10-Q 1 tfiq32014-10q.htm 10-Q TFI Q3 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 September 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 November [12], 2014, there were 31,829,633 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 9,770,367 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. Tiptree Financial Partners, L.P. (“TFP”) owns approximately 75% of Operating Company. As of September 30, 2014, Tiptree owned approximately 37% of TFP, with the remainder owned by the existing limited partners of TFP. As a result Tiptree’s combined direct and indirect ownership of Operating Company was approximately 53% as of September 30, 2014. The remainder 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, 14 and 20 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)
 
 

September 30, 2014

December 31, 2013
Assets



 
 
 
 
Cash and cash equivalents – unrestricted
$
179,892


$
120,557

Cash and cash equivalents – restricted
23,785


26,395

Trading investments, at fair value
38,837


35,991

Investments in available for sale securities, at fair value
(amortized cost: $16,889 and $17,708 in 2014 and 2013, respectively)
17,064


17,763

Loans held for sale, at fair value ($31,737 pledged as collateral at September 30, 2014 )
32,109

 

Investments in loans, at fair value
222,020


171,087

Loans owned, at amortized cost – net of allowance
32,714


40,260

Investments in partially-owned entities
2,832


9,972

Real estate
104,833


105,061

Policy loans
94,779


102,147

Deferred tax assets
7,487


3,310

Intangible assets
152,070


154,695

Goodwill
4,617


4,294

Other assets
46,202


49,201

Separate account assets
4,461,601


4,625,099

Assets of consolidated CLOs
1,627,680


1,414,616

Total assets
$
7,048,522


$
6,880,448

Liabilities and Stockholders’ Equity



Liabilities:



Derivative financial instruments, at fair value
$
460


$
598

U.S. Treasuries, short position
19,234


18,493

Debt
425,349


360,609

Policy liabilities
105,956

 
112,358

Due to brokers, dealers and trustees
18,390

 
8,193

Other liabilities and accrued expenses
52,627

 
13,636

Separate account liabilities
4,461,601

 
4,625,099

Liabilities of consolidated CLOs
1,417,141

 
1,175,606

Total liabilities
6,500,758

 
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, 21,955,877 and 10,556,390 shares issued and outstanding, respectively
22


11

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 19,636,823 and 30,968,877 shares issued and outstanding, respectively
20


31

Additional paid-in capital
225,813


100,903

Accumulated other comprehensive income
107


33

Retained earnings
21,301


18,933

Total stockholders’ equity of Tiptree Financial Inc.
247,263


119,911


2


Non-controlling interest
235,951


361,354

Appropriated retained earnings of consolidated TAMCO
64,550


84,591

Total stockholders’ equity
547,764


565,856

Total liabilities and stockholders’ equity
$
7,048,522


$
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 September 30,

Nine months ended September 30,


2014

2013

2014

2013
Realized and unrealized gains:









Net realized gain (loss) on investments

$
7,909


$
669


$
7,007


$
(770
)
Change in unrealized (depreciation) appreciation on investments

(1,819
)

3,514


(1,530
)

1,014

Income from investments in partially owned entities

2,204


1,800


2,884


3,213

Net realized and unrealized gain

8,294


5,983


8,361


3,457

Investment income:








Interest income

7,363


3,916


17,664


11,131

Separate account fees

5,931


5,526


16,943


16,336

Administrative service fees

12,845


12,760


37,786


36,856

Rental revenue

4,469


1,363


13,308


3,279

Gain on sale of loans held for sale, net

2,383




5,117



Other income

1,537


325


3,404


701

Total investment income

34,528


23,890


94,222


68,303

Total net realized and unrealized gains and investment income

$
42,822


$
29,873


$
102,583


$
71,760


4


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)




Three months ended September 30,

Nine months ended September 30,


2014

2013

2014

2013
Expenses:









Interest expense

$
8,500


$
4,110


$
20,721


$
12,008

Payroll expense

12,559


8,753


35,642


26,277

Professional fees

3,420


2,252


7,334


6,204

Change in future policy benefits

1,063


1,189


3,260


3,502

Mortality expenses

2,667


2,633


7,892


7,885

Commission expense

679


631


1,837


1,805

Depreciation and amortization expenses

2,290


1,216


5,656


3,382

Other expenses

5,505


4,227


15,562


10,722

Total expenses

36,683


25,011


97,904


71,785

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

6,139


4,862


4,679


(25
)
Results of consolidated CLOs:








(Loss) income attributable to consolidated CLOs

(4,093
)

11,256


20,742


33,475

Expenses attributable to consolidated CLOs

15,552


12,783


44,541


34,021

Net loss attributable to consolidated CLOs

(19,645
)

(1,527
)

(23,799
)

(546
)
(Loss) income before taxes from continuing operations

(13,506
)

3,335


(19,120
)

(571
)
Provision for income taxes

(20
)

1,434


906


4,549

(Loss) income from continuing operations

(13,486
)

1,901


(20,026
)

(5,120
)
Discontinued operations:








Gain on sale of Bickford portfolio, net







15,463

Income from discontinued operations, net







1,647

Provision for income taxes








Discontinued operations, net







17,110

Net (loss) income

(13,486
)

1,901


(20,026
)

11,990

Less: Net (loss) income attributable to noncontrolling interest

(1,904
)

7,008


(2,353
)

21,185

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

(11,854
)

(6,937
)

(20,041
)

(15,758
)
Net income available to common stockholders

$
272


$
1,830


$
2,368


$
6,563


5


TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)




Three months ended September 30,

Nine months ended September 30,


2014

2013

2014

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








Basic, continuing operations, net

$
0.02


$
0.18


$
0.18


$
(1.03
)
Basic, discontinued operations, net







1.67

Net income basic

0.02


0.18


0.18


0.64

Diluted, continuing operations, net

0.01


0.18


0.18


(1.03
)
Diluted, discontinued operations, net







1.67

Net income dilutive

$
0.01


$
0.18


$
0.18


$
0.64

Weighted average number of Class A common shares:








Basic

17,449,974


10,246,176


12,909,949


10,243,893

Diluted

17,449,974


10,271,537


12,909,949


10,266,164

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 September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net (loss) income
 
$
(13,486
)

$
1,901


$
(20,026
)

$
11,990

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized holding (losses)/gains on securities available for sale net of tax (benefit)/ expense of $(41), $(144), $29 and $(15)
 
(76
)

(267
)
 
54

 
(27
)
Less: reclassification adjustment for net gains included in net income net of tax expense of $6, $1, $11 and $26
 
11


3

 
20

 
48

Total comprehensive (loss) income
 
(13,573
)
 
1,631

 
(19,992
)
 
11,915

Less: comprehensive (loss) income attributable to non-controlling interests and VIE subordinated noteholders
 
(13,758
)

71

 
(22,394
)

5,427

Total comprehensive income available to Class A common stockholders
 
$
185

 
$
1,560

 
$
2,402

 
$
6,488


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
19,988

 

 

 

 
151

 

 

 

 

 
151

Stock-based compensation to employees and other
47,445

 

 

 

 
488

 

 

 

 

 
488

Class A shares issued due to TFP unit redemptions
11,332,054

 
11

 

 

 
123,760

 

 

 

 

 
123,771

Class B shares redeemed due to TFP unit redemptions

 

 
(11,332.054
)
 
(11
)
 

 

 

 

 

 
(11
)
Contribution

 

 

 

 

 

 

 

 
44

 
44

Net unrealized gains and losses on available for sale securities (net of tax of $40)

 

 

 

 

 
74

 

 

 
5

 
79

Dividends paid

 

 

 

 

 

 

 

 
(192
)
 
(192
)
Purchase of majority ownership of subsidiary

 

 

 

 

 

 

 

 
1,276

 
1,276

Net changes in non-controlling interest

 

 

 

 
511

 

 

 

 
(124,183
)
 
(123,672
)
Net (loss) income

 

 

 

 

 

 
(20,041
)
 
2,368

 
(2,353
)
 
(20,026
)
Balance at September 30, 2014
21,955,877

 
$
22

 
19,636.823

 
$
20

 
$
225,813

 
$
107

 
$
64,550

 
$
21,301

 
$
235,951

 
$
547,764


See accompanying notes to consolidated financial statements.

8

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


 
Nine months ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
2,368

 
$
6,563

Net (loss) income attributable to non-controlling interest
(2,353
)
 
21,185

Net loss attributable to VIE subordinated note holders
(20,041
)
 
(15,758
)
Net (loss) income
(20,026
)
 
11,990

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Net realized (gain) loss – investments
(7,007
)
 
770

Net realized gain on sale of properties, net

 
(15,463
)
Increase in other liabilities and accrued expenses
39,397

 
9,859

Increase in due to brokers, dealers and trustees
10,197

 
55,412

Change in unrealized depreciation (appreciation) – investments
1,530

 
(1,014
)
Net change in loans originated for sale
(10,516
)
 

Income from investments in partially-owned entities, net
(2,884
)
 
(3,213
)
Deferred tax (benefit) expense
(2,499
)
 
508

Decrease/ (increase) in other assets
3,084

 
(15,787
)
Non cash compensation expense
49

 
169

Non cash interest from investments in loans
358

 
(189
)
Accretion of discounts and depreciation expense
4,689

 
5,223

Amortization and write off of deferred financing costs
221

 
26

Accretion of mortgage note discount
(127
)
 
35

(Decrease)/increase in policy liabilities
(6,402
)
 
6,062

Operating activities from VIEs
55,634

 
(13,272
)
Net cash provided by operating activities
65,698

 
41,116

Cash flows from investing activities:
 
 
 
Purchases of trading securities and loans carried at fair value
(297,991
)
 
(129,719
)
Purchases of available for sale securities
(5,437
)
 
(7,790
)
Purchases of derivatives
(7,221
)
 
(1,996
)
Purchases of real estate
(4,607
)
 
(21,347
)
Purchases of loans
(17,443
)
 
(27,040
)
Purchases of fixed assets
(125
)
 
(47
)
Proceeds from sales of real estate

 
44,038

Decrease/(Increase) in restricted cash
2,609

 
(13,462
)
Acquisitions, net cash
7,213

 
2,138

Proceeds from loan repayments
33,713

 
799

Proceeds from sales of trading securities
251,659

 
45,572

Proceeds from foreign exchange

 
45

Proceeds from sales/maturities of available for sale securities
6,194

 
5,881

Proceeds from distributions paid by partially owned entities
7,058

 
221

Decrease/(Increase) in policy loans
7,368

 
(5,752
)
Change due to consolidation of trusts
(34
)
 
(41
)
Investing activities from VIEs
(225,837
)
 
(593,362
)
Net cash (used in)/provided by investing activities
(242,881
)
 
(701,862
)

9


Cash flows from financing activities:
 
 
 
Capital distributions paid by subsidiaries

 
(2,824
)
Dividends paid

 
(366
)
Proceeds from loan
184,438

 
108,612

Principal payments under mortgage notes payable
(1,230
)
 
(740
)
Partial paydown of borrowings
(140,382
)
 
(3,917
)
Payment of placement costs
(153
)
 
(38
)
Proceeds from issuance of common units of subsidiaries
467

 
2,755

Financing activities from VIEs
193,378

 
592,422

Net cash provided by financing activities
236,518

 
695,904

Net increase in cash
59,335

 
35,158

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

 
88,563

Cash and cash equivalents – unrestricted – end of period
$
179,892

 
$
123,721

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
52,431

 
$
29,171

Cash paid for taxes
3,673

 
1,931

Non-cash investing and financing activities:
 
 
 
Capital change due to equity compensation
$
594

 
$
30

     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)
September 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 significant 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 completed 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.
Fortegra Acquisition

On August 11, 2014, Operating Company and its subsidiaries Caroline Holdings LLC and Caroline Merger Sub, Inc. entered into an Agreement and Plan of Merger to acquire Fortegra Financial Corporation (Fortegra) (NYSE:FRF) for approximately $218,000 in cash. Fortegra is a publicly traded insurance services company. Closing of the merger is subject to the satisfaction of customary conditions including, among other things, insurance regulatory approvals.

(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.

11

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

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.

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.

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in ASU 2014-10 affect reporting entities that have interests in entities that are development stage entities as there will be an elimination of the exception to the sufficiency-of-equity-at-risk criterion, allowing the reporting entities to apply consistent guidance for transactions that are economically similar. The guidance applied will be the same for determining whether an entity is a variable interest entity and whether the variable interest entity should be consolidated. ASU 2014-10 is effective for the first quarter of 2015 for the Company, and the Company is evaluating the effect upon its financial statements.

In August 2014, the FASB issued ASU 2014- 13, Consolidation (Topic 810)-Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity. The update allows a reporting entity that consolidates a collateralized financing entity (whose financial assets and liabilities are measured at fair value) to measure both the financial assets and the financial liabilities of that collateralized financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets or the fair value of the financial liabilities. Entities are permitted to apply the guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. Early adoption is permitted as of the beginning of an annual period. A reporting entity also may apply the amendments retrospectively to all relevant prior periods beginning with the annual

12

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

period in which the amendment was initially adopted. The amendments of ASU 2014-13 are effective for the Company for the first quarter of 2015, and the Company is evaluating the effect upon its financial statements.


(4) 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 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.
The table below represents the assets and liabilities of these 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.
 
September 30, 2014
 
December 31, 2013
Assets:
 
 
 
Restricted cash
$
60,995

 
$
67,604

Investment in loans
1,516,054

 
1,298,155

Investment in trading securities
22,650

 
19,366

Due from brokers
12,408

 
15,945

Accrued interest receivable
3,835

 
4,108

Deferred debt issuance costs
11,551

 
9,261

Other assets
187

 
177

Total assets of consolidated CLOs
$
1,627,680

 
$
1,414,616

 
 
 
 
Liabilities:
 
 
 
Notes payable
$
1,386,212

 
$
1,154,097

Due to brokers
20,901

 
11,479

Accrued interest payable
9,446

 
9,745

Other liabilities
582

 
285

Total liabilities of consolidated CLOs
$
1,417,141

 
$
1,175,606

Net assets of consolidated CLOs
$
210,539

 
$
239,010


13

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Income:
 
 
 
 
 
 
 
Realized loss
$
(9,661
)
 
$
(10,385
)
 
$
(21,993
)
 
$
(16,550
)
Unrealized (loss) gain loans
(14,949
)
 
1,499

 
(16,426
)
 
(2,071
)
Interest income
20,517

 
20,142

 
59,161

 
52,096

Total (loss) income attributable to consolidated CLOs
$
(4,093
)
 
$
11,256

 
$
20,742

 
$
33,475

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Interest expense
$
15,119

 
$
12,386

 
$
43,463

 
$
33,106

Other expense
433

 
397

 
1,078

 
915

Total expenses attributable to consolidated CLOs
$
15,552

 
$
12,783

 
$
44,541

 
$
34,021


The tables below summarize the debt obligations of the CLOs consolidated by the Company as of September 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:
 
September 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
%
 
$
246

 
$
251,754

Class B-1
39,000

 
N/A

(1) 
342

 
38,658

Class B-2
7,500

 
2.15
%
 
68

 
7,432

Class C
32,750

 
3.00
%
 
521

 
32,229

Class D
19,750

 
3.65
%
 
1,077

 
18,673

Class E
18,000

 
5.00
%
 
1,664

 
16,336

Class F
7,750

 
5.50
%
 
1,050

 
6,700

Subordinated
10,500

 
N/A

 
995

 
9,505

 
 
 
 
 
 
 
 
Telos 4 (maturity July 2024)
 
 
 
 
 
 

Class A
$
214,000

 
1.30
%
 
$
897

 
$
213,103

Class B
46,500

 
1.80
%
 
1,930

 
44,570

Class C
29,000

 
2.75
%
 
1,313

 
27,687

Class D
19,250

 
3.50
%
 
1,470

 
17,780

Class E
16,000

 
5.00
%
 
1,871

 
14,129

Class X
2,100

 
0.95
%
 

 
2,100

Subordinated
10,700

 
N/A

 
481

 
10,219


14

TIPTREE FINANCIAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
September 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
%
 
534

 
25,966

Class D
18,000

 
4.25
%
 
774

 
17,226

Class E
15,000

 
5.50
%
 
1,433

 
13,567

Class F
6,000

 
5.50
%
 
705

 
5,295

Subordinated
34,350

 
N/A

 
1,451

 
32,899

 
 
 
 
 
 
 
 
Telos 2 (maturity April 2022)
 
 
 
 
 
 
 
Class A-1
$
110,249

 
0.26
%
 
$
12,812

 
$
97,437

Class A-2
40,000

 
0.40
%
 
8,034

 
31,966

Class B
27,500

 
0.55
%
 
6,967

 
20,533

Class C
22,000

 
0.95
%
 
8,861

 
13,139

Class D
22,000

 
2.20
%
 
11,275

 
10,725

Class E
16,000

 
5.00
%
 
12,956

 
3,044

Subordinated
2,000

 
N/A

 
1,594

 
406

 
 
 
 
 
 
 
 
Telos 1 (maturity October 2021)
 
 
 
 
 
 
 
Class A-1D
$
12,097

 
0.27
%
 
$
1,357

 
$
10,740

Class A-1R
4,536

 
0.29
%
 
509

 
4,027

Class A-1T
16,634

 
0.27
%
 
1,867

 
14,767

Class A-2
60,000

 
0.40
%
 
11,707

 
48,293

Class B
27,200

 
0.49
%
 
6,689

 
20,511

Class C
22,000

 
0.85
%
 
8,610

 
13,390

Class D
22,000

 
1.70
%
 
10,857

 
11,143

Class E
16,000

 
4.25
%
 
12,571

 
3,429

Subordinated
40,223

 
N/A

 
24,889

 
15,334

 
$
1,546,589

 
 
 
$
160,377

 
$
1,386,212


(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)
September 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



16

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

Warehouse Facility
As of September 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 $60,846 and $42,674, respectively, as well as the management fees receivable of $2,975 and $3,616 as of September 30, 2014 and December 31, 2013, respectively. Both the carrying values (including accrued distributions) of the Company’s investment in the CLOs and management fees receivable are eliminated upon consolidation.
On May 21, 2014, Telos entered into a $100,000 warehouse agreement in anticipation of formation of Telos 2014-6, Ltd. (Telos 6). The Company contributed an initial $25,000 to the warehouse facility, with incremental contributions of $10,000 both in July and August 2014, at which time the warehouse borrowing increased to $180,000. As of September 30, 2014, the warehouse has investments in loans at fair value of $218,885, debt of $158,984, and an amount of $18,390 payable to brokers which are included in the Company’s consolidated balance sheet. The Company’s exposure in Telos 6 is limited to its investment of $45,000 as of September 30, 2014.
(5) Operating Segment Data
The Company has four reportable operating segments which are organized in a manner that reflects how management views its strategic business units. A description of each of the reportable segments follows:
Insurance and Insurance Services operations are currently 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 $4,461,601. PFASC administers approximately $37.6 billion in COLI and BOLI policies.

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. Luxury is a residential mortgage lender that originates loans conforming FHA, prime jumbo and super jumbo mortgages for sale to institutional investors. 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, 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 Asset Management LLC (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 Management, LLC (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 14—Stockholder’s Equity—Contribution Transactions for further detail).

The tabular information that follows shows components of revenue, expense, and profit or loss, for each of the operating segments for the periods ended September 30, 2014 and 2013 and total assets as of September 30, 2014 and December 31, 2013.

17

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

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 September 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
18,776

(1) 
$


$


$


$


$
18,776

Rental revenue


16




4,453




4,469

Interest income
1,131


9,988




139


(3,895
)

7,363

Other revenue
18


1,538


(313
)
(2) 
10,518


453


12,214

Intersegment revenues


114


5,089

(2) 


(5,203
)


Total revenue
$
19,925


$
11,656


$
4,776


$
15,110


$
(8,645
)

$
42,822














Interest expense
$
2,873


$
4,921


$


$
974


$
(268
)

$
8,500

Payroll expense
4,890


3,162


2,734


1,773

 


12,559

Professional fee expense
419


2,303

 
474

 
392

 
(168
)

3,420

Other expense
8,593

 
1,383

 
172

 
3,562

 
(1,506
)

12,204

Total expense
16,775

 
11,769

 
3,380

 
6,701

 
(1,942
)

36,683

Segment profit/(loss)
$
3,150

 
$
(113
)
 
$
1,396

 
$
8,409

 
$
(6,703
)

$
6,139

Net loss attributable to consolidated CLOs

 

 

 

 


(19,645
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










(13,758
)
Discontinued operations











Income taxes










(20
)
Net income available to common stockholders










$
272

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees which is a component of other income in 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)
September 30, 2014
(Unaudited)


Three months ended September 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
18,286

(1) 
$


$


$


$


$
18,286

Rental revenue






1,363




1,363

Interest income
1,251


5,923




589


(3,847
)

3,916

Other revenue
5


4,353


85

(2
)
1,862


3


6,308

Intersegment revenues


(83
)

3,902

(2
)


(3,819
)


Total revenue
$
19,542


$
10,193

 
$
3,987

 
$
3,814

 
$
(7,663
)

$
29,873













Interest expense
$
3,121


$
596


$


$
393


$


$
4,110

Payroll expense
4,447


1,006


2,918


382




8,753

Professional fee expense
804


521


591


336




2,252

Other expense
8,064


827


346


1,181


(522
)

9,896

Total expense
16,436


2,950


3,855


2,292


(522
)

25,011

Segment profit/(loss)
$
3,106


$
7,243


$
132


$
1,522


$
(7,141
)

$
4,862

Net loss attributable to consolidated CLOs










(1,527
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders










71

Discontinued operations











Income taxes










1,434

Net income available to common stockholders










$
1,830

(1) Includes separate account and administrative servicing fees.
(2) Includes management fees which is a component of other income in 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)
September 30, 2014
(Unaudited)


Nine months ended September 30, 2014

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other

Totals
Fee income
$
54,729

(1) 
$


$


$


$


$
54,729

Rental revenue


34




13,274




13,308

Interest income
3,464


23,947




1,504


(11,251
)

17,664

Other revenue
32


5,908


224

(2) 
10,860


(142
)

16,882

Intersegment revenues


301


11,400

(2) 


(11,701
)


Total revenue
$
58,225


$
30,190


$
11,624


$
25,638


$
(23,094
)

$
102,583



















Interest expense
$
8,683


$
9,408


$


$
2,930


$
(300
)

$
20,721

Payroll expense
14,960


7,577


7,818


5,287




35,642

Professional fee expense
1,344


4,485


941


564




7,334

Other expense
23,954


4,058


875


7,633


(2,313
)

34,207

Total expense
48,941


25,528


9,634


16,414


(2,613
)

97,904

Segment profit/(loss)
$
9,284


$
4,662


$
1,990

 
$
9,224


$
(20,481
)

$
4,679

Net loss attributable to consolidated CLOs















(23,799
)
Less: non-controlling interest and net income attributable to the VIE subordinated noteholders















(22,394
)
Discontinued operations
















Income taxes















906

Net income available to common stockholders















$
2,368

Segment assets as of September 30, 2014
$
4,811,378


$
495,659


$
15,593

(3) 
$
153,231


$
1,572,661


$
7,048,522

(1)    Includes separate account and administrative servicing fees.
(2)    Includes management fees, which is a component of other income in the Company’s Consolidated Statements of Operations.
(3)    Refer to Management’s Discussion and Analysis—Economic Net Income Components for information on assets under management.



20

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


Nine months ended September 30, 2013

Insurance and insurance services

Specialty finance

Asset management

Real estate

Corporate eliminations and other