10-Q 1 tfiq12014-10q.htm 10-Q TFI Q1 2014 - 10Q
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 March 31, 2014
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Financial Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
38-3754322
(State or Other Jurisdiction of
(IRS Employer
Incorporation of Organization)
Identification No.)
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
10017
(Address of Principal Executive Offices)
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
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 May 12, 2014, there were 10,617,947 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

Item 1. Financial Statements (Unaudited)

Financial Statements Introductory Note

Tiptree Financial Inc. (“Tiptree”) is a holding company that is the sole managing member, and owns approximately 25%, of Tiptree Operating Company, LLC (“Operating Company”). As the sole managing member of Operating Company, Tiptree operates and controls all of the business and affairs of Operating Company and its subsidiaries and consolidates the financial results of Operating Company and its subsidiaries. The ownership by Tiptree Financial Partners, L.P. (“TFP”) of approximately 75% of Operating Company is reflected as a non-controlling interest in Tiptree’s consolidated financial statements. See “Overview” section of Management’s Discussion and Analysis and Notes 1 and 13 to the consolidated financial statements for further discussion of Tiptree’s capital and ownership structure.


1

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


 
(Unaudited)
 
 

March 31, 2014

December 31, 2013
Assets



Assets:
 
 
 
Cash and cash equivalents – unrestricted
$
124,824


$
120,557

Cash and cash equivalents – restricted
36,230


26,395

Trading investments, at fair value
32,834


35,991

Investments in available for sale securities, at fair value
(amortized cost: $17,508 and $17,708 in 2014 and 2013, respectively)
17,662


17,763

Loans held for sale, at fair value ($15,776 pledged as collateral at March 31, 2014 )
15,776

 

Investments in loans, at fair value
198,887


171,087

Loans owned, at amortized cost – net of allowance
42,105


40,260

Investments in partially-owned entities
8,566


9,972

Real estate
105,853


105,061

Policy loans
99,339


102,147

Deferred tax assets
2,932


3,310

Intangible assets
154,095


154,695

Goodwill
4,617


4,294

Other assets
46,099


49,201

Separate account assets
4,675,098


4,625,099

Assets of consolidated CLOs
1,390,599


1,414,616

Total assets
$
6,955,516


$
6,880,448

Liabilities and Stockholders’ Equity



Liabilities:



Derivative financial instruments, at fair value
978


598

U.S. Treasuries, short position
18,875


18,493

Debt
381,266


360,609

Policy liabilities
109,412


112,358

Other liabilities and accrued expenses
37,092


21,829

Separate account liabilities
4,675,098


4,625,099

Liabilities of consolidated CLOs
1,167,325


1,175,606

Total liabilities
6,390,046


6,314,592

Commitment and contingent liabilities
 
 
 
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, 10,610,281 and 10,556,390 shares issued and outstanding respectively
11


11

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


31

Additional paid-in capital
101,572


100,903


2


Accumulated other comprehensive income
93


33

Retained earnings
19,958


18,933

Total stockholders’ equity of Tiptree Financial Inc.
121,665


119,911

Non-controlling interest
362,732


361,354

Appropriated retained earnings of consolidated TAMCO
81,073


84,591

Total stockholders’ equity
565,470


565,856

Total liabilities and stockholders’ equity
$
6,955,516


$
6,880,448


See accompanying notes to consolidated financial statements.



3


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



Three months ended March 31,


2014
 
2013
Realized and unrealized gains:
 
 
 
 
Net realized gain on investments

$
142

 
$
154

Change in unrealized appreciation on investments

516

 
558

Income from investments in partially owned entities

344

 
89

Net realized and unrealized gains

$
1,002

 
$
801

Investment income:


 

Interest income

$
5,363

 
$
3,027

Separate account fees

5,487

 
5,306

Administrative service fees

12,352

 
11,931

Rental revenue

4,446

 
822

Gain on sale of loans held for sale, net
 
952

 

Other income

730

 
218

Total investment income

29,330

 
21,304

Total net realized and unrealized gains and investment income

$
30,332

 
$
22,105


4


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



Three months ended March 31,


2014
 
2013
Expenses:




Interest expense

$
5,962

 
$
3,835

Payroll expense

10,570

 
8,628

Professional fees

1,090

 
1,372

Change in future policy benefits

1,125

 
1,117

Mortality expenses

2,642

 
2,614

Commission expense

984

 
555

Depreciation and amortization expenses

1,563

 
943

Other expenses
 
6,156

 
3,474

Total expenses
 
30,092

 
22,538

Net income before taxes and income attributable to consolidated CLOs from continuing operations
 
240

 
(433
)
Results of consolidated CLOs:
 
 
 
 
Income attributable to consolidated CLOs
 
11,986

 
16,564

Expenses attributable to consolidated CLOs
 
13,992

 
9,821

Net Income attributable to consolidated CLOs
 
(2,006
)
 
6,743

Income before taxes from continuing operations
 
(1,766
)
 
6,310

Provision for income taxes
 
429

 
1,299

(Loss) income from continuing operations
 
(2,195
)
 
5,011

Discontinued operations:
 

 

Income from discontinued operations, net


 
841

Provision for income taxes


 

Discontinued operations, net


 
841

Net (loss) income

(2,195
)
 
5,852

Less net income attributable to noncontrolling interest

298

 
4,105

Less net (loss) income attributable to VIE subordinated noteholders

(3,518
)
 
429

Net income available to common stockholders

$
1,025

 
$
1,318

Net income (loss) per Class A common share:


 

Basic, continuing operations, net
 
$
0.10

 
$
0.05

Basic, discontinued operations, net


 
0.08

Net income basic

0.10

 
0.13

Diluted, continuing operations, net

0.10

 
0.05

Diluted, discontinued operations, net


 
0.08

Net income dilutive

$
0.10

 
$
0.13


5


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



Three months ended March 31,


2014
 
2013
Weighted average number of Class A common shares:

 
 
 
Basic

10,586,587

 
10,251,292

Diluted

10,586,587

 
10,251,292

See accompanying notes to consolidated financial statements.

6


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands, except share and per share data)
(Unaudited)
 
 
Three months ended March 31,
 
 
2014
 
2013
Net (loss) income
 
$
(2,195
)
 
$
5,852

Other comprehensive income:
 
 
 
 
Net unrealized holding gains (losses) on securities available for sale net of tax expense/(benefit) of $31 and ($35)
 
57

 
(65
)
Less: reclassification adjustment for net gains included in net (loss) income net of tax expense of $2 and $11
 
3

 
20

Total comprehensive (loss) income
 
(2,141
)
 
5,767

Less: comprehensive (loss)/income attributable to non-controlling interests and VIE subordinated noteholders
 
(3,220
)

4,534

Total comprehensive income available to Class A common stockholders
 
$
1,079

 
$
1,233


See accompanying notes to consolidated financial statements


7


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share and per share data)
(Unaudited)
 
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
TAMCO
 
Retained
earnings
 
Non-controlling
interest
 
Total
Balance at December 31, 2013
10,556,390

 
$
11

 
30,968,877

 
$
31

 
$
100,903

 
$
33

 
$
84,591

 
$
18,933

 
$
361,354

 
$
565,856

Stock-based compensation to directors for services rendered
6,446

 

 

 

 
48

 

 

 

 

 
48

Stock-based compensation to employees and other
47,445

 

 

 

 
352

 

 

 

 

 
352

Contribution

 

 

 

 

 

 

 

 
14

 
14

Net unrealized gains and losses on available for sale securities (net of tax of $33)

 

 

 

 

 
60

 

 

 
4

 
64

Dividends paid

 

 

 

 

 

 

 

 
(43
)
 
(43
)
Purchase of majority ownership of subsidiary

 

 

 

 

 

 

 

 
1,281

 
1,281

Net changes in non-controlling interest

 

 

 

 
269

 

 

 

 
(176
)
 
93

Net (loss) income

 

 

 

 

 

 
(3,518
)
 
1,025

 
298

 
(2,195
)
Balance at March 31, 2014
10,610,281

 
$
11

 
30,968,877

 
$
31

 
$
101,572

 
$
93

 
$
81,073

 
$
19,958

 
$
362,732

 
$
565,470


See accompanying notes to consolidated financial statements

8

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


 
Three months ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
1,025

 
$
1,318

Net income attributable to non-controlling interest
298

 
4,105

Net (loss) income attributable to VIE subordinated note holders
(3,518
)
 
429

Net (loss) income
(2,195
)
 
5,852

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Net realized gain – trading securities
(142
)
 
(155
)
Increase/(decrease) in other liabilities and accrued expenses
14,156

 
(88
)
Change in unrealized appreciation – trading securities
(516
)
 
(558
)
Income from investments in partially-owned entities, net
(344
)
 
(89
)
Deferred tax expense
343

 
1,251

Increase in other assets
(914
)
 
(1,049
)
Non cash incentive fee
16

 

Non cash compensation expense
53

 
92

Non cash interest from investments in loans
(99
)
 
(38
)
Accretion of discounts and depreciation expense
1,498

 
1,857

Amortization and write off of deferred financing costs
60

 
13

Accretion of mortgage note discount
(73
)
 
5

(Decrease)/increase in policy liabilities
(2,946
)
 
2,475

Operating activities from VIEs
35,195

 
1,293

Net cash provided by operating activities
44,092

 
10,861

Cash flows from investing activities:
 
 
 
Purchases of subsidiaries
(524
)

(9,833
)
Purchases of trading securities and loans carried at fair value
(52,372
)
 
(24,668
)
Purchases of available for sale securities
(2,429
)
 

Purchases of real estate
(313
)
 
(97
)
Purchases of loans
(2,700
)
 
(17,258
)
Purchases of fixed assets
(2
)
 
(2
)
Increase in restricted cash
(9,834
)
 
(215
)
Acquisitions, net cash
7,213

 
(2,114
)
Proceeds from mortgages held for sale
5,606

 

Proceeds from loan repayments
303

 
277

Proceeds from sales of trading securities
35,064

 
20,508

Proceeds from loans receivable

 
(1,224
)
Proceeds from foreign exchange

 
45

Proceeds from sales of available for sale securities
2,601

 
2,590

Proceeds from maturities of available for sale securities

 
12


9

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


Proceeds from distributions paid by partially owned entities
278

 

Decrease/ (increase) in policy loans
2,807

 
(2,461
)
Change due to consolidation of trusts
(34
)
 

Investing activities from VIEs
15,384

 
(347,196
)
Net cash provided by /(used in) investing activities
1,048

 
(381,636
)
Cash flows from financing activities:
 
 
 
Capital distributions paid by subsidiaries

 
(810
)
Principal payments under mortgage notes payable
(422
)
 
(371
)
Partial paydown of borrowings
(7,160
)
 
(1,250
)
Repurchase of common stock of subsidiary

 
(2
)
Payment of placement costs
(200
)
 
(38
)
Proceeds from issuance of common units of subsidiaries
400

 

Proceeds from borrowings
6,598

 

Financing activities from VIEs
(40,089
)
 
345,938

Net cash (used in)/provided by financing activities
(40,873
)
 
343,467

Net increase/(decrease) in cash
4,267

 
(27,308
)
Cash and cash equivalents – unrestricted – beginning of period
120,557

 
88,563

Cash and cash equivalents – unrestricted – end of period
$
124,824

 
$
61,255

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
10,295

 
$
8,128

Cash paid for taxes
$
782

 
$

Non-cash investing and financing activities:
 
 
 
Capital change due to equity compensation
$
53

 
$
21

     Net assets related to acquisitions
(3,275
)
 

     Non-cash financing costs
$

 
$
2,500


See accompanying notes to consolidated financial statements.

10

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)


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 Company, Tiptree Operating Company, LLC (Operating Company). Tiptree’s primary focus is on four sectors: 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.”
(2) Acquisitions

The following discussion summarizes the acquisition of businesses by Tiptree subsequent to December 31, 2013.
Luxury Mortgage Corp.

Tiptree completed the acquisition of 67.5% of Luxury in January 2014; therefore, Luxury is consolidated within Tiptree’s financial statements beginning with the first quarter of 2014 and reported in Tiptree’s specialty finance segment. Luxury’s operations include the origination, packaging and sale of agency, prime jumbo and super jumbo mortgage loans into the secondary market through whole loan sales. The loans are typically sold shortly after origination into a liquid secondary market.

Management has completed a preliminary assessment of the allocation of the fair value of the assets acquired and liabilities assumed from the Luxury acquisition in accordance with ASC 805 Business Combinations. The allocation of the purchase price is preliminary pending receipt of information necessary to identify and measure the assets acquired and the liabilities assumed. The Company anticipates finalizing the purchase price allocation as soon as practicable.
Accounting Policies

Substantially all loans originated by the Company are held for sale to permanent investors. The Company has elected to record all mortgage loans held for sale at fair value. The fair value of loans held for sale is determined using quoted prices for similar assets (level 2 inputs) and is determined on a loan by loan basis.

Luxury issues interest rate lock commitments (IRLC) to its customers, which are carried at estimated fair value on the Company’s consolidated balance sheet. The estimated fair values of these commitments are generally calculated by reference to quoted prices in secondary markets for commitments to sell certain government sponsored agencies. The fair values of these commitments generally result in a Level 2 classification.

Luxury’s revenues include interest income earned for the period the loans are on Luxury’s balance sheet, gain on sale income representing the difference between the fair value and the selling price of the related loan sold as well as fee income earned at origination.

(3) Summary of Significant Accounting Policies
The consolidated financial statements of Tiptree Financial Inc. were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in Note 2 of Notes to Financial Statements included in the 2013 Annual Report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

11

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

Management believes there are no recently issued accounting standards not yet implemented that are applicable to the Company as of March 31, 2014.

(4) CLOs and Consolidated Variable Interest Entities
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 Tiptree Asset Management Company, LLC (TAMCO), the Company did not consolidate the then existing CLOs (Telos 1 and Telos 2) as it only held a residual interest which was recorded at fair value. The Company met the requirement to consolidate when it acquired the management rights of the CLOs.
The Company’s percentage ownerships of the subordinated notes of the CLOs as of March 31, 2014 are as follows: 7.11% (Telos 1), 95.45% (Telos 2), 0.00% (Telos 3) and 71.08% (Telos 4).
The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated debt obligations 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.
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 Variable Interest Entities (“VIE”) subordinated noteholders is reflected as appropriated retained earnings.
As of March 31, 2014 and December 31, 2013, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $33,842 and $38,459, respectively, as well as the management fees receivable of $3,122 and $3,616 as of March 31, 2014 and December 31, 2013, respectively. Both the carrying values of the Company’s investment in the CLOs and management fees receivable are eliminated upon consolidation.
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 March 31, 2014, $192,940 is carried as investments in loans at fair value and $139,150 as debt on the consolidated balance sheet of Tiptree. The Company’s exposure in Telos 5 is limited to its equity investment of $45,000 , the $35,000 that had been in place since December 31, 2013 along with an additional $10,000 investment added during the three months ended March 31, 2014. Subsequent to March 31, 2014, Telos 5 closed (see Note 19 “Subsequent Events”)

12

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

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. Subordinated debt obligations owned by Tiptree are not included in these tables as these amounts are eliminated in consolidation.
 
March 31, 2014
 
December 31, 2013
Assets:
 
 
 
Restricted cash
$
108,897

 
$
67,604

Investment in loans
1,240,805

 
1,298,155

Investment in trading securities
20,166

 
19,366

Due from brokers
8,565

 
15,945

Accrued interest receivable
2,988

 
4,108

Deferred debt issuance costs
9,038

 
9,261

Other assets
140

 
177

Total assets of consolidated CLOs
$
1,390,599

 
$
1,414,616

 
 
 
 
Liabilities:
 
 
 
Notes payable
$
1,128,113

 
$
1,154,097

Due to brokers
30,760

 
11,479

Accrued interest payable
8,151

 
9,745

Other liabilities
301

 
285

Total liabilities of consolidated CLOs
$
1,167,325

 
$
1,175,606

The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:
 
Three months ended March 31,
 
2014
 
2013
Income:
 
 
 
Realized loss loans
$
(6,955
)
 
$
(663
)
Unrealized gain loans
218

 
3,116

Interest income
18,723

 
14,111

Total income attributable to consolidated CLOs
$
11,986

 
$
16,564

 
 
 
 
Expenses:
 
 
 
Interest expense
$
13,462

 
$
9,611

Other expense
530

 
210

Total expenses attributable to consolidated CLOs
$
13,992

 
$
9,821




13

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)


The tables below summarize the debt obligations of the CLOs consolidated by the Company as of March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
Aggregate
Principal Amount
 
Spread over three Months LIBOR
 
Unamortized
Discount
 
Carrying Amount
Description
 
 
 
 
 
 
 
Telos 4 (maturity July 2024)
 
 
 
 
 
 
 
Class A
$
214,000

 
1.30
%
 
$
940

 
$
213,060

Class B
46,500

 
1.80
%
 
2,021

 
44,479

Class C
29,000

 
2.75
%
 
1,372

 
27,628

Class D
19,250

 
3.50
%
 
1,532

 
17,718

Class E
16,000

 
5.00
%
 
1,942

 
14,058

Class X
3,500

 
0.95
%
 

 
3,500

Subordinated
10,700

 
N/A

 
504

 
10,196

 
 
 
 
 
 
 
 
Telos 3 (maturity October 2024)
 
 
 
 
 
 
 
Class A
225,000

 
1.42
%
 

 
225,000

Class B
36,500

 
2.25
%
 

 
36,500

Class C
26,500

 
3.00
%
 
559

 
25,941

Class D
18,000

 
4.25
%
 
806

 
17,194

Class E
15,000

 
5.50
%
 
1,486

 
13,514

Class F
6,000

 
5.50
%
 
731

 
5,269

Subordinated
34,350

 
N/A

 
1,385

 
32,965

 
 
 
 
 
 
 
 
Telos 2 (maturity April 2022)
 
 
 
 
 
 
 
Class A-1
193,442

 
0.26
%
 
23,909

 
169,533

Class A-2
40,000

 
0.40
%
 
8,491

 
31,509

Class B
27,500

 
0.55
%
 
7,346

 
20,154

Class C
22,000

 
0.95
%
 
9,273

 
12,727

Class D
22,000

 
2.20
%
 
11,699

 
10,301

Class E
16,000

 
5.00
%
 
13,095

 
2,905

Subordinated
2,000

 
N/A

 
1,634

 
366

 
 
 
 
 
 
 
 
Telos 1 (maturity October 2021)
 
 
 
 
 
 
 
Class A-1D
35,017

 
0.27
%
 
4,210

 
30,807

Class A-1R
13,131

 
0.29
%
 
1,579

 
11,552

Class A-1T
48,149

 
0.27
%
 
5,790

 
42,359

Class A-2
60,000

 
0.40
%
 
12,426

 
47,574


14

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

Class B
27,200

 
0.49
%
 
7,083

 
20,117

Class C
22,000

 
0.85
%
 
9,048

 
12,952

Class D
22,000

 
1.70
%
 
11,324

 
10,676

Class E
16,000

 
4.25
%
 
12,772

 
3,228

Subordinated
40,223

 
N/A

 
25,892

 
14,331

 
$
1,306,962

 
 
 
$
178,849

 
$
1,128,113



December 31, 2013

Aggregate
Principal amount

Spread over three Months LIBOR

Unamortized
Discount

Carrying Amount
Description







Telos 4 (maturity July 2024)







Class A
$
214,000


1.30
%

$
962


$
213,038

Class B
46,500


1.80
%

2,066


44,434

Class C
29,000


2.75
%

1,401


27,599

Class D
19,250


3.50
%

1,562


17,688

Class E
16,000


5.00
%

1,976


14,024

Class X
3,500


0.95
%



3,500

Subordinated
10,700


N/A


516


10,184









Telos 3 (maturity October 2024)







Class A
225,000


1.42
%



225,000

Class B
36,500


2.25
%



36,500

Class C
26,500


3.00
%

570


25,930

Class D
18,000


4.25
%

822


17,178

Class E
15,000


5.50
%

1,512


13,488

Class F
6,000


5.50
%

743


5,257

Subordinated
29,000


N/A


1,322


27,678









Telos 2 (maturity April 2022)







Class A-1
221,836


0.26
%

28,216


193,620

Class A-2
40,000


0.40
%

8,717


31,283

Class B
27,500


0.55
%

7,532


19,968

Class C
22,000


0.95
%

9,473


12,527

Class D
22,000


2.20
%

11,900


10,100

Class E
16,000


5.00
%

13,155


2,845

Subordinated
2,000


N/A


1,654


346









Telos 1 (maturity October 2021)








15

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

Class A-1D
39,270


0.27
%

4,867


34,403

Class A-1R
14,726


0.29
%

1,826


12,900

Class A-1T
53,996


0.27
%

6,693


47,303

Class A-2
60,000


0.40
%

12,781


47,219

Class B
27,200


0.49
%

7,277


19,923

Class C
22,000


0.85
%

9,261


12,739

Class D
22,000


1.70
%

11,548


10,452

Class E
16,000


4.25
%

12,861


3,139

Subordinated
40,223


N/A


26,391


13,832


$
1,341,701




$
187,604


$
1,154,097

(5) 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 segments 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), PFASC, and Philadelphia Financial Agency, Inc. (PFA). Philadelphia Financial’s principal insurance activity is the structuring, underwriting, marketing 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 $4,675,098. PFASC, acquired certain assets and administration rights from The Hartford on July 13, 2012. PFASC administers approximately $37.0 billion in COLI and BOLI policies for The Hartford.

Specialty Finance activities are primarily conducted through the Company’s majority-controlled subsidiaries, MFCA, Luxury 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. Luxury is a residential mortgage lender that originates in conforming FHA, prime jumbo and super jumbo mortgages for sale to institutional investors. In addition to MFCA, Luxury and Siena, Tiptree’s other specialty finance investments include principal investment holdings of CLO subordinated notes and a structured corporate loan portfolio.

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, which provides services to Operating Company; and (4) TREIT, a real estate focused service provider.

Real Estate primarily relates to the activities of Care LLC, a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of senior housing assets including assisted-living, independent-living and memory care. 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). (See Note 13—Stockholder’s Equity—Contribution Transactions for further detail) In addition, Tiptree holds a 17% interest in Star Asia Finance, Limited (SAF), a 27.59% 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 real estate holding companies formed to invest in Asian properties and real estate related debt instruments.


16

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

The tabular information that follows shows components of revenue, expense, and profit or loss, for each of the operating segments for the periods ended March 31, 2014 and 2013 and total assets as of March 31, 2014 and December 31, 2013.
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 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 revenue 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, assets of consolidated CLOs and non-controlling interest. These items are classified as corporate eliminations and other in the tables below.
Each reportable segment’s measure of profit (loss) is reported before income taxes and includes discontinued operations and non-controlling interest as this is how management views its segments.

 
Three months ended March 31, 2014
 
Insurance and insurance services
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate eliminations and other
 
Totals
Fee income
$
17,839

(1) 
$


$

 
$

 
$


$
17,839

Rental revenue






4,446

 


4,446

Interest income
1,188


7,316




683

 
(3,824
)

5,363

Other revenue
5


2,498


95

(2) 
229

 
(143
)

2,684

Intersegment revenues


78


3,368

(2) 

 
(3,446
)


Total revenue
$
19,032


$
9,892


$
3,463


$
5,358

 
$
(7,413
)

$
30,332

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$
2,914


$
2,148


$


$
978

 
$
(78
)

$
5,962

Payroll expense
5,283


1,166


2,312


1,798

 
11


10,570

Professional fee expense
190


853


216


55

 
(224
)

1,090

Other expense
8,274


1,777


331


2,119

 
(31
)

12,470

Total expense
16,661


5,944


2,859


4,950

 
(322
)

30,092

Segment profit/(loss)
$
2,371


$
3,948


$
604


$
408

 
$
(7,091
)

$
240

Net loss attributable to consolidated CLOs
 
 
 
 
 
 
 
 
 
 
(2,006
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders
 
 
 
 
 
 
 
 
 
 
(3,220
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 

Income taxes
 
 
 
 
 
 
 
 
 
 
429

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
1,025

Segment assets
$
4,994,314


$
443,426


$
9,743


$
150,136

 
$
1,357,897


$
6,955,516


17

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

 
Three months ended March 31, 2013
 
Insurance
 
Specialty finance
 
Asset management
 
Real estate
 
Corporate eliminations and other
 
Totals
Fee income
$
17,237

(1) 
$


$

 
$

 
$


$
17,237

Rental revenue






3,841

 
(3,019
)

822

Interest income
1,181


5,008




324

 
(3,486
)

3,027

Other revenue
32


564


137

(2) 
455

 
(169
)

1,019

Intersegment revenues


117


3,734

(2) 

 
(3,851
)


Total revenue
$
18,450


$
5,689


$
3,871


$
4,620

 
$
(10,525
)

$
22,105

 











 





Interest expense
$
3,134


$
494


$


$
1,651

 
$
(1,444
)

$
3,835

Payroll expense
5,017


6


3,219


386

 


8,628

Professional fee expense
323


833


216



 


1,372

Other expense
8,177


574


135


2,725

 
(2,908
)

8,703

Total expense
16,651


1,907


3,570


4,762

 
(4,352
)

22,538

Segment profit/(loss)
$
1,799


$
3,782


$
301


$
(142
)
 
$
(6,173
)

$
(433
)
Net income attributable to consolidated CLOs
 
 
 
 
 
 
 
 
 
 
6,743

Less: non-controlling interest and net income attributable to the VIE subordinated noteholders
 
 
 
 
 
 
 
 
 
 
4,534

Discontinued operations
 
 
 
 
 
 
 
 
 
 
841

Income taxes
 
 
 
 
 
 
 
 
 
 
1,299

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
1,318

Segment assets as of December 31, 2013
$
4,949,262


$
385,987


$
7,896


$
170,683

 
$
1,366,620


$
6,880,448

(1) Includes separate account and administrative servicing fees
(2) Includes management fees which is a component of other income on the Company’s Consolidated Statements of Operations

18

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)


(6) Available for Sale Securities
The amortized cost and fair values of available for sale securities held as of March 31, 2014 and December 31, 2013 are as follows:
 
March 31, 2014
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of
U.S. government authorities and agencies
$
11,014

 
$
145

 
$
(57
)
 
$
11,102

Corporate securities
6,325

 
79

 
(15
)
 
6,389

Certificates of deposit
100

 

 

 
100

Asset-backed securities
69

 
2

 

 
71

 
$
17,508

 
$
226

 
$
(72
)
 
$
17,662

 
December 31, 2013
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of
U.S. government authorities and agencies
$
11,965

 
$
140

 
$
(116
)
 
$
11,989

Corporate securities
5,567

 
71

 
(42
)
 
5,596

Certificates of deposit
100

 

 

 
100

Asset-backed securities
76

 
2

 

 
78

 
$
17,708

 
$
213

 
$
(158
)
 
$
17,763


19

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

The following table summarizes the gross unrealized losses on available for sale securities in an unrealized loss position as of March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
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
$
3,408

 
$
(34
)
 
$
1,155

 
$
(23
)
Corporate securities
1,750

 
(15
)
 
147

 

Asset-backed securities

 

 
2

 

Total
$
5,158

 
$
(49
)
 
$
1,304

 
$
(23
)
 
December 31, 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
$
5,543

 
$
(102
)
 
$
854

 
$
(14
)
Corporate securities
2,253

 
(42
)
 
67

 

Asset-backed securities

 

 
2

 

Total
$
7,796

 
$
(144
)
 
$
923

 
$
(14
)
At March 31, 2014, the Company held eight securities which were in an unrealized loss position for more than one year. The total unrealized losses on these securities were $23 and the fair value was $1,304. At December 31, 2013, the Company held five securities that were in an unrealized loss position for more than one year. The total unrealized loss on these securities was $14 and the fair value was $923. 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 for the periods ending March 31, 2014 or March 31, 2013.
The amortized cost and fair values of investments of these debt securities at March 31, 2014, 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.
 
Amortized Cost
 
Fair Value
Due in one year or less
$
1,113

 
$
1,121

Due after one year through five years
10,814

 
10,877

Due after five years through ten years
4,935

 
5,003

Due after ten years through twenty years
577

 
590

Asset-backed securities
69

 
71

 
$
17,508

 
$
17,662


20

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

Purchases of available for sale debt securities were $2,429 and $0 for the periods ended March 31, 2014 and 2013, respectively. Proceeds from maturities of available for sale debt securities were $0 and $12 for these same periods. Proceeds from sales of available for sale debt securities for the period ended March 31, 2014 were $2,601 with associated gains of $5. For the same period in 2013, proceeds from sales of available for sale debt securities were $2,590 with associated gains of $33.

21

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

(7) 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 March 31, 2014 and December 31, 2013. Included are balances associated with the consolidated CLOs:
 
 
 
March 31, 2014
 
 
Assets:
Quoted Prices in
active markets
Level 1
 
 Other Significant
Observable inputs
Level 2
 
 Significant unobservable inputs
Level 3
 
Fair Value
 
Carrying Value
Trading investments:
 
 
 
 
 
 
 
 
 
Privately held equity securities (1)
$

 
$

 
$
5,713

 
$
5,713

 
$
5,713

Tax exempt securities

 
23,701

 
3,456

 
27,157

 
27,157

CDO

 

 
440

 
440

 
440

CLO

 

 
840

 
840

 
840

Corporate bonds (2)

 

 
18,205

 
18,205

 
18,205

Total trading investments

 
23,701

 
28,654

 
52,355

 
52,355

Derivative assets:
 
 
 
 
 
 
 
 
 
IRLC

 
514

 

 
514

 
514

CDS

 
131

 

 
131

 
131

Total derivative assets

 
645

 

 
645

 
645

 Total trading securities

 
24,346

 
28,654

 
53,000

 
53,000

          Corporate loans (3)

 
1,052,127

 
387,410

 
1,439,537

 
1,439,537

Available for sale securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
7,420

 

 

 
7,420

 
7,420

Obligations of state and political subdivisions

 
3,682

 

 
3,682

 
3,682

Certificates of deposit

 
100

 

 
100

 
100

Corporate bonds

 
6,389

 

 
6,389

 
6,389

Asset-backed securities

 
71

 

 
71

 
71

 Total available for sale securities
7,420

 
10,242

 

 
17,662

 
17,662

 


22

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
March 31, 2014
(Unaudited)

 
 
 
March 31, 2014
 
 
 
 Quoted Prices in
Active markets
Level 1
 
 Other Significant
Level 2
 
 Significant
Unobservable inputs
Level 3
 
 Fair Value
 
 Carrying Value
 
 
 
 
 
 
 
 
 
 
Separate Account Assets:
 
 
 
 
 
 
 
 
 
Cash
$
4,570

 
$

 
$

 
$
4,570

 
$
4,570

Short-term investments
180,876

 

 

 
180,876

 
180,876

Debt Securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
18,084

 

 

 
18,084

 
18,084

U.S. government agencies

 
1,283

 

 
1,283

 
1,283

Municipal bonds

 
6,882

 

 
6,882

 
6,882

Asset-backed securities

 
7,648

 

 
7,648

 
7,648

Corporate bonds

 
15,911

 

 
15,911

 
15,911

Preferred stocks
1,163

 

 

 
1,163

 
1,163

Common stocks
107,400

 

 

 
107,400

 
107,400

Mutual funds
95,115

 
98,454

 

 
193,569

 
193,569

Real estate funds

 

 
2,738,934

 
2,738,934

 
2,738,934

Private equity

 

 
110

 
110

 
110

Hedge funds:
 
 
 
 
 
 
 
 
 
Multi-strategy

 
67,208

 
695,545

 
762,753

 
762,753

Long/short

 
18,922

 
82,170

 
101,092

 
101,092

Fund of funds

 
3,277

 
169,983

 
173,260

 
173,260

Event driven

 

 
85,551

 
85,551

 
85,551

Long only

 
34,948

 
20,532