10-Q 1 tiptreeform10-qq32013.htm FORM 10-Q Tiptree Form 10-Q Q3 2013
E

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended September 30, 2013
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Financial Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
38-3754322
(State or Other Jurisdiction of
(IRS Employer
Incorporation of Organization)
Identification No.)
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
10017
(Address of Principal Executive Offices)
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 12, 2013, there were 10,266,853 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 30,968,877 shares, par value $0.001, of the registrant’s Class B common stock outstanding.




Tiptree Financial Inc.
INDEX
 
 
Part I Financial Information
 
 
Condensed Consolidated Balance Sheets for September 30, 2013 and December 31, 2012
Condensed Consolidated Statements of Operations for three and nine month periods ended September 30, 2013 and 2012
Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2013 and 2012
Condensed Consolidated Statements of Stockholders’ Equity for the period ended September 30, 2013
Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2013 and 2012
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
 
Part II Other Information
Signatures
Exhibit Index.






PART I. - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Financial Statements Introductory Note

Tiptree Financial Inc. (“Tiptree” or the “Company”) is a holding company that is the sole managing member of, and owns approximately 25% of, Tiptree Operating Company, LLC ("Operating Subsidiary"). As the sole managing member of Operating Subsidiary, Tiptree operates and controls all of the business and affairs of Operating Subsidiary and its subsidiaries and consolidates the financial results of Operating Subsidiary and its subsidiaries. Tiptree Financial Partners L.P.'s ownership of approximately 75% of Operating Subsidiary is reflected as a non-controlling interest in Tiptree's consolidated financial statements. See Notes 1 and 16 to the consolidated financial statements for further discussion of the Company’s capital and ownership structure.

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
(in thousands, except share and per share data)
 
September 30, 2013
 
December 31, 2012
 
 
Assets
 
 
 
Cash and cash equivalents – unrestricted
$
123,721

 
$
88,563

Cash and cash equivalents – restricted
34,210

 
20,748

Due from separate accounts
2,467

 
2,128

Investments in trading securities, at fair value
39,333

 
59,982

Investments in available for sale securities, at fair value
(amortized cost: $17,546 and $15,693 in 2013 and 2012, respectively)
17,721

 
16,303

Investments in loans, at fair value
128,467

 
20,423

Loans owned, at amortized cost – net of allowance
32,443

 
5,467

Investments in partially-owned entities
11,075

 
8,388

Derivative financial instruments, at fair value
2

 
834

Due from brokers, dealers, and trustees
247

 
8,539

Real estate
62,492

 
118,827

Reinsurance receivables
9,080

 
8,802

Management fee receivables
255

 
249

Policy loans
104,875

 
99,123

Insurance policies and contracts acquired
39,809

 
41,379

Deferred policy acquisition costs
4,543

 
3,878

Separate account assets
4,353,490

 
4,035,053

Deferred tax assets
4,834

 
5,342

Notes receivable
6,071

 

Accrued interest and dividends receivable
1,048

 
1,642

Intangible assets
115,286

 
121,033

Goodwill
4,243

 
3,088

Assets of consolidated CLOs
1,491,744

 
851,660

Other assets
16,777

 
12,351

Total assets
$
6,604,233

 
$
5,533,802





Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Derivative financial instruments, at fair value
$

 
$
3,172

U.S. Treasuries, short position
18,945

 
20,175

Mortgage notes payable
33,254

 
95,232

Notes payable
146,500

 
100,416

Loans payable
58,749

 

Policy liabilities
114,930

 
108,868

Separate account liabilities
4,353,490

 
4,035,053

Due to brokers, dealers and trustees
47,120

 

Accrued interest payable
293

 
420

Liabilities of consolidated CLOs
1,250,931

 
620,310

Other liabilities and accrued expenses
24,243

 
14,568

Total liabilities
$
6,048,455

 
$
4,998,214

Commitments and contingencies

 

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

 
$

Common stock - Class A: $0.001 par value, 200,000,000 shares authorized, 10,260,379 and 10,226,250 shares issued and outstanding respectively
11

 
11

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

 

Additional paid-in capital
97,250

 
96,144

Accumulated other comprehensive income
290

 
311

Retained earnings
16,652

 
11,892

Total stockholders' equity of Tiptree Financial Inc.
114,234

 
108,358

Non-controlling interest
354,667

 
324,595

Appropriated retained earnings of consolidated TAMCO
86,877

 
102,635

Total stockholders' equity
555,778

 
535,588

Total liabilities and stockholders' equity
$
6,604,233

 
$
5,533,802


See accompanying notes to consolidated financial statements.



1


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




 
Three Months
Ended
 
Three Months
Ended
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2012
 
September 30, 2013
 
September 30, 2012
Net realized gains (losses) and change in unrealized appreciation (depreciation) on investments:
 
 
 
 
 
 
 
Net realized gains - trading securities
$
697

 
$
352

 
$
1,014

 
$
471

Net realized gains - available for sale securities
4

 
268

 
74

 
455

Net realized (losses) - loans
(32
)
 

 
(32
)
 

Net realized (losses) - derivatives

 

 
(1,996
)
 

Net realized gain - extinguishment of note payable

 

 
48

 

Net realized gain - foreign exchange

 

 
122

 

Income from investments in partially-owned entities, net
1,800

 
272

 
3,213

 
1,053

Change in unrealized appreciation/(depreciation) - trading securities
3,636

 
2,077

 
(1,222
)
 
9,529

Change in unrealized (depreciation) - loans
(24
)
 

 
(24
)
 

Change in unrealized (depreciation)/appreciation - derivatives
(98
)
 
(509
)
 
2,337

 
(1,371
)
Change in unrealized depreciation - foreign exchange

 
(24
)
 
(77
)
 
(25
)
Net realized and unrealized gains
5,983

 
2,436

 
3,457

 
10,112

Investment income:
 
 
 
 
 
 
 
Loan and security interest income
3,916

 
2,317

 
11,131

 
7,498

Separate account and administrative service fees
18,286

 
15,372

 
53,192

 
25,119

Rental revenue
1,363

 
429

 
3,279

 
1,254

Management fee income
85

 
184

 
297

 
949

Income attributable to consolidated CLOs
11,256

 
23,804

 
33,475

 
50,420

Other income
240

 
550

 
404

 
1,340

Total investment income
35,146

 
42,656

 
101,778

 
86,580

Total net realized and unrealized gains and investment income
41,129

 
45,092

 
105,235

 
96,692


2

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

 
Three Months
Ended
 
Three Months
Ended
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2012
 
September 30, 2013
 
September 30, 2012
Expenses:
 
 
 
 
 
 
 
Interest expense
4,110

 
3,348

 
12,008

 
4,416

Payroll expense
8,741

 
7,448

 
26,277

 
12,746

Professional fees
2,252

 
4,755

 
6,204

 
9,179

Change in future policy benefits
1,189

 
1,047

 
3,502

 
3,042

Mortality expenses
2,633

 
2,542

 
7,885

 
7,338

Commission expense
631

 
496

 
1,805

 
1,489

Depreciation and amortization expenses
1,215

 
593

 
3,382

 
1,527

Expenses attributable to consolidated CLOs
12,783

 
6,183

 
34,021

 
25,190

Other expenses
4,240

 
1,153

 
10,722

 
4,922

Total expenses
37,794

 
27,565

 
105,806

 
69,849

Income (loss) before taxes from continuing operations
3,335

 
17,527

 
(571
)
 
26,843

Provision for income taxes
1,434

 
735

 
4,549

 
162

Income from continuing operations
1,901

 
16,792

 
(5,120
)
 
26,681

Discontinued operations:
 
 
 
 
 
 
 
Gain on sale of Bickford portfolio, net

 

 
15,463

 

Income from discontinued operations, net

 
721

 
1,647

 
2,294

Provision for income taxes

 

 

 

Discontinued operations, net

 
721

 
17,110

 
2,294

Net income
1,901

 
17,513

 
11,990

 
28,975

 
 
 
 
 
 
 
 
Less net income attributable to noncontrolling interest
7,008

 
9,485

 
21,185

 
19,652

Less net (loss) income attributable to the VIE subordinated noteholders
(6,937
)
 
4,939

 
(15,758
)
 
2,815

Net income available to common stockholders
$
1,830

 
$
3,089

 
$
6,563

 
$
6,508

Net income (loss) per common share:
 
 
 
 
 
 
 
Basic, continuing operations
$
0.18

 
$
0.23

 
$
(1.03
)
 
$
0.41

Basic, discontinued operations, net

 
0.07

 
1.67

 
0.22

Net income basic
0.18

 
0.30

 
0.64

 
0.63

 
 
 
 
 
 
 
 
Diluted, continuing operations
0.18

 
0.23

 
(1.03
)
 
0.41

Diluted, discontinued operations, net

 
0.07

 
1.67

 
0.22

Net income dilutive
$
0.18

 
$
0.30

 
$
0.64

 
$
0.63

Weighted average number of common shares:
 
 
 
 
 
 
 
Basic
10,246,176

 
10,217,648

 
10,243,893

 
10,206,020

Diluted
10,271,537

 
10,237,512

 
10,266,164

 
10,225,754

See accompanying notes to consolidated financial statements.                                

3


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

 
Three month period ended
 
Three month period ended
 
Nine month period ended
 
Nine month period ended
 
September 30, 2013
 
September 30, 2012
 
September 30, 2013
 
September 30, 2012
Net income:
$
1,901

 
$
17,513

 
$
11,990

 
$
28,975

Other comprehensive income:
 
 
 
 
 
 
 
Net unrealized holding losses on securities available for sale net of tax benefit of $144, $76, $15 and $164
(267
)
 
(142
)
 
(27
)
 
(305
)
Less: reclassification adjustment for net gains included in net income net of tax expense of $1, $94, $26 and $159
3

 
174

 
48

 
296

Total comprehensive income:
1,631

 
17,197

 
11,915

 
28,374

Less: comprehensive income attributable to non-controlling interests and VIE subordinated noteholders
$
71

 
$
14,424

 
$
5,427

 
$
22,467

Total comprehensive income available to common stockholders
$
1,560

 
$
2,773

 
$
6,488

 
$
5,907


See accompanying notes to consolidated financial statements


4


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 2013
(in thousands, except share and per share data)
 
Class A Common Stock
 
Class B Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Number of
shares
 
Common stock
 
Number of
shares
 
Common stock
Additional paid-in capital
 
Accumulated
other
comprehensive
income
 
Appropriated
retained earnings
of consolidated
CLO vehicles
 
Retained
earnings
 
Noncontrolling
interest
 
Total
Balance at December 31, 2012
10,226,250

 
$
11

 

 
$

$
96,144

 
$
311

 
$
102,635

 
$
11,892

 
$
324,595

 
$
535,588

Stock-based compensation to directors for services rendered
4,360

 

 

 

30

 

 

 

 

 
30

Issuance of shares

 

 
30,968,877

 
31


 

 

 

 

 
31

Net unrealized appreciation on available for sale securities (net of tax $11)

 

 

 


 
(21
)
 

 

 
10

 
(11
)
Dividends paid

 

 

 


 

 

 
(1,803
)
 

 
(1,803
)
Repurchased shares
(302
)
 

 

 

(2
)
 

 

 

 

 
(2
)
Net changes in non-controlling interest

 

 

 

922

 

 

 

 
8,877

 
9,799

Stock-based compensation to employees
30,071

 
 
 

 

156

 
 
 
 
 
 
 
 
 
156

Net income

 

 

 


 

 
(15,758
)
 
6,563

 
21,185

 
11,990

Balance at September 30, 2013
10,260,379

 
$
11

 
30,968,877

 
$
31

$
97,250

 
$
290

 
$
86,877

 
$
16,652

 
$
354,667

 
$
555,778


See accompanying notes to consolidated financial statements

5

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



 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2012
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
6,563

 
$
6,508

Net income (loss) attributable to the noncontrolling interest
21,185

 
19,652

Net (loss) income attributable to VIE subordinated note holders
(15,758
)
 
2,815

Net income
11,990

 
28,975

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized gain – trading securities
(1,014
)
 
(471
)
Net realized gain – available for sale securities
(74
)
 
(455
)
Net realized loss - derivatives
1,996

 

Net realized loss - loans
32

 

Net realized gains - foreign exchange
(122
)
 

Net realized gain on sale of properties, net
(15,463
)
 

Realized gain – extinguishment of note payable
(48
)
 

Increase in other liabilities and accrued expenses
9,778

 
10,923

Change in unrealized depreciation (appreciation) – trading securities
1,222

 
(9,529
)
Change in unrealized depreciation - loans
24

 

Change in unrealized depreciation - foreign exchange
77

 
25

Change in unrealized (appreciation) depreciation – derivatives
(2,337
)
 
1,371

Income from investments in partially-owned entities, net
(3,213
)
 
(1,053
)
Increase in payment in kind interest

 
267

Decrease (increase) in due from brokers, dealers, and trustees
55,412

 
(410
)
Decrease in accrued interest and dividends receivable
594

 
(122
)
Distribution of loss from partially-owned entities
167

 
242

Decrease/(increase) in deferred income tax
508

 
(378
)
(Increase)/decrease in due from separate accounts
(339
)
 
2,344

Increase in reinsurance receivables
(278
)
 
(28
)
Increase in note receivable
(6,071
)
 

Increase in deferred policy acquisition costs
(665
)
 
(432
)
Increase in other assets
(9,076
)
 
(2,737
)
(Decrease) in accrued interest payable
(126
)
 
(48
)
Non-cash incentive fee
48

 

Non cash compensation expense
169

 
228

Non cash interest from investments in loans
(189
)
 


6

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


Non cash impairment of partially owned entity
40

 

Accretion of discounts and depreciation expense
5,223

 
4,501

Amortization and write off of deferred financing costs
26

 
147

Accretion of mortgage note discount
35

 

Increase/(decrease) in policy liabilities
6,062

 
(226
)
Operating activities from VIEs
(13,272
)
 
8,951

Net cash provided by operating activities
41,116

 
42,085

Cash flows from investing activities:
 
 
 
Purchases of subsidiaries

 
(24,925
)
Purchases of trading securities and loans carried at fair value
(129,719
)
 
(18,155
)
Purchases of available for sale securities
(7,790
)
 
(7,091
)
Purchases of derivatives
(1,996
)
 

Purchases of real estate
(21,347
)
 

Purchases of loans
(27,040
)
 

Purchases of fixed assets
(47
)
 

Investment in partially-owned entities

 
(4,700
)
Proceeds from principal paydowns of trading securities

 
289

Proceeds from sales of real estate
44,038

 

Increase in restricted cash
(13,462
)
 
(20,753
)
Acquisitions, net cash
2,138

 

Acquisition of administration servicing rights

 
(116,000
)
Proceeds from loan repayments
814

 
229

Proceeds from sales of trading securities
45,572

 
63,816

Proceeds from loans receivable
(15
)
 

Proceeds from foreign exchange
45

 

Proceeds from sales of available for sale securities
5,411

 
11,659

Proceeds from maturities of available for sale securities
470

 

Proceeds from distributions paid by partially owned entities
221

 
4,982

Increase in policy loans
(5,752
)
 
(3,200
)
Margin posted for foreign exchange trade

 
(25
)
Change due to consolidation of trusts
(41
)
 

Investing activities from VIEs
(593,362
)
 
(20,889
)
Net cash used in investing activities
(701,862
)
 
(134,763
)

(continued)

7

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



 
Nine Months
Ended
 
Nine Months
Ended
 
September 30, 2013
 
September 30, 2012
Cash flows from financing activities:
 
 
 
Capital distributions paid
(2,557
)
 
1,897

Dividends paid
(366
)
 
(4,177
)
Distribution payable to Tricadia

 
(14,540
)
Proceeds from loan
58,749

 

Proceeds from issuance of notes payable
50,000

 
115,680

Principal payments under mortgage notes payable
(740
)
 
(16,080
)
Partial paydown of loan
(3,917
)
 
(833
)
Margin on UST short position

 
(811
)
Performance Share Allocation paid in cash

 
(3,460
)
Repurchase of common stock of subsidiary
(2
)
 
(72
)
Payment of placement costs
(38
)
 
(683
)
Proceeds from issuance of common units
2,757

 
25,000

Proceeds from borrowings under mortgage notes payables
(137
)
 

Non cash distribution
(267
)
 

Financing activities from VIEs
592,422

 

Net cash provided by financing activities
695,904

 
101,921

Net increase in cash
35,158

 
9,243

Cash and cash equivalents – unrestricted – beginning of period
88,563

 
97,009

Cash and cash equivalents – unrestricted – end of period
$
123,721

 
$
106,252

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
6,995

 
$
7,045

Noncash investing and financing activities:
 
 
 
Capital change due to equity compensation
30

 
433

     Net assets related to acquisitions
(378
)
 


See accompanying notes to consolidated financial statements.

8

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013


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

On July 1, 2013, Care Inc. completed a transaction with Tiptree Financial Partners, L.P. (TFP) in which Care Inc. contributed substantially all of its assets to Operating Subsidiary in exchange for 10,289,192 common units in Operating Subsidiary (representing an approximately 25% interest in Operating Subsidiary), and TFP contributed substantially all of its assets (excluding shares of Tiptree's Class A Common Stock owned by TFP) to Operating Subsidiary in exchange for 31,147,371 common units in Operating Subsidiary (representing an approximately 75% interest in Operating Subsidiary) and 31,147,371 shares of Tiptree's newly classified Class B Common Stock. These transactions are collectively referred to as the Contribution Transactions. Effective September 30, 2013, each of Tiptree and TFP forfeited and Operating Subsidiary canceled a number of Operating Subsidiary units such that, following the forfeiture and cancellation, (i) the ratio of Operating Subsidiary units owned by Tiptree to Class A common stock outstanding (including for this purpose 6,474 shares issued to directors on October 3, 2013) was 1:1, or 10,266,853 common units and (ii) the ratio of Operating Subsidiary common units owned by TFP to TFP partnership units outstanding was 2.798:1, or 30,968,877 common units. Tiptree also canceled a number of shares of Class B common stock held by TFP to cause the ratio of Operating Subsidiary units owned by TFP to Class B common stock to be 1:1. In addition, Tiptree reserved 3,609,420 shares of Class B common stock for issuance upon exercise of existing warrants held by TFP to acquire an aggregate of 3,609,420 Operating Subsidiary common units.

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

On July 1, 2013, immediately prior to closing the Contribution Transactions, Care Inc. filed the Fourth Articles of Amendment and Restatement with the Maryland Department of Assessments and Taxation in order to, among other things, (i) change its name from “Care Investment Trust Inc.” to “Tiptree Financial Inc.”, (ii) rename its common stock as “Class A common stock,” with no change to the economic or voting rights of such stock, (iii) reclassify 50,000,000 authorized and unissued shares of its common stock as Class B common stock, and (iv) remove certain provisions related to Care Inc.'s qualification as a real estate investment trust (REIT).

9

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013


Pursuant to Operating Subsidiary's limited liability operating agreement, at any time after July 1, 2014, TFP will have the right to redeem common units of Operating Subsidiary held by it for an equal number of shares of Class A common stock of Tiptree (and an equal number of shares of Class B common stock held by TFP will be canceled). Tiptree may instead, at its election, deliver a cash amount (or combination of cash and Class A common stock) based on the fair market value of the Class A common stock on the redemption date.
As a result of the Contribution Transactions, Tiptree will not qualify to be taxed as a REIT for Federal income tax purposes and will become a taxable corporation effective January 1, 2013 due to the nature of the assets and the businesses contributed by TFP. As a REIT, Care Inc. was generally not subject to U.S., federal corporate income tax on its taxable income distributed to stockholders. However, even as a REIT, Care Inc. was subject to U.S. federal income and excise taxes in various situations, such as on Care Inc.’s undistributed income. See Note 14 for a discussion of income taxes.

Acquisition of businesses
The following discussion summarizes the acquisition of businesses by TFP that were contributed to Operating Subsidiary as part of the Contribution Transactions on July 1, 2013. As explained in Note 1, due to the Contribution Transactions, comparative financial information has been retrospectively adjusted to furnish comparative combined financial information from August 2010 (the date of common control). The application of this “as-if pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity. As a result, any capital transaction activity of TFP related to these acquisitions, such as any increases or decreases in noncontrolling interest, was retroactively adjusted as an adjustment to Tiptree’s additional paid-in capital. Also, the results of operations of each of the acquisitions that have occurred after August 2010 are included in the consolidated financial statements from the date of acquisition.
TAMCO
On June 30, 2012, TFP acquired from Tricadia Holdings, L.P. (Tricadia), a controlling financial interest in Tiptree Asset Management Company, LLC (TAMCO), which managed the assets of the subsidiaries of TFP as well as other entities, such as collateralized loan obligations (CLOs) and trusts. The two CLOs that TAMCO managed as of June 30, 2012 had assets of $810,600 and related note payables of $736,300 at par value. Given Tricadia’s controlling position in relation to both TAMCO and TFP, this combination was accounted for as a combination of entities under common control. As a result, the assets and liabilities of TAMCO, including the CLOs, have been presented as if they had been consolidated by TFP as of January 1, 2010 and their results of operations included in the TFP's results of operations going forward. The application of this “as-if pooling of interests” required the previously issued consolidated financial statements of TFP to be recast to reflect such activity. In conjunction with this combination, TFP issued 2,197,347 common units and 750,000 warrants collectively valued at $57,661 to Tricadia in return for a 99% controlling indirect interest in TAMCO. TFP then contributed its interests in TAMCO to the Operating Subsidiary in connection with the Contribution Transactions.
The acquisition of controlling interests in each of TFP's businesses discussed below were accounted for under the purchase method of accounting. The purchase price allocations were based on estimates of fair values of the assets acquired and liabilities assumed at the acquisition date. The fair values of the acquired net assets were determined using observable and unobservable information.

10

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

MFCA
In February 2009, TFP acquired a controlling financial interest (approximately 57%) of the outstanding limited liability company interests of Muni Funding Company of America, LLC (MFCA), a specialty finance holding company that invests directly and indirectly in U.S. federally tax exempt bonds. TFP paid $12,838 for a controlling financial interest with an acquisition date fair value of $20,594, which resulted in a bargain purchase gain of $7,756. As of December 31, 2009, TFP had increased its ownership to approximately 75% of the outstanding limited liability company interests of MFCA as a result of a tender and rights offering. In June 2011, TFP acquired 100% of the outstanding limited liability company interests of MFCA as a result of a tender offer and merger.
Philadelphia Financial Group, Inc.
On June 23, 2010, TFP acquired all of the outstanding Common Shares of Philadelphia Financial Group, Inc. (PFGI) (formerly known as PFG Holdings, Inc.) and its subsidiaries (collectively, PFG), a provider of private placement life insurance. TFP paid $28,500 for a 100% controlling financial interest.
On December 16, 2010, PFG initiated a recapitalization whereby TFP exchanged its 9,098 original PFG Common Shares in return for 2,850,000 shares of Series A participating preferred stock along with 2,850,000 shares of newly issued common stock. In addition, through the issuance of an additional 985,352 shares of Series A participating preferred stock and 985,352 Common Shares, PFG raised an additional $9,854 of which TFP contributed $4,076. This additional capital raised reduced TFP's ownership percentage from 100% to approximately 84.94%. During the first quarter of 2011, PFG issued 148,100 shares each of Common Shares and Series A participating preferred stock to PFG employees. PFG also issued 21,548 shares each of Common Shares and Series A participating preferred stock to an outside investor during the same timeframe. These share issuances reduced TFP's ownership percentage to approximately 81.34%. During the third quarter of 2012, PFG issued 2,000,000 shares each of Common Shares and Series A participating preferred stock as part of a $25,000 capital raise in which TFP was the primary participant. This resulted in an increase in TFP's ownership percentage to approximately 86.0%.
On December 28, 2012, Operating Subsidiary issued a note payable in the amount of $2,500 with an annual interest rate of 5%. This note was payment for 6.6% of the issued and outstanding Series A preferred stock and 8.8% of the issued and outstanding Common stock of PFG. This acquisition increased TFP's ownership percentage to 93.58%.
On July 13, 2012, PFG purchased certain assets of Hartford Life Private Placement, LLC (HLPP) from affiliates of The Hartford Financial Services Group, Inc. (The Hartford) for a purchase price of $117,500. PFG and certain insurance subsidiaries of The Hartford entered into a long-term servicing agreement whereby PFG administers approximately $35.0 billion in company owned life insurance (COLI) and bank owned life insurance (BOLI) business previously serviced by HLPP in exchange for a fee. We refer to this transaction as the PFAS Transaction.
Funding for the acquisition was provided in the form of equity of $23,500 issued by PFG and debt of $100,000 issued by PFG to an affiliate of Hartford. During the measurement period for this acquisition, the total purchase price was adjusted to $116,000. The information presented below reflects the subsequent adjustments to goodwill and the administrative servicing intangible asset to show the final purchase price allocation to assets acquired.


11

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

Intangible assets:
 
Administrative servicing asset
$
111,750

Software license
588

Goodwill
3,088

EDP equipment
424

Furniture and equipment
150

Total
$
116,000

 
Siena
In April 2013, the Company committed $10,000 to purchase a majority of the voting equity interests of Siena Capital Finance LLC (Siena). As of June 30, 2013, $7,310 of the commitment had been funded. This transaction resulted in a 59.38% controlling interest in Siena and generated $1,155 in goodwill, which was recorded on the Company’s consolidated balance sheet. On July 24, 2013, the Company made a subsequent investment of $2,690 in Siena, which has increased its controlling interest to 66.67% as of September 30, 2013.
(2)
    Summary of Significant Accounting Policies
(a)
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The consolidated financial statements prepared under GAAP for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common control described in Note 1 related to TAMCO and the Contribution Transactions. All intercompany items have been eliminated for these periods.
(b)
Principles of Consolidation
The consolidated financial statements reflect the consolidated accounts of Tiptree and (i) its wholly-owned subsidiaries, (ii) subsidiaries in which it has a controlling interest, and (iii) certain other entities known as variable interest entities (VIEs) in which Tiptree, through its subsidiaries, is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. This consolidation, particularly with respect to the VIEs, significantly impacts these consolidated financial statements.
(c)
Variable Interest Entities
ASC Topic 810, Consolidations, requires the consolidation of a VIE into the financial statements of the entity that is considered the VIE’s primary beneficiary. ASC Topic 810 provides a framework for determining whether an entity should be considered a VIE and accordingly evaluated for consolidation. If an entity is a VIE, it would then need to be determined whether Tiptree’s relationship, direct or indirect through subsidiaries, to the VIE (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If Tiptree does have a variable interest in the entity, it would then need to be determined whether Tiptree is deemed to be the primary beneficiary. For VIEs, if Tiptree is deemed to (i) have the power to

12

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

direct the activities of the VIE that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, then Tiptree would be deemed to be the primary beneficiary of the VIE and would be required to consolidate the VIE. Generally, TAMCO’s contractual relationship as collateral manager of the CLOs described herein satisfies criteria (i) of the prior sentence, and its ownership interests in and/or ability to earn certain incentive or other management fees in certain CLOs can typically satisfy criteria (ii).
Prior to the closing of the acquisition of TAMCO, it was established that TAMCO was the primary beneficiary of two CLOs that it managed as well as any subsequent CLOs that are established. As such, the financials statements of these CLOs are included in the consolidated financial statements of the Company. See Note 1.
The consolidation of the CLOs required the initial recognition of the assets and liabilities at fair value as of January 1, 2010. Since the assets are solely for the benefit of the beneficial interest holders (liability holders) and no residual value from their liquidation is available to TAMCO, the difference between the fair value of the assets of the CLOs and its liabilities upon consolidation have been reflected as appropriated retained earnings. Given the nature and activity of the CLOs, TAMCO has applied the investment company accounting guidance to the CLOs’ financial statements and as such, recognizes changes in fair value of the assets of the CLOs and accreted the fair value adjustment to the liabilities of the CLOs (recorded upon consolidation) in the consolidated statements of operations. A portion of the results of operations of the CLOs are reflected as net income (loss) attributable to subordinated noteholders and as an adjustment to the appropriated retained earnings as that pertains to the amount of subordinated interests of the CLOs not held by Tiptree.
Tiptree has an approximate 25% ownership interest in Operating Subsidiary as of September 30, 2013. Based on the VIE guidance in ASC Topic 810, Operating Subsidiary has been determined to be a VIE and Tiptree has been determined to be the primary beneficiary of Operating Subsidiary. TFP's approximate 75% non-controlling interest in Operating Subsidiary is reflected as such in the consolidated statements of operations.
(d)
Use of Estimates
The preparation of 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. The estimates and assumptions most susceptible to change are the valuation of securities, loans, separate account assets, derivative positions, and acquired assets and liabilities. Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.
(e)
New accounting pronouncements
In June 2013, the FASB issued ASU No. 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. This ASU introduces a new approach for assessing whether an entity is an investment company. To determine whether an entity is an investment company for accounting purposes, Tiptree will now be required to evaluate the fundamental and typical characteristics of the entity

13

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

including its purpose and design. The amendments in the ASU will be effective for Tiptree in the first quarter of 2014. Earlier application is prohibited. Management is evaluating the impact of adopting this ASU.

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) (ASU 2013-11), which provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. ASU 2013-11 will be effective for the Company beginning in the first quarter of fiscal 2014. The Company is currently assessing the potential impact on its financial statements once it adopts this new guidance.
(f)
Cash and Cash Equivalents
The Company considers all highly liquid investments of sufficient credit quality with maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand and cash held in banks. The Company’s restricted cash primarily consists of cash held by its consolidated CLOs as well as cash that is collateral for any U.S. Treasury short positions held. The cash related to CLO's can only be utilized by the individual CLOs, and cannot be distributed and as such is not available to the Company for its use.
(g)
Fair Value Measurement
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 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.

14

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in nonactive markets;
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability;
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
    Level 3 – Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data and assumptions that are used in pricing the asset or liability.
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 falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’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, the Company’s assets and liabilities will transfer between one level to another level. It is the Company’s policy to recognize transfers between different levels at the end of each reporting period.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. The Company’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include a third-party pricing services, independent broker quotations or pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value from measurement period to measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources.
The Company utilizes observable and unobservable inputs within 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

15

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand considerations and market volatility.
Trading Securities: Trading securities consist primarily of privately held equity securities, exchange-traded equity securities, U.S. Treasury securities (USTs), CLOs, collateralized debt obligations (CDOs), asset backed securities (ABSs), loans, and tax exempt securities. The fair value of privately held equity securities are either based on quotes obtained from dealers or internally developed valuation models. Because significant inputs used to determine the dealer quotes or model values are not observable, such as projected future earnings and price volatility, the Company has classified them within Level 3 of the fair value hierarchy. Exchange-traded equity securities are valued based on quoted prices from the exchange. These securities are actively traded and valuation adjustments are not applied. Accordingly, they are categorized in Level 1 of the fair value hierarchy. USTs are actively traded and valuation adjustments are not applied. They are categorized in Level 1 of the fair value hierarchy. Positions in securitized products such as CLOs, CDOs, and ABSs are based on quotes obtained from dealers. When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in an active or inactive market, the Company has classified them within Level 2 of the fair value hierarchy. If these quotes are based on valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand considerations, and market volatility, the Company has classified them within Level 3 of the fair value hierarchy. The fair value of tax exempt securities is determined by obtaining quotes from independent pricing services. In most cases, quotes are obtained from two pricing services and the average of both quotes is used. The independent pricing services determine their quotes using observable inputs such as current interest rates, specific issuer information and other market data for such securities. Therefore, the estimate of fair value is subject to a high degree of variability based upon market conditions, the availability of issuer information and the assumptions made. The valuation inputs used to arrive at fair value for such debt obligations are generally classified within Level 2 or Level 3 of the fair value hierarchy.
Available for sale securities: Available for sale securities consist primarily of obligations of states and political subdivisions, USTs, certificates of deposit, ABSs, and corporate bonds. These securities will generally be classified within either Level 1 or Level 2 of the fair value hierarchy. The fair value of fixed maturity securities is based on estimated fair value obtained from an independent pricing service, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market‑based or independently sourced market parameters, including interest rate yield curves, option volatilities, and currency rates.
Derivative Assets and Liabilities: Derivative assets and liabilities are comprised of credit default swaps (CDS), and interest rate swaps (IRS). The fair value of derivative assets and liabilities is based upon valuation pricing models, which represent what the Company would expect to receive or pay at the balance sheet date if the contracts were canceled. In general, the fair value of CDSs are based on dealer quotes. Because significant inputs used to determine the dealer quotes are not observable, such as price volatility, the Company has classified them as Level 3. The fair value of IRS is determined by obtaining broker or counterparty quotes. Because there were observable inputs used to arrive at these quotes, the Company has classified the IRS within Level 2 of the fair value hierarchy.

16

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

Separate Account Assets: Separate account assets are primarily invested in alternative investments (which include investments in limited partnerships, private equity funds, hedge funds, and fund of funds), mutual funds, fixed maturity securities, and equity securities. The alternative investments are valued at estimated fair value with the assistance of the investment managers of the underlying alternative investments. Since the entities underlying these alternative investments are investment companies for accounting purposes, as a practical expedient, the Company utilizes the separate account’s proportionate interest in the fair value of the underlying net assets to determine the fair value of these investments. The fair value of the underlying net assets of each alternative investment is determined from financial information provided by the investment manager. These alternative investments are generally classified within Level 3 of the fair value hierarchy. Most hedge fund investments are classified as Level 3. However, some hedge fund investments with minimal liquidity restrictions such as no lockup period, redemption notification of 35 days or less, withdrawal frequency greater than annually, and withdrawal payouts within 30 days are classified within Level 2. Mutual funds and equity securities are exchange-traded and are valued based on quoted market prices from independent pricing services and are classified within Level 1 of the fair value hierarchy. U.S. Treasury securities are classified within Level 1 of the fair value hierarchy and all other fixed maturity securities are classified within Level 2.
Cash and Cash Equivalents – Unrestricted: The carrying amounts of cash and cash equivalents - unrestricted are carried at cost which approximates fair value.
Cash and Cash Equivalents – Restricted: The carrying amounts of cash and cash equivalents - restricted are carried at cost which approximates fair value.
Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts of these assets and liabilities approximate their fair value due to their relatively short‑term nature.
Loans Owned, at Amortized Cost: The fair value of loans owned, at amortized cost is computed by discounting the expected future cash flows at market rates. Variable rate lines of credit outstanding are assumed to be at fair value.
Mortgage Notes Payable: The fair value of notes payable is determined based on contractual cash flows discounted at market rates.
Notes Payable: The fair value of notes payable is determined based on either dealer quotes or contractual cash flows discounted at market rates.
Policy Loans: The fair value of policy loans is deemed to be the carrying value, which is unpaid principal and accrued interest. Policy loans are not marketable instruments and can only be satisfied by the policy owner for the value carried.
For the nine month period ended September 30, 2013, $15,001 was transferred between Level 2 and Level 3. For the nine month period ended September 30 2012, $43,512 was transferred from Level 3 into Level 2. The majority of these amounts were due to CLOs, as quoted prices for these assets were obtained from active markets.
(h)
Investments

17

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

The Company records all security transactions on a trade‑date basis. Realized gains/(losses) are generally determined using the specific-identification method. ASC Topic 320, Investments – Debt and Equity Securities, requires the Company to classify its investment assets as trading, available for sale or held to maturity.
(i)
Trading Securities
Debt and equity securities classified as trading securities are intended to be sold at any time and are recorded at fair value, with unrealized gains/(losses) included in the consolidated statements of operations.
(j)
Available for Sale Securities
Debt securities classified as available for sale are intended to be held for indefinite periods of time and 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. Debt securities held as available for sale securities are recorded at fair value, with unrealized gains/(losses), net of related tax effects, excluded from earnings and reported as other comprehensive income.
Realized gains/(losses) on the sale of debt securities are calculated by the specific-identification method. The Company regularly monitors the difference between cost and the estimated fair value of its available for sale securities, which involves uncertainty as to whether declines in value are temporary in nature. If the Company believes a decline in the value of a particular security is temporary, it records the decline as an unrealized loss in equity. If the decline is deemed to be other than temporary, the Company writes it down to the carrying value of the security and records an other‑than‑temporary impairment loss on its consolidated statements of operations, regardless of whether the Company continues to hold the security. Management’s assessment of a decline in value 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 anticipate recovery; (v) whether it is more likely than not that the Company will sell a security before recovery of its amortized cost basis. Further, for securities expected to be sold, an other‑than‑temporary impairment loss is recognized if the Company does not expect the fair value of a security to recover its cost prior to the expected date of sale. If that judgment changes in the future, the Company may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology the Company uses to assess other‑than‑temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, and unfavorable changes in economic and social conditions, interest rates or credit ratings.
(k)
Investments in Loans at Fair Value
The CLOs managed by the Company contain a diversified portfolio of middle market leveraged loans carried at estimated fair value. In general, the fair value of leveraged loans are obtained from an independent pricing service which provides secondary coverage of market participants.

18

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

The values represent a composite of mark-to-market bid/offer prices and are classified as Level 2. In certain instances the Company will make its own determination of fair value of leveraged loans based on internal models and other unobservable inputs and the Company classified these leveraged loans as Level 3. The changes in fair values of investments in loans are reported in the consolidated statements of operations.
(l)
Investments in Loans at Amortized Cost
Certain loans held for investment are held at amortized cost. The Company periodically reviews its loans for impairment. Impairment losses are taken for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral may be determined by an evaluation of operating cash flow from the property during the projected holding period, and/or estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs. Whichever method is used, other factors considered relate to geographic trends and project diversification, the size of the portfolio and current economic conditions. When it is probable that the Company will be unable to collect all amounts contractually due, the loan would be considered impaired.
Interest income is 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 are those on which the accrual of interest has been suspended. Loans are placed on nonaccrual status and considered nonperforming when full payment of principal and interest is in doubt, or when principal or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. In addition, the amortization of net deferred loan fees is suspended. Interest income on nonaccrual loans may be recognized only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal, cash receipts on such nonaccrual loans are applied to reduce the carrying value of such loans. Nonaccrual loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the restructured terms of such loan. The Company did not have any loans on nonaccrual status as of September 30, 2013 or December 31, 2012.
(m)
Derivative Financial Instruments
The Company recognizes all derivatives on the consolidated balance sheets at fair value. The Company has not designated any derivative transactions as accounting hedges, and consequently, has not applied hedge accounting treatment. The changes in the fair values of the derivative financial instruments are reported in the consolidated statements of operations.
(n)
Real Estate and Identifiable Intangible Assets
Real estate and identified intangible assets are carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is provided on a straight‑line basis over the assets’ estimated useful lives which range from 9 to 40 years. Amortization is provided on a straight-line basis over the life of the in-place leases.

19

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

Upon the acquisition of real estate, management will assess the fair value of acquired assets (including land, buildings and improvements, and identified intangible assets such as above and below market leases and acquired in‑place leases and customer relationships) and acquired liabilities and then allocate purchase price based on these assessments. Management assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Other intangible assets acquired include amounts for in-place lease values that are based on management’s evaluation of the specific characteristics of each property and the respective tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods and market conditions. In estimating carrying costs, the Company includes estimates of lost rents at estimated market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions and expected trends.
Real estate properties, including any related intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. If such reviews indicate that the asset is impaired, the asset’s carrying amount is written down to its fair value. An impairment loss is measured based on the excess of the carrying amount over the fair value. The fair value is determined by using a discounted cash flow model and appropriate discount and capitalization rates. Estimates of future cash flows are based on a number of factors including historical operating results, leases in place, known trends, and market/economic conditions that may affect the property. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. If anticipated holdings periods change or estimated cash flows decline based on market conditions or otherwise, an impairment loss may be recognized. Long-lived assets to be disposed of are recorded at the lower of carrying value or fair value less estimated costs to sell. There were no material impairments on our wholly-owned real estate investments and intangibles for the three and nine month periods ended September 30, 2013 and 2012, except for the impairment on our investment in SMC as discussed in Note 9.
In addition, the Company also carries intangible assets, which represent insurance licensing agreements, insurance servicing agreement and leases in place. Management has deemed the insurance licensing agreements to have indefinite useful life and performs impairment tests on these assets at least annually. The Company recorded an intangible asset related to administration servicing rights acquired in connection with the acquisition of Hartford Life Private Placement LLC. This intangible asset is being amortized in relation to expected gross profits over the life of the serving rights. Annual impairment testing is performed on both the insurance servicing agreement and the leases in place. For the nine months ended September 30, 2013 and 2012, there was no impairment recognized on these assets.
(o)
Insurance Policies and Contracts Acquired
Insurance policies and contracts acquired is an intangible asset held by a subsidiary of the Company which reflects the estimated fair value of insurance policies and contracts in force at the time the subsidiary was acquired by the Company. The amount represents the portion of the

20

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

purchase price of the subsidiary that is allocated to the value of the right to received future cash flows from the policies and contracts. Insurance policies and contracts acquired is based on actuarially determined projections of premiums, future policy and contract charges, mortality, surrenders/withdrawals, separate account investment performance and operating expenses and is maintained by line of business. Actual experience may vary from these projections.
The Company amortizes insurance policies and contracts acquired over the estimated lives of the policies and contracts in proportion to actual and estimated future gross profits. Each reporting period, the Company updates the estimated gross profits with actual gross profits for the period. In addition, assumptions are reviewed and updated as necessary. Cumulative amortization is recalculated and adjusted by a cumulative charge or credit to current earnings. Estimated gross profits are regularly reviewed to determine the recoverability of insurance policies and contracts acquired.
(p)
Investments in Partially-Owned Entities
The Company invests in real estate‑related equity interests that allow it to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing. At the inception of the investment, it must be determined whether such investment should be accounted for as a loan, joint venture or as real estate. For the periods ended September 30, 2013, and December 31, 2012, the Company held three, real estate‑related investments and accounted for such investments under the equity method.
The Company assesses whether there are indicators that the value of its partially-owned entities may be impaired. An investment’s value is impaired if management determines that a decline in the value of the investment below its carrying value is other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated value of the investment. For the nine month period ended September 30, 2013, the Company recognized a $40 other than temporary impairment on one of its investments. For the nine month period ended September 30, 2013, the Company did not recognize any impairment.
(q)
Deferred Policy Acquisition Costs
Policy acquisition costs for traditional life insurance products are generally deferred and amortized over the premium paying period of the policy. Deferred policy acquisition costs and policy initiation costs related to universal life and investment‑type products are amortized in relation to expected gross profits over the life of the policies.
(r)
Separate Accounts
Separate account assets and liabilities represent variable annuity and variable universal life contract funds invested primarily in private and public equity securities, fixed maturities and investment partnerships. The separate account assets and liabilities are reported at fair value in the consolidated financial statements.
The assets of the separate accounts are legally segregated and are not subject to the claims that arise out of any other business of the Company or its subsidiaries.

21

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

Investment income, gains and losses are accrued directly to the policyholders and are not included in the results of operations of the Company. Premiums and deposits received and payments made on the policyholder’s accumulated account value are excluded from the amounts reported in the consolidated statements of operations.
(s)
Future Policy Benefits and Policyholder Deposits
Future policy benefit reserves are determined using the net level premium method, which provides for benefits based upon estimated future investment yield, expected mortality and estimated policy lapses. Interest rate assumptions range from 3.0% to 6.0%. Mortality has been calculated principally on an experience multiple applied to select and ultimate tables in common usage in the insurance industry. Estimated policy lapses have been determined principally based upon historical experience. Future policy benefit reserves for universal life policies consist of premiums received plus credited interest less accumulated policyholder assessments. These items are included in policy liabilities in the Company's consolidated balance sheet.
(t)
Rental Revenue
The Company recognizes rental revenue in accordance with ASC 840, Leases (ASC 840). ASC 840 requires that revenue be recognized 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. Amortization expense of above-market leases reduces rental income on a straight-line basis over the non-cancelable term of the lease. Taxes, insurance and reserves collected from tenants are separately shown as reimbursable income and corresponding payments are included in reimbursed property expenses included as components of other income and other expenses respectively in the condensed consolidated financial statements of income.
(u)
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 allocable to common stock holders by the weighted average number of common shares, including vested restricted share units, outstanding 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 share‑based payment awards that contain non-forfeitable rights to distributions or distribution equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS using the two‑class method. Accordingly, all earnings (distributed and

22

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

undistributed) are allocated to common shares and participating securities based on their respective rights to receive distributions.
See Note 22 for EPS computations.
(v)
Equity Based Compensation
The Company accounts for equity‑based compensation issued to nonemployees, directors, and affiliates of the Company using the current fair value based methodology.
The Company has determined that the measurement date for restricted shares and options awarded to nonemployees occurs when the restricted shares and options vest. The Company initially measures the cost of an award of restricted share units and options to nonemployees at the fair value of the restricted share units on the date awarded and subsequently measures the cost of the restricted shares and options at their fair value at each vesting and reporting date throughout the vesting period. The initial compensation cost and subsequent changes thereto are charged to expense over the vesting period with a corresponding credit to capital.
(w)
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. The Company's subsidiaries PFG, Siena Capital Finance Acquisition Corp., MFCA Funding and Tamco Manager, Inc. file both state and federal returns. 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 14.
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.
(x)
Administrative Fees Revenue and Expenses
The Company earns administrative fee revenue as a third party administrator for insurance contracts. The revenue is recorded as earned. The Company pays fees to a third party in conjunction with the administration of certain insurance contracts. The fees are recorded when incurred by the Company.
(y)
Premium and Fee Revenue and Related Expenses
Amounts assessed to the policyholders for mortality and expense charges, premium loads, charges for cost of insurance, and policy initiation fees are included in revenues. Death benefits and other benefits paid in excess of the policyholder’s accumulated account value are included in expenses. The Company recognizes premiums for life insurance products and other long‑duration life insurance products as revenue when due from policyholders. The Company

23

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

matches benefits, losses and related expenses with premiums over the related contract periods. These amounts are recorded as a component of fees of separate accounts and mortality expense respectively on the Company's condensed consolidated statements of income.
(z)
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
(3)
CLOs and Consolidated Variable Interest Entities
The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO's assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available.
CLOs typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of investments. These securities receive interest and principal payments from the CLO in accordance with an agreed upon priority of payments, commonly referred to as a “waterfall.” The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO. This tranche of notes is issued at a specified spread over LIBOR and normally has the first claim on the earnings of the CLO’s investments after payment of certain fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings of the CLO's investments if the required interest and principal payments have been made on the more senior tranches. The most junior tranche can take the form of either subordinated notes or preference shares and is referred to as the CLO’s “subordinated notes.” The subordinated notes generally do not have a stated coupon but are entitled to residual cash flows from the CLO's’ investments after all of the other tranches of notes and certain other fees and expenses are paid.
CLOs, which are designed to serve as investments for third party investors, generally have an investment manager that selects and actively manages the underlying assets to achieve target investment performance, including avoidance of loss. In exchange for these services, CLO managers typically receive three types of investment advisory fees: senior management fees, subordinated management fees and incentive fees. CLOs also generally appoint a trustee, custodian and collateral administrator, who are responsible for holding a CLO’s investments, collecting investment income and distributing that income in accordance with the waterfall. Telos Asset Management LLC (Telos), a subsidiary of the Company acquired in 2012, is a CLO manager of four CLOs; namely Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007‑2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the acquisition of TAMCO, the Company did not consolidate the CLOs as it only held a residual interest in certain CLOs which were recorded at fair value. The Company met the requirement to consolidate when it acquired the management rights of the CLOs as well as any subsequent CLOs managed by TAMCO.

24

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

Although the Company consolidates all of the assets and liabilities of the CLOs, the maximum exposure to loss related to the CLOs is limited to the Company’s investments in the CLOs (accreted value of $38,049 as of September 30, 2013 and $6,819 as of December 31, 2012), the investment advisory fee receivables from the CLOs ($3,402 as of September 30, 2013 and $3,089 as of December 31, 2012), and any future investment advisory fees, all of which are eliminated upon consolidation.
The assets of each of the CLOs are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider them assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. For this reason the difference between the fair value of the assets and liabilities at initial consolidation and subsequent results attributable to the VIE subordinated noteholders is reflected as appropriated retained earnings.
On August 6, 2013, Telos entered into a new $100,000 warehouse agreement with Telos 2013-5, Ltd. (Telos 5) that was amended on September 25, 2013 to increase the amount to $140,000. As of September 30, 2013, $128,467 is carried as investments in loans at fair value and $58,749 as loans payable on the consolidated balance sheet.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s consolidated balance sheet as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
Assets:
 
 
 
Restricted cash
$
115,129

 
$
75,105

Investment in loans
1,334,310

 
741,743

Investment in trading securities
18,997

 
18,970

Due from brokers
9,280

 
9,034

Accrued interest receivable
4,347

 
6,660

Deferred debt issuance costs
9,574

 

Other assets
107

 
148

Total assets
$
1,491,744

 
$
851,660

 
 
 
 
Liabilities:
 
 
 
Notes payable
$
1,191,623

 
$
571,751

Due to brokers
51,156

 
43,396

Accrued interest payable
5,959

 
4,858

Other liabilities
2,193

 
305

Total liabilities
$
1,250,931

 
$
620,310


25

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:
 
Nine months ended September 30, 2013
 
Nine months ended September 30, 2012
 
Three months ended September 30, 2013
 
Three months ended September 30, 2012
Income:
 
 
 
 
 
 
 
Realized gain (loss) trading securities
$

 
$
472

 
$

 
$
472

Realized gain (loss) loans
(16,550
)
 

 
(10,385
)
 
(930
)
Unrealized gain (loss) loans
(2,071
)
 
11,660

 
1,499

 
10,900

Interest income
52,096

 
38,288

 
20,142

 
13,362

Total income
$
33,475

 
$
50,420

 
$
11,256

 
$
23,804

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Interest expense
$
33,106

 
$
23,758

 
$
12,386

 
$
5,910

Other expense
915

 
1,432

 
397

 
273

Total expense
$
34,021

 
$
25,190

 
$
12,783

 
$
6,183


26

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

(4)
Operating segment data
The Company has four reportable operating segments. The Company’s operating segments are organized in a manner that reflects how management views these strategic business units. A description of each of the reportable segment is as follows:
Insurance and Insurance Services operations are conducted by PFG, a majority owned subsidiary of Tiptree. PFG's operating subsidiaries consist of Philadelphia Financial Life Assurance Company (PFLAC), Philadelphia Financial Life Assurance Company of New York (PFLACNY), Philadelphia Financial Distribution Company (PFDC), Philadelphia Financial Administration Services Company (PFASC), and Philadelphia Financial Agency, Inc. (PFA). Philadelphia Financial’s principal insurance activity is the structuring, underwriting, marketing and reinsurance and administration of variable life insurance and variable annuity products to the high net worth market. Total separate account assets for policies written by PFG are $4,353. PFASC, a third-party administrator for insurance contracts, was acquired by Philadelphia Financial from The Hartford on July 13, 2012. PFASC administers approximately $35.0 billion in COLI and BOLI policies for The Hartford.

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

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

Real Estate primarily relates to the activities of Care Investment Trust LLC (Care LLC), a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of senior housing properties including assisted-living, independent-living, memory care, skilled nursing and other healthcare‑related services in the U.S. Care LLC operates the business operated by Care Inc. prior to the Contribution Transactions (and this business as operated by Care Inc. and Care LLC is collectively referred to as Care). In addition, Tiptree holds a 17% interest in Star Asia Finance, Limited (SAF), a 27.6% interest in Star Asia Opportunity, LLC (SAO) and a 50% interest in Star Asia Opportunity II, LLC (SAO II). The Star Asia entities are all Tokyo based

27

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

real estate holding companies formed to invest in Asian properties and real estate related debt instruments.


The tabular information that follows shows the segment revenue, profit or loss, for each of the operating segments for the three and nine month periods ended September 30, 2013 and 2012 and total assets as of September 30, 2013 and December 30, 2012.
Revenue is derived from the main income components of each segment. For Insurance and Insurance Services, the main drivers of revenue are fees on separate account assets, and administration service fees. For Specialty Finance, the main sources of revenue are investment interest, dividend income, and realized and unrealized gains/losses on investment securities. For Asset Management, revenue is derived from management fees based on assets under management and, in some cases, incentive fees based on the profits generated. For Real Estate, revenue includes rental income and investment interest.
Intersegment revenues refers to those items of revenue which will be eliminated upon consolidation. Included in revenue, expense, interest revenue, interest expense, segment profit/(loss), and segment assets are items which are eliminated upon consolidation as well as adjustments for discontinued operations, reclassifications, consolidated CLOS and non-controlling interest. These items are classified as corporate eliminations and other in the tables below. In addition, interest revenue and interest expense are presented as a component of revenue and expense, respectively, in the tables below.
 
Three months ended September 30, 2013
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
Corporate eliminations and other
 
Totals
Revenues
$
17,393

 
$
5,896

 
$
85

 
$
2,169

$
15,586

 
$
41,129

Intersegment revenues
2,148

 
3,075

 
3,901

 
(72
)
(9,052
)
 

Interest revenue
1,251

 
5,794

 
4

 
589

(3,722
)
 
3,916

Expense
17,243

 
2,949

 
3,855

 
2,292

11,455

 
37,794

Interest expense
3,121

 
596

 

 
393


 
4,110

Segment profit/(loss)
$
2,298

 
$
3,529

 
$
131

 
$
1,522

$
(5,650
)
 
$
1,830


28

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

 
Three months ended September 30, 2012
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
Corporate eliminations and other
 
Totals
Revenues
$
16,354

 
$
6,626

 
$
184

 
$
4,008

$
17,920

 
$
45,092

Intersegment revenues
407

 
11,592

 
3,274

 
282

(15,555
)
 

Interest revenue
1,121

 
4,684

 

 
200

(3,688
)
 
2,317

Expense
16,002

 
1,206

 
3,461

 
4,186

2,710

 
27,565

Interest expense
2,840

 
431

 

 
1,565

(1,488
)
 
3,348

Segment profit/(loss)
$
760

 
$
19,962

 
$
(3
)
 
$
103

$
(17,733
)
 
$
3,089


 
Nine months ended September 30, 2013
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
Corporate eliminations and other
 
Totals
Revenues
$
51,471

 
$
17,249

 
$
296

 
$
26,749

$
9,470

 
$
105,235

Intersegment revenues
5,455

 
(1,223
)
 
12,776

 
1,703

(18,711
)
 

Interest revenue
3,658

 
16,729

 
4

 
1,500

(10,760
)
 
11,131

Expense
51,090

 
7,208

 
11,293

 
13,517

22,698

 
105,806

Interest expense
9,383

 
1,660

 

 
3,755

(2,790
)
 
12,008

Segment profit/(loss)
5,837

 
8,395

 
1,779

 
16,652

(26,100
)
 
6,563

Segment assets
$
4,680,970

 
$
809,363

 
$
7,400

 
$
105,821

$
1,000,679

 
$
6,604,233

 
Nine months ended September 30, 2012
 
Insurance
 
Specialty finance
 
Asset management
 
Real estate
Corporate eliminations and other
 
Totals
Revenues
$
29,116

 
$
23,683

 
$
1,025

 
$
12,816

$
30,052

 
$
96,692

Intersegment revenues
(223
)
 
12,783

 
12,289

 
333

(25,182
)
 

Interest revenue
3,314

 
15,115

 

 
603

(11,534
)
 
7,498

Expense
29,208

 
5,912

 
6,658

 
12,373

15,698

 
69,849

Interest expense
2,840

 
1,115

 

 
4,750

(4,289
)
 
4,416

Segment profit/(loss)
(315
)
 
42,162

 
6,656

 
777

(42,772
)
 
6,508

Segment assets (as of December 31, 2012)
$
4,354,945

 
$
650,389

 
$
4,262

 
$
191,693

$
332,513

 
$
5,533,802



29

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

(5)
Available for Sale Securities
The amortized cost and fair values of available for sale securities held as of September 30, 2013 and December 31, 2012 are as follows:
 
September 30, 2013
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of
  U.S. government authorities and agencies
$
11,970

 
$
195

 
$
(56
)
 
$
12,109

Corporate securities
5,390

 
78

 
(44
)
 
5,424

Certificates of deposit
100

 

 

 
100

Asset-backed securities
86

 
2

 

 
88

 
$
17,546

 
$
275

 
$
(100
)
 
$
17,721

 
December 31, 2012
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of
  U.S. government authorities and agencies
$
8,731

 
$
412

 
$
(3
)
 
$
9,140

Obligations of states and political subdivisions
475

 
3

 

 
478

Corporate securities
6,076

 
206

 
(5
)
 
6,277

Certificates of deposit
100

 

 

 
100

Asset-backed securities
311

 
5

 
(8
)
 
308

 
$
15,693

 
$
626

 
$
(16
)
 
$
16,303


30

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

The following table summarizes the gross unrealized losses on available for sale securities in an unrealized loss position as of September 30, 2013 and December 31, 2012:
 
September 30, 2013
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair Value
 
Gross
Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
3,754

 
$
(52
)
 
$
287

 
$
(4
)
Corporate securities
2,233

 
(44
)
 

 

Asset-backed securities

 

 
2

 

Total
$
5,987

 
$
(96
)
 
$
289

 
$
(4
)
 
December 31, 2012
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair Value
 
Gross
Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
612

 
$
(3
)
 
$

 
$

Corporate securities
540

 
(3
)
 
149

 
(2
)
Asset-backed securities

 

 
194

 
(8
)
Total
$
1,152

 
$
(6
)
 
$
343

 
$
(10
)
At September 30, 2013, the Company held two securities which were in an unrealized loss position for more than one year. The total unrealized losses on these securities were $4 and the fair value was $289. At December 31, 2012, the Company had three securities that were in an unrealized loss position for more than one year. The total unrealized losses on these securities were $10 and the fair value was $343. The unrealized losses were attributable to changes in interest rates and not credit-related issues. There have been no other‑than‑temporary impairments recorded by the Company in 2013 or 2012.
The amortized cost and fair values of investments of these debt securities at September 30, 2013, 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.

31

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

 
Amortized Cost
 
Fair Value
Due in one year or less
$
403

 
$
404

Due after one year through five years
11,190

 
11,287

Due after five years through ten years
5,287

 
5,352

Due after ten years through twenty years
580

 
590

Asset-backed securities
86

 
88

 
$
17,546

 
$
17,721

Purchases of available for sale debt securities were $7,790 and $7,091 for the periods ended September 30, 2013 and 2012, respectively. Proceeds from maturities of available for sale debt securities were $470 and $724 for these same periods. Proceeds from sales of available for sale debt securities for the period ended September 30, 2013 were $5,411 with associated gains of $74. For the same period in 2012, proceeds from sales of available for sale debt securities were $10,934 with associated gains of $455.

32

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

(6)
Fair Value of Financial Instruments
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities measured on a recurring basis and the associated fair value hierarchy amounts as of September 30, 2013 and December 31, 2012. Included are balances associated with the consolidated CLOs:
 
 
 
September 30, 2013
 
 
Assets:
Quoted Prices in
 active markets
Level 1
 
 Other Significant
 Observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair Value
 
Carrying Value
Trading securities:
 
 
 
 
 
 
 
 
 
Privately held equity securities (1)
$

 
$

 
$
5,074

 
$
5,074

 
$
5,074

Tax exempt securities

 
33,880

 
298

 
34,178

 
34,178

CDO

 

 
820

 
820

 
820

CLO

 

 
721

 
721

 
721

Corporate bonds (2)

 

 
17,537

 
17,537

 
17,537

 Total trading securities

 
33,880

 
24,450

 
58,330

 
58,330

          Corporate loans (3)

 
1,462,777

 

 
1,462,777

 
1,462,777

Available for sale securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
7,872

 

 

 
7,872

 
7,872

Obligations of state and political subdivisions

 
4,237

 

 
4,237

 
4,237

Certificates of deposit

 
100

 

 
100

 
100

Corporate bonds

 
5,424

 

 
5,424

 
5,424

Asset-backed securities

 
88

 

 
88

 
88

 Total available for sale securities
7,872

 
9,849

 

 
17,721

 
17,721

Derivative Assets:
 
 
 
 
 
 
 
 
 
CDS

 

 
2

 
2

 
2

Total Derivative Assets
$

 
$

 
$
2

 
$
2

 
$
2




33

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except shares and per share data)
September 30, 2013

 
 
 
September 30, 2013
 
 
 
 Quoted Prices in
Active markets
Level 1
 
 Other Significant
Level 2
 
 Significant
Unobservable inputs
Level 3
 
 Fair Value
 
 Carrying Value
Separate Account Assets:
 
 
 
 
 
 
 
 
 
Cash
$
4,039

 
$

 
$

 
$
4,039

 
$
4,039

Short-term investments
131,750

 

 

 
131,750

 
131,750

Debt Securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
13,706

 

 

 
13,706

 
13,706

U.S. government agencies

 
569

 

 
569

 
569

Municipal bonds

 
3,568

 

 
3,568

 
3,568

Asset-backed securities

 
8,170

 

 
8,170

 
8,170

Corporate bonds

 
13,230

 

 
13,230

 
13,230

Preferred stocks
25

 

 

 
25

 
25

Common stocks
107,587

 

 

 
107,587

 
107,587

Mutual funds
163,627

 

 

 
163,627

 
163,627

Real estate funds

 

 
2,593,508

 
2,593,508

 
2,593,508

Private equity

 

 
244

 
244

 
244