10-K 1 tfi201510-k.htm 10-K 10-K




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
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)
Securities Registered Pursuant to Section 12(b) of the Act: Class A Common Stock, par value $0.001 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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
As of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $215,646,610, based upon the closing sales price of $7.25 per share as reported on the NASDAQ Capital Market. For purposes of this calculation, all of the registrant’s directors and executive officers were deemed to be affiliates of the registrant.
As of March 10, 2016, there were 34,971,065 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 8,049,029 shares, par value $0.001, of the registrant’s Class B common stock outstanding.

Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2016 Annual Meeting of Stockholders is incorporated by reference into Part III.






TIPTREE FINANCIAL INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2015




PART I

Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in this Annual Report on Form 10-K.
 
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.

Note to Reader

In reading this Annual Report on Form 10-K, references to:

“1940 Act” means the Investment Company Act of 1940, as amended.
“Administrative Services Agreement” means the Administrative Services Agreement between Operating Company (as assignee of TFP) and BackOffice Services Group, Inc., dated as of June 12, 2007.
“AUM” means assets under management.
“Care” means Care Inc. and Care LLC, collectively.
“Care Inc.” means Care Investment Trust Inc. prior to the Contribution Transactions.
“Care LLC” means Care Investment Trust LLC.
“CFPB” means the Consumer Financial Protection Bureau.
“CLOs” means collateralized loan obligations.
“Code” means the Internal Revenue Code of 1986, as amended.
“Consolidated CLOs” means Telos 5 and Telos 6.
“Contribution Transactions” means the closing on July 1, 2013 of the transactions pursuant to the Contribution Agreement by and between the Company, Operating Company and TFP, dated as of December 31, 2012.
“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“Gramm-Leach-Bliley Act” means the Gramm-Leach-Bliley Act of 1999.
“Greenfield” means Greenfield Holdings, LLC.
“HIPAA” means the Health Insurance Portability and Accountability Act of 1996.
“Luxury” means Luxury Mortgage Corp.
“Mariner” means Mariner Investment Group LLC.
“MCM” means Muni Capital Management, LLC.
“MFCA” means Muni Funding Company of America LLC.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“NPPF I” means Non-Profit Preferred Funding Trust I.

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“Operating Company” means Tiptree Operating Company, LLC.
“PFAS” means Philadelphia Financial Administration Services Company, LLC.
“PFG” means Philadelphia Financial Group, Inc.
“RAIT” means RAIT Financial Trust.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“Royal” means Royal Senior Care Management LLC.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Seneca” means Seneca Mortgage Servicing LLC.
“Siena” means Siena Capital Finance LLC.
“Star Asia Entities” means collectively Star Asia Finance, Limited, Star Asia Opportunity, LLC, Star Asia Opportunity II, LLC and Star Asia SPV, LLC.
“Synovus” means Synovus Bank.
“TAMCO” means Tiptree Asset Management Company, LLC.
“TDH” means Tiptree Direct Holdings LLC.
“Telos” means Telos Asset Management, LLC.
“Telos 1” means Telos CLO 2006-1, Ltd.
“Telos 2” means Telos CLO 2007-2, Ltd.
“Telos 3” means Telos CLO 2013-3, Ltd.
“Telos 4” means Telos CLO 2013-4, Ltd.
“Telos 5” means Telos CLO 2014-5, Ltd.
“Telos 6” means Telos CLO 2014-6, Ltd.
“Telos 7” means Telos CLO 2016-7, Ltd.
“TFP” means Tiptree Financial Partners, L.P.
“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means, unless otherwise indicated by the context, Operating Company and its consolidated subsidiaries, together with the standalone net assets held by Tiptree Financial.
“Tiptree Financial” or “TFI”, means Tiptree Financial Inc.
“Transition Services Agreement” means the Transition Services Agreement among TAMCO, Tricadia and Operating Company (as assignee of TFP), dated as of June 30, 2012.
“Tricadia” means Tricadia Holdings, L.P.
“Westside Loan” means that certain loan by an affiliate of Care which was secured by skilled nursing facilities as well as collateral relating to assisted living facilities and a multifamily property.

Item 1. Business

OVERVIEW
Tiptree Financial is a diversified holding company that primarily acquires and manages controlling interests of operating businesses. The Company, whose operations date back to 2007, currently has subsidiaries that operate in the following four segments: insurance and insurance services, specialty finance, asset management and real estate. The Company’s principal investments are included in a corporate and other segment. Tiptree Financial’s Class A common stock trades on the NASDAQ Capital Market. All of Tiptree Financial’s Class B common stock is owned by TFP. Tiptree Financial’s Class B common stock has voting but no economic rights.

From July 1, 2014, the limited partners of TFP (other than Tiptree Financial itself) have been provided with the opportunity to exchange TFP partnership units for Tiptree Financial Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit. The percentage of TFP (and therefore Operating Company) owned by Tiptree Financial may increase in the future to the extent TFP’s limited partners choose to exchange their limited partnership units of TFP for Class A common stock of Tiptree Financial.

Effective January 1, 2016, Tiptree Financial, TFP and Operating Company created a consolidated group among themselves and various Operating Company subsidiaries for U.S. federal income tax purposes, with Tiptree Financial being the parent company. In connection with the creation of the consolidated group, TFP and Operating Company elected to be treated as corporations for U.S. federal income tax purposes, and Tiptree Financial contributed its 28% interest in Operating Company to TFP in exchange for 4,307,023 additional common units of TFP. As a result of these steps, effective January 1, 2016, Tiptree Financial directly owns 81.29% of TFP and TFP directly owns 100% of Operating Company.


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The following charts show a simplified version of our organizational structure:
As of December 31, 2015
 
As of January 1, 2016
 

For more information on our ownership and structure, see Note 1—Organization and Note 19—Stockholders’ Equity, within the accompanying consolidated financial statements.

SIGNIFICANT EVENTS IN 2015

On January 1, 2015, Fortegra exercised an option to acquire the remainder of ProtectCELL, which is now 100% owned by Fortegra.

On February 9, 2015, affiliates of Care acquired five seniors housing communities with affiliates of Royal for $29.3 million which are managed by Royal pursuant to a management agreement.

On March 30, 2015, Care completed the purchase of six seniors housing communities for $54.5 million. The properties are leased to Greenfield, who operate the properties.

In May 2015, the Company leveraged its $25.0 million to seed Telos Credit Opportunities Fund, L.P., a leveraged loan fund managed by the Company’s Telos subsidiary with an asset based secured credit facility of which $54.9 million was outstanding as of December 31, 2015.

During the second quarter, the Company sold its investments in the subordinated notes issued by Telos 2 and Telos 4 to partly fund the diversification of its principal investments and to recycle capital from existing CLOs into a warehouse facility with the objective of creating new CLOs to increase asset management fees. The sales generated net cash of $39.7 million and realized losses of $8.0 million.

On June 30, 2015, the Company completed the sale of its PFG subsidiary for proceeds to the Company of $142.8 million at closing and future payments over the next two years totaling approximately $7.3 million. The sale resulted in a pre-tax gain of approximately $27.2 million and an after tax gain of $15.6 million in 2015, which is classified as a gain on sale from discontinued operations. The Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for 2014 and 2015.

On July 1, 2015, the Company completed the acquisition of Reliance, a retail mortgage originator, for $7.5 million in cash, 1,625,000 shares of Class A common stock, $2.78 million in working capital adjustments and an earn-out provision over 3 years of up to 2 million Tiptree Class A shares.


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During the second half of 2015, we contributed an aggregate of $45 million to a special purpose vehicle, Telos CLO 2016-7, Ltd. (“Telos 7”), which entered into a warehouse credit facility in anticipation of launching a new CLO, of which $119.5 million was outstanding as of December 31, 2015.

During 2015, the Company made principal investments in pools of NPLs of approximately $39.7 million. In the first quarter of 2016, the Company purchased an additional $8.0 million in NPLs, bringing the Company’s total investment in NPLs to $47.7 million as of the date of this report.

In the fourth quarter of 2015, the Company and its subsidiaries purchased approximately 1.4 million common shares of RAIT, a publicly traded multi-strategy commercial real estate investment trust, for an aggregate of $3.5 million. In the first quarter of 2016, the Company and its subsidiaries purchased an additional approximately 5.2 million common shares of RAIT for an aggregate of $12.6 million.

During 2015, Tiptree Financial returned $7.3 million to Class A stockholders through dividends of $3.3 million and stock repurchases of $4.0 million. For further details, see “Part II—Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”

HOLDING COMPANY

Tiptree’s Strategy
Tiptree Financial is a diversified holding company that draws upon the extensive experience of its management team in the areas of insurance, specialty finance, asset management, real estate and credit investing to acquire controlling interests of operating businesses. We believe our business ownership mix of (i) specialty insurance, insurance services and warranty protection companies, (ii) operating companies which principally originate or own tangible assets, and (iii) asset management companies which earn fees from third-party investment vehicles, provides business synergies which generate a higher overall return on shareholder capital.

When making new acquisitions, we strive to identify businesses that: (i) have strong and experienced management, (ii) have the potential to generate attractive and stable cash returns on capital with limited downside, (iii) complement existing businesses or strategies through clearly identifiable synergies, and (iv) have sustainable and scalable business models. Tiptree’s permanent capital base allows us to have a long term view of our businesses, providing a competitive advantage relative to alternative capital sources with shorter-term objectives. We will retain a well-performing business for an indefinite period, but will consider selling a business when we believe material shareholder value creation will be achieved.

When we acquire a business, we aim to partner with the management and employees, providing assistance when needed, but relying on their unique expertise to run the business day-to-day. We enhance the value of our businesses by utilizing our experience in capital markets, mergers and acquisitions, capital raising, credit markets, distressed investing, securitization, asset management, corporate governance and government regulatory issues. We also optimize the efficiencies of our business operations by strategically using the resources and talents of our more than 900 employees at our consolidated subsidiaries.

We seek to adopt a prudent approach with regard to our capital structure, the diversification of financial risk and the avoidance of reputational risk. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital to alternative investment options and major market indices.

Tiptree Regulation
Because Tiptree Financial indirectly owns capital stock in several insurance company subsidiaries, it is subject to the state insurance holding company statutes of states in which it has insurance operations, which limit affiliate transactions and dividends or distributions from our insurance subsidiaries. See “—Operating Businesses—Insurance and Insurance Services—Regulation” and “Risk Factors—Risks Related to our Structure—Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders will depend on distributions from our subsidiaries that may be subject to restrictions.” The holding company statutes, as well as other laws, also require, among other things, prior regulatory approval of an acquisition of control of a domestic insurer, certain transactions between affiliates and payments of extraordinary dividends or distributions. As a holding company, Tiptree Financial is not regulated as an insurance company.

Each of Tiptree’s operating businesses is subject to regulation as described under “— Operating Businesses” below.


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The 1940 Act may limit the types and nature of businesses that we engage in and assets that we may acquire. See “Risk Factors—Risks Related to Regulatory and Legal Matters—Maintenance of our 1940 Act exemption will impose limits on our operations.”
Tiptree’s Competition

Each of our businesses faces competition, as discussed under “—Operating Businesses” below. In addition to the competition our businesses face, we are subject to significant competition for acquisition opportunities. Our competitors for acquisition include commercial and investment banks, mortgage companies, specialty finance companies, insurance companies, asset managers, private equity funds, hedge funds, family offices, real estate investment trusts, limited partnerships, business development companies and special purpose acquisition vehicles. Many of our competitors are significantly larger, have greater access to capital and other resources and may possess other competitive advantages. We believe that Tiptree Financial’s position as a public company may provide a competitive advantage over privately held entities that compete to acquire certain target businesses, unlike private buyers of companies such as private equity firms, Tiptree is able to pay for certain acquisitions with its own equity securities in addition to cash.

Tiptree Employees

As of December 31, 2015, Tiptree had 929 employees. As of that date, 20 persons provided services to Tiptree (as employees or pursuant to a services agreement) at the holding company level.

OPERATING BUSINESSES
Insurance and Insurance Services
Tiptree’s insurance operations consist of Fortegra, a specialized insurance and insurance services company offering consumer related protection products, including credit insurance, non-standard auto insurance, warranties, service contracts, auto warranty and roadside assistance. Fortegra also offers administration services through a vertically integrated platform and provides fronting services for self-insured clients.
Fortegra’s products and related services offer protection from life events and uncertainties along with simplified steps to ease consumers’ recovery. Credit insurance and debt protection products offer consumers the option to protect a loan balance in the event of death, disability, job loss or other events that could impair the consumers’ ability to repay a debt and damage their credit. Fortegra’s non-standard auto insurance programs, administered by managing general agents (“MGAs”), focus on servicing consumers in the non-standard market. Warranty and other service contracts for mobile handsets, furniture and major appliances provide consumers protection from product failure and loss. Automotive products protect consumers from mechanical failure and provide roadside assistance when needed.

Fortegra’s products are marketed under its Fortegra, Life of the South, ProtectCELL, 4Warranty, United Motor Club, Continental Car Club, Auto Knight and Consecta brands. Through these brands, Fortegra delivers credit insurance, debt protection, warranty contracts, motor club solutions, membership plans and other services to installment loan companies, retailers, independent wireless dealers, regional banks, community banks, warranty administrators, automobile dealers, vacation ownership developers and credit unions. Fortegra’s clients then offer these products and services to their customers in conjunction with consumer transactions.

Fortegra typically structures agreements with its clients whereby they share in the economic results of the program either through retrospective commission arrangements or producer-owned reinsurance companies. Fortegra may selectively assume insurance underwriting risk to meet clients’ needs or to enhance its profitability.

Fortegra generates revenues from net earned premiums. These premiums consist of direct and assumed earned premiums generated from the direct sale of payment protection insurance policies and non-standard auto insurance policies and premiums written by another carrier for payment protection insurance policies assumed by Fortegra. In addition to ceding premiums to producer owned reinsurance companies, Fortegra elects to cede to reinsurers a significant portion of the credit and auto insurance that it underwrites for loss protection and capital management purposes. Net earned premiums are offset in-part by commission expenses and loss and loss adjustment expenses.

In addition, Fortegra generates service and administrative fee revenue for administering payment protection products and fronting arrangements on behalf of its clients and earns service and administrative fees from sales of warranty products and motor club solutions. These revenues are offset in part by commission expenses and member benefit claims. Fortegra earns ceding

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commissions for credit insurance that it cedes to reinsurers through coinsurance arrangements. In addition, Fortegra generates net investment income from its investment portfolio.

Competition

Fortegra operates in several niche markets and we believe that no single competitor competes against it in all of its business lines. The markets in which Fortegra operates are competitive based on many factors, including price, industry knowledge, quality of client service, sales force effectiveness, technology platforms and processes, the security and integrity of information systems, financial strength ratings, breadth of products and services, brand recognition and reputation. Fortegra’s credit protection products and warranty service contracts compete with similar products of insurance companies, warranty companies and other insurance service providers. Many of Fortegra’s competitors are significantly larger, have greater access to capital and may possess other competitive advantages. The principal competitors for Fortegra include: The Warranty Group, Inc., Assurant, Inc., eSecuritel Holdings, LLC, Asurion, LLC, AmTrust Financial Services, Inc. and several smaller regional companies.

Regulation
Fortegra’s business is subject to extensive regulation and supervision, including at the federal, state, local and foreign levels. Fortegra’s insurance company, service contract, and motor club subsidiaries are subject to regulation in the various states and jurisdictions in which it transacts business. Fortegra’s insurance products and its business are also affected by U.S. federal, state and local tax laws, and the tax laws of non-U.S. jurisdictions.
Fortegra owns and operates insurance company subsidiaries to meet the various requirements of the jurisdictions where it operates. Fortegra’s insurance subsidiaries are generally restricted by the insurance laws of their respective domiciles as to the amount of dividends they may pay without the prior approval of the respective regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior regulatory approval is limited to a stated percentage of that subsidiary’s statutory surplus as of a certain date, or net income of the subsidiary for the preceding year.
Fortegra’s insurance company subsidiaries are domiciled in California, Delaware, Georgia, Kentucky and Louisiana. The regulation, supervision and administration by state departments of insurance relate, among other things, to:
standards of solvency that must be met and maintained;
restrictions on the payment of dividends;
changes in control of insurance companies;
the licensing of insurers and their agents and other producers;
the types of insurance that may be written;
privacy practices;
the ability to enter and exit certain insurance markets;
the nature of and limitations on investments and premium rates, or restrictions on the size of risks that may be insured under a single policy;
reserves and provisions for unearned premiums, losses and other obligations;
deposits of securities for the benefit of policyholders;
payment of sales compensation to third parties;
approval of policy forms; and
the regulation of market conduct, including underwriting and claims practices.

Fortegra’s insurance company subsidiaries must comply with their respective state of domicile’s laws regulating insurance company investments, which are generally modeled on the standards promulgated by the NAIC. Such investment laws are generally permissive with respect to federal, state and municipal obligations, and more restrictive with respect to corporate obligations, particularly non-investment grade obligations, foreign investment, equity securities and real estate investments. Each insurance company is therefore limited by the investment laws of its state of domicile from making excessive investments in any given security (such as single issuer limitations) or in certain classes or riskier investments (such as aggregate limitation in non-investment grade bonds).

The NAIC has adopted a model act with risk-based capital (“RBC”) formulas to be applied to insurance companies to measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. State insurance regulators use RBC standards to determine appropriate actions relating to insurers that show signs of weak or deteriorating conditions. The domiciliary states of Fortegra’s insurance company subsidiaries have adopted laws substantially similar to the NAIC’s RBC model act. Under laws adopted by individual states, insurers having total adjusted

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capital less than that required by the RBC calculation will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.
A portion of Fortegra’s business is ceded to its reinsurance company subsidiaries domiciled in Turks and Caicos. Those subsidiaries must satisfy local regulatory requirements, such as filing annual financial statements, filing annual certificates of compliance and paying annual fees.
In connection with the Dodd-Frank Act, Congress created the CFPB. While the CFPB does not have direct jurisdiction over insurance products under the Dodd-Frank Act, it is possible that regulatory actions taken by the CFPB may affect the sales practices related to these products and thereby potentially affect Fortegra’s business or the clients that it serves.
Fortegra is also subject to federal and state laws and regulations related to its administration of insurance products on behalf of other insurers. In order for Fortegra to process and administer insurance products of other companies, it is required to maintain licenses of a third party administrator in the states where those insurance companies operate. Fortegra is also subject to the related federal and state privacy laws and must comply with data protection and privacy laws such as the Gramm-Leach-Bliley Act and HIPAA and certain state data privacy laws. Fortegra is also subject to laws and regulations related to call center services, such as the Telemarketing Consumer Fraud and Abuse Prevention Act and the Telemarketing Sales Rule, the Telephone Consumer Protection Act, the Do-Not-Call Implementation Act and rules promulgated by the Federal Communications Commission and the Federal Trade Commission and the CAN-SPAM Act.
Seasonality
Fortegra’s financial results may be affected by seasonal variations. Revenues associated with its products may fluctuate seasonally based on consumer spending trends. Consumer spending has historically been higher in September and December, corresponding to the back-to-school and holiday seasons. Accordingly, Fortegra’s revenues from its products may be higher in the third and fourth quarters than in the first half of the year. Member benefit claims on mobile device protection are typically more frequent in the summer months, and accordingly, Fortegra’s claims expense from those products may be higher in the second and third quarters than other times of the year.
Employees
At December 31, 2015, Fortegra employed 411 employees, on a full or part time basis.
Intellectual Property
Fortegra owns or licenses a number of trademarks, patents, trade names, copyrights, service marks, trade secrets and other intellectual property rights that relate to its services and products. Although Fortegra believes that these intellectual property rights are, in the aggregate, of material importance to its business, Fortegra believes that its business is not materially dependent upon any particular trademark, trade name, copyright, service mark, license or other intellectual property right. Fortegra has entered into confidentiality agreements with its clients that impose restrictions on its clients’ use of Fortegra’s proprietary software and other intellectual property rights.
Specialty Finance
Tiptree’s specialty finance operations consists of a controlling ownership interest in Siena, which provides asset-based loans to smaller U.S. businesses, our mortgage origination business, which is conducted through two entities, Reliance, which is wholly owned and Luxury, which is 67.5% owned by the Company. The Company intends to continue to grow its specialty finance operations organically through increased volume, through acquisitions and by exploring strategic alternatives with respect to new financing products.

Mortgage Business
The operations of Luxury and Reliance include the origination, packaging and sale of mortgage loans, primarily FHA/ VA, conforming/agency and jumbo mortgage loans. The loans are typically sold shortly after origination into a liquid secondary market. Loans sold into the secondary market may be sold “servicing-retained” or “servicing-released,” referring to whether the rights to service the mortgage are retained by the originator or released to the secondary market investor at the time of sale. Luxury and Reliance currently sell all of their loans on a servicing released basis. However, Reliance has the appropriate approvals to retain servicing and expects to begin doing so on a limited basis in 2016. Our mortgage business is financed using warehouse revolving credit facilities to fund mortgage loans held for sale. Revenues are generated from gain on sale of loans, net interest income and loan fee income.

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Our mortgage business offers a variety of residential fixed and adjustable rate mortgage products. We currently use two production channels to originate or acquire mortgage loans: retail sales offices (commonly referred to as “retail”), and a broker channel (commonly referred to as “wholesale”). Each production channel produces similar mortgage loan products and generally applies the same underwriting standards. We leverage technology to streamline the mortgage origination process and bring service and convenience to both channels. In the wholesale channel, brokers are able to register and lock loans, check the status of the loan, and deliver documents in electronic format through the Internet. Our sales support team assists brokers in jurisdictions where our mortgage business is licensed to do business.

In the retail channel, loans are originated by mortgage loan originators employed by us. When loans are originated on a retail basis, the origination documentation is completed internally inclusive of customer disclosures and other aspects of the lending process and the funding of the transactions. In the wholesale channel, an unaffiliated bank, mortgage bank, or mortgage brokerage company completes much of the loan paperwork. All loans are underwritten on a loan-level basis to our underwriting standards.

Competition

The market for origination of residential mortgages is highly competitive. There are a large number of institutions offering mortgage loans, including many that operate on a national scale, as well as local savings banks, commercial banks, and other lenders. With respect to those products that we offer, we compete by offering competitive interest rates, fees, and other loan terms and services and by offering efficient and rapid service. Many of our mortgage business competitors are larger and have access to greater financial resources. In addition, many of the largest competitors are banks or are affiliated with banking institutions, the advantages of which include, but are not limited to, the ability to hold mortgage loan originations in an investment portfolio and having access to financing with more favorable terms, including lower interest rate bank deposits as a favorable source of funding.

Regulation
Our mortgage business is subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, the Federal Trade Commission and various state agencies that license, audit and conduct examinations. Luxury is licensed or qualified to do business in 22 states and Reliance is licensed or qualified to do business in 32 states in the U.S. Luxury and Reliance must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act, the Patriot Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act, the Fair Housing Act, the Equal Credit Opportunity Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Home Mortgage Disclosure Act, the Federal Trade Commission Act, the Dodd-Frank Act and state foreclosure laws. These statutes apply to loan origination, fair lending, debt collection, use of credit reports, safeguarding of non-public personally identifiable information about customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers.
Employees
Our mortgage business had 467 employees as of December 31, 2015.
Siena Lending Group
Siena is a commercial finance company providing financing solutions to small and medium sized U.S. companies. Siena originates, structures, underwrites and services senior secured asset-based loans for companies with sales typically between $5 million and $50 million operating across a range of industry sectors. Its core financing solutions include revolving lines of credit and term loans and typically range in size from $1 million to $25 million. Siena also has the ability to arrange significantly larger transactions that may be syndicated to others or Siena may participate in large syndications itself. Siena funds its lending practice from capital contributions by its owners as well as from a revolving credit agreement.
Siena’s loans are typically used to fund working capital needs and are secured by eligible, margined collateral, including accounts receivable, inventories, and, to a lesser extent, other long-term assets. In determining a borrowers’ ability and willingness to repay loans, Siena conducts a detailed due diligence investigation to assess financial reporting accuracy and capabilities as well as to verify the values of business assets, among other things. Siena employs third parties to conduct field exams to audit financial reporting and to appraise the value of certain types of collateral in order to estimate its liquidation value. Financing arrangements with customers also typically include substantial controls over the application of borrowers’ cash and Siena retains discretion over collateral advance rates and eligibility among other key terms and conditions.

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Siena also offers a servicing platform, which provides asset-based lending solutions for community and regional banks that do not have the expertise or capacity to underwrite or service asset-based loans.
Competition
Siena’s market is competitive, based on factors that vary by product, customer, and geographic region. Competitors include commercial and investment banks, regional and community banks, captive finance companies, and other niche specialty finance companies. Many of the larger competitors have greater financial, technological, and marketing resources than Siena.
Employees
Siena had 18 employees as of December 31, 2015.
Real Estate
Tiptree’s real estate operations consist of Care, a real estate investment company focused on seniors housing. As of December 31, 2015, Care’s portfolio consisted of 24 properties across 9 states in the Northeast, Mid-Atlantic and Southern United States. Care’s properties are either leased to tenants pursuant to a triple net lease (“Triple Net Lease Properties”) or owned by Care but managed by a management company pursuant to a management agreement (“Managed Properties”). As of December 31, 2015, Care’s portfolio is comprised of 11 Triple Net Lease Properties and 13 Managed Properties.

In Triple Net Lease Properties, Care only owns the real estate and enters into a long term lease with an operator who is typically responsible for bearing operating costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements. Triple Net Lease Properties are not consolidated since Care does not manage the underlying operations. For Triple Net Lease Properties operations, Care recognizes primarily rental income from the lease since substantially all expenses are passed through to the tenant. In Managed Properties, Care generally owns between 65-80% of the real estate and the operations with affiliates of the management company owning the remainder. Care therefore consolidates all of the assets, liabilities, income and expense of the Managed Properties operations in segment reporting.  

15 out of Care’s 24 facilities, representing over 50% of its real estate portfolio by purchase price, were acquired between the end of 2014 and the beginning of 2015. In connection with the acquisition of 13 of the 15 recent acquisition properties, Care brought new management to the properties and initiated comprehensive capital expenditure plans designed to grow revenues and drive efficiencies.

Care’s focus is on acquisitions ranging in size from $5 to $250 million in the seniors housing industry. Care’s overall strategy is to identify strong and experienced managers or operators of seniors housing facilities who are looking to expand and diversify their operations by entering into strategic relationships with a capital partner. Care may also own a portion of the operations of seniors housing properties and partner with experienced managers to run the day-to-day operations at the properties while affiliates of the managers own the remaining percentage of the properties and operations. Care is funded by a combination of internally generated capital, cash contributed from Tiptree and property-specific recourse debt used to acquire properties that generate income and gain on sale of assets.

Care’s seniors housing communities currently include senior apartments, independent and assisted living communities, a skilled nursing facility and memory care communities. Rent payments and services provided in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid and Medicare. Care intends to continue to grow its portfolio primarily through the acquisition of seniors housing properties, utilizing investment structures such as Triple Net Lease Properties and Managed Properties. As Care acquires additional properties and expands its portfolio, it intends to further diversify its concentrations by tenant, asset class and geography within the seniors housing sector, including further investments in senior apartments, independent and assisted living communities, and memory care communities.

Competition

Care competes for investments in the seniors housing and care sector with other real estate investment companies and real estate investment trusts, real estate partnerships, private equity firms and hedge funds, finance/investment companies, taxable and tax-exempt bond funds, health care and seniors housing operators and developers. Care competes for investments based on a number of factors including investment structures, underwriting criteria and reputation. Care’s ability to successfully compete is impacted by economic and demographic trends, availability of acceptable investment opportunities, ability to negotiate beneficial investment terms, availability and cost of capital and new and existing laws and regulations.


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The operators/managers/lessees of Care’s properties compete on a local and regional basis with those of properties that provide comparable services. Operators/managers/lessees compete for residents based on a number of factors including quality of service, reputation, physical appearance of properties, location, services offered, family preferences, staff and price.

Regulation

Tenants and operators of healthcare properties are typically subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. Some of these laws and regulations impose joint and several liabilities on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, there are various federal, state and local fire, health, life-safety and similar regulations applicable to healthcare properties.

Care’s properties may be affected by Care’s operators’, managers’ and lessees’ operations, the existing condition of land when acquired, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent a property.

In addition, the healthcare industry is highly regulated by federal, state and local licensing requirements, facility inspections, reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other laws, regulations and rules. In addition, regulators require compliance by our tenants and third party operators with a variety of safety, health, staffing and other requirements relating to the design and conditions of the licensed facility and quality of care provided. The failure of any tenant, manager or operator to comply with such laws, requirements and regulations could affect a tenant’s, manager’s or operator’s ability to operate the facilities that Care owns.

Private, federal and state payment programs, including Medicaid and Medicare, and the effect of laws and regulations may also have a significant influence on the profitability of the properties and their tenants.

Employees

As of December 31, 2015, 3 employees were dedicated to Care (excluding the employees of Care’s Managed Properties).

Asset Management
TAMCO

Tiptree’s asset management operations are conducted through TAMCO, an SEC-registered investment adviser that is primarily a holding company for Tiptree’s asset management subsidiaries, which include Telos and MCM. Telos primarily manages credit related assets. MCM currently manages portfolios of tax exempt securities for third parties and the Company. Tiptree seeks to grow its asset management operations through acquisitions and through investments in new products launched and managed by its subsidiaries. As of December 31, 2015, TAMCO had approximately $1.9 billion of AUM for third parties.

Competition
TAMCO and its subsidiaries compete for business with other asset managers, including those affiliated with major commercial or investment banks and other financial institutions. Many of these organizations offer products and services that are similar to, or compete with, those TAMCO and its subsidiaries may offer, and many of these organizations have substantially more personnel and greater financial resources. Some of these competitors have proprietary products and distribution channels that may make it more difficult for TAMCO and its subsidiaries to compete with them. Some competitors also have greater portfolio management resources, greater name recognition, have had managed client accounts for longer periods of time, have greater experience over a wider range of products or have other competitive advantages. The factors considered by clients in choosing TAMCO and its subsidiaries or a competitor include the past performance of the products managed, the background and experience of key personnel, the experience in managing a particular product, overall reputation, investment advisory fees and the structural features of the investment products offered.

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Regulation
The asset management industry in the U.S. is subject to extensive regulation under federal and state securities laws as well as the rules of self-regulatory organizations. TAMCO is registered with the SEC as an investment adviser and Telos and MCM (collectively with TAMCO, the “Advisers”) rely on TAMCO’s registration. The Advisers are also required to make notice filings in certain states. Virtually all aspects of the asset management business, including related sales and distribution activities, are subject to various federal and state laws and regulations and self-regulatory organization rules. These laws, rules and regulations are primarily intended to protect the asset management clients and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict an investment advisor from conducting its asset management business in the event that it fails to comply with such laws and regulations. In addition, investment vehicles managed by the Advisers are subject to various securities laws and other laws.
Employees
As of December 31, 2015, 10 employees were dedicated to TAMCO.

Telos Asset Management
Telos is an investment manager that establishes and manages investment products for pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors. Its core investment products are primarily in the form of CLOs and managed accounts investing in leveraged loans.
The term “CLO” generally refers to a special purpose vehicle that owns a portfolio of senior secured loans and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s indenture and other governing documents, which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. Telos, as investment advisor manager of CLOs, selects and actively manages the underlying assets to achieve target investment performance, while seeking to avoid losses. Historically, formation of a CLO to be managed by Telos has been funded by a combination of cash from Tiptree and warehouse revolving credit facilities which generate net interest income. At issuance of the new CLO, funding is provided by a combination of cash from Tiptree and from third party investors, creating a CLO that generates management fees to TAMCO and investment income to the Company.
The investment advisory fees paid to Telos by the CLOs under management are its primary source of revenue and are generally paid on a quarterly basis. Investment advisory fees typically consist of senior and subordinated management fees based on the amount of assets and, in certain cases, include incentive fees based on the returns generated for certain investors.
Telos is currently the manager of the following CLOs:
($ in thousands)
Issuance date
 
Fee earning AUM (1)
 
First optional call date (2)
 
Termination of reinvestment period (3)
 
Maturity date (4)
Telos 1
11/2006
 
$
131,560

 
1/2011
 
1/2013
 
10/2021
Telos 2
06/2007
 
179,546

 
7/2011
 
7/2013
 
4/2022
Telos 3
02/2013
 
354,554

 
1/2015
 
1/2017
 
1/2024
Telos 4
08/2013
 
355,101

 
7/2015
 
7/2017
 
7/2024
Telos 5
05/2014
 
403,148

 
4/2016
 
4/2018
 
4/2025
Telos 6
12/2014
 
352,063

 
1/2017
 
1/2019
 
1/2027
Total CLOs
 
 
$
1,775,972

 
 
 
 
 
 
(1)     Fee earning AUM as of the next distribution date after December 31, 2015, except for Telos 1, which is as of December 30, 2015.
(2)
CLOs are generally callable by equity holders (or the subordinated note holders of the CLO) once per quarter beginning after termination of a non-call period and subject to certain other restrictions.

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(3)
“Termination of reinvestment period” refers to the date after which we can no longer use certain principal collections to purchase additional collateral and such collections are instead used to repay the outstanding amounts of certain debt securities issued by the CLO.
(4)     Represents the contractual maturity of the CLO. Generally, the actual maturity of the CLO is expected to occur in advance of contractual maturity.

Telos also manages Telos 7, which, as of December 31, 2015, owned a $167.8 million pool of loans assembled in anticipation of launching a CLO, and Telos Credit Opportunities Fund, a $78.7 million leveraged loan fund seeded by Tiptree.

Management fees are reported in the asset management segment. Tiptree owns various amounts of subordinated notes issued by Telos 1, Telos 5 and Telos 6 and management fee participation rights with an aggregate original purchase price of $47.2 million and a fair market value of $28.7 million as of December 31, 2015. CLO subordinated notes are often referred to as “equity” because they are entitled to recurring distributions which are generally equal to the remaining cash flow of the payments made by the securities owned by the CLO less contractual payments to debt holders and fund expenses. Distributions earned, realized gains/(losses), and changes in the fair value of subordinated notes owned by Tiptree are reported in our corporate and other segment.
Muni Capital Management - MCM
MCM is a manager of investments in securities exempt from U.S. federal income taxes. MCM currently manages NPPF I, a structured tax-exempt pass-through vehicle. Interests in NPPF I are held solely by unaffiliated third parties. MCM also manages the Company’s portfolio of tax exempt securities. Investment gains and losses on the portfolio of tax-exempt securities are reported in our corporate and other segment. Management fees earned by MCM from the management of NPPF I are reported in our asset management segment. The AUM of NPPF I as of December 31, 2015 was $148.6 million.

Principal Investments

The Company’s principal investments consist primarily of the positions in the subordinated notes of CLOs managed by Telos, common shares of RAIT, a portfolio of tax-exempt securities held by MFCA, investments in loans consisting of Telos 7, investments in NPLs, Telos credit opportunities and Tiptree’s interests in the Star Asia Entities, which are Tokyo-based real estate holding companies formed to invest predominately in Asian properties and real estate related debt instruments. The Company has been winding down its tax exempt securities portfolio.

Through its subsidiary, Winsted Funding Trust 2015-1, Tiptree invests in pools of primarily nonperforming and reperforming residential mortgage loans purchased from private investors (rather than government agencies or directly from banks) at substantial discounts to unpaid principal balance (“UPB”) and at a discount to the appraised value of the properties securing the loans. Nonperforming loans are loans greater than 60 days delinquent or loans performing on a workout plan with a minimum of two contractual payments received in a three month period. Reperforming loans are loans less than 60 days delinquent. Tiptree seeks to either re-structure or modify the mortgages such that they become performing and then sell the loans at a profit. In cases where such modifications are not achieved Tiptree intends to foreclose on the underlying properties (which results in owned real estate (“REO”) and sell the properties at a profit. Tiptree has engaged Spurs Capital, LLC (“Spurs Capital”) to identify, evaluate and coordinate pools of NPLs for acquisition by Tiptree pursuant to an Acquisition Services Agreement and to manage Tiptree’s NPL portfolio including loan modifications and conversion to REO pursuant to an Asset Management Agreement. Tiptree has engaged Seneca Mortgage Servicing LLC (“Seneca”) to provide servicing of the loans and REO.

Discontinued Operations

On June 30, 2015, the Company completed the sale of its PFG subsidiary for proceeds to the Company of $142.8 million at closing and future payments over the next two years totaling approximately $7.3 million. The sale resulted in a pre-tax gain of approximately $27.2 million and an after tax gain of $15.6 million, which is classified as a gain on sale from discontinued operations. For further information relating to the sale of PFG see Note 4—Dispositions, Assets Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements.

AVAILABLE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.


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

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

Item 1A. Risk Factors

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

Risks Related to our Businesses

We have identified, and may identify in the future, material weaknesses in our internal control over financial reporting, which may require us to incur substantial costs and divert management resources in connection with our efforts to remediate the material weaknesses.
We have determined that material weaknesses in internal controls over financial reporting existed as of December 31, 2015. Detailed descriptions of the material weaknesses are provided in Part II, Item 9A—“Controls and Procedures” of this Annual Report on Form 10-K. Due solely to the material weaknesses, management has concluded that we did not maintain an effective internal control over financial reporting as of December 31, 2015 (and, solely as a result of the material weaknesses, we have concluded that our disclosure controls and procedures were not effective as of December 31, 2015). We are in the process of developing and implementing new processes and procedures to remediate the material weaknesses. We cannot be certain that any remedial measures we take will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future and, accordingly, additional material weaknesses may occur in the future. It is possible that additional control deficiencies may be identified in addition to, or that are unrelated to, the material weaknesses described above. These control deficiencies may represent one or more material weaknesses. Our inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other things, cause us to fail to file timely our periodic reports with the SEC (which may have a material adverse effect on our ability to access the capital markets); prevent us from providing reliable and accurate financial information and forecasts or from avoiding or detecting fraud; or require us to incur additional costs or divert management resources to, among other things, comply with Section 404 of the Sarbanes-Oxley Act of 2002.
We operate in highly competitive markets for business opportunities and personnel, which could impede our growth and negatively impact our results of operations.

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

Acquisitions may have unforeseen operating difficulties and may require greater than expected financial and other resources and we may fail to successfully integrate the businesses we acquire which would have an adverse effect on our business results of operation and financial condition.

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

our ability to realize the full extent of the benefits, synergies or cost savings that we expect to realize as a result of the completion of an acquisition within the anticipated time frame, or at all;
receipt of necessary consents, clearances and approvals in connection with the acquisition;
diversion of management’s attention from other strategies and objectives;

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motivating, recruiting and retaining executives and key employees; and
conforming and integrating financial reporting, standards, controls, procedures and policies, business cultures and compensation structures.

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

We may need to raise additional capital in the future or may need to refinance existing indebtedness, but there is no assurance that such capital will be available on a timely basis, on acceptable terms or at all.

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

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

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

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

Claims paying ability ratings, sometimes referred to as financial strength ratings, indicate a rating agency’s view of an insurance company’s ability to meet its obligations to its policy holders. These ratings are therefore key factors underlying the competitive position of insurers. Some distributors of insurance products may choose not to do business with insurance companies that are rated below certain financial strength ratings. Fortegra's insurance subsidiaries currently has a rating of “B++” from A.M. Best Company, Inc. Rating agencies can be expected to continue to monitor our insurance subsidiaries’ financial strength and claims paying ability, and no assurances can be given that future ratings downgrades will not occur, whether due to changes in their performance, changes in rating agencies’ industry views or ratings methodologies, or a combination of such factors. A ratings downgrade or the potential for such a downgrade in a rating could, to the extent applicable to a particular type of policy, adversely affect relationships with distributors of insurance products, reduce new policy sales and adversely affect our ability to compete in the insurance industry.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There is uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will continue to be in existence, the extent of their roles in the market and what forms they will have. The future roles of Fannie Mae and Freddie Mac could be reduced or eliminated and the nature of their guarantees could be limited or eliminated relative to historical measurements. The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could adversely affect our mortgage businesses, financial condition and results of operations. Furthermore, any discontinuation of, or significant reduction in, the operation of these GSEs and Ginnie Mae, or any significant adverse change in the level of activity of these agencies in the primary or secondary mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect our business, financial condition and results of operations.

We may be required to indemnify or repurchase loans we originated, or will originate, if, among other things, our loans fail to meet certain criteria or characteristics.
The contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;
we fail to secure adequate mortgage insurance within a certain period after closing;
a mortgage insurance provider denies coverage; or
we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment.

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

The residential mortgage loans which our mortgage businesses originate may be subject to delinquency, foreclosure and loss, which could result in significant losses to us.
Residential mortgage loans are secured by residential property and those that are not guaranteed by a U.S. Government agency or GSE are subject to risks of delinquency, foreclosure and loss during the period of time that loans are held pending sale, generally 20-30 days. The ability of a borrower to repay a loan secured by a residential property depends upon the income or assets of the borrower as well as a number of other factors. In the event of any default or underwriting flaw under a mortgage loan held directly by our mortgage businesses, we may bear, or be required to indemnify against, a risk of loss of principal to the extent of any deficiency between the value of the collateral on the one hand and the principal and accrued interest of the mortgage loan on the other, which could have a material adverse effect on our cash flow from operations. In the event of the

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bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.
We may be unable to obtain sufficient capital to meet the financing requirements of our mortgage business.
We fund substantially all of the loans which we originate through borrowings under warehouse financing and repurchase facilities.  Our borrowings are in turn repaid with the proceeds we receive from selling such loans through whole loan sales.  As we expand our operations, we will require increased financing.
There can be no assurance that such financing will be available on terms reasonably satisfactory to us or at all.  An event of default, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit-similar to the market conditions experienced in recent years-may increase our cost of funds and make it difficult for us to obtain new, or retain existing, warehouse financing facilities.  If we fail to maintain, renew or obtain adequate funding under these warehouse financing facilities or other financing arrangements, or there is a substantial reduction in the size of or increase in the cost of such facilities, we would have to curtail our mortgage loan production activities, which could have a material adverse effect on our business, financial condition and operating results.
Certain contingency risks associated with the loans we originate and purchase may materially and adversely affect us.
Although we sell substantially all of the loans that we originate and purchase on a nonrecourse basis, we retain some degree of credit risk on all loans originated or purchased, even after they are sold. We remain subject to claims for repurchases of mortgage loans previously sold under provisions requiring repurchase in the event of early payment defaults or breaches of representations and warranties regarding loan quality, compliance and certain other loan characteristics. We also remain subject to claims for indemnification by HUD with respect to FHA and VA loans we originate for alleged failure to comply with FHA or VA guidelines with respect to such loans.
In the ordinary course of our business, we are subject to claims made against us by borrowers and private investors arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and agents (including our appraisers), incomplete documentation and our failure to comply with various laws and regulations applicable to our business. We believe that the liability with respect to any currently asserted claims or legal actions is not likely to be material to our financial condition or results of operations; however, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on us.
The underwriting practices in our mortgage businesses may not adequately capture the risk inherent in our mortgage lending operations and failures in our underwriting process may result in loans that expose us to a greater risk of loss.
Our mortgage businesses seek to mitigate the risks inherent in our mortgage lending operations by adhering to specific underwriting practices. These practices will often include, among other things, analysis of a borrower’s prior credit history, credit score, employment, income verification, financial statements, tax returns and cash flow projections; valuation of collateral; and verification of liquid assets. If our underwriting process fails to capture accurate information or proves to be inadequate, we may incur losses on mortgage loans that meet our underwriting criteria, and those losses may exceed the amounts set aside as reserves in the allowance for loan losses. With respect to the loans we originate for others, if we fail to underwrite to our investors’ requirements, we could be subject to indemnity and/or repurchase claims.
In addition, should the mortgage loans we originate sustain higher levels of delinquencies and/or defaults, (1) we may lose the ability to originate and/or sell FHA loans, or to do so profitably and (2) investors to whom we currently sell our mortgage loans may refuse to continue to do business with us, or may reduce the prices they are willing to purchase our mortgage loans and it may be difficult or impossible to sell any of our mortgage loans in the future. Any of the foregoing risks could adversely affect our business, financial condition and results of operations.
Geographic concentration of our mortgage loans increases our exposure to risks in those areas.
Concentration of originations in any one area increases our exposure to the economic and natural hazard risks associated with that area. A significant percentage of our mortgage originations by loan balance were secured by properties in California,

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Connecticut, Florida, Michigan, New Jersey, New York, North Carolina, Pennsylvania and Tennessee. These states have experienced, and may experience in the future, an economic downturn and have also suffered the effects of certain natural hazards. In the recent past, as a result of an economic downturn, real estate values in these and most other states have decreased drastically and may continue to decrease in the future, which could have a material adverse effect on our results of operations or financial condition.
Additionally, if borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the property is damaged. This would cause delays in the sale of properties, increased loan repurchase activity and decrease our ability to recover losses on properties affected by such disasters. This could have a material adverse effect on our results of operations or financial condition.
The volume of our mortgage loan originations is subject to a variety of factors, which include the level of interest rates, overall conditions in the housing market and general economic trends.
 
Changes in interest rates and the level of interest rates are key drivers that impact the volatility of our mortgage loan originations.  The historically low interest rate environment in 2014 and 2015 has created strong demand for mortgages. The Federal Reserve recently raised rates and has indicated an intention to continue raising rates in the near future. Further increases in interest rates could result in us having lower revenue or profitability. Demand for mortgages could be negatively impacted by rising interest rates but demand for mortgages is also driven by general economic conditions, home price appreciation and housing starts so a gradual increase in interest rates may or may not affect our mortgage origination volumes depending on trends in these other factors. The overwhelming majority of our mortgage loan originations have historically been refinancing existing homeowner’s mortgage loans. With rates at or near historically low levels, we have been able to continue to grow our mortgage loan originations by focusing on refinances. We may not be able to continue to do so in the future.

A reduction in fees paid to Telos could adversely affect our profitability.

Telos generates management and advisory fees based on the amount of assets managed, and, in certain cases, on the returns generated by the assets managed. A reduction in fees paid to Telos, due to termination of management agreements, reduction in assets managed (for example, as a result of exercise of optional call provisions by subordinated noteholders), lower than expected returns or otherwise, could adversely affect our results of operations.

Changes in CLO spreads and an adverse market environment could make it difficult for us to launch new CLOs.

The ability to issue new CLOs is dependent, in part, on the amount of excess interest earned on a new CLO’s investments over interest payable on its debt obligations. If the spread is not attractive to potential CLO equity investors we may not be able to sponsor the issuance of new CLOs, which could have a material adverse impact on our business. During the fourth quarter of 2015, there was a dislocation in the credit markets that significantly impeded CLO formation. Continued dislocation in credit markets could impede our ability to launch new CLOs which could adversely impact our results of operations and financial condition.

We expect to enter into warehouse agreements in connection with our potential investment in and management of CLOs, which may expose us to substantial risks.

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


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Because the values we record for certain investments and liabilities are based on estimates of fair value made by our management, we are exposed to substantial risks.

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

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

Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets, securitization transactions and other aspects of our operations are highly complex and require the application of judgment and assumptions by our management. The consolidation of variable interest entities (“VIEs”) is subject to periodic reassessment which could lead to the deconsolidation of previously consolidated entities or the consolidation of entities that were previously not required to be consolidated. Deferred tax assets are subject to the establishment of a valuation allowance in the event management concludes that the tax benefits of certain timing differences may not be realized. Business acquisitions require the valuation of assets acquired and liabilities assumed. Assets acquired include intangible assets, including goodwill that will be subject to periodic testing and evaluation for impairment. A substantial amount of our assets are illiquid assets held at estimated fair value, which amounts are not readily determinable. We report estimated fair value of these assets quarterly, which may cause our quarterly operating results to fluctuate. Therefore, our past quarterly results may not be indicative of our performance in future quarters. Fair market valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, so our determinations of fair value may differ materially from the values that would have been used if a ready market for these assets existed and we may be unable to realize the carrying value on a sale of these assets. Those assets that are not held at fair value are held at original cost and are either depreciated or amortized. These complexities could lead to a delay in the preparation of our financial information. In addition, changes in accounting rules, interpretations or assumptions could materially impact the presentation, disclosure and usability of our financial statements.

Our real estate operating entities expose us to various operational risks, liabilities and claims that could adversely affect our ability to generate revenues or increase our costs and could adversely affect our financial condition and results of operations.

Our ownership of real estate operating entities exposes us to various operational risks, liabilities and claims that could increase our costs or adversely affect our ability to generate revenues, thereby reducing our profitability. These operational risks include fluctuations in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), rent control regulations, increases in the cost of food, materials, energy, labor (as a result of unionization or otherwise) or other services, national and regional economic conditions, the imposition of new or increased taxes, capital expenditure requirements, professional and general liability claims, and the availability and cost of professional and general liability insurance. Any one or a combination of these factors could result in operating deficiencies in our operating assets, which could adversely affect our financial condition and results of operations.

Liability relating to environmental matters may decrease the value of our real estate assets.

Under various federal, state and local laws, an owner or operator of real property may become liable for the costs of cleanup of certain hazardous substances released on or under its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that any of our owned real estate encounters environmental issues, it may adversely affect the value of that real estate. Further, in regard to any mortgage investment, if the owner of the underlying property becomes liable for cleanup costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us. In addition, in certain instances, we may be liable in part or in full for the cost of any required remediation or clean up.


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Violation of fraud and abuse laws applicable to our real estate tenants, lessees and operators may jeopardize a tenant’s, lessee’s or operator’s ability to make payments to us.

The federal government and numerous state governments have passed laws and regulations that attempt to eliminate healthcare fraud and abuse by prohibiting business arrangements that induce patient referrals or inappropriately influence the ordering of specific ancillary services. In addition, numerous federal laws have continued to strengthen the federal fraud and abuse laws to provide for broader interpretations of prohibited conduct and stiffer penalties for violations. Violations of these laws may result in the imposition of criminal and civil penalties, including possible exclusion from federal and state healthcare programs. Imposition of any of these penalties upon any of our tenants, lessees or operators could jeopardize their ability to operate a facility or to make payments to us, thereby potentially adversely affecting us, or our financial condition and results of operations.

In the past several years, federal and state governments have significantly increased investigation and enforcement activity to detect and eliminate fraud and abuse in the Medicare and Medicaid programs. In addition, legislation and regulations have been adopted at state and federal levels, which severely restricts the ability of physicians to refer patients to entities in which they have a financial interest. It is anticipated that the trend toward increased investigation and enforcement activity in the area of fraud and abuse, as well as self-referrals, will continue in future years and could adversely affect our prospective tenants, lessees or operators and their operations, and in turn their ability to make payments to us.

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

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

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

We may be limited in the future in utilizing net operating losses incurred during prior periods to offset taxable income.

Care previously incurred net operating losses. In the event that we experience an “ownership change” within the meaning of Section 382 of the Code, including as a result of the contribution transactions that occurred on July 1, 2013, which we refer to as the “Contribution Transactions” or the exchange by TFP’s limited partners of their partnership units in TFP for Tiptree Class A common stock, our ability to use those net operating losses to offset taxable income could be subject to an annual limitation. The annual limitation would be equal to a percentage of our equity value at the time the ownership change occurred. In general, such an “ownership change” would occur if the percentage of our stock owned by one or more 5% stockholders (including certain groups or persons acting in concert) were to increase by 50 percentage points during any three-year period. All stockholders that own less than 5% of our stock are treated as a single 5% stockholder. In addition, the Treasury Regulations under Section 382 of the Code contain additional rules the effect of which is to make it more likely that an ownership change could be deemed to occur. Accordingly, our ability to use prior net operating losses to offset future taxable income would be subject to a limitation if we experience an ownership change.


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

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

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

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

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

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

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

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

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

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

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

Our risk mitigation or hedging strategies could result in our experiencing significant losses that may materially adversely affect us.

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We pursue risk mitigation and hedging strategies to seek to reduce our exposure to losses from adverse credit events, interest rate changes and other risks. These strategies include short Treasury positions, interest rate swaps, credit derivative swaps, CDX derivative index positions, buying and selling credit protection on different tranches of risk in differing CDX indexes and derivative hedging instruments. Since we account for derivatives at fair market value, changes in fair market value are reflected in net income other than derivative hedging instruments which are reflected in accumulated other comprehensive income in stockholders’ equity. Some of these strategies could result in our experiencing significant losses that may materially adversely affect our business, financial condition and results of operations.
We face risks related to recession, financial and credit market disruptions and other economic conditions.

Demand for our products and services may be impacted by weak economic conditions, recession, equity market, and fixed income volatility or other negative economic factors that are out of our control. Similarly, disruptions in financial and/or credit markets may impact our and our subsidiaries’ ability to manage normal commercial relationships with customers, counterparties and creditors which could negatively impact our business, financial condition and results of operations.

We acquire NPLs which have a substantial risk of loss.

We acquire NPLs where the borrower has failed to make timely payments of principal and/or interest. Many of these loans will have current loan-to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate, however we expect to purchase NPLs at significant discounts to unpaid principal balance (“UPB”) and underlying property value. If actual results are different from our assumptions in determining the prices for such loans, particularly if the market value of the underlying property decreases significantly, we may incur a loss.

We may be materially and adversely affected by risks affecting borrowers in NPLs we acquire which may be geographically concentrated.

Our acquisition of NPLs are not subject to any geographic, diversification or concentration limitations. Accordingly, our portfolio of NPLs may be concentrated by geography, and borrower demographics, increasing the risk of loss to us if the particular concentration in our NPL portfolio is subject to greater risks or undergoing adverse developments. In addition, adverse conditions in the areas where the properties securing or otherwise underlying the NPLs are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our NPLs. A material decline in the demand for housing in these or other areas where we will own assets may materially and adversely affect us. Lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments in NPLs.

We rely on a third party with respect to our NPL acquisitions, and, if our relationship with either is terminated, we may not be able to replace that third party on favorable terms in a timely manner, or at all.

We use a third party to identify, evaluate and coordinates our NPL acquisitions as well as to manage our NPL portfolio, including loan modifications and conversion to REO. Maintaining our relationship with such third party is important for us to effectively run our NPL business. If our agreements with such third party terminates and we are unable to obtain a replacement, our ability to acquire, resolve or dispose of our NPLs could be adversely affected.

Our use of models in connection with the valuation of our NPLs subjects us to potential risks in the event that such models are inaccurate.

We rely on a third party’s proprietary models to evaluate NPLs to purchase. The models are based on historical trends. These trends may not be indicative of future results. Furthermore, the assumptions underlying the models may prove to be inaccurate, causing actual results to differ from results predicted by the models. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risk of loss.

The failure of third party servicers to service our NPL assets effectively would materially and adversely affect us.

We rely on third parties to service our NPLs, including managing collections. If the servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments. We also will rely on the servicers to provide all of our property management and renovation management services associated with the real properties we acquire upon conversion of NPLs to REO. The failure of our servicers to effectively service our NPLs and REO could negatively impact the value of our NPLs.


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Mortgage servicing is heavily regulated at the U.S. federal, state and local levels and our servicer’s failure to comply with applicable regulations could materially adversely affect our expenses and results of operations.

Mortgage servicers must comply with U.S. federal, state and local laws and regulations that regulate, among other things, the manner in which it services our NPL mortgage loans and manages our real property in accordance with the servicing agreement, including recent CFPB mortgage servicing regulations promulgated pursuant to the Dodd-Frank Act. These laws and regulations cover topics such as licensing; allowable fees and loan terms; permissible servicing and debt collection practices; limitations on forced-placed insurance; special consumer protections in connection with default and foreclosure; and protection of confidential, nonpublic consumer information. The volume of new or modified laws and regulations has increased in recent years, and states and individual cities and counties continue to enact laws that either restrict or impose additional obligations in connection with certain loan origination, acquisition and servicing activities in those cities and counties. The laws and regulations are complex and vary greatly among the states and localities, and in some cases, these laws are in conflict with each other or with U.S. federal law. Material changes in these rules and regulations could increase our expenses under the servicing agreement. From time to time, our mortgage servicers may be party to certain regulatory inquiries and proceedings, which, even if unrelated to the residential mortgage servicing operation, may result in adverse findings, fines, penalties or other assessments and may affect adversely its reputation. Our mortgage servicer’s failure to comply with applicable laws and regulations could adversely affect our expenses and results of operations. If we were to determine to change servicers, there is no assurance that we could find servicers that satisfy our requirements or with whom we could enter into agreements on satisfactory terms.

The supply of NPLs may decline over time as a result of higher credit standards for new loans and/or general economic improvement and the prices for NPLs may increase, which could materially and adversely affect our ability to grow this portfolio.

Following a result of the economic crisis in 2008, supply of NPLs available for sale increased significantly. However, in response to the economic crisis, lenders have increased their standards of credit-worthiness in originating new loans and fewer homeowners may go into distressed or non-performing status on their residential mortgage loans. In addition, the prices at which NPLs can be acquired may increase due to the entry of new participants into the distressed loan marketplace or a lower supply of NPLs in the marketplace. For these reasons, along with the general improvement in the economy, the supply of NPLs that we may acquire may decline over time, and such decline could materially and adversely affect our ability to grow this portfolio.

Risks Related to our Structure

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

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

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


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Termination of our Transition Services Agreement or the Administrative Services Agreement could materially increase our costs, which could adversely affect our financial condition and results of operations.

Pursuant to a Transition Services Agreement, we pay fees to Tricadia Holdings, L.P., an asset management holding company which we refer to as “Tricadia” for the services of Michael Barnes, our Executive Chairman, and for certain administrative and information technology services. A portion of the services that Tricadia provides to us are in turn provided to Tricadia by Mariner pursuant to an agreement that may be terminated by Tricadia or Mariner without our consent. In addition, pursuant to an Administrative Services Agreement, a subsidiary of Mariner provides certain back office services to us directly for a fee. If any of the Transition Services Agreement, Tricadia’s services agreement with Mariner or the Administrative Services Agreement is terminated, we would be required to make alternative arrangements for the performance of these services. We may not be able to obtain these services promptly or at reasonable rates or at all, and our costs of obtaining such services could materially increase, which could adversely affect our results of operations.

Some of our officers and directors currently or may in the future act as members, managers, officers, directors or employees of entities with conflicting business strategies.

Some of our officers and directors currently or may in the future act as members, managers, officers, directors or employees of entities with business strategies that may conflict with our business strategies. Michael Barnes, our Executive Chairman, is a founding partner and Co-Chief Investment Officer of Tricadia, and Executive Chairman and a member of the board of directors of TFP. Tricadia’s subsidiaries include, and Mr. Barnes is Co-Chief Investment officer of, companies that manage hedge funds, private equity funds and structured vehicles with business strategies that may compete with ours. Jonathan Ilany, our Chief Executive Officer, is a limited partner of Mariner, which is a stockholder of Tiptree and provides certain back office services to Tiptree. Julia Wyatt, our Chief Operating Officer, is the Chief Financial Officer of Tricadia and the Chief Operating Officer of TFP and is also a limited partner of Tricadia. Such positions may give rise to actual or potential conflicts of interest, which may not be resolved in a manner that is in the best interests of the Company or the best interests of its stockholders.

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

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

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

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

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

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

Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter under the Maryland Control Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely

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by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: one-tenth or more but less than one-third; one-third or more but less than a majority; or a majority or more of all voting power. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.

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

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

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

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

Risks Related to Regulatory and Legal Matters

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

We conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). Therefore, we must limit the types and nature of businesses in which we engage and assets that we acquire. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Assets that would generally be excluded from the term “investment securities,” include securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on certain exceptions from the definition of investment company set forth in the 1940 Act. Assets that generally would constitute “investment securities” include loans, debt securities, preference shares and subordinated notes issued by CLOs.

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

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


27




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

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

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

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

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

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

Due to the highly regulated nature of the residential mortgage industry, our mortgage subsidiaries are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, disclosures we must provide, the manner in which we conduct our mortgage business and the fees we may charge. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. There continue to be changes in, and new, state and federal laws and regulations that could increase costs and operational complexity of our mortgage businesses and impose significant penalties for violation.  A failure to comply with any of these existing or new laws or regulations could subject our mortgage businesses to lawsuits or governmental actions, which could result in the loss or suspension of our licenses in the applicable jurisdictions where such violations occur and/or monetary fines or changes in our mortgage operations.  Any of these outcomes could materially and adversely affect our mortgage businesses. New rules governing the content and timing of mortgage loan disclosures to borrowers, commonly known as TILA-RESPA Integrated Disclosures (“TRID”), issued by the Consumer Financial Protection Bureau (“CFPB”) became effective on October 3, 2015. While we believe our mortgage subsidiaries have taken steps to effectively implement TRID, the complexities and inter-related nature of the TRID rules could result in delays in loan closings and therefore lower loan volumes in our mortgage origination business until any implementation issues are resolved.

28




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

The final rules implementing the credit risk retention requirements of the Dodd-Frank Act become effective beginning on December 24, 2016 with respect to CLOs (the “Risk Retention Rules”). The Risk Retention Rules generally require sponsors of asset-backed securities transactions or their affiliates to retain not less than 5% of the credit risk of the assets collateralizing asset-backed securities for the life of the vehicle. Historically, Tiptree has invested in the subordinated notes of CLOs managed by Telos, in some cases in amounts greater than 5%, but from time to time subsequently sold the subordinated notes to fund new vehicles that establish warehouse credit facilities in anticipation of launching new CLOs. After the effective date of the Risk Retention Rules, the new mandatory risk retention requirement for CLOs may result in us having to maintain our investment in CLOs that we manage at 5% of the outstanding certificates for the life of the securities, reducing the availability of capital that would otherwise be available for other uses. The Risk Retention Rules generally prohibit hedging the credit risk that is required to be retained. While the impact of the Risk Retention Rules on the loan securitization market and the leveraged loan market generally are uncertain, the Risk Retention Rules may impact our returns in the business, and thus our ability or desire to manage CLOs in the future. We are exploring multiple alternatives for compliance with the Risk Retention Rules.
While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulatory actions taken by the CFPB may affect the sales practices related to these products and thereby potentially affect Fortegra’s business or the clients that it serves. In March 2015, the CFPB announced it is considering proposing rules under its unfair, deceptive and abusive acts and practices rulemaking authority relating to consumer installment loans, among other things. If and when implemented CFPB rules regarding consumer installment loans could adversely impact Fortegra’s volume of insurance products and services and cost structure. In addition, the CFPB’s enforcement actions and examinations have resulted in large refunds and civil penalties against financial institutions in connection with their marketing of payment protection and other products. Due to such regulatory actions, some lenders may reduce their sales and marketing of payment protection and other ancillary products, which may adversely affect Fortegra’s revenues.

The properties held by our Care subsidiary are regulated by state and federal laws regarding healthcare facilities. Luxury is subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, the Federal Trade Commission and various state agencies that license, audit and conduct examinations.

Unlike competitors that are banks, our mortgage businesses are subject to state licensing and operational requirements that result in substantial compliance costs.
Because we are not a depository institution, we do not benefit from a federal exemption to state mortgage banking, loan servicing or debt collection licensing and regulatory requirements. Our mortgage businesses must comply with state licensing requirements and varying compliance requirements in each of the states (and the District of Columbia) in which they do business. Future regulatory changes may increase our costs through stricter licensing laws, disclosure laws or increased fees or may impose conditions to licensing that we or our personnel are unable to meet. In addition, our mortgage businesses are subject to periodic examinations by state regulators, which can result in refunds to borrowers of certain fees earned by our mortgage businesses, and we may be required to pay substantial penalties imposed by state regulators due to compliance errors. Future state legislation and changes in existing regulation may significantly increase our mortgage businesses’ compliance costs or reduce the amount of ancillary fees, including late fees that we may charge to borrowers. This could make our business cost-prohibitive in the affected state or states and could materially affect our business, financial condition and results of operations.

29




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

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

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

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

Item 1B. Unresolved Staff Comments

None.
Item 2. Properties

Administrative Offices

Our principal executive offices are located at 780 Third Avenue, 21st Floor, New York, New York 10017. The table below outlines the Company’s leased properties as of December 31, 2015, all of which are used as administrative offices. All facilities are considered adequate and suitable for the Company’s current level of operations. We do not own any properties for administrative purposes.
Leased Properties
Location
Square Footage
Purpose
Segment Used In
Athens, GA
1,080
Office Space
Insurance
Beaverton, OR
11,364
Office Space
Insurance
Farmington Hills, MI
10,700
Fulfillment Center
Insurance
Jacksonville, FL
58,089
Office Space
Insurance
Jacksonville, FL
9,473
Office Space
Insurance
Marksville, LA
3,996
Office Space
Insurance

30




Leased Properties
Location
Square Footage
Purpose
Segment Used In
Novi, MI
17,335
Office Space
Insurance
Paducah, KY
2,500
Office Space
Insurance
Palm Desert, CA
6,340
Office Space
Insurance
Rose, LA
1,025
Office Space
Insurance
Boca Raton, FL
2,460
Office Space
Specialty Finance
Cedarhurst, NY
600
Office Space
Specialty Finance
East Hampton, NY           
580
Office Space
Specialty Finance
Garden City, NY                
2,900
Office Space
Specialty Finance
Greenwich, CT                 
115
Office Space
Specialty Finance
Los Angeles, CA               
3,050
Office Space
Specialty Finance
Melville, NY
2,518
Office Space
Specialty Finance
Montvale, NJ                    
1,797
Office Space
Specialty Finance
New York, NY
1,967
Office Space
Specialty Finance
Newport Beach, CA       
200
Office Space
Specialty Finance
Southfield, MI
5,874
Office Space
Specialty Finance
Stamford, CT
14,643
Office Space
Specialty Finance
Westport, CT                    
2,775
Office Space
Specialty Finance
White Plains, NY              
3,625
Office Space
Specialty Finance
Allentown, PA
3,203
Office Space
Specialty Finance
Blue Bell, PA
5,265
Office Space
Specialty Finance
Charlotte, NC
13,746
Office Space
Specialty Finance
Cincinnati, OH
2,033
Office Space
Specialty Finance
Franklin, TN
6,605
Office Space
Specialty Finance
Independence, OH
6,021
Office Space
Specialty Finance
Melville, NY
29,080
Office Space
Specialty Finance
Pittsburgh, PA
10,060
Office Space
Specialty Finance
Plano, TX
5,299
Office Space
Specialty Finance
New York, NY
2,750
Office Space
Asset Management
New York, NY
1,532
Office Space
Real Estate
New York, NY
7,693
Tiptree Corporate Offices
Corporate and Other
Philadelphia, PA
17,269
Office Space
Discontinued Operations


31




Real Estate Owned

The Company’s owned real estate as of December 31, 2015 is listed below. All of the owned real estate consists of properties owned by Care, except the Stamford, CT location, which is owned by Luxury.
Owned Properties
Location
Square Feet
Purpose
Segment Used In
Stamford, CT
3,500
Investment Property
Specialty Finance
Arlington, TX
128,486
Seniors Housing
Real Estate
Baldwinsville, NY
34,535
Seniors Housing
Real Estate
Bel Air, MD
28,392
Seniors Housing
Real Estate
Berryville, VA
28,708
Seniors Housing
Real Estate
Chesapeake, VA
31,225
Seniors Housing
Real Estate
Cockeysville, MD
12,316
Seniors Housing
Real Estate
Easley, SC
33,217
Seniors Housing
Real Estate
Fredericksburg, VA
16,322
Seniors Housing
Real Estate
Gaffney, SC
40,722
Seniors Housing
Real Estate
Geneva, NY
38,334
Seniors Housing
Real Estate
Glassboro, NJ
45,200
Seniors Housing
Real Estate
Hagerstown, MD
20,302
Seniors Housing
Real Estate
Harrisburg, PA
64,155
Seniors Housing
Real Estate
Milford, PA
49,170
Seniors Housing
Real Estate
Oak Ridge, TN
105,500
Seniors Housing
Real Estate
Port Royal, SC
34,950
Seniors Housing
Real Estate
Richmond, VA
19,600
Seniors Housing
Real Estate
Sewell, NJ
168,000
Seniors Housing
Real Estate
Stafford, VA
29,436
Seniors Housing
Real Estate
Summerville, SC
59,080
Seniors Housing
Real Estate
Tampa, FL
31,189
Seniors Housing
Real Estate
Weatherly, PA
48,829
Seniors Housing
Real Estate
Wheatfield, NY
198,604
Seniors Housing
Real Estate

Item 3. Legal Proceedings

Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's agents. While the court did not award sanctions, it did order Fortegra to subpoena certain records from its agents. Although Fortegra appealed the order on numerous grounds, the Kentucky Supreme Court ultimately denied the appeal in April 2014. Consequently, Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's agents. On January 29, 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which Fortegra has appealed. On July 8, 2015, the Kentucky Court of Appeals dismissed Fortegra’s appeal, on the grounds that the court lacked subject-matter jurisdiction. No trial or hearings are currently scheduled in this matter.

In management’s opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot reasonably estimate a range of loss.


32




Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position or results of operations.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

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

Market Information
Tiptree Financial’s Class A common stock has traded on the NASDAQ Capital Market under the ticker symbol “TIPT” since August 9, 2013. Prior to the Contribution Transactions, Care’s common stock was quoted on the OTCQX market under the ticker symbol “CVTR”.

Holders
As of December 31, 2015, there were 109 Class A common stockholders of record.

Stock Price and Dividends
The following table sets forth the high and low closing stock prices per share of our Class A common stock and the dividends declared and paid per share on our Class A common stock for the periods indicated.
2015
High Price
Low Price
Dividends
First Quarter
$
7.94

$
6.13

$
0.025

Second Quarter
$
7.59

$
6.26

$
0.025

Third Quarter
$
7.36

$
5.21

$
0.025

Fourth Quarter
$
7.25

$
5.93

$
0.025

 
 
 
 
2014
High Price
Low Price
Dividends
First Quarter
$
8.25

$
6.77

$

Second Quarter
$
10.18

$
7.29

$

Third Quarter
$
8.45

$
6.82

$

Fourth Quarter
$
8.40

$
7.21

$


Our Class B common stock is not listed nor traded on any stock exchange.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share purchase activity for the quarter ended December 31, 2015 was as follows:
Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs
October 1, 2015 to October 31, 2015: Open Market Purchases
Tiptree Financial
53,900

$
6.96

53,900

$
1,681,563

Michael Barnes
53,900

$
7.02

53,900

1,682,118

Total
107,800

$
6.99

107,800

$
3,363,681

 
 
 
 
 
 
November 1, 2015 to November 30, 2015: Open Market Purchases
Tiptree Financial
47,900

$
6.96

47,900

$
1,347,959

Michael Barnes
47,790

$
6.97

47,790

1,348,959

Total
95,690

$
6.97

95,690

$
2,696,918

 
 
 
 
 
 

33




Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs
December 1, 2015 to December 31, 2015: Open Market Purchases
Tiptree Financial
53,850

$
6.60

53,850

$
992,531

Michael Barnes
53,784

$
6.60

53,784

993,859

Total
107,634

$
6.60

107,634

$
1,986,390

(1)
On August 18, 2015, Tiptree Financial engaged a broker in connection with a new share repurchase program for the repurchase of up to $2.5 million of its outstanding Class A common stock. In addition, on the same date, Mr. Barnes entered into a Rule 10b5-1 plan pursuant to which he may, for his own account, purchase up to $2.5 million of Tiptree Financial’s outstanding Class A common stock. Repurchases by Tiptree Financial and purchases by Mr. Barnes will be made through a single broker and are anticipated to be allocated equally between Tiptree Financial and Mr. Barnes (or to Tiptree Financial in the case of trades that cannot be split evenly). The Company expects the share purchases to be made from time to time in the open market or through privately negotiated transactions, or otherwise, subject to applicable laws and regulations. Unless otherwise completed or terminated earlier, the repurchase program will expire on August 19, 2016.

Item 6. Selected Financial Data

As a smaller reporting company, we are not required to provide the information contained in this Item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to “Tiptree” or the “Company” mean Tiptree Operating Company, LLC (“Operating Company”) and its consolidated subsidiaries, together with the standalone net assets held by Tiptree Financial Inc. References to “Tiptree Financial” mean Tiptree Financial Inc.  Tiptree Financial is publicly traded and owns approximately 81% of Operating Company.

OVERVIEW

Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows:
Overview
Results of Operations
Non-GAAP Financial Measures
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Recently Adopted and Issued Accounting Standards

The Company currently has five reporting segments: insurance and insurance services, specialty finance, real estate, asset management, and corporate and other. See Note 5—Operating Segment Data, in the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following discussion is presented on both a consolidated and segment basis.

The Company has identified internal control deficiencies that in the aggregate resulted in material weaknesses as of December 31, 2015 that have not been fully remediated and tested. See “Item 9A. Controls and Procedures” below for more details.

Market Trends

Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions, consumer confidence, wage growth, business confidence, increased investment, GDP growth, home affordability, market volatility, interest rates and spreads, aging U.S. population demographics, and the following current trends and market conditions specific to our businesses.
A significant portion of our assets, including our CLO subordinated notes, are held at fair value and changes in fair value of these assets is reported quarterly as unrealized gains and losses in revenues. In 2015 we experienced $17.5 million of unrealized losses on our Telos 5 and Telos 6 CLO subordinated notes and related participations in management fees as we determined fair value to be a significant discount to their face amount at issuance in 2014.

34




During 2015, concerns about global growth prospects, liquidity, lower oil prices and the expectation of higher interest rates negatively affected credit markets. Beginning in the third quarter of 2015, we began to see signs of dislocation in the CLO market place. Secondary market broker bid/ask quotes on CLO subordinated notes widened at the end of the third quarter and widened even more by the end of the fourth quarter.
The dealer price quotes that we receive for our CLO subordinated notes are a function of the trading levels for similar securities observed by the dealers and the results of cash flow analysis that the dealers, buyers and sellers, perform to determine price along with seller-specific liquidity issues. The lower prices of CLO subordinated notes reflect expectations of higher default rates of the individual leveraged loans collateralizing the CLO. Leveraged loan price volatility has been driven primarily by default expectations in the energy, metals and mining sectors.
We expect increased volatility in the prices of leveraged loans and the valuation of CLO subordinated notes to continue throughout 2016.
Significant Events in the Year

On January 1, 2015, Fortegra exercised an option to acquire the remainder of ProtectCELL, which is now 100% owned by Fortegra.

On February 9, 2015, affiliates of Care acquired five seniors housing communities with affiliates of Royal for $29.3 million which are managed by Royal pursuant to a management agreement.

On March 30, 2015, Care completed the purchase of six seniors housing communities for $54.5 million. The properties are leased to Greenfield, who operate the properties.

In May 2015, the Company leveraged its $25.0 million to seed Telos Credit Opportunities Fund, L.P., a leveraged loan fund managed by the Company’s Telos subsidiary with an asset based secured credit facility of which $54.9 million was outstanding as of December 31, 2015.

During the second quarter, the Company sold its investments in the subordinated notes issued by Telos 2 and Telos 4 to partly fund the diversification of its principal investments and to recycle capital from existing CLOs into a warehouse facility with the objective of creating new CLOs to increase asset management fees. The sales generated net cash of $39.7 million and realized losses of $8.0 million.

On June 30, 2015, the Company completed the sale of its PFG subsidiary for proceeds to the Company of $142.8 million at closing and future payments over the next two years totaling approximately $7.3 million. The sale resulted in a pre-tax gain of approximately $27.2 million and an after tax gain of $15.6 million in 2015, which is classified as a gain on sale from discontinued operations. The Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for 2014 and 2015.

On July 1, 2015, the Company completed the acquisition of Reliance, a retail mortgage originator, for $7.5 million, 1,625,000 shares of Class A common stock, $2.8 million in working capital adjustments and an earn-out provision over 3 years of up to 2 million Tiptree Class A shares. The results of our mortgage business, including Reliance, are reported in our specialty finance segment.

During the second half of 2015, we contributed an aggregate of $45.0 million to a special purpose vehicle, Telos 7, which entered into a warehouse credit facility in anticipation of launching a new CLO, of which $119.5 million was outstanding as of December 31, 2015. Until a CLO is launched, results of Telos 7 are included in our corporate and other segment.
During 2015, the Company made an aggregate of $39.7 million principal investments in pools of NPLs. In the first quarter of 2016, the Company purchased an additional $8.0 million in NPLs, bringing the Company’s total investment in NPLs to $47.7 million as of the date of this report. Further details of the Company’s principal investments in NPLs are contained in our corporate and other segment.

In the fourth quarter of 2015, the Company and its subsidiaries purchased approximately 1.4 million common shares of RAIT, a publicly traded multi-strategy commercial real estate investment trust, for an aggregate of $3.5 million. In the first quarter of 2016, the Company and its subsidiaries purchased an additional approximately 5.2 million common shares of RAIT for an aggregate of $12.6 million.


35




During 2015, Tiptree Financial returned $7.3 million to Class A stockholders through dividends of $3.3 million and stock repurchases of $4.0 million. For further details, see “Part II—Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”

Summary Consolidated Statements of Operations
($ in thousands)
Year ended December 31,
 
2015
 
2014
Total revenues
$
440,116

 
$
80,313

 
 
 
 
Total expenses
445,666

 
99,050

 
 
 
 
Net (loss) income attributable to consolidated CLOs
(6,889
)
 
19,525

 
 
 
 
(Loss) income before taxes from continuing operations
(12,439
)
 
788

 
 
 
 
Less: provision for income taxes
1,377

 
4,141

 
 
 
 
Discontinued operations, net
22,618

 
7,937

 
 
 
 
Net income before non-controlling interests
8,802

 
4,584

 
 
 
 
Less: net income attributable to non-controlling interests
3,023

 
6,294

 
 
 
 
Net income (loss) available to common stockholders
$
5,779

 
$
(1,710
)

Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. The Company believes that consolidated EBITDA and Adjusted EBITDA on a consolidated basis and for each segment provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. The Company believes segment EBITDA and Adjusted EBITDA provides additional supplemental information to compare results among our segments. Beginning in 2016 the Company Adjusted EBITDA will also be used in determining incentive compensation for the Company’s executive officers. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP.

Summary Adjusted EBITDA(1)  
($ in thousands)
Year ended December 31,
 
2015
 
2014
Adjusted EBITDA from continuing operations of the Company
$
25,917

 
$
24,130

 
 
 
 
Adjusted EBITDA from discontinued operations of the Company
$
32,502

 
$
34,793

 
 
 
 
Total Adjusted EBITDA of the Company
$
58,419

 
$
58,923


(1) For further information relating to the Company’s Adjusted EBITDA, including a reconciliation to GAAP net income, see“—Non-GAAP Financial Measures” below.


36




Key Drivers of Results of Operations

The Company had a net loss before taxes from continuing operations of $12.4 million for the year ended December 31, 2015, which was a decrease of $13.2 million from 2014. The key drivers of pretax results from continuing operations were higher depreciation and amortization from new investments in real estate at Care, realized and unrealized losses on CLO subordinated note investments of $25.9 million, lower distributions received on CLO subordinated notes due to sales of CLO subordinated notes in the second quarter of 2015, and higher corporate expenses associated with our effort to improve our controls and financial reporting infrastructure offset in part by improved profitability from the addition of Fortegra, growth in specialty finance volumes and margins, and increased rental income in our real estate operations. In addition, in the twelve months ended December 31, 2014, there was a one-time gain of $7.9 million from the repayment of the Westside Loan, which impacted the year over year comparison.

A discussion of the changes in revenues, expenses and net income is presented below and in more detail in our segment analysis.

Revenues

For the year ended December 31, 2015, the Company reported revenues of $440.1 million, an increase of $359.8 million from the year ended December 31, 2014. The primary driver of the increase in revenues was the addition of Fortegra. Other key drivers were the improvement in volume and margins at our specialty finance segment, including from the addition of Reliance, increased rental income from our real estate segment, offset in part by the elimination of the one-time gain mentioned above from the prior year period, and the realized and unrealized losses on CLO subordinated note investments.

Expenses

For the year ended December 31, 2015, the Company had expenses of $445.7 million, an increase of $346.6 million from the year ended December 31, 2014. The primary driver of the increase in expenses was the addition of Fortegra. Other key drivers were higher payroll and commission expense due to higher volume overall in our specialty finance segment, including from the addition of Reliance, increased operating expenses and depreciation and amortization associated with our increased investments in our real estate segment, increases in corporate payroll and professional expenses to improve our reporting and controls infrastructure and separation payments of $6.5 million.

Adjusted EBITDA from Continuing Operations

For the year ended December 31, 2015, the Company reported Adjusted EBITDA from continuing operations of $25.9 million, an increase of $1.8 million from the year earlier. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our pretax income from continuing operations. The smaller decline versus that reported for pretax income from continuing operations was primarily driven by the elimination of the period over period changes attributable to increased depreciation and amortization at our real estate segment and the purchase accounting impacts at Fortegra.

Total Adjusted EBITDA

The Company reported total Adjusted EBITDA for the year ended December 31, 2015 of $58.4 million, a decrease of $0.5 million from the year ended December 31, 2014. The primary drivers of the decrease in this metric were the same factors that impacted Adjusted EBITDA from continuing operations combined with the positive impact of the gain on sale from our sale of PFG, partially offset by the loss of income from discontinued operations in the second half of the year.

Income Before Non-Controlling Interests

The Company reported net income before non-controlling interests of $8.8 million in the year ended December 31, 2015, an increase of $4.2 million from the year ended December 31, 2014. The primary drivers of the year-over-year difference in net income before non-controlling interests were the same factors which impacted the year-over-year change from pre-tax income from continuing operations, plus additional factors of the decrease in the provision for income taxes and the impact of the gain on sale and loss of income from discontinued operations due to our sale of PFG at the end of the second quarter.

Net Income/(Loss) Available to Class A Common Stockholders

The Company reported net income to common shareholders of $5.8 million in the year ended December 31, 2015, an increase of $7.5 million from the year ended December 31, 2014. The key drivers of net income were consistent with those that contributed to the differences in income before non-controlling interests, partially benefiting from the exchange of non-controlling interests for Tiptree Financial’s Class A shares during the year. As of December 31, 2015, the Class A common stockholders were entitled,

37




directly or indirectly, to approximately 81% of the net income of the Company, compared to approximately 77% as of December 31, 2014. For more information on the Company’s structure, see Note 1—Organization, in the accompanying consolidated financial statements.

Since we acquired Fortegra on December 4, 2014, the results of Fortegra are only reflected for approximately one month in our 2014 insurance and insurance services segment results. Since we acquired Reliance on July 1, 2015, the results of Reliance are only reflected for six months in our 2015 mortgage business results. The results of PFG, which was sold on June 30, 2015, are presented in discontinued operations for the first six months of 2015. Discussion of the changes in revenues, expenses and net income is presented below and in more detail, in our segment analysis.


38




RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Results - Year Ended December 31, 2015 and December 31, 2014
($ in thousands)
Years Ended December 31, 2015 and December 31, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Net realized and unrealized (losses) gains
$
(58
)
$
5

 
$
(178
)
$
244

 
$
(194
)
$
7,006

 
$

$

 
$
(1,743
)
$
(320
)
 
$
(2,173
)
$
6,935

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments


 
891

420

 


 


 


 
891

420

Interest income
5,113

196

 
8,336

3,611

 
95

1,529

 


 
6,386

9,509

 
19,930

14,845

Service and administrative fees
106,525

8,657

 


 


 


 


 
106,525

8,657

Ceding commissions
43,217

3,737

 


 


 


 


 
43,217

3,737

Earned premiums, net
166,265

12,827

 


 


 


 


 
166,265

12,827

Gain on sale of loans held for sale, net


 
33,849

7,154

 


 


 


 
33,849

7,154

Loan fee income


 
9,373

3,736

 


 


 


 
9,373

3,736

Rental revenue


 

52

 
43,065

19,695

 


 


 
43,065

19,747

Other income
6,642

753

 
2,728

6

 
3,162

1,051

 
6,524

278

 
118

167

 
19,174

2,255

Total revenues
327,704

26,175

 
54,999

15,223

 
46,128

29,281

 
6,524

278

 
4,761

9,356

 
440,116

80,313

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
6,135

637

 
3,558

1,530

 
6,796

4,111

 


 
7,002

6,263

 
23,491

12,541

Payroll and employee commissions
38,786

3,483

 
31,633

10,690

 
18,479

8,056

 
4,687

5,117

 
14,225

5,194

 
107,810

32,540

Commission expense
105,751

4,287

 


 


 


 


 
105,751

4,287

Member benefit claims
29,744

2,676

 


 


 


 


 
29,744

2,676

Net losses and loss adjustment expense
56,568

3,153

 


 


 


 


 
56,568

3,153

Depreciation and amortization
29,673

4,265

 
760

499

 
14,546

7,181

 


 
145


 
45,124

11,945

Other expenses
31,269

10,845

 
12,783

4,466

 
15,842

6,762

 
573

774

 
16,711

9,061

 
77,178

31,908

Total expenses
297,926

29,346

 
48,734

17,185

 
55,663

26,110

 
5,260

5,891

 
38,083

20,518

 
445,666

99,050

Net income attributable to consolidated CLOs


 


 


 
4,131

11,770

 
(11,020
)
7,755

 
(6,889
)
19,525

Pre-tax income (loss)
$
29,778

$
(3,171
)
 
$
6,265

$
(1,962
)
 
$
(9,535
)
$
3,171

 
$
5,395

$
6,157

 
$
(44,342
)
$
(3,407
)
 
$
(12,439
)
$
788

Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,377

4,141

Discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
22,618

7,937

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
8,802

$
4,584

Less: net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,023

6,294

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
5,779

$
(1,710
)

39




Segment Assets as of - December 31, 2015 and December 31, 2014
($ in thousands)
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Total
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Segment assets
$
931,073

$
767,914

 
$
208,840

$
79,147

 
$
235,636

$
179,822

 
$
2,451

$
2,871

 
$
394,416

$
67,261

 
$
1,772,416

$
1,097,015

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
728,812

1,978,094

Assets held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5,129,745

Total assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,501,228

$
8,204,854


Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. The Company believes that consolidated EBITDA and Adjusted EBITDA on a consolidated basis and for each segment provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. The Company believes segment EBITDA and Adjusted EBITDA provides additional supplemental information to compare results among our segments. Beginning in 2016 the Company Adjusted EBITDA will also be used in determining incentive compensation for the Company’s executive officers. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary segment EBITDA and Adjusted EBITDA for continuing operations for the year ended December 31, 2015 and December 31, 2014(1) 

($ in thousands)
Years Ended December 31, 2015 and December 31, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Segment EBITDA
$
65,586

$
1,731

 
$
10,583

$
67

 
$
11,807

$
14,463

 
$
5,395

$
6,157

 
$
(37,195
)
$
2,856

 
$
56,176

$
25,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
$
41,114

$
7,823

 
$
5,895

$
(1,463
)
 
$
6,590

$
10,352

 
$
5,395

$
6,157

 
$
(33,077
)
$
1,261

 
$
25,917

$
24,130


(1) For further information relating to the Company’s Adjusted EBITDA, including a reconciliation to GAAP net income, see“—Non-GAAP Financial Measures” below.

Insurance and Insurance Services segment - operating results for the year ended December 31, 2015

The Company’s insurance and insurance services segment is comprised of its wholly-owned Fortegra subsidiary, which was acquired in December 2014. Comparisons in this report to Fortegra’s prior year operating results refer to Fortegra’s unaudited financial information for the year ended December 31, 2014, without taking into account the effects of purchase price accounting adjustments giving effect to the push-down accounting treatment of the acquisition. These adjustments include setting deferred cost assets to a fair value of zero, modifying deferred revenue liabilities to their respective fair values, and recording a substantial intangible asset representing the value of the business acquired (“VOBA”). The application of push-down accounting creates a modest impact to net income, but significantly impacts individual assets, liabilities, revenues, and expenses. We have presented the year ended December 31, 2015 income statements on a pro forma basis to eliminate the impact of purchase price accounting adjustments. In addition, the purchase of the remaining 37.6% of ProtectCELL in January 2015 reduced the amount of net income attributable to non-controlling interests for the year ended December 31, 2015 and thus had a positive impact on net income.

40




The following table presents our insurance and insurance services segment results on a GAAP basis and a pro forma basis adjusted to eliminate the effects of purchase price accounting adjustments.
 
Year Ended December 31, 2015
($ in thousands)
Actual
 
Adjustments
 
Pro Forma
Revenues:
 
 
 
 
 
Earned premiums
$
166,265

 
$

 
$
166,265

Service and administrative fees
106,525

 
19,518

(1) 
126,043

Ceding commissions
43,217

 
3,410

(2) 
46,627

Interest income (a)
5,055

 

 
5,055

Financing interest income

 

 

Other Income
6,642

 

 
6,642

  Total revenues
327,704

 
22,928

 
350,632

Less:
 
 
 
 
 
Commission expense
105,751

 
45,166

(3) 
150,917

Member benefit claims
29,744

 

 
29,744

Net losses and loss adjustment expenses
56,568

 

 
56,568

Net revenues
135,641

 
(22,238
)
 
113,403

Expenses:
 
 
 
 
 
Interest expense
6,135

 

 
6,135

Payroll and employee commissions
38,786

 

 
38,786

Professional fees
7,141

 

 
7,141

Depreciation and amortization expenses
29,673

 
(19,320
)
(4) 
10,353

Other expenses
24,128

 
1,928

(5) 
26,056

Loss on note receivable

 

 

Total operating expenses
105,863

 
(17,392
)
 
88,471

Income before taxes from continuing operations
29,778

 
(4,846
)
 
24,932

Less: Provision for income taxes
10,863

 
(1,770
)
(6) 
9,093

Net Income from continuing operations before non-controlling interests
$
18,915

 
$
(3,076
)
 
$
15,839


(a) Includes realized gains and losses.

(1) Represents service fee revenues that would have been recognized had purchase accounting effects not been recorded.  Deferred service fee liabilities at the acquisition date were reduced to reflect the purchase accounting fair value.
(2) Represents ceding commission revenues that would have been recognized had purchase accounting effects not been recorded.  Deferred ceding commissions liabilities at the acquisition date were reduced to reflect the purchase accounting fair value.
(3) Represents additional commissions expense that would have been recorded without purchase accounting; the values of deferred commission assets were eliminated in purchase accounting.
(4) Represents the removal of net additional depreciation and amortization expense that would not have been recorded without purchase accounting; fixed assets and amortizing intangible assets were adjusted in purchase accounting based on fair value analyses.
(5) Represents additional premium tax and other acquisition expenses that would have been recorded without purchase accounting; values of deferred acquisition costs were eliminated in purchase accounting.
(6) Represents the removal of additional income tax expense resulting from the impact of recording purchase accounting. The recording of purchase accounting resulted in an overall positive impact to net income before income tax, and therefore, had the effect of increasing income tax expense.

Insurance and Insurance Services segment

Results of the Company’s PFG subsidiary, which had previously been presented in the insurance and insurance services segment have been reclassified as discontinued operations for 2014 and 2015. The Company’s PFG subsidiary was sold during the second quarter of 2015. Since Tiptree acquired Fortegra in December 2014, comparable prior year information is not included in or incorporated by reference in this report.

Results

Insurance and insurance services segment pre-tax income was $29.8 million in the year ended December 31, 2015, an increase

41




over the prior year operating results. The primary drivers of the improvement in year-over-year results was a reduction in total operating expenses, primarily in payroll and other operating expenses, partially offset by a reductions in revenues driven by competition in the warranty segment.

Revenues

Insurance and insurance services segment revenues are generated by the sale of the following products and services: credit protection, warranty, specialty products and other. Credit protection products include the following types of insurance: credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include cell phone warranty, furniture and appliance service contracts and auto service contracts. Specialty products are primarily non-standard auto rebate insurance such as tire/wheel or windshield coverage. Services and other revenues principally represent fees for insurance sales and business process outsourcing services, and interest for premium and mobile device plan financing offset by reductions in fee income, ceding commissions, and commissions expense due to recording the purchase accounting effect of VOBA related to insurance contracts. The net revenue impact of VOBA, which is additive to net revenue, is substantially offset by increased amortization expense recorded in depreciation and amortization expense.

42




The following table presents product revenue mix within the insurance and insurance services segment for the year ended December 31, 2015 without any adjustment for the effects of purchase price accounting.
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Year Ended December 31, 2015
 
 
  Credit Protection
 
  Warranty
 
  Specialty Products
 
  Services and Other (1)
 
Fortegra Total
Income:
 
 
 
 
 
 
 
 
 
 
Earned premiums
 
$
120,936

 
$
29,810

 
$
15,519

 
$

 
$
166,265

Service and administrative fees
 
35,380

 
59,802

 
4,719

 
6,624

 
106,525

Ceding commissions
 
46,601

 
26

 

 
(3,410
)
 
43,217

Interest income (2)
 
2,988

 

 

 
2,067

 
5,055

Other income
 
650

 
5,877

 
115

 

 
6,642

Total revenue
 
206,555


95,515


20,353


5,281


327,704

 
 
 
 
 
 
 
 
 
 
 
Income Adjustments:
 
 
 
 
 
 
 
 
 
 
Net losses and member benefit claims
 
27,199

 
46,373

 
12,581

 
159

 
86,312

Commissions
 
114,645

 
15,909

 
2,233

 
(27,036
)
 
105,751

Total income adjustments
 
141,844


62,282


14,814


(26,877
)

192,063

 
 
 
 
 
 
 
 
 
 
 
Net Revenues
 
$
64,711


$
33,233


$
5,539


$
32,158


$
135,641

 
 
 
 
 
 
 
 
 
 
 
(1) Services and Other include Consecta, Financial Services, Insurance Services, ImageWorks, VOBA and Other
(2) Includes net realized and unrealized gains (losses) on investments
 
 
 
 
 
 
 
 
 
 
 
For insurance and insurance services, the main components of revenue are service and administrative fees, ceding commissions and earned premiums, net. Net revenues, which is a non-GAAP financial measure, is shown as total revenue less commissions paid to brokers, member benefit claims and net loss and loss adjustment expenses. We use Net revenues as another means of understanding product contributions to our results. Year over year comparisons of total revenues are often impacted by clients’ choice as to whether to retain risk.

Net revenues were $135.6 million for the year ended December 31, 2015. After adjusting for the impact of purchase accounting, net revenues were $113.4 million, down slightly from 2014. While the net revenues for cell phone warranty contracts have been dampened by competitive pressures, slowing growth in that area has been more than offset by combined growth in the sale of credit life insurance, warranty and specialty insurance products in the auto sector and for other consumer durables.

Credit protection net revenues for the year ended December 31, 2015 were $64.7 million, higher than the previous year operating results. Cell phone warranty products for the year ended December 31, 2015 were $33.2 million, down approximately the same amount as credit protections net revenue were up from the prior year operating results. Improvement in specialty products helped close the gap in net revenues for the year ended December 31, 2015 due to the competitive pressures in the cellphone warranty business. Specialty products net revenue for the year ended December 31, 2015 was $5.5 million, up significantly from the prior year operating results. Credit protection products and specialty products continue to provide opportunities for growth through a combination of expanded product offerings, new clients and geographic expansion in the latter case.

Net revenues are net of commission paid to brokers. Commissions expense is incurred on most product lines, most of which are retrospective commissions paid to distributors and retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions and retention levels. Commission expense of $105.8 million for the year ended December 31, 2015, was driven by the increase in policies issued in the credit life and specialty auto warranty and insurance products. For the year ended December 31, 2015, commission expense adjusted for the impact of purchase accounting was $150.9 million, down meaningfully from the prior year as a result of lower ceding percentages.

There are two types of income adjustments for claims payments under insurance and warranty service contracts: member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in car club and warranty protection service contracts. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering claims for credit life and other insurance lines, such as non-standard auto.


43




Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.

Member benefits claims and net losses and loss adjustment expenses, combined were $86.3 million for the year ended December 31, 2015, with claims up year over year. The increase over the prior year was a function of growth in earned premiums in credit life and non-standard auto and motor club partially offset by lower claims in mobile devices.

Expenses

Operating expenses in the insurance and insurance services segment are composed of payroll and employee commissions, interest expense, professional fees, depreciation and amortization expenses and other expenses. Segment operating expenses in the year ended December 31, 2015 were $105.9 million, a meaningful increase from the previous year costs. The primary driver of the year over year increase in costs was attributable to higher depreciation and amortization expense as a result of the purchase accounting impact on the amortization of the fair value attributed to the insurance policies and contracts acquired of $19.3 million for the year ended December 31, 2015. The purchase accounting expense was partially offset by cost reduction efforts throughout 2015. Pro forma operating expenses of $88.5 million were down year over year as a result of the cost reductions efforts described above.

Payroll and employee commissions expense are the largest component of expenses and are composed of base salaries, employee commissions and accruals for employee paid time off and bonuses. Payroll and employee commission expense was $38.8 million for the year ended December 31, 2015, down from the prior year as a result of cost reduction efforts.

Professional fees and other expenses were $31.3 million for the year ended December 31, 2015, down substantially, also as a result of cost reduction efforts. Other expenses are primarily comprised of acquisition, advertising and event costs, bank and credit card processing fees, technology expenses, filing and licensing fees, premium taxes and office rent costs.

Depreciation and amortization expense of $29.7 million for the year ended December 31, 2015 related primarily to the amortization of the intangible assets acquired. The most significant of these expenses is the amortization of the fair value attributed to the insurance policies and contracts acquired, which had a value of $36.5 million as of the acquisition date and has a steep amortization curve. Amortization of this intangible asset was approximately $19.3 million for the year ended December 31, 2015.

For information relating to Fortegra’s debt and interest expenses, please refer to Note 17—Debt, of the accompanying financial statements.

Adjusted EBITDA

Insurance and insurance services segment adjusted EBITDA was $41.1 million for the year ended December 31, 2015. The key drivers of Adjusted EBITDA year over year growth was higher credit insurance and specialty products revenues and lower operating expenses, adjusted for the impact of purchase accounting effects, partially offset by lower warranty revenues driven by competition in the cell phone warranty business.
 
 
 
 
 
 
 
 
 
 
 
 

44




Specialty Finance segment - operating results for the year ended December 31, 2015 and December 31, 2014
 
 
 
 
 
 
 
 
 
Total
 
Siena
 
Mortgage Origination
 
Specialty Finance
 
Year Ended December 31,
 
Year Ended December 31,
 
Year Ended December 31,
($ in thousands)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Net realized and unrealized (losses) gains
$
(178
)
 
$

 
$

 
$
244

 
$
(178
)
 
$
244

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments

 

 
891

 
420

 
891

 
420

Interest income
5,718

 
2,566

 
2,618

 
1,045

 
8,336

 
3,611

Gain on sale of loans held for sale, net

 

 
33,849

 
7,154

 
33,849

 
7,154

Loan fee income
4,471

 
1,931

 
4,902

 
1,805

 
9,373

 
3,736

Rental revenue

 

 

 
52

 

 
52

Other income
68

 
6

 
2,660

 

 
2,728

 
6

Total revenue
10,079

 
4,503

 
44,920

 
10,720

 
54,999

 
15,223

 
`
 
 
 
 
 
 
 
 
 
 
Interest expense
1,092

 
497

 
2,466

 
1,033

 
3,558

 
1,530

Payroll and employee commissions
4,167

 
2,468

 
27,466

 
8,222

 
31,633

 
10,690

Depreciation and amortization expense
276

 
244

 
484

 
255

 
760

 
499

Other expenses
2,024

 
1,174

 
10,759

 
3,292

 
12,783

 
4,466

Total expense
7,559

 
4,383

 
41,175

 
12,802

 
48,734

 
17,185

Pre-tax income (loss)
$
2,520

 
$
120

 
$
3,745

 
$
(2,082
)
 
$
6,265

 
$
(1,962
)
Specialty Finance segment

The specialty finance segment is comprised of Siena, a commercial finance company, which is 62% owned by the Company and our mortgage origination business, which is conducted through two entities, Reliance, a mortgage originator, which is 100% owned as of July 1, 2015 and Luxury, a mortgage originator which is 67.5% owned by the Company.

Results

Specialty finance segment pre-tax income was $6.3 million for 2015, compared with a net loss of $2.0 million for 2014. The key drivers of the increase were higher loan volume, including the impact from the acquisition of Reliance.

Segment revenues were $55.0 million for 2015, compared with $15.2 million for 2014, an increase of $39.8 million or 262%. Segment expenses were $48.7 million in 2015, compared with $17.2 million in 2014, an increase of $31.5 million or 183%. Higher revenues more than offset higher expenses resulting in improving operating margins, driven by the scalability of our lending business.

Siena

Siena’s pre-tax net income was $2.5 million for 2015, compared with pre-tax net income of $120 thousand for 2014. The improvement in Siena’s results in 2015 were primarily the result of increased loan originations, higher utilization rates of facilities by borrowers and higher fee income. The combination produced average earning assets of $56.0 million for the year ended December 31, 2015, compared with $29.3 million for 2014, an increase of 91%. Siena’s improved results were primarily driven by higher interest income on the loans it makes to small and medium sized U.S. companies and increased fee income associated with the Company’s lending activities.

Revenues

Siena’s revenues totaled $10.1 million in 2015, compared with $4.5 million in 2014, an increase of $5.6 million or 124%. The increase in revenue year over year was primarily driven by the increase in lending volume, combined with higher loan fee income which was due to a higher number of loan waivers, and early termination and prepayment fees.

Expenses

Siena’s expenses were $7.6 million in 2015, compared with $4.4 million in 2014, an increase of $3.2 million or 73%. Siena’s expenses are comprised primarily of payroll and employee commissions, interest and other expenses. Growth in expenses was

45




at a slower pace than the increase in lending volume as a result of scale in the business, and was partially impacted by the relocation of the corporate headquarters to accommodate Siena’s growth.

Mortgage Business

The mortgage business’s pre-tax net income was $3.7 million for the year ended December 31, 2015, compared with a pre-tax net loss of $2.1 million for the same period in 2014, an increase of $5.8 million. The improvement in results was primarily driven by a combination of the acquisition of Reliance and increased loan volume at Luxury, which contributed to a year over year improvement in mortgage origination volume of 131% from $538.7 million for the year ended December 31, 2014 to $1,243.7 million for the current year period combined with a 81% improvement in revenue margins, measured in basis points, year over year, primarily as a result of the inclusion of Reliance’s higher margin Federal Housing Administration and the U.S. Department of Veterans Affairs (“FHA/VA”) and agency products.

Selected mortgage margin and product mix analysis for the year ended December 31, 2015 and December 31, 2014

The table below presents the funded volume, brokered volume and sold volume of mortgage loans originated in our mortgage origination businesses as well as the mortgage margin, as measured in basis points, and product mix of such mortgage loans for the year ended December 31, 2015 and 2014, respectively. “Volume” refers to the unpaid principal balance of the mortgage loan. The table is being provided to assist investors’ understanding of the key drivers of the year over year and quarter over quarter change in revenues and expenses.
($ in thousands)
Year Ended December 31,
 
2015
 
2014
Funded volume
$
1,137,108

 
$
445,648

Brokered volume
106,597

 
93,074

Total origination volume
$
1,243,705

 
$
538,722

 
 
 
 
Sold volume
$
1,119,438

 
$
446,802

 
 
 
 
(basis points of total origination volume)
 
 
 
Net revenue
321.0

 
177.1

Expenses
 
 
 
Commissions
82.3

 
61.2

Non commission payroll expenses
138.6

 
90.0

Total other expense
90.4

 
65.8

Total expenses
311.3


217.0

Pretax income (loss)
9.7

 
(39.9
)
 
 
 
 
Percent of volume
 
 
 
Agency
30.0
%
 
19.0
%
FHA/VA
19.8

 
2.4

Jumbo/other
35.2

 
49.6

  Total retail
85.0

 
71.0

Wholesale
6.4

 
11.6

Brokered
8.6

 
17.3

Total
100
%
 
100
%

Revenues

Total origination volume increased from $538.7 million in the year ended December 31, 2014 to $1,243.7 million in the year ended December 31, 2015. Funded volume increased at a faster pace than brokered volume primarily due to the fact that the substantial majority of Reliance’s volume is in this category.

Total sold volume in the current year was $1,119.4 million, up from $446.8 million a year earlier. The primary drivers of the increase in volume was the acquisition of Reliance and improvements in the mortgage industry overall, driven by a number of economic factors, including continued low interest rates, improving employment and increases in home prices.

Net revenue margins also improved in the year ended December 31, 2015. While margins generally improved industry wide, the primary driver of the improved margins was the higher mix of FHA/ VA and agency volumes as the result of the inclusion of Reliance.

46





Agency and FHA/VA originations have significantly higher net revenue margin than jumbo and brokered volumes. The improvement in product mix and margins were a significant driver of improved profitability in the mortgage business in addition to the increased volume as net revenue margins (in bps) grew faster than expenses.

Mortgage business revenues for the year ended December 31, 2015 were $44.9 million compared with $10.7 million for the year ended December 31, 2014, an increase of $34.2 million or 320%. The revenue improvement was driven primarily by a combination of the inclusion of Reliance’s originations, which resulted in both higher funding volume and improved margins given Reliance’s focus on FHA/VA and agency production, which are higher margin products compared to jumbo mortgages and improved volume at Luxury. Revenues earned by the mortgage business are comprised of gain on sale on mortgages originated and sold to investors, gains and losses on the mortgage pipeline of interest rate lock commitments and mortgage loans held for sale and the associated hedges, net interest income on mortgages held for sale, and fees associated with the mortgage origination business. Loan fees are primarily comprised loan application fees, appraisal fees, document preparation fees, broker fees earned and loan underwriting fees.

Expenses

Mortgage business expenses, for the year ended December 31, 2015 were $41.2 million compared with $12.8 million for the comparable period in 2014, an increase of $28.4 million or 222%. Expenses are composed of payroll and employee commissions and other expenses. As the mortgage origination business is highly scalable, expenses generally increase at a slower pace relative to increases in revenues. As a result, expenses were up less than the increases in funding volume and margins, driving improved profitability. The primary driver of higher expenses was a combination of the inclusion of Reliance, which recorded higher commissions and loan origination expense as the result of increased volumes.

Adjusted EBITDA

Specialty finance segment Adjusted EBITDA was $5.9 million for the year ended December 31, 2015 compared to a loss of $1.5 million in the prior year period. Improvement in Adjusted EBITDA was driven by the increased volume, higher revenue margins, and the benefit of scale and improved income margins as described above.

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