,504

CLOs
—

 
—

 
5,027

 
5,027

Total other investments, at fair value
—

 
44

 
8,487

 
8,531

 
 
 
 
 
 
 
 
Total
$
10,564


$
473,610


$
146,282


$
630,456

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
Forward delivery contracts
$
—

 
$
52

 
$
—

 
$
52

TBA mortgage backed securities
—

 
824

 
—

 
824

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


876


—


876


F- 45
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


 
As of December 31, 2018
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Total
$
—


$
876


$
—


$
876

 
As of December 31, 2017
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
Assets:
 
 
 
 
 
 
 
Available for sale securities, at fair value:
 
 
 
 
 
 
 
Equity securities
$
541

 
$
—

 
$
47

 
$
588

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

 
47,945

 
—

 
47,945

Obligations of state and political subdivisions
—

 
46,981

 
—

 
46,981

Obligations of foreign governments
—

 
570

 
—

 
570

Certificates of deposit
896

 
—

 
—

 
896

Asset backed securities
—

 
23,493

 
—

 
23,493

Corporate bonds
—

 
61,975

 
—

 
61,975

Total available for sale securities, at fair value
1,437


180,964


47


182,448

 
 
 
 
 
 
 
 
Loans, at fair value:
 
 
 
 
 
 
 
Corporate loans
—

 
40,925

 
116,736

 
157,661

Mortgage loans held for sale
—

 
62,846

 
—

 
62,846

Non-performing loans
—

 
—

 
37,666

 
37,666

Total loans, at fair value
—


103,771


154,402


258,173

 
 
 
 
 
 
 
 
Equity securities, at fair value
25,536

 
—

 
—

 
25,536

 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
Derivative assets:

 
 
 
 
 
 
Forward delivery contracts
—

 
30

 
—

 
30

Interest rate lock commitments
—

 
—

 
4,808

 
4,808

TBA mortgage backed securities
—

 
175

 
—

 
175

Total derivative assets
—

 
205

 
4,808

 
5,013

CLOs
—

 
—

 
3,409

 
3,409

Total other investments, at fair value
—

 
205

 
8,217

 
8,422

 
 
 
 
 
 
 
 
Total
$
26,973


$
284,940


$
162,666


$
474,579

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
TBA mortgage backed securities
$
—

 
$
117

 
$
—

 
$
117

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


117


—


117

Total
$
—


$
117


$
—


$
117


F- 46
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(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:    
 
Year Ended December 31,
 
2018 (1)
 
2017 (1)
 
Non-CLO assets
 
Non-CLO assets
 
CLO assets
Balance at January 1,
$
162,666

 
$
211,192

 
$
585,870

Net realized gains (losses)
521

 
8,835

 
(1,668
)
Net unrealized gains (losses)
(4,123
)
 
923

 
89

Origination of IRLC
49,067

 
73,554

 
—

Purchases
65,661

 
64,718

 
76,123

Sales (1)
(71,282
)
 
(102,725
)
 
(193,205
)
Issuances
373

 
683

 
675

Transfer into Level 3 (1)
12,748

 
—

 
17,601

Transfer adjustments (out of) Level 3 (1)
(11,567
)
 
(9,089
)
 
(23,427
)
Deconsolidation of CLOs due to sale
—

 
2,817

 
(462,058
)
Conversion to real estate owned
(7,367
)
 
(15,033
)
 
—

Conversion to mortgage held for sale
(50,415
)
 
(72,519
)
 
—

Transfer to assets held for sale
—

 
(690
)
 
—

Balance at December 31,
$
146,282

 
$
162,666

 
$
—

 
 
 
 
 
 
Changes in unrealized gains (losses) included in earnings related to assets still held at period end
$
(2,971
)
 
$
3,809

 
$
—

(1) All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third-party pricing on both CLO and Non-CLO assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.

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:
 
Year Ended December 31,
 
2018
 
2017
 
Non-CLO liabilities
 
Non-CLO liabilities
 
CLO liabilities
Balance at January 1,
$
—

 
$
3,084

 
$
912,034

Net unrealized (gains) losses
—

 
—

 
(1,377
)
Settlements
—

 
(4,838
)
 
(155,194
)
Dispositions
—

 
—

 
(49,011
)
FV adjustment
—

 
1,754

 
—

Deconsolidation of CLOs due to sale
—

 
—

 
(706,452
)
Balance at December 31,
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—


The following is quantitative information about Level 3 assets with significant unobservable inputs used in fair valuation.
 
Fair Value as of
 
 
 
 
 
Actual or Range
(Weighted average)
Assets
December 31, 2018
 
December 31, 2017
 
Valuation technique
 
Unobservable input(s)
 
December 31, 2018
 
December 31, 2017
Interest rate lock commitments
$
3,460

 
$
4,808

 
Internal model
 
Pull through rate
 
50% - 95%
 
50% - 95%
NPLs
27,556

 
37,666

 
Discounted cash flow
 
See table below (1)
 
See table below
 
See table below
Total
$
31,016

 
$
42,474

 
 
 
 
 
 
 
 


F- 47
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


(1)
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 December 31, 2018
 
As of December 31, 2017
Unobservable inputs
 
High
 
Low
 
Average(1)
 
High
 
Low
 
Average(1)
Discount rate
 
30.0%
 
16.0%
 
23.6%
 
30.0%
 
16.0%
 
23.5%
Loan resolution time-line (Years)
 
2.1
 
0.6
 
1.2
 
2.3
 
0.5
 
1.3
Value of underlying properties
 
$1,780
 
$55
 
$383
 
$1,775
 
$40
 
$306
Holding costs
 
14.7%
 
5.0%
 
6.9%
 
22.0%
 
5.3%
 
7.6%
Liquidation costs
 
14.2%
 
8.4%
 
9.2%
 
16.8%
 
8.4%
 
9.4%
Note rate
 
6.0%
 
3.0%
 
4.9%
 
6.0%
 
3.0%
 
4.8%
Secondary market transaction prices/UPB
 
88.3%
 
74.5%
 
83.3%
 
88.5%
 
75.5%
 
83.4%

(1)
Weighted based on value of underlying properties.
 
 
 
 
 
 
 
 
 
 
 
 
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 December 31, 2018
 
As of December 31, 2017
 
Level within
fair value
hierarchy
 
Fair value
 
Carrying value
 
Level within
fair value
hierarchy
 
Fair value
 
Carrying value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Debentures
2
 
$
5,134

 
$
5,134

 
2
 
$
4,163

 
$
4,163

Notes and accounts receivable, net
2
 
13,057

 
13,057

 
2
 
12,225

 
12,225

Total assets
 
 
$
18,191

 
$
18,191

 
 
 
$
16,388

 
$
16,388

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Debt, net
3
 
$
363,769

 
$
363,769

 
3
 
$
356,537

 
$
355,913

Total liabilities
 
 
$
363,769

 
$
363,769

 
 
 
$
356,537

 
$
355,913

Debentures: Since interest rates on debentures are at current market rates for similar credit risks, the carrying amount approximates fair value. These values are net of allowance for doubtful accounts.

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, which approximates fair value of LIBOR based debt, represents the total debt balance at face value excluding the unamortized discount. The fair value of the Junior subordinated notes is determined based on dealer quotes. Categorized as Level 3 of the fair value hierarchy.

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

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.

F- 48
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



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.

(12) Liability for Unpaid Claims and Claim Adjustment Expenses

The following tables present undiscounted information about incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. This information is presented in the aggregate for all short-duration contracts, due to the commonality of claims characteristics. The tables reflect three years of information because historically over 99% of incurred losses have been paid within three years of the accident period.

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:
 
For the Year Ended December 31,
 
2018
 
2017
Policy liabilities and unpaid claims balance as of January 1,
$
112,003

 
$
103,391

     Less : liabilities of policy-holder accounts balances, gross
(15,474
)
 
(17,417
)
     Less : non-insurance warranty benefit claim liabilities
(58
)
 
(91
)
Gross liabilities for unpaid losses and loss adjustment expenses
96,471

 
85,883

     Less : reinsurance recoverable on unpaid losses - short duration
(73,778
)
 
(63,112
)
     Less : other lines, gross
(224
)
 
(208
)
Net balance as of January 1, short duration
22,469

 
22,563

 
 
 
 
Incurred (short duration) related to:
 
 
 
     Current year
129,352

 
103,306

     Prior years
2,509

 
3,347

Total incurred
131,861

 
106,653

 
 
 
 
Paid (short duration) related to:
 
 
 
     Current year
105,740

 
84,493

     Prior years
20,975

 
22,254

Total paid
126,715

 
106,747

 
 
 
 
Net balance as of December 31, short duration
27,615

 
22,469

     Plus : reinsurance recoverable on unpaid losses - short duration
90,016

 
73,778

     Plus : other lines, gross
227

 
224

Gross liabilities for unpaid losses and loss adjustment expenses
117,858

 
96,471

     Plus : liabilities of policy-holder accounts balances, gross
13,659

 
15,474

     Plus : non-insurance warranty benefit claim liabilities
94

 
58

Policy liabilities and unpaid claims balance as of December 31,
$
131,611

 
$
112,003


The following schedule reconciles the total on short duration contracts per the table above to the amount of total losses incurred as presented in the consolidated statement of operations, excluding the amount for member benefit claims:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Short duration incurred
$
131,861

 
$
106,653

 
$
82,579

Other lines incurred
124

 
123

 
277

Unallocated loss adjustment expense
2,867

 
1,763

 
2,094

Total losses incurred
$
134,852

 
$
108,539

 
$
84,950


F- 49
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


For the year ended December 31, 2018, the Company’s specialty insurance business experienced an increase in prior year case development of $2,509 primarily from its non-standard auto business.

For the year ended December 31, 2017, the Company’s specialty insurance business experienced an increase in prior year case development of $3,347. This included $2,345 in non-standard auto and $1,466 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.

Incurred and Paid Development

The following table presents information about incurred and paid loss development and average claim duration as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The cumulative number of reported claims represents open claims, claims closed with payment, and claims closed without payment. It does not include an estimated count of unreported claims. The number of claims is measured by claim event. The Company considers a claim that does not result in a liability as a claim closed without payment.
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
As of December 31, 2018
 
For the Years Ended December 31,
 
Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims
 
Cumulative Number of Reported Claims
Accident Year
2016
2017
2018
 
 
2016
$
84,178

$
87,290

$
87,993

 
$
474

 
256

2017
 
103,306

104,898

 
$
1,749

 
322

2018
 
 
129,352

 
$
19,005

 
316

 
 
Total

$
322,243

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
Accident Year
2016
2017
2018
 
 
 
 
2016
$
62,989

$
84,185

$
86,531

 
 
 
 
2017
 
84,493

102,620

 
 
 
 
2018
 
 
105,740

 
 
 
 
 
 
Total

$
294,891

 
 
 
 
All outstanding liabilities before 2016, net of reinsurance
263

 
 
 
 
Liabilities for loss and loss adjustment expenses, net of reinsurance
$
27,615

 
 
 
 

Duration
The following table presents supplementary information about average historical claims duration as of December 31, 2018 for short duration contracts:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
Short duration
78.0%
20.0%
2.0%

F- 50
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



Reconciliation of Reserves to Balance Sheet

The following table presents a reconciliation of net outstanding liabilities for unpaid loss and loss adjustment expenses of short-duration contracts to the consolidated balance sheet value of policy liabilities and unpaid claims:
 
As of December 31,
 
2018
Net outstanding liabilities:
 
Short duration
$
27,615

Insurance lines other than short-duration
32

Total liabilities for unpaid losses and loss adjustment expenses, net of reinsurance
27,647

 
 
Reinsurance recoverable on unpaid losses and loss adjustment expenses:
 
Short duration
90,016

Other insurance lines
195

Total reinsurance recoverable on unpaid losses and loss adjustment expenses
90,211


 
Total gross liability for unpaid losses and loss adjustment expenses
117,858

Liabilities of policy-holder accounts balances, gross
13,659

Non-insurance warranty benefit claim liabilities
94

Total policy liabilities and unpaid claims
$
131,611


(13) Revenue From Contracts with Customers

As discussed in Note (2) Summary of Significant Accounting Policies, the Company adopted ASU 2014-09 and other ASUs related to Topic 606 as of January 1, 2018. A substantial majority of the Company’s non-investment related revenues are comprised of revenues from insurance contracts that are accounted for under Financial Services-Insurance (Topic 944) or certain financial services products (e.g. gains upon the origination of mortgages) that are not within the scope of the new standard. There was no impact to any prior period amounts or transition adjustment recorded as a result of the adoption of the new standard.

Revenue from contracts with customers is primarily comprised of asset management fee income included as a part of other revenue, and warranty coverage, car club and other revenues included as a part of service and administrative fees in our specialty insurance business. The table below presents the disaggregated amounts of revenue from contracts with customers by product type for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Asset management fee income
$
6,694

 
$
8,314

 
$
9,400

Warranty coverage revenue
26,058

 
18,385

 
22,709

Car club revenue
32,242

 
31,501

 
32,742

Other
7,840

 
7,987

 
10,243

Revenue from contracts with customers
$
72,834

 
$
66,187

 
$
75,094


Management Fees
The Company earns asset management fee income in the form of base management fees and incentives from the CLOs it manages. These base management fees are billed as the services are provided and paid periodically in accordance with the terms of the individual management agreements for as long as the Company manages the funds. Base management fees typically consist of fees based on the amount of assets held in the CLOs. Base management fees are recognized as revenue when earned. The Company does not recognize incentive fees until all contractual contingencies have been removed.

Service and Administrative Fees
Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.


F- 51
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Administrative fee revenue includes the administration of premium associated with our producers and their PORCs. In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.

Information on Remaining Performance Obligations
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at December 31, 2018.

Contract Balances
The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.

The table below presents the activity in the significant deferred assets and liabilities related to revenue from contracts with customers for the year ended December 31, 2018.
 
January 1, 2018
 
 
 
 
 
December 31, 2018
 
Beginning balance
 
Additions
 
Amortizations
 
Ending balance
Deferred costs
 
 
 
 
 
 
 
Warranty coverage revenue
$
2,249

 
$
344

 
$
1,319

 
$
1,274

Car club revenue
11,144

 
25,555

 
24,510

 
12,189

Total
$
13,393

 
$
25,899

 
$
25,829

 
$
13,463

Deferred revenue
 
 
 
 
 
 
 
Warranty coverage revenue
$
28,324

 
$
37,569

 
$
26,058

 
$
39,835

Car club revenue
14,861

 
33,509

 
32,242

 
16,128

Total
$
43,185

 
$
71,078

 
$
58,300

 
$
55,963


Bad debt expense was not material for any period presented.

(14) Other Assets and Other Liabilities and Accrued Expenses

Other Assets

The following table presents the components of other assets as reported in the consolidated balance sheets:
 
As of December 31,
 
2018
 
2017
Furniture, fixtures and equipment, net
$
6,122

 
$
4,304

Prepaid expenses
7,351

 
7,297

Income tax receivable
2,307

 
9,588

Subsidiary sale receivable (1)
10,676

 
—

Other
19,578

 
10,395

Total other assets
$
46,034


$
31,584

(1) Related to the gain contingency on sale of Care recorded in December 2018. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.


F- 52
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


The following table presents the depreciation expense related to furniture, fixtures and equipment for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Depreciation expense related to furniture, fixtures and equipment
$
1,984

 
$
2,555

 
$
2,531


Other Liabilities and Accrued Expenses

The following table presents the components of other liabilities and accrued expenses as reported in the consolidated balance sheets:
 
As of December 31,
 
2018
 
2017
Accounts payable and accrued expenses
$
63,755

 
$
52,032

Deferred tax liabilities, net
25,433

 
22,744

Due to brokers
486

 
8,669

Commissions payable
11,076

 
14,185

Accrued interest payable
3,452

 
3,393

Escrow payable
460

 
6,753

Other
19,528

 
13,545

Total other liabilities and accrued expenses
$
124,190

 
$
121,321


(15) Other Revenue, Other Expenses and Other Income

Other Revenue

The following table presents the components of other revenue as reported in the consolidated statement of operations. Other revenue is primarily generated by Tiptree Capital non-insurance activities except as noted in the footnote to the table.
 
Year Ended December 31,
 
2018
 
2017
 
2016
Other investment income (1)
$
25,541

 
$
26,261

 
$
26,096

Management fee income
6,694

 
8,314

 
9,400

Other (2)
5,827

 
7,700

 
7,078

Total other revenue
$
38,062

 
$
42,275

 
$
42,574

(1) See Note (5) Investments for the components of Other investment income.
(2) Includes $2,554, $3,552 and $2,859 related to Specialty Insurance for the year ended December 31, 2018, 2017 and 2016, respectively.

Other Expenses

The following table presents the components of other expenses as reported in the consolidated statement of operations:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Professional fees
$
15,216

 
$
16,245

 
$
21,923

General and administrative
16,218

 
14,800

 
14,567

Premium taxes
14,026

 
11,658

 
8,244

Mortgage origination expenses
8,857

 
8,822

 
8,079

Rent and related
11,114

 
10,379

 
10,115

Other
12,470

 
12,535

 
9,648

Total other expenses
$
77,901

 
$
74,439

 
$
72,576


Other Income

The CLOs are considered variable interest entities (VIE) and the Company consolidates entities when it is determined to be the

F- 53
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


primary beneficiary under current VIE accounting guidance.

During 2017 the Company exited all consolidated CLOs. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.
 
 
 
 
 
 
 
 
The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Income:
 
 
 
 
 
Net realized and unrealized gains (losses)
$
—

 
$
2,364

 
$
1,865

Interest income
—

 
22,539

 
51,712

Total income
—

 
24,903

 
$
53,577

Expenses:
 
 
 
 
 
Interest expense
—

 
13,386

 
$
31,033

Other expense
—

 
1,060

 
2,290

Total expense
—

 
14,446

 
33,323

Net income (loss) attributable to consolidated CLOs
$
—

 
$
10,457

 
$
20,254


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:
Year Ended December 31,
 
2018
 
2017
 
2016
Distributions received
$
—

 
$
5,757

 
$
14,825

Realized and unrealized gains (losses) on subordinated notes held by the Company, net
—

 
3,559

 
2,510

Total
—

 
9,316

 
17,335

Management fee income
—

 
1,141

 
2,919

Total economic interests
$
—

 
$
10,457

 
$
20,254


(16) Stockholders’ Equity

On June 5, 2017, in settlement of an option, TFP delivered 1,510,920 shares of the Company’s Common Stock to Tricadia (a related party) for total consideration of approximately $8,100. These shares were delivered using shares accounted for as treasury stock.

On June 21, 2017, a subsidiary of the Company purchased 1,000,000 shares of Common Stock of the Company 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 Common Stock. These shares were delivered from shares accounted for as treasury stock.

On April 10, 2018, the Company completed a reorganization merger whereby TFP merged with and into the Company with the Company continuing as the surviving company (Reorganization Merger). After the Reorganization Merger, TFP ceased to exist and the Company owned 100% of Operating Company. As a result of the merger, the balance of Non-controlling interest - TFP as of the merger date was allocated to Additional paid in capital and Accumulated other comprehensive income (loss), as detailed in the consolidated statement of changes in stockholders’ equity.

In connection with the Reorganization Merger, each TFP limited partner other than Tiptree received 2.798 shares of Class A common stock for each partnership unit, 6,861,561 Class A common shares were issued, and all outstanding Class B common stock was canceled. Outstanding warrants to acquire 652,500 shares of Class A common stock at an exercise price of $11.33 per share owned by TFP were canceled. In addition, warrants to acquire 103,994 shares of Class A common stock at an exercise

F- 54
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


price of $11.33 were issued to partners of TFP other than Tiptree, and expired unexercised on December 31, 2018. Warrants to acquire 805,986 TFP LP units at $21.232 per unit were canceled and Tiptree issued warrants for 2,255,149 Tiptree shares of Class A common stock at an exercise price of $7.59 per share to holders of the canceled TFP warrants.

On April 16, 2018, the Company canceled 5,035,977 shares of Class A common stock held by a subsidiary of the Company, which had no effect on total Tiptree Inc. stockholders’ equity.

At the 2018 Annual Meeting of Stockholders of the Company held on June 6, 2018, the Company’s stockholders approved an amendment and restatement (the Amendment) to the Fourth Articles of Amendment and Restatement of the Company (as amended by the Amendment, the Fifth A&R Charter) to remove all references to the Company’s Class B common stock as well as other ministerial changes, including changing the name of our Class A common stock to Common Stock. The Amendment was filed with the State Department of Assessments and Taxation of Maryland on June 7, 2018.

On March 19, 2018 and December 10, 2018 the Company engaged a broker in connection with a daily stock repurchase program for the repurchase of up to $10.0 million of shares of the Company’s outstanding Common Stock, for a total authorization of $20.0 million. On March 19, 2018, the Company’s Board of Directors authorized the Company to make block repurchases of up to $10.0 million of shares in the aggregate, at the discretion of the Company's Executive Committee. On December 10, 2018 the Company’s Board of Directors replenished the authorization to $10.0 million.
 
Year Ended December 31, 2018
 
As of December 31, 2018
 
Number of shares purchased
 
Average price per share
 
Remaining repurchase authorization
Share repurchase programs:
 
 
 
 
 
March 2018 Program
1,510,577

 
$
6.62

 
$
—

December 2018 Program
66,658

 
5.46

 
9,633

Block repurchase program
600,000

 
6.25

 
10,000

Total
2,177,235

 
$
6.48

 
$
19,633


The Company declared cash dividends per share for the following periods presented below:
 
Dividends per share for the
 
Year Ended December 31,
 
2018
 
2017
 
2016
First Quarter
$
0.035

 
$
0.030

 
$
0.025

Second Quarter
0.035

 
0.030

 
0.025

Third Quarter
0.035

 
0.030

 
0.025

Fourth Quarter (1)
0.035

 
0.030

 
0.025

Total cash dividends declared
$
0.140

 
$
0.120

 
$
0.100

(1) See Note (24) Subsequent Events for when dividend was declared.
Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions

The Company's regulated insurance company subsidiaries may pay dividends to our insurance holding company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to our insurance holding company are permitted only with prior approval of the insurance department of the applicable state of domicile. The Company eliminated all dividends from its subsidiaries in the consolidated financial statements. For the year ended December 31, 2018 and December 31, 2017, respectively, the Company's insurance company subsidiaries did not pay any ordinary or extra ordinary 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:

F- 55
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


 
As of December 31,
 
2018
 
2017
Combined statutory capital and surplus of the Company's insurance company subsidiaries
$
131,859

 
$
105,989

 
 
 
 
Required minimum statutory capital and surplus
$
17,950

 
$
19,200

 
 
 
 
Amount available for ordinary dividends of the Company's insurance company subsidiaries
$
13,532

 
$
10,115


At December 31, 2018, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $13,532. 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 December 31, 2018.

The following table presents the net income of the Company’s statutory insurance companies for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net income of statutory insurance companies
$
13,986

 
$
9,135

 
$
12,369


(17) 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 (loss)
 
TFP
 
Other
 
Total AOCI (loss) to Tiptree Inc.
Balance at December 31, 2015
$
(222
)
 
$
111

 
$
(111
)
 
$
—

 
$
—

 
$
(111
)
Other comprehensive income (losses) before reclassifications
186

 
1,552

 
1,738

 
(128
)
 
(376
)
 
1,234

Amounts reclassified from AOCI
(664
)
 
96

 
(568
)
 
—

 
—

 
(568
)
Period change
(478
)
 
1,648

 
1,170

 
(128
)
 
(376
)
 
666

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

 
$
1,059

 
$
(128
)
 
$
(376
)
 
$
555

Other comprehensive income (losses) before reclassifications
522

 
190

 
712

 
(94
)
 
(50
)
 
568

Amounts reclassified from AOCI
(282
)
 
125

 
(157
)
 
—

 
—

 
(157
)
Period change
240

 
315

 
555

 
(94
)
 
(50
)
 
411

Balance at December 31, 2017
$
(460
)
 
$
2,074

 
$
1,614

 
$
(222
)
 
$
(426
)
 
$
966

Other comprehensive income (losses) before reclassifications
(2,257
)
 
835

 
(1,422
)
 
61

 
211

 
(1,150
)
Amounts reclassified from AOCI
648

 
—

 
648

 
—

 
—

 
648

Reclassification of AOCI - interest rate swaps (1)
—

 
(2,909
)
 
(2,909
)
 
502

 
226

 
(2,181
)
Reorganization merger
—

 
—

 
—

 
(341
)
 
—

 
(341
)
Period change
(1,609
)
 
(2,074
)
 
(3,683
)
 
222

 
437

 
(3,024
)
Balance at December 31, 2018
$
(2,069
)
 
$
—

 
$
(2,069
)
 
$
—

 
$
11

 
$
(2,058
)
(1) Relates to the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations


F- 56
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the consolidated statement of operations for the following periods:
 
Year Ended December 31,
Affected line item in consolidated statement of operations
Components of AOCI
2018
 
2017
 
2016
Unrealized gains (losses) on available for sale securities
$
(819
)
 
$
435

 
$
1,026

Net realized and unrealized gains (losses)
Related tax (expense) benefit
171

 
(153
)
 
(362
)
Provision for income tax
Net of tax
$
(648
)
 
$
282

 
664


 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
$
—

 
$
(184
)
 
(121
)
Interest expense
Reclassification of AOCI - interest rate swaps (1)
3,845

 
—

 
—

Gain on sale of discontinued operations
Related tax (expense) benefit
(936
)
 
59

 
25

Provision for income tax
Net of tax
$
2,909

 
$
(125
)
 
(96
)

(1) Relates to the sale of Care. See Note (3) Dispositions, Assets Held for Sale and Discontinued Operations.

(18) Stock Based Compensation

Equity Plans

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 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.

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 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 June 6, 2027. The table below summarizes changes to the issuances under the Company’s 2013 and 2017 Equity Plan for the periods indicated, excluding awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Common Stock:
2013 Equity Plan
Number of shares (1)
Available for issuance as of December 31, 2015
1,582,339

Awards issued and granted
(620,689
)
Available for issuance as of December 31, 2016
961,650

Awards granted
(954,291
)
Awards rolled into 2017 Equity Plan
(7,359
)
Available for issuance as of December 31, 2017
—

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

Available from 2017 Equity Plan (1) (2)
6,100,000

Awards granted
(82,988
)
Available for issuance as of December 31, 2017
6,017,012

RSU and option awards granted
(558,034
)
Forfeited
15,236

Available for issuance as of December 31, 2018
5,474,214

(1) Excludes awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Common Stock.
(2) Includes remaining awards from Manager Plan and 2013 Equity Plan.


F- 57
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Restricted Stock Units (RSUs)
Tiptree Corporate Incentive Plans
Generally, the Tiptree RSUs 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 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, 2015
128,323


$
7.68

Granted (1)
369,452

 
5.71

Vested
(197,958
)
 
6.13

Unvested units as of December 31, 2016
299,817

 
$
6.27

Granted (1)
466,652

 
6.60

Vested
(167,587
)
 
6.43

Unvested units as of December 31, 2017
598,882

 
$
6.48

Granted (1)
315,371

 
5.95

Vested
(222,387
)
 
6.39

Forfeited
(15,236
)
 
6.04

Unvested units as of December 31, 2018
676,630

 
$
6.27

(1) Includes grants of 46,572, 39,164 and 25,508 shares of Common Stock to directors for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company values RSUs at their grant-date fair value as measured by Tiptree’s Common Stock price. Included in vested shares for 2018 are 29,286 shares surrendered to pay taxes on behalf of the employees with shares vesting. During the year ended December 31, 2018, the Company granted 268,799 RSUs to employees of the Company. 147,467 shares vest ratably over a period of three years that began in February 2018 and the remaining 121,332 shares will cliff vest in February 2021.

Subsidiary Incentive Plans

Certain of the Company’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 Common Stock under the 2017 Equity Plan. The Company has the option, but not the obligation to settle the exchange right in cash.

F- 58
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


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, 2015
$
874

Granted
7,339

Vested
(97
)
Fair value adjustment
119

Unearned
(146
)
Unvested balance as of December 31, 2016
$
8,089

Granted
2,669

Vested
(2,436
)
Grant value adjustment (1)
(210
)
Performance assumption adjustment
680

Unvested balance as of December 31, 2017
$
8,792

Granted
1,113

Vested
(1,771
)
Performance assumption adjustment
576

Unvested balance as of December 31, 2018
$
8,710

The vested and unvested balance (assuming full vesting) translates to 3,626,887 shares of Common Stock if converted as of December 31, 2018.
(1) Due to the approval of the 2017 Equity Plan, the Company changed the classification of the subsidiary RSU’s during the year ended December 31, 2017 from liability to equity awards because the Company expects to settle these awards in stock.

Stock Options - Tiptree Corporate

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. The option awards have a 10-year term and are subject the recipient’s continuous service, a market requirement, and vest one third on each of the third, fourth and fifth anniversary of the grant date. The market requirement is a book value per share target that can be met at 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 options granted in 2018 include a retirement provision and are amortized over the lesser of the service condition or expected retirement date.

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 periods:
Valuation Input
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
 
 
 
 
 
 
Range
 
Weighted Average
 
 
Assumption
 
Assumption
 
Low
 
High
 
Historical volatility
 
30.63%
 
47.20%
 
50.19%
 
50.46%
 
N/A
Risk-free rate
 
2.85%
 
2.44%
 
1.93%
 
2.28%
 
N/A
Dividend yield
 
2.03%
 
1.80%
 
1.70%
 
1.76%
 
N/A
Expected term (years)
 
6.5
 
6.5
 
 
 
 
 
6.5


F- 59
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(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, 2015
—

 
$
—

 
$
—

 
—

Granted
251,237

 
5.69

 
2.62

 
—

Balance, December 31, 2016
251,237

 
$
5.69

 
$
2.62

 
—

Granted
570,627

 
6.65

 
2.91

 
—

Balance, December 31, 2017
821,864

 
$
6.36

 
$
2.82

 
—

Granted
242,663

 
5.85

 
1.88

 
—

Balance, December 31, 2018 (1)
1,064,527

 
$
6.24

 
$
2.61

 
—

 
 
 
 
 
 
 
 
Weighted average remaining contractual term at December 31, 2018 (in years)
8.1

 
 
 
 
 
 
(1) Book value targets for grants in 2018, 2017, and 2016 are $9.97, $10.14, and $8.96, respectively.

Stock-based Compensation Expense

The following table presents total stock-based compensation expense and the related income tax benefit recognized on the consolidated statements of operations:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Employee compensation and benefits
$
6,354

 
$
6,560

 
$
2,441

Director compensation
303

 
266

 
194

Professional fees (1)
—

 
—

 
143

Income tax benefit
(1,438
)
 
(2,410
)
 
(980
)
Net stock-based compensation expense
$
5,219

 
$
4,416

 
$
1,798

(1) Professional fees consist of the value of restricted stock units and options granted to our Executive Chairman providing services to the Company under the TSA. See Note (22) Related Party Transactions.

Additional information on total non-vested stock-based compensation is as follows:
 
As of December 31,
 
2018
 
Stock options
 
Restricted stock awards and RSUs
Unrecognized compensation cost related to non-vested awards
$
1,296

 
$
5,446

Weighted - average recognition period (in years)
2.30

 
1.52



F- 60
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


(19) Income Taxes

The Company’s provision (benefit) for income taxes is reflected as a component of income (loss) from continuing and discontinued operations and consists of the following:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Current tax expense (benefit):
 
 
 
 
 
Federal
$
(9,650
)
 
$
(1,559
)
 
$
6,268

State
(1,182
)
 
246

 
455

Foreign
754

 
—

 
—

Total current tax expense (benefit)
(10,078
)
 
(1,313
)
 
6,723

 
 
 
 
 
 
Deferred tax expense (benefit):
 
 
 
 
 
Federal
4,110

 
(13,755
)
 
6,736

State
59

 
2,506

 
(944
)
Foreign
—

 
—

 
—

Total deferred tax (benefit)
4,169

 
(11,249
)
 
5,792

Total income tax expense (benefit) from continuing operations
$
(5,909
)
 
$
(12,562
)
 
$
12,515

 
 
 
 
 
 
Income tax (benefit) from discontinued operations
13,714

 
(2,224
)
 
(1,537
)
Total tax expense (benefit)
$
7,805

 
$
(14,786
)
 
$
10,978


The Company accounts for its income taxes receivable or payable on a gross basis with offsetting permitted for balances booked by a filing entity in a single jurisdictional basis. The Company’s income taxes receivable as of December 31, 2018 of $2,307 is offset with an income tax payable balance of $1,692, resulting in a consolidated net receivable of $615. The Company’s income taxes receivable as of December 31, 2017 was $9,588 offset with an income tax payable balance of $1,142 resulting in a consolidated net receivable of $8,446.

The Company’s primary tax jurisdiction is the United States, which currently has a statutory income tax rate equal to 21%. On December 22, 2017, the U.S. government enacted Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act), which, among other things, reduces the federal income tax rate from 35% to 21% effective January 1, 2018, and requires mandatory deemed repatriation of foreign earnings. As a result of the Tax Act, we re-measured our net deferred tax liabilities and recognized a net tax benefit of $15,238 in 2017.

The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 6.0%. Both the U.S. federal rate and the state statutory rates are before the consideration of rate reconciling items. A reconciliation of the expected federal income tax expense on income from continuing operations using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows for the periods indicated below:

F- 61
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


 
Year Ended December 31,
 
2018
 
2017
 
2016
Income (loss) before income taxes from continuing operations
$
(19,796
)
 
$
(3,330
)
 
$
49,140

Federal statutory income tax rate
21.0
%
 
35.0
%
 
35.0
%
Expected federal income tax expense at the federal statutory income tax rate
(4,157
)
 
(1,166
)
 
17,199

Effect of change in U.S. federal tax rate effective 2018
—

 
(15,238
)
 
—

Effect of Reliance contingent liability valuation
—

 
1,018

 
446

Effect of state income tax expense, net of federal benefit
(471
)
 
219

 
(18
)
Effect of dividends received deduction
(1,534
)
 
—

 
—

Effect of foreign operations
1,053

 
—

 
—

Effect of permanent differences
170

 
(144
)
 
228

Effect of changes in valuation allowance
55

 
2,314

 
(641
)
Effect of change in tax status
—

 
—

 
(4,044
)
Effect of return-to-accrual and other items
(1,025
)
 
435

 
(655
)
Tax (benefit) on income from continuing operations
$
(5,909
)
 
$
(12,562
)
 
$
12,515

 
 
 
 
 
 
Effective tax rate
29.9
%
 
377.2
%
 
25.5
%


For the year ended December 31, 2018, the Company’s effective tax rate on losses from continuing operations was equal to 29.9%. The effective tax rate for the year ended December 31, 2018 is higher than the U.S. statutory income tax rate of 21.0% primarily due to the dividends received deduction, offset by the effect of foreign operations.

For the year ended December 31, 2017, the Company’s effective tax rate on income from continuing operations was equal to 377.2%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2017 is higher than the U.S. statutory income tax rate of 35.0% primarily due to the $15,238 discrete tax benefit of the U.S. federal tax law change and resulting revaluation of the net deferred tax liability, partially offset by an increase in the valuation allowance on certain deferred tax assets and the impact of the Reliance contingent liability revaluation.

For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal to 25.5%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2016 is lower than the U.S. statutory income tax rate of 35.0% 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.

F- 62
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)



The table below presents the components of the Company’s net deferred tax assets and liabilities as of the respective balance sheet dates:
 
As of December 31,
 
2018
 
2017
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
13,554

 
$
20,018

Unrealized losses
5,703

 
4,647

Accrued expenses
1,618

 
3,059

Unearned premiums
13,752

 
11,300

Deferred revenue
5,769

 
4,682

Other deferred tax assets
5,653

 
2,007

Total deferred tax assets
46,049

 
45,713

Less: Valuation allowance
(3,092
)
 
(4,303
)
Total net deferred tax assets
42,957

 
41,410

 
 
 
 
Deferred tax liabilities:
 
 
 
Property
414

 
6,504

Unrealized gains
—

 
4,700

Other deferred tax liabilities
2,666

 
769

Deferred acquisition cost
37,473

 
32,423

Advanced commissions
18,153

 
14,265

Intangibles
9,684

 
5,493

Total deferred tax liabilities
68,390

 
64,154

Net deferred tax liability
$
25,433

 
$
22,744


As of January 2016, Tiptree has established a U.S. federal consolidated income tax group and as such files on a consolidated basis, with certain exceptions such as a Fortegra life insurance company and Luxury. Tiptree consolidated, and certain subsidiaries on a separate basis, file returns in various state jurisdictions, and as such may have state tax obligations. Additionally, as needed the Company will take all necessary steps to comply with any income tax withholding requirements.

As of December 31, 2018, the Company had total U. S. Federal net operating loss carryforwards (NOLs) of $40.2 million arising from continuing operations. The following table presents the U.S. Federal NOLs by tax year of expiration:

 
As of December 31,
 
2018
Tax Year of Expiration
 
2026
$
86

2027
124

2028
—

2029
166

2030
17

2031
—

2032
—

2033
—

2034
1,893

2035
562

2036
35,295

2037
1,766

Indefinite
335

Total
$
40,244


In addition to the U.S. Federal NOL, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $5.0 million.

F- 63
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


Valuation allowances have been established for net operating loss carryforwards and other deferred tax assets generated by Luxury, and certain state NOLs of $3,092, since management has concluded it is more likely than not they will expire unutilized based on existing positive and negative evidence. Management believes it is more likely than not the remaining NOLs and deferred tax assets will be utilized prior to their expiration dates. As of December 31, 2017, the consolidated valuation allowance for Tiptree was $4,303. In 2018, the Company recorded a net decrease in its valuation allowances equal to $1,211, compared with an increase in its valuation allowance of $2,312 in 2017.

As of December 31, 2018, the Company had no material unrecognized tax benefits or accrued interest and penalties. This is consistent with the tax years ending December 31, 2017 and December 31, 2016 as well. Federal tax years 2015 through 2018 were open for examination as of December 31, 2018.

(20) Commitments and Contingencies

Contractual Obligations

The table below summarizes the Company’s contractual obligations by period that payments are due:
 
As of December 31, 2018
 
Less than one year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total
Total - operating lease obligations (1)
$
5,483

 
$
12,428

 
$
9,305

 
$
15,898

 
$
43,114

(1)
Minimum rental obligations for office leases.

The following table presents rent expense for the Company’s office leases recorded on the consolidated statements of operations:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Rent expense for office leases
$
7,519

 
$
6,816

 
$
6,322


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, the trial court issued an Order denying the Company’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied the Company’s Motion for Summary Judgment as to certain disability insurance policies. In January 2018, the court vacated its November 2017 order granting Company’s Motion for Summary Judgment as to the life certificates at issue with leave to refile. No trial or additional 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 the Company’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.


F- 64
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


(21) Earnings Per Share

The Company calculates basic net income per Common Share based on the weighted average number of 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 year ended December 31, 2018, 2017 and 2016, the income available to Common Stockholders was allocated to the unvested restricted stock units.

Diluted net income per Common Shares for the period includes the effect of potential equity of subsidiaries as well as potential Common Stock. For the year ended December 31, 2018 the assumed exercise of all dilutive instruments were anti-dilutive to continuing operations and not included in diluted net income per Common Share calculation.

The following table presents a reconciliation of basic and diluted net income per Common Share for the following periods:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net income (loss) from continuing operations
$
(13,887
)
 
$
9,232

 
$
36,625

Less:
 
 
 
 
 
Net income (loss) attributable to non-controlling interests
(612
)
 
2,603

 
8,370

Net income allocated to participating securities
—

 
123

 
252

Net income (loss) from continuing operations attributable to Common Shares
(13,275
)
 
6,506

 
28,003

 
 
 
 
 
 
Net income (loss) from discontinued operations
43,770

 
(3,998
)
 
(4,287
)
Less:
 
 
 
 
 
Net income (loss) from discontinued operations attributable to non-controlling interests
6,562

 
(973
)
 
(1,352
)
Net income allocated to participating securities
—

 
(56
)
 
(28
)
Net income (loss) from discontinued operations attributable to Common Shares
37,208

 
(2,969
)
 
(2,907
)
Net income (loss) attributable to Common Shares - basic
$
23,933

 
$
3,537

 
$
25,096

Effect of Dilutive Securities:
 
 
 
 
 
Securities of subsidiaries
—

 
(128
)
 
(279
)
Adjustments to income relating to exchangeable interests, net of tax
—

 
736

 
—

Net income (loss) attributable to Common Shares - diluted
$
23,933

 
$
4,145

 
$
24,817

 
 
 
 
 
 
Weighted average number of shares of Common Stock outstanding - basic
34,715,852

 
29,134,190

 
31,721,449

Weighted average number of incremental shares of Common Stock issuable from exchangeable interests and contingent considerations
—

 
8,172,442

 
45,225

Weighted average number of shares of Common Stock outstanding - diluted
34,715,852

 
37,306,632

 
31,766,674

 
 
 
 
 
 
Basic:
 
 
 
 
 
Net income (loss) from continuing operations
$
(0.38
)
 
$
0.22

 
$
0.88

Net income (loss) from discontinued operations
1.07

 
(0.10
)
 
(0.09
)
Net income (loss) attributable to Common Shares
$
0.69

 
$
0.12

 
$
0.79

 
 
 
 
 
 
Diluted:
 
 
 
 
 
Net income (loss) from continuing operations
$
(0.38
)
 
$
0.21

 
$
0.86

Net income (loss) from discontinued operations
1.07

 
(0.10
)
 
(0.08
)
Net income (loss) attributable to Common Shares
$
0.69

 
$
0.11

 
$
0.78


(22) Related Party Transactions

On June 30, 2012, TAMCO, TFP and Tricadia entered into the Transition Services Agreement (TSA) in connection with the internalization of the management of the Company. Pursuant to the TSA, Tricadia currently provides the Company with office space. In prior years, Tricadia provided the Company with the services of Michael Barnes, Tiptree’s Executive Chairman, office

F- 65
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


space and information technology services. On January 1, 2018, The Company’s executive chairman became an employee of the Company. Payments to Tricadia for the services of our Executive Chairman are included in employee compensation and benefits.
 
 
 
 
 
 
 
 
 
 
Payments under the TSA in the year ended December 31, 2018, 2017 and 2016 were not material.

See Note (16) Stockholders’ Equity for information on the settlement of an option with a related party.

(23) Summarized Quarterly Information (Unaudited)

 
2018
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Total revenues
$
148,072

 
$
152,709

 
$
172,668

 
$
152,377

Total expenses
155,115

 
151,132

 
173,806

 
165,569

Income (loss) before taxes from continuing operations
(7,043
)
 
1,577

 
(1,138
)
 
(13,192
)
Less: provision (benefit) for income taxes
(1,568
)
 
701

 
(611
)
 
(4,431
)
Net income (loss) from continuing operations
(5,475
)
 
876

 
(527
)
 
(8,761
)
 
 
 
 
 
 
 
 
Income (loss) before taxes from discontinued operations
624

 
—

 
—

 
—

Gain on sale of discontinued operations
46,184

 
—

 
—

 
10,676

Less: Provision (benefit) for income taxes
12,327

 
—

 
—

 
1,387

Net income (loss) from discontinued operations
34,481

 
—

 
—

 
9,289

 
 
 
 
 
 
 
 
Net income (loss) before non-controlling interests
29,006

 
876

 
(527
)
 
528

Less: net income (loss) attributable to non-controlling interests
5,446

 
50

 
91

 
363

Net income (loss) attributable to Common Stockholders
$
23,560

 
$
826

 
$
(618
)
 
$
165

 
 
 
 
 
 
 
 
Net (loss) income per Common Share:
 
 
 
 
 
 
 
Basic, continuing operations, net
$
(0.15
)
 
$
0.02

 
$
(0.02
)
 
$
(0.25
)
Basic, discontinued operations, net
0.94

 
—

 
—

 
0.26

Basic earnings per share
$
0.79

 
$
0.02

 
$
(0.02
)
 
$
0.01

 
 
 
 
 
 
 
 
Diluted, continuing operations, net
$
(0.15
)
 
$
0.02

 
$
(0.02
)
 
$
(0.25
)
Diluted, discontinued operations, net
0.94

 
—

 
—

 
0.26

Diluted earnings per share
$
0.79

 
$
0.02

 
$
(0.02
)
 
$
0.01

 
 
 
 
 
 
 
 
Weighted average number of Common Shares:
 
 
 
 
 
 
 
Basic
29,861,496

 
36,593,154

 
36,402,129

 
35,921,632

Diluted
29,861,496

 
37,386,319

 
36,402,129

 
35,921,632



F- 66
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except share data)


 
2017
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Total revenues
$
146,189

 
$
139,245

 
$
144,936

 
$
151,428

Total expenses
146,066

 
147,045

 
151,414

 
151,060

Total other income
3,915

 
2,895

 
2,583

 
1,064

Income (loss) before taxes from continuing operations
4,038

 
(4,905
)
 
(3,895
)
 
1,432

Less: provision (benefit) for income taxes
1,568

 
(1,305
)
 
(1,541
)
 
(11,284
)
Net income (loss) from continuing operations
2,470

 
(3,600
)
 
(2,354
)
 
12,716

 
 
 
 
 
 
 
 
Income (loss) before taxes from discontinued operations
(1,530
)
 
(2,294
)
 
(1,535
)
 
(863
)
Less: Provision (benefit) for income taxes
(402
)
 
(570
)
 
(511
)
 
(741
)
Net income (loss) from discontinued operations
(1,128
)
 
(1,724
)
 
(1,024
)
 
(122
)
 
 
 
 
 
 
 
 
Net income (loss) before non-controlling interests
1,342

 
(5,324
)
 
(3,378
)
 
12,594

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

 
(881
)
 
(264
)
 
2,533

Net income (loss) attributable to Common Stockholders
$
1,100

 
$
(4,443
)
 
$
(3,114
)
 
$
10,061

 
 
 
 
 
 
 
 
Net (loss) income per Class A common share:
 
 
 
 
 
 
 
Basic, continuing operations, net
$
0.07

 
$
(0.11
)
 
$
(0.08
)
 
$
0.34

Basic, discontinued operations, net
(0.03
)
 
(0.04
)
 
(0.03
)
 
(0.01
)
Basic earnings per share
$
0.04

 
$
(0.15
)
 
$
(0.11
)
 
$
0.33

 
 
 
 
 
 
 
 
Diluted, continuing operations, net
$
0.06

 
$
(0.11
)
 
$
(0.08
)
 
$
0.32

Diluted, discontinued operations, net
(0.03
)
 
(0.04
)
 
(0.03
)
 
(0.01
)
Diluted earnings per share
$
0.03

 
$
(0.15
)
 
$
(0.11
)
 
$
0.31

 
 
 
 
 
 
 
 
Weighted average number of Common Shares:
 
 
 
 
 
 
 
Basic
28,424,824

 
28,832,975

 
29,455,462

 
29,804,802

Diluted
36,749,956

 
28,832,975

 
29,455,462

 
37,853,831


(24) Subsequent Events

On February 15, 2019, the Company and Tricadia entered into a Strategic Combination Agreement and Amended and Restated Transition Services Agreement. Tricadia is a related party of the Company because Tricadia is deemed to be controlled by Michael Barnes, the Company’s Executive Chairman. Tiptree agreed to invest $75 million to seed new investment funds to be managed by Tricadia in exchange for management control of and a profit participation in Tricadia.

No consideration was paid for the acquisition of control by Tiptree. Tiptree will over time receive a 51% economic interest in certain profit shares interests in Tricadia, in increments stepping up by 10.2% each year, beginning in 2021. During the five-year period, beginning on January 1, 2026, Tiptree has the right to acquire the remaining economic interests in Tricadia that are held by Mr. Barnes, based upon a fair value-based formula. During the four-year period, beginning on January 1, 2027, Mr. Barnes has the reciprocal right to put his remaining economic interests in Tricadia to Tiptree using the same formula. Mr. Barnes has customary minority approval rights over specified actions at Tricadia while a Tricadia equity owner. Tiptree and Tricadia have agreed to provide each other with certain support services on an arms’-length basis, pursuant to a Transition Services Agreement.

On March 12, 2019, the Company’s board of directors declared a quarterly cash dividend of $0.035 per share to holders of Common Stock with a record date of March 25, 2019, and a payment date of April 1, 2019.

As of March 11, 2019, the Company purchased and retired an aggregate of 1,472,730 shares of its Common Stock for $9.1 million in the aggregate in open market purchases and block purchases.



F- 67

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of its Executive Chairman, Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of December 31, 2018. Based upon that evaluation, the Company’s Executive Chairman, Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2018.

The Company is committed to maintaining a strong internal control environment which is accompanied by management’s ongoing focus on processes and related controls to achieve accurate and reliable financial reporting. However, all systems of internal control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(b)
Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are made only in accordance with the authorization of management and the Boards of Directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.

If the Company identifies any material weaknesses, the COSO Framework does not allow the Company to conclude that our internal control over financial reporting is effective. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Based upon its assessment, management concluded that the Company’s internal control over financial reporting as of December 31, 2018 was effective using the COSO Framework.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm that audited the Company’s consolidated financial statements as of and for the year ended December 31, 2018, as stated in their report, included in Item 8 of this Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.

(c)
Changes in Internal Control over Financial Reporting

There were no changes in 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 three months ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.


56

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning our executive officers is incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.
Information regarding our audit committee and our audit committee financial experts is incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.
Information required by Item 405 of Regulation S-K is incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.

Item 11. Executive Compensation

Information with respect to executive compensation is incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information with respect to such contractual relationships and independence is incorporated herein by reference to the information in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.

Item 14. Principal Accountant Fees and Services

Information with respect to principal accounting fees and services and pre-approval policies are incorporated herein by reference to information included in the Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)(2) Financial Statement Schedules

Schedule II—“Condensed Financial Information of Registrant”, is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the financial statements and notes thereto contained in Item 8—“Financial Statements and Supplementary Data.”


57

The financial statements of Invesque Inc. required by Rule 3-09 of Regulation S-X will be provided as Exhibit 99.1 to this report.

All other financial statements and financial statement schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instruction, are not material or are not applicable and, therefore, have been omitted.

(a)(3) Exhibits
Exhibit No.
 
Description
2.1
 
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
10.4
 
 
 
 
10.5
 
 
 
 
10.6
 
 
 
 

58

Exhibit No.
 
Description
10.7
 
 
 
 
10.8
 
 
 
 
10.9
 
 
 
 
10.10
 
 
 
 
10.11
 
 
 
 
10.12
 
 
 
 
10.13
 
 
 
 
10.14
 
 
 
 
10.15
 
 
 
 
10.16
 
 
 
 
10.17
 
 
 
 
10.18
 
 
 
 

59

Exhibit No.
 
Description
10.19
 
 
 
 
10.20
 
 
 
 
16.1
 
 
 
 
21.1
 
23.1
 
23.2
 
23.3
 
31.1
 
31.2
 
31.3
 
32.1
 
32.2
 
32.3
 
99.1
 
 
 
 
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 Annual Report on Form 10-K are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (audited) for December 31, 2018 and December 31, 2017, (ii) the Consolidated Statements of Operations (audited) for the years ended December 31, 2018, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income (audited) for the years ended December 31, 2018, 2017 and 2016, (iv) the Consolidated Statements of Changes in Stockholders’ Equity (audited) for the years ended December 31, 2018, 2017 and 2016, (v) the Consolidated Statements of Cash Flows (audited) for the years ended December 31, 2018, 2017 and 2016 and (vi) the Notes to the Consolidated Financial Statements (audited).

** Denotes a management contract or compensatory plan, contract or arrangement.

Item 16. Form 10-K Summary

None.

60

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Tiptree Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
Tiptree Inc.
Date:
March 13, 2019
 
By:/s/ Jonathan Ilany
 
 
 
Jonathan Ilany
 
 
 
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
  
Title
 
Date
 
 
 
 
/s/ Jonathan Ilany
Jonathan Ilany
  
Chief Executive Officer and Director (Principal Executive Officer)
 
March 13, 2019
 
 
 
 
/s/ Sandra Bell
Sandra Bell
 
Chief Financial Officer (Principal Financial Officer)
 
March 13, 2019
 
 
 
 
 
/s/ Timothy Schott
Timothy Schott
  
Principal Accounting Officer (Principal Accounting Officer)
 
March 13, 2019
 
 
 
 
/s/ Michael G. Barnes
Michael G. Barnes
  
Executive Chairman and Director
 
March 13, 2019
 
 
 
 
 
/s/ Paul M. Friedman
Paul M. Friedman
  
Director
 
March 13, 2019
 
 
 
 
/s/ Lesley Goldwasser
Lesley Goldwasser
  
Director
 
March 13, 2019
 
 
 
 
/s/ John E. Mack
John E. Mack
  
Director
 
March 13, 2019
 
 
 
 
/s/ Bradley E. Smith
Bradley E. Smith
  
Director
 
March 13, 2019


61

Schedule II — Condensed Financial Information of Registrant

TIPTREE INC.
PARENT COMPANY ONLY CONDENSED STATEMENTS OF INCOME
(All Amounts in Thousands)
Years Ended December 31,
 
2018
 
2017
 
2016
Revenues
 
 
 
 
 
Interest income(1)
$
137

 
$
417

 
$
29

Other income
10

 
5

 
—

Total revenues
147

 
422

 
29

 
 
 
 
 
 
Expenses
 
 
 
 
 
Other expenses
30

 
—

 
—

Total expenses
30

 
—

 
—

 
 
 
 
 
 
Equity in earnings (losses) of subsidiaries, net of tax(1)
(13,392
)
 
6,370

 
29,111

 
 
 
 
 
 
Income (loss) before taxes from continuing operations
(13,275
)
 
6,792

 
29,140

Less: provision (benefit) for income taxes
—

 
163

 
885

Net income (loss) from continuing operations
$
(13,275
)
 
$
6,629

 
$
28,255

 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
Income from discontinued operations, net of tax and non-controlling interest
414

 
(3,025
)
 
(2,935
)
Gain on sale of discontinued operations, net of tax and non-controlling interest
36,794

 
—

 
—

Discontinued operations, net of tax and non-controlling interest
37,208

 
(3,025
)
 
(2,935
)
Net income (loss) attributable to Tiptree Inc. Common Stockholders
$
23,933

 
$
3,604

 
$
25,320

(1) Eliminated in consolidation.

62

TIPTREE INC.
PARENT COMPANY ONLY CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
As of December 31,
 
2018
 
2017
Assets
 
 
 
Investment in subsidiaries (1)
$
388,016

 
$
300,916

Cash and cash equivalents
673

 
565

Notes receivable(1)
—

 
5,306

Other assets
194

 
9,304

Total assets
$
388,883

 
$
316,091

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Other liabilities
$
1,782

 
$
16,014

Total liabilities
$
1,782

 
$
16,014

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

 
$
—

Common stock: $0.001 par value, 200,000,000 shares authorized, 35,870,348 and 35,003,004 shares issued and outstanding, respectively
36

 
35

Common stock - Class B: $0.001 par value, none and 50,000,000 shares authorized, none and 8,049,029 shares issued and outstanding, respectively
—

 
8

Additional paid-in capital
331,892

 
295,582

Accumulated other comprehensive income (loss), net of tax
(2,058
)
 
966

Retained earnings
57,231

 
38,079

Common Stock held by subsidiaries, 0 and 5,197,551 shares, respectively
—

 
(34,585
)
Class B common stock held by subsidiaries, none and 8,049,029 shares, respectively
—

 
(8
)
Total stockholders’ equity
387,101

 
300,077

Total liabilities and stockholders' equity
$
388,883

 
$
316,091

(1) Eliminated in consolidation.
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
Years Ended December 31,
 
2018
 
2017
 
2016
Operating Activities:
 
 
 
 
 
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
$
23,933

 
$
3,604

 
$
25,320

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Equity in earnings of subsidiaries(1)
(23,816
)
 
(3,345
)
 
(26,176
)
Changes in operating assets and liabilities
 
 
 
 
 
Changes in other operating assets and liabilities
4,772

 
3,805

 
4,030

Net cash provided by (used in) operating activities
4,889

 
4,064

 
3,174

Financing Activities:
 
 
 
 
 
Dividends paid
(4,781
)
 
(3,499
)
 
(3,191
)
Net cash provided by (used in) financing activities
(4,781
)
 
(3,499
)
 
(3,191
)
Net increase (decrease) in cash and cash equivalents
108

 
565

 
(17
)
Cash and cash equivalents at beginning of period
565

 
—

 
17

Cash and cash equivalents at end of period
$
673

 
$
565

 
$
—

 
 
 
 
 
 
Cash (received) paid for income taxes
$
(5,915
)
 
$
14

 
$
20,510

(1) Eliminated in consolidation.

Note 1. Basis of Presentation
 
Tiptree Inc. (Tiptree or the Company) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree is a holding company that combines specialty insurance operations with investment management capabilities. Tiptree allocates its capital across insurance operations and other investments. Tiptree’s Common Stock is traded on the Nasdaq Capital Market under the symbol “TIPT”.

63

Tiptree’s primary asset is its ownership of Tiptree Operating Company, LLC (Operating Company) an intermediate holding company through which Tiptree operates its businesses.

Pursuant to the terms discussed in Note—(10) Debt, net in the notes to consolidated financial statements, a secured corporate credit agreement of a subsidiary of Tiptree restricts the ability to pay or make any dividend or distribution to Tiptree Inc. In addition, certain other subsidiaries activity are regulated, or subject to specific restriction on transfers as a result of financing arrangements. As a result of these restrictions, these Condensed Financial Statements of the Registrant have been prepared in accordance with Rule 12-04 of Regulation S-X, as restricted net assets of the Company's subsidiaries (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25% of the Company's consolidated net assets as of December 31, 2018.

The Company is a holding company without any operations of its own. These condensed financial statements have been prepared on a "parent-only" basis. Under a parent-only presentation, the Parent Company's investments in subsidiaries are presented under the equity method of accounting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Stock-based compensation expense associated with equity incentive awards issued by the Parent Company and the related tax effects are recorded at the subsidiary level where the employees provide the services. The accompanying condensed financial information should be read in conjunction with the Tiptree Inc. consolidated financial statements and related Notes thereto.

Note 2. Dividends Received

The Company received dividends of $4,781, $3,499, and $3,191 for the years ended December 31, 2018, 2017 and 2016, respectively. 

64