10-Q 1 tfiq22014-10q.htm 10-Q TFI Q2 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 June 30, 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 August 12, 2014, there were 21,720,761 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 19,871,939 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 1,13 and 19 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)
 
 

June 30, 2014

December 31, 2013
Assets



 
 
 
 
Cash and cash equivalents – unrestricted
$
122,050


$
120,557

Cash and cash equivalents – restricted
22,796


26,395

Trading investments, at fair value
34,129


35,991

Investments in available for sale securities, at fair value
(amortized cost: $17,669 and $17,708 in 2014 and 2013, respectively)
17,952


17,763

Loans held for sale, at fair value ($24,833 pledged as collateral at June 30, 2014 )
25,104

 

Investments in loans, at fair value
122,138


171,087

Loans owned, at amortized cost – net of allowance
55,003


40,260

Investments in partially-owned entities
8,691


9,972

Real estate
105,224


105,061

Policy loans
92,711


102,147

Deferred tax assets
5,327


3,310

Intangible assets
153,246


154,695

Goodwill
4,617


4,294

Other assets
51,166


49,201

Separate account assets
4,799,568


4,625,099

Assets of consolidated CLOs
1,758,909


1,414,616

Total assets
$
7,378,631


$
6,880,448

Liabilities and Stockholders’ Equity



Liabilities:



Derivative financial instruments, at fair value
$
1,517


$
598

U.S. Treasuries, short position
19,254


18,493

Debt
285,706


360,609

Policy liabilities
102,882

 
112,358

Due to brokers, dealers and trustees
71,068

 
8,193

Other liabilities and accrued expenses
15,264

 
13,636

Separate account liabilities
4,799,568

 
4,625,099

Liabilities of consolidated CLOs
1,522,093

 
1,175,606

Total liabilities
6,817,352

 
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, 10,617,947 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
101,586


100,903

Accumulated other comprehensive income
172


33

Retained earnings
21,029


18,933

Total stockholders’ equity of Tiptree Financial Inc.
122,829


119,911


2


Non-controlling interest
362,046


361,354

Appropriated retained earnings of consolidated TAMCO
76,404


84,591

Total stockholders’ equity
561,279


565,856

Total liabilities and stockholders’ equity
$
7,378,631


$
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 June 30,
 
Six months ended June 30,

 
2014
 
2013

2014
 
2013
Realized and unrealized gains:
 
 
 
 
 
 
 
 
Net realized (loss) gain on investments
 
$
(1,044
)

$
(1,593
)

$
(902
)

$
(1,439
)
Change in unrealized (depreciation) appreciation on investments
 
(227
)
 
(3,058
)

289


(2,500
)
Income from investments in partially owned entities
 
336

 
1,324


680


1,413

Net realized and unrealized (loss) gain
 
(935
)
 
(3,327
)

67


(2,526
)
Investment income:
 
 
 
 




Interest income
 
4,938

 
4,188


10,301


7,215

Separate account fees
 
5,525

 
5,504


11,012


10,810

Administrative service fees
 
12,589

 
12,165


24,941


24,096

Rental revenue
 
4,393

 
1,094


8,839


1,916

Gain on sale of loans held for sale, net
 
1,782

 

 
2,734



Other income
 
1,137

 
158


1,867


376

Total investment income
 
30,364

 
23,109


59,694


44,413

Total net realized and unrealized gains and investment income
 
$
29,429

 
$
19,782


$
59,761


$
41,887


4


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



 
Three months ended June 30,
 
Six months ended June 30,

 
2014
 
2013

2014
 
2013
Expenses:
 
 
 
 




Interest expense
 
$
6,259


$
4,063


$
12,221


$
7,898

Payroll expense
 
12,513


8,896


23,083


17,524

Professional fees
 
2,824


2,580


3,914


3,952

Change in future policy benefits
 
1,072


1,196


2,197


2,313

Mortality expenses
 
2,583


2,638


5,225


5,252

Commission expense
 
174


619


1,158


1,174

Depreciation and amortization expenses
 
1,803


1,223


3,366


2,166

Other expenses
 
3,901


3,021

 
10,057


6,495

Total expenses
 
31,129

 
24,236

 
61,221


46,774

Net (loss) income before taxes and income attributable to consolidated CLOs from continuing operations
 
(1,700
)

(4,454
)
 
(1,460
)

(4,887
)
Results of consolidated CLOs:
 
 
 
 
 



Income attributable to consolidated CLOs
 
12,849


5,655

 
24,835


22,219

Expenses attributable to consolidated CLOs
 
14,997


11,417

 
28,989


21,238

Net (loss) income attributable to consolidated CLOs
 
(2,148
)
 
(5,762
)
 
(4,154
)

981

Income before taxes from continuing operations
 
(3,848
)
 
(10,216
)
 
(5,614
)

(3,906
)
Provision for income taxes
 
497


1,816

 
926


3,115

(Loss) income from continuing operations
 
(4,345
)
 
(12,032
)
 
(6,540
)

(7,021
)
Discontinued operations:
 
 
 
 
 



Gain on sale of Bickford portfolio, net
 


15,463




15,463

Income from discontinued operations, net
 


806




1,647

Provision for income taxes
 







Discontinued operations, net
 


16,269




17,110

Net (loss) income
 
(4,345
)

4,237


(6,540
)

10,089

Less: Net (loss) income attributable to noncontrolling interest
 
(747
)

10,072


(449
)

14,177

Less: Net (loss) income attributable to VIE subordinated noteholders
 
(4,669
)

(9,250
)

(8,187
)

(8,821
)
Net income available to common stockholders
 
$
1,071


$
3,415


$
2,096


$
4,733


5


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



 
Three months ended June 30,
 
Six months ended June 30,

 
2014
 
2013

2014
 
2013
Net income (loss) per Class A common share:
 
 
 
 


 

Basic, continuing operations, net
 
$
0.10

 
$
(1.26
)
 
$
0.20


$
(1.21
)
Basic, discontinued operations, net
 

 
1.59




1.67

Net income basic
 
0.10

 
0.33


0.20


0.46

Diluted, continuing operations, net
 
0.10

 
(1.26
)

0.20


(1.21
)
Diluted, discontinued operations, net
 

 
1.59




1.67

Net income dilutive
 
$
0.10

 
$
0.33


$
0.20


$
0.46

Weighted average number of Class A common shares:
 
 
 
 

 
 
 
Basic
 
10,617,863

 
10,243,951


10,602,311


10,242,733

Diluted
 
10,617,863

 
10,243,951


10,602,311


10,242,733

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 June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net (loss) income
 
$
(4,345
)

$
4,237


$
(6,540
)

$
10,089

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on securities available for sale net of tax expense/(benefit) of $39, ($143), $70 and ($178)
 
73


(266
)
 
130

 
(331
)
Less: reclassification adjustment for net gains included in net (loss) income net of tax expense of $3, $14, $5 and $25
 
6


26

 
9

 
46

Total comprehensive (loss) income
 
(4,278
)
 
3,945

 
(6,419
)
 
9,712

Less: comprehensive (loss) income attributable to non-controlling interests and VIE subordinated noteholders
 
(5,416
)

822

 
(8,636
)

5,356

Total comprehensive income available to Class A common stockholders
 
$
1,138

 
$
3,123

 
$
2,217

 
$
4,356


See accompanying notes to consolidated financial statements.


7


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statement 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
14,112

 

 

 

 
105

 

 

 

 

 
105

Stock-based compensation to employees and other
47,445

 

 

 

 
443

 

 

 

 

 
443

Contribution

 

 

 

 

 

 

 

 
14

 
14

Net unrealized gains and losses on available for sale securities (net of tax of $75)

 

 

 

 

 
139

 

 

 
9

 
148

Dividends paid

 

 

 

 

 

 

 

 
(87
)
 
(87
)
Purchase of majority ownership of subsidiary

 

 

 

 

 

 

 

 
1,276

 
1,276

Net changes in non-controlling interest

 

 

 

 
135

 

 

 

 
(71
)
 
64

Net (loss) income

 

 

 

 

 

 
(8,187
)
 
2,096

 
(449
)
 
(6,540
)
Balance at June 30, 2014
10,617,947

 
$
11

 
30,968,877

 
$
31

 
$
101,586

 
$
172

 
$
76,404

 
$
21,029

 
$
362,046

 
$
561,279


See accompanying notes to consolidated financial statements.

8

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


 
Six months ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
2,096

 
$
4,733

Net (loss) income attributable to non-controlling interest
(449
)
 
14,177

Net (loss) income attributable to VIE subordinated note holders
(8,187
)
 
(8,821
)
Net (loss) income
(6,540
)
 
10,089

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Net realized loss – investments
902

 
1,439

Net realized gain on sale of properties, net

 
(15,463
)
Increase in other liabilities and accrued expenses
1,817

 
2,199

Increase in due to brokers, dealers and trustees
62,874

 
13,886

Change in unrealized (appreciation) depreciation– investments
(289
)
 
2,500

Net change in loans originated for sale
(3,573
)
 

Income from investments in partially-owned entities, net
(680
)
 
(1,413
)
Deferred tax (benefit) expense
(1,409
)
 
1,894

Increase in other assets
(5,322
)
 
(1,632
)
Non cash compensation expense
580

 
185

Non cash interest from investments in loans
(198
)
 
(111
)
Accretion of discounts and depreciation expense
3,510

 
3,985

Amortization and write off of deferred financing costs
91

 
26

Accretion of mortgage note discount
(141
)
 
20

(Decrease)/increase in policy liabilities
(9,477
)
 
5,046

Operating activities from VIEs
58,405

 
(2,025
)
Net cash provided by operating activities
100,550

 
20,625

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


Purchases of trading securities and loans carried at fair value
(186,431
)
 
(159,923
)
Purchases of available for sale securities
(3,921
)
 
(4,917
)
Purchases of derivatives
(986
)
 
(1,996
)
Purchases of real estate
(1,098
)
 
(304
)
Purchases of loans
(16,882
)
 
(21,198
)
Purchases of fixed assets
(17
)
 
(40
)
Proceeds from sales of real estate

 
44,037

Decrease/(Increase) in restricted cash
3,601

 
(2,572
)
Acquisitions, net cash
7,213

 
2,138

Proceeds from loan repayments
648

 
562

Proceeds from sales of trading securities
248,603

 
32,145

Proceeds from foreign exchange

 
45

Proceeds from sales of available for sale securities
3,910

 
4,730

Proceeds from distributions paid by partially owned entities
210

 

Decrease/(Increase) in policy loans
9,436

 
(4,760
)
Change due to consolidation of trusts
(69
)
 
(19
)
Investing activities from VIEs
(341,361
)
 
(309,205
)
Net cash (used in)/provided by investing activities
(277,668
)
 
(421,277
)

9


Cash flows from financing activities:
 
 
 
Capital distributions paid by subsidiaries

 
(1,625
)
Dividends paid

 
(1,599
)
Proceeds from loan
59,427

 
111,700

Principal payments under mortgage notes payable
(829
)
 
(740
)
Partial paydown of borrowings
(159,814
)
 
(2,500
)
Payment of placement costs
(176
)
 
(40
)
Proceeds from issuance of common units of subsidiaries

 
1,318

Financing activities from VIEs
280,003

 
318,348

Net cash provided by financing activities
178,611

 
424,862

Net increase in cash
1,493

 
24,210

Cash and cash equivalents – unrestricted – beginning of period
120,557

 
88,563

Cash and cash equivalents – unrestricted – end of period
$
122,050

 
$
112,773

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
15,703

 
$
13,082

Cash paid for taxes
2,650

 
318

Non-cash investing and financing activities:
 
 
 
Capital change due to equity compensation
$
170

 
$
152

     Net assets related to acquisitions
(3,275
)
 
(378
)

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)
June 30, 2014
(Unaudited)


Basis of Presentation
The consolidated financial statements of Tiptree Financial Inc. and subsidiaries (the Company) were compiled in accordance with generally accepted accounting principles (GAAP). In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2013.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash or cash equivalents.

(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.
(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.
Below are the significant accounting policies associated with the Company’s subsidiary Luxury acquired in January 2014:
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.


11

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)

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 agency securities. The fair values of these commitments generally result in a Level 2 classification.

Luxury’s revenues include interest income earned for the period associated with loans 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 any fee income earned at origination.

The following recently issued accounting standards are applicable to the Company and have not yet been implemented:

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)-Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company, and the Company is evaluating the effect upon its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This standard is effective for the Company January 1, 2017 and the Company is evaluating the effect upon its financial statements.

(4) CLOs and Consolidated Variable Interest Entities
Telos Asset Management LLC (Telos), a subsidiary of the Company acquired in 2012, is a collateralized loan obligation (“CLO”) manager of five CLOs; namely Telos CLO 2014-5, Ltd. (Telos 5), 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), in June 2012, 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 in June 2012.
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.

12

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)

The Company’s percentage ownerships of the subordinated notes of the CLOs as of June 30, 2014 are as follows: 7.11% (Telos 1), 95.45% (Telos 2), 0.00% (Telos 3), 71.08% (Telos 4) and 70.51% (Telos 5).
As of June 30, 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 $56,976 and $38,459, respectively, as well as the management fees receivable of $3,112 and $3,616 as of June 30, 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 May 21, 2014, Telos entered into a new $100,000 warehouse agreement with Telos 2014-6, Ltd. (Telos 6). As of June 30, 2014, $118,983 is carried as investments in loans at fair value and $23,400 as debt on the consolidated balance sheet of Tiptree. The Company’s exposure in Telos 6 is limited to its equity investment of $25,000. In July 2014, the Company further contributed $10,000 to the warehouse. In August 2014, the Company contributed an additional $10,000 to the warehouse.
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.
 
June 30, 2014
 
December 31, 2013
Assets:
 
 
 
Restricted cash
$
140,862

 
$
67,604

Investment in loans
1,565,916

 
1,298,155

Investment in trading securities
21,472

 
19,366

Due from brokers
14,640

 
15,945

Accrued interest receivable
3,963

 
4,108

Deferred debt issuance costs
11,844

 
9,261

Other assets
212

 
177

Total assets of consolidated CLOs
$
1,758,909

 
$
1,414,616

 
 
 
 
Liabilities:
 
 
 
Notes payable
$
1,459,153

 
$
1,154,097

Due to brokers
53,337

 
11,479

Accrued interest payable
9,138

 
9,745

Other liabilities
465

 
285

Total liabilities of consolidated CLOs
$
1,522,093

 
$
1,175,606


13

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)

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 June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Income:
 
 
 
 
 
 
 
Realized loss
$
(5,377
)
 
$
(5,502
)
 
$
(12,332
)
 
$
(6,165
)
Unrealized gain loans
(1,695
)
 
(6,685
)
 
(1,477
)
 
(3,569
)
Interest income
19,921

 
17,843

 
38,644

 
31,953

Total income attributable to consolidated CLOs
$
12,849

 
$
5,656

 
$
24,835

 
$
22,219

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Interest expense
$
14,882

 
$
11,109

 
$
28,344

 
$
20,720

Other expense
115

 
308

 
645

 
518

Total expenses attributable to consolidated CLOs
$
14,997

 
$
11,417

 
$
28,989

 
$
21,238


The tables below summarize the debt obligations of the CLOs consolidated by the Company as of June 30, 2014 and December 31, 2013. Subordinated debt obligations owned by Tiptree are not included in these tables as these amounts are eliminated in consolidation:
 
June 30, 2014
 
Aggregate
principal amount
 
Spread over three months LIBOR
 
Unamortized
discount
 
Carrying amount
Description
 
 
 
 
 
 
 
Telos 5 (maturity April 2025)
 
 
 
 
 
 

Class A
$
252,000

 
1.55
%
 
$
251

 
$
251,749

Class B-1
39,000

 
N/A

(1) 
349

 
38,651

Class B-2
7,500

 
2.15
%
 
70

 
7,430

Class C
32,750

 
3.00
%
 
531

 
32,219

Class D
19,750

 
3.65
%
 
1,097

 
18,653

Class E
18,000

 
5.00
%
 
1,691

 
16,309

Class F
7,750

 
5.50
%
 
1,066

 
6,684

Subordinated
10,500

 
N/A

 
1,028

 
9,472

 
 
 
 
 
 
 
 
Telos 4 (maturity July 2024)
 
 
 
 
 
 

Class A
$
214,000

 
1.30
%
 
$
918

 
$
213,082

Class B
46,500

 
1.80
%
 
1,975

 
44,525

Class C
29,000

 
2.75
%
 
1,343

 
27,657

Class D
19,250

 
3.50
%
 
1,501

 
17,749

Class E
16,000

 
5.00
%
 
1,906

 
14,094

Class X
2,800

 
0.95
%
 

 
2,800

Subordinated
10,700

 
N/A

 
493

 
10,207


14

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)

 
 
 
 
 
 
 
 
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
%
 
547

 
25,953

Class D
18,000

 
4.25
%
 
790

 
17,210

Class E
15,000

 
5.50
%
 
1,460

 
13,540

Class F
6,000

 
5.50
%
 
718

 
5,282

Subordinated
34,350

 
N/A

 
1,349

 
33,001

 
 
 
 
 
 
 
 
Telos 2 (maturity April 2022)
 
 
 
 
 
 
 
Class A-1
$
161,470

 
0.26
%
 
$
19,377

 
$
142,093

Class A-2
40,000

 
0.40
%
 
8,263

 
31,737

Class B
27,500

 
0.55
%
 
7,157

 
20,343

Class C
22,000

 
0.95
%
 
9,069

 
12,931

Class D
22,000

 
2.20
%
 
11,490

 
10,510

Class E
16,000

 
5.00
%
 
13,028

 
2,972

Subordinated
2,000

 
N/A

 
1,614

 
386

 
 
 
 
 
 
 
 
Telos 1 (maturity October 2021)
 
 
 
 
 
 
 
Class A-1D
$
24,666

 
0.27
%
 
$
2,870

 
$
21,796

Class A-1R
9,250

 
0.29
%
 
1,077

 
8,173

Class A-1T
33,915

 
0.27
%
 
3,946

 
29,969

Class A-2
60,000

 
0.40
%
 
12,068

 
47,932

Class B
27,200

 
0.49
%
 
6,887

 
20,313

Class C
22,000

 
0.85
%
 
8,831

 
13,169

Class D
22,000

 
1.70
%
 
11,094

 
10,906

Class E
16,000

 
4.25
%
 
12,676

 
3,324

Subordinated
40,223

 
N/A

 
25,391

 
14,832

 
$
1,633,074

 
 
 
$
173,921

 
$
1,459,153


(1) Tranche B-1 Notes in Telos 5 have a fixed rate of 4.45% over the life of the CLO.

15

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)


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)







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

16

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)

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), Philadelphia Financial Administrative Services Company (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 $4,799,568. PFASC, acquired certain assets and administration rights from The Hartford on July 13, 2012. PFASC administers approximately $37.4 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 loans 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 1) Care LLC, a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of senior housing assets including senior apartments, assisted-living, independent-living and memory care and 2) Star Asia, which consists of various entities which are all Japan based real estate holding companies formed to invest in Asian properties and real estate debt instruments. Care LLC operates the business operated by Care Inc. prior to the Contribution Transactions ( 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).

On May 21, 2014, Star Asia Opportunity, LLC (SAO) was liquidated and Tiptree received a final distribution of $16. In addition, Tiptree holds a 17% interest in Star Asia Finance, Limited (SAF), and a 50% interest in Star Asia Opportunity II, LLC (SAO II).

The tabular information that follows shows components of revenue, expense, and profit or loss, for each of the operating segments for the periods ended June 30, 2014 and 2013 and total assets as of June 30, 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.

17

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)

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 June 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
18,114

(1) 
$


$


$


$


$
18,114

Rental revenue






4,375


18


4,393

Interest income
1,145


6,643




682


(3,532
)

4,938

Other revenue
9


1,871


442

(2) 
113


(451
)

1,984

Intersegment revenues


110


2,943

(2) 


(3,053
)


Total revenue
$
19,268


$
8,624


$
3,385


$
5,170


$
(7,018
)

$
29,429














Interest expense
$
2,897


$
2,340


$


$
978


$
44


$
6,259

Payroll expense
4,788


3,237


2,772


1,716

 


12,513

Professional fee expense
734


1,329

 
252

 
117

 
392


2,824

Other expense
7,087

 
898

 
372

 
1,952

 
(776
)

9,533

Total expense
15,506

 
7,804

 
3,396

 
4,763

 
(340
)

31,129

Segment profit/(loss)
$
3,762

 
$
820

 
$
(11
)
 
$
407

 
$
(6,678
)

$
(1,700
)
Net loss attributable to consolidated CLOs

 

 

 

 


(2,148
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










(5,416
)
Discontinued operations











Income taxes










497

Net income available to common stockholders










$
1,071

(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)
June 30, 2014
(Unaudited)


Three months ended June 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
17,669

(1) 
$


$


$


$


$
17,669

Rental revenue






3,995


(2,901
)

1,094

Interest income
1,226


5,720




587


(3,345
)

4,188

Other revenue/unrealized (loss)
40


(4,401
)

74

(2
)
17,153


(16,035
)

(3,169
)
Intersegment revenues


47


5,141

(2
)


(5,188
)


Total revenue
$
18,935


$
1,366

 
$
5,215

 
$
21,735

 
$
(27,469
)

$
19,782













Interest expense
$
3,129


$
570


$


$
1,711


$
(1,347
)

$
4,063

Payroll expense
4,595


269


3,450


582




8,896

Professional fee expense
336


841


216


1,187




2,580

Other expense
6,681


672


203


2,981


(1,840
)

8,697

Total expense
14,741


2,352


3,869


6,461


(3,187
)

24,236

Segment profit/(loss)
$
4,194


$
(986
)

$
1,346


$
15,274


$
(24,282
)

$
(4,454
)
Net loss attributable to consolidated CLOs










(5,762
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










822

Discontinued operations










16,269

Income taxes










1,816

Net income available to common stockholders










3,415

(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.


19

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)


Six months ended June 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
35,953

(1) 
$


$


$


$


$
35,953

Rental revenue






8,821


18


8,839

Interest income
2,333


13,959




1,365


(7,356
)

10,301

Other revenue
14


4,370


537

(2) 
342


(595
)

4,668

Intersegment revenues


187


6,311

(2) 


(6,498
)


Total revenue
$
38,300


$
18,516


$
6,848


$
10,528


$
(14,431
)

$
59,761



















Interest expense
$
5,810


$
4,487


$


$
1,956


$
(32
)

$
12,221

Payroll expense
10,070


4,415


5,084


3,514




23,083

Professional fee expense
924


2,182


467


172


169


3,914

Other expense
15,361


2,675


703


4,071


(807
)

22,003

Total expense
32,165


13,759


6,254


9,713


(670
)

61,221

Segment profit/(loss)
$
6,135


$
4,757


$
594


$
815


$
(13,761
)

$
(1,460
)
Net loss attributable to consolidated CLOs















(4,154
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders















(8,636
)
Discontinued operations
















Income taxes















926

Net income available to common stockholders















$
2,096

Segment assets as of June 30, 2014
$
5,114,648


$
396,366


$
11,879

(3) 
$
150,844


$
1,704,894


$
7,378,631

(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.
(3)    Refer to Management’s Discussion and Analysis—Economic Net Income Components for further information on assets under management.



20

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
June 30, 2014
(Unaudited)


Six months ended June 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
34,906

(1) 
$


$


$


$


$
34,906

Rental revenue






7,836


(5,920
)

1,916

Interest income
2,407


10,728




911


(6,832
)

7,214

Other revenue/ unrealized (loss)
72


(3,836
)

211

(2) 
17,608