10-Q 1 tfi2017q1-10q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended March 31, 2017
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 Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ¨     No  x
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   ¨     No   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer x
Non-accelerated filer ¨                    Smaller reporting company ¨
Emerging growth company ¨
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 5, 2017, there were 35,003,004 shares, par value $0.001, of the registrant’s Class A common stock outstanding (including 4,985,543 shares of Class A common stock held by subsidiaries of the registrant) and 8,049,029 shares, par value $0.001, of the registrant’s Class B common stock outstanding.






Tiptree Inc.
Quarterly Report on Form 10-Q
March 31, 2017
Table of Contents
ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION

Forward-Looking Statements

Except for the historical information included and incorporated by reference in this Quarterly Report on Form 10-Q, 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in our other public filings with the SEC.
 
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.

Market and Industry Data

Certain market data and industry data included in this Quarterly Report on Form 10-Q were obtained from reports of governmental agencies and industry publications and surveys. We believe the data from third-party sources to be reliable based upon our management’s knowledge of the industry, but have not independently verified such data and as such, make no guarantees as to its accuracy, completeness or timeliness.

Note to Reader

In reading this Quarterly Report on Form 10-Q, references to:

“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 Investment Trust LLC.
“CLOs” means collateralized loan obligations.
“consolidated CLOs” means Telos 6 and Telos 7.
“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.
“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.
“Luxury” means Luxury Mortgage Corp.
“Mariner” means Mariner Investment Group 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.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.

F-1




“Siena” means Siena Capital Finance LLC.
“TAMCO” means Tiptree Asset Management Company, 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 Inc. (formerly known as 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.


F-2


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

Item 1. Financial Statements (Unaudited)
 
As of
 
March 31, 2017

December 31, 2016
Assets
(Unaudited)
 

Investments:
 
 
 
Available for sale securities, at fair value
$
152,529

 
$
146,171

Loans, at fair value
327,393

 
373,089

Loans at amortized cost, net
94,414

 
113,838

Equity securities, trading, at fair value
46,872

 
48,612

Real estate, net
329,014

 
309,423

Other investments
25,687

 
25,467

Total investments
975,909

 
1,016,600

Cash and cash equivalents
67,190

 
63,010

Restricted cash
27,470

 
24,472

Notes and accounts receivable, net
172,647

 
157,500

Reinsurance receivables
311,774

 
296,234

Deferred acquisition costs
121,712

 
126,608

Goodwill and intangible assets, net
177,591

 
178,245

Other assets
36,753

 
37,886

Assets of consolidated CLOs
575,918

 
989,495

Total assets
$
2,466,964

 
$
2,890,050


 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Debt, net
$
751,885

 
$
793,009

Unearned premiums
418,106

 
414,960

Policy liabilities and unpaid claims
104,623

 
103,391

Deferred revenue
51,337

 
52,254

Reinsurance payable
89,736

 
70,588

Other liabilities and accrued expenses
122,182

 
133,735

Liabilities of consolidated CLOs
535,257

 
931,969

Total liabilities
$
2,073,126

 
$
2,499,906

Commitments and contingencies (see Note 22)

 


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

 
$

Common stock - Class A: $0.001 par value, 200,000,000 shares authorized, 34,988,864 and 34,983,616 shares issued and outstanding, respectively
35

 
35

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 8,049,029 and 8,049,029 shares issued and outstanding, respectively
8

 
8

Additional paid-in capital
297,268

 
297,391

Accumulated other comprehensive income (loss), net of tax
1,062

 
555

Retained earnings
38,220

 
37,974

Class A common stock held by subsidiaries, 6,496,463 and 6,596,000 shares, respectively
(41,877
)
 
(42,524
)
Class B common stock held by subsidiaries, 8,049,029 and 8,049,029 shares, respectively
(8
)
 
(8
)
Total Tiptree Inc. stockholders’ equity
294,708

 
293,431

Non-controlling interests (including $76,160 and $76,077 attributable to Tiptree Financial Partners, L.P., respectively)
99,130

 
96,713

Total stockholders’ equity
393,838

 
390,144

Total liabilities and stockholders’ equity
$
2,466,964

 
$
2,890,050

See accompanying notes to consolidated financial statements.

F-3


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



Three Months Ended March 31,

2017
 
2016
Revenues:
 
 
 
Earned premiums, net
$
89,231

 
$
44,615

Service and administrative fees
23,776

 
30,310

Ceding commissions
2,271

 
10,703

Net investment income
4,505

 
2,405

Net realized and unrealized gains (losses)
16,212

 
18,760

Rental and related revenue
17,403

 
13,605

Other income
10,510

 
10,340

Total revenues
163,908

 
130,738


 
 
 
Expenses:
 
 
 
Policy and contract benefits
32,992

 
23,698

Commission expense
56,793

 
33,038

Employee compensation and benefits
36,109

 
30,608

Interest expense
8,779

 
6,480

Depreciation and amortization
7,809

 
8,377

Other expenses
22,833

 
24,667

Total expenses
165,315

 
126,868


 
 
 
Results of consolidated CLOs:
 
 
 
Income attributable to consolidated CLOs
8,867

 
7,677

Expenses attributable to consolidated CLOs
4,952

 
6,572

Net income (loss) attributable to consolidated CLOs
3,915

 
1,105

Income (loss) before taxes
2,508

 
4,975

Less: provision (benefit) for income taxes
1,166

 
(2,439
)
Net income (loss) before non-controlling interests
1,342

 
7,414

Less: net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
208

 
2,629

Less: net income (loss) attributable to non-controlling interests - Other
34

 
(770
)
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
$
1,100

 
$
5,555

 
 
 
 
Net income (loss) per Class A common share:
 
 
 
Basic earnings per share
$
0.04

 
$
0.16

Diluted earnings per share
$
0.03

 
$
0.16


 
 
 
Weighted average number of Class A common shares:
 
 
 
Basic
28,424,824

 
34,976,485

Diluted
36,749,956

 
35,084,505













See accompanying notes to consolidated financial statements.

F-4


TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)



 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net income (loss) before non-controlling interests
$
1,342

 
$
7,414

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
Unrealized holding gains (losses) arising during the period
678

 
2,659

Related tax (expense) benefit
(243
)
 
(938
)
Reclassification of (gains) losses included in net income
47

 
(57
)
Related tax expense (benefit)
(16
)
 
20

Unrealized gains (losses) on available-for-sale securities, net of tax
466

 
1,684

 
 
 
 
Interest rate swaps (cash flow hedges):
 
 
 
Unrealized gains (losses) on interest rate swaps
132

 
(136
)
Related tax (expense) benefit
(48
)
 
47

Reclassification of (gains) losses included in net income
144

 
(319
)
Related tax expense (benefit)
(45
)
 
112

Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
183

 
(296
)
 
 
 
 
Other comprehensive income (loss), net of tax
649

 
1,388

Comprehensive income (loss)
1,991

 
8,802

Less: Comprehensive income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
324

 
2,629

Less: Comprehensive income (loss) attributable to non-controlling interests - Other
60

 
(770
)
Comprehensive income (loss) attributable to Tiptree Inc. Class A common stockholders
$
1,607

 
$
6,943






















See accompanying notes to consolidated financial statements.

F-5


TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except shares)

 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Common Stock held by subsidiaries
 
Total stockholders’ equity to Tiptree Inc.
 
Non-controlling
interests - Tiptree Financial Partners, L.P.
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
Class A Shares
 
Class A Amount
 
Class B Shares
 
Class B Amount
 
 
 
 
Balance at December 31, 2016
34,983,616

 
8,049,029

 
$
35

 
$
8

 
$
297,391

 
$
555

 
$
37,974

 
(6,596,000
)
 
$
(42,524
)
 
(8,049,029
)
 
$
(8
)

$
293,431


$
76,077


$
20,636


$
390,144

Amortization of share-based incentive compensation

 

 

 

 
398

 

 

 

 

 

 

 
398

 

 

 
398

Vesting of share-based incentive compensation
5,248

 

 

 

 
(614
)
 

 

 
99,537

 
647

 

 

 
33

 

 

 
33

Other comprehensive income, net of tax

 

 

 

 

 
507

 

 

 

 

 

 
507

 
116

 
26

 
649

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
1,318

 
1,318

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(241
)
 
(286
)
 
(527
)
Net changes in non-controlling interest

 

 

 

 
93

 

 

 

 

 

 

 
93

 

 
1,242

 
1,335

Dividends declared

 

 

 

 

 

 
(854
)
 

 

 

 

 
(854
)
 

 

 
(854
)
Net income

 

 

 

 

 

 
1,100

 

 

 

 

 
1,100

 
208

 
34

 
1,342

Balance at March 31, 2017
34,988,864

 
8,049,029

 
$
35

 
$
8

 
$
297,268

 
$
1,062

 
$
38,220

 
(6,496,463
)
 
$
(41,877
)
 
(8,049,029
)
 
$
(8
)
 
$
294,708

 
$
76,160

 
$
22,970

 
$
393,838











See accompanying notes to consolidated financial statements.

F-6


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


 
Three months ended March 31,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss) available to common stockholders
$
1,100

 
$
5,555

Net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
208

 
2,629

Net income (loss) attributable to non-controlling interests - Other
34

 
(770
)
Net income (loss)
1,342

 
7,414

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net realized and unrealized (gains) losses
(16,212
)
 
(18,760
)
Net unrealized loss (gain) on interest rate swaps
(343
)
 
1,416

Change in fair value of contingent consideration
554

 
(161
)
Non cash compensation expense
1,798

 
388

Amortization/accretion of premiums and discounts
345

 
332

Depreciation and amortization expense
7,921

 
8,377

Provision for doubtful accounts
129

 
504

Amortization of deferred financing costs
665

 
445

Deferred tax expense (benefit)
1,166

 
(3,642
)
Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(347,601
)
 
(317,808
)
Proceeds from the sale of mortgage loans originated for sale
405,637

 
357,439

(Increase) decrease in notes and accounts receivable
(10,253
)
 
(28,750
)
(Increase) decrease in reinsurance receivables
(15,540
)
 
(20,928
)
(Increase) decrease in deferred acquisition costs
4,896

 
1,673

(Increase) decrease in other assets
4,027

 
(1,076
)
Increase (decrease) in unearned premiums
3,146

 
14,401

Increase (decrease) in policy liabilities and unpaid claims
1,232

 
9,264

Increase (decrease) in deferred revenue
(1,213
)
 
(4,696
)
Increase (decrease) in reinsurance payable
19,148

 
6,092

Increase (decrease) in other liabilities and accrued expenses
(10,347
)
 
(1,222
)
Operating activities from consolidated CLOs
(1,333
)
 
2,831

Net cash provided by (used in) operating activities
49,164

 
13,533

 
 
 
 
Investing Activities:
 
 
 
Purchases of investments
(43,024
)
 
(58,904
)
Proceeds from sales and maturities of investments
51,108

 
36,561

(Increase) decrease in loans owned, at amortized cost, net
19,393

 
(6,406
)
Purchases of real estate capital expenditures
(500
)
 
(519
)
Proceeds from the sale of real estate
2,028

 
207

Purchases of corporate fixed assets
(780
)
 
(155
)
Proceeds from notes receivable
13,682

 
7,951

Issuance of notes receivable
(18,701
)
 
(8,251
)
(Increase) decrease in restricted cash
(2,998
)
 
(3,173
)
Business and asset acquisitions, net of cash and deposits
(16,601
)
 
(52,729
)
Investing activities from consolidated CLOs
21,618

 
(481
)
Net cash provided by (used in) investing activities
25,225

 
(85,899
)
 
 
 
 
Financing Activities:
 
 
 
Non-controlling interest contributions
1,318

 
1,914

Non-controlling interest distributions
(527
)
 
(465
)
Change in non-controlling interest

 
41

Payment of debt issuance costs
(88
)
 
(433
)
Proceeds from borrowings and mortgage notes payable
384,933

 
406,357


F-7


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


 
Three months ended March 31,
 
2017
 
2016
Principal paydowns of borrowings and mortgage notes payable
(434,435
)
 
(360,112
)
Repurchases of common stock

 
(851
)
Financing activities from consolidated CLOs
(21,410
)
 
(260
)
Net cash provided by (used in) financing activities
(70,209
)
 
46,191

Net increase (decrease) in cash and cash equivalents
4,180

 
(26,175
)
Cash and cash equivalents – beginning of period
63,010

 
69,400

Cash and cash equivalents – end of period
$
67,190

 
$
43,225

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
$
2,968

 
$
1,667

Real estate acquired through asset acquisition
$
8,178

 
$

Intangible assets related to in-place leases acquired through asset acquisition
$
2,049

 
$

Assets of consolidated CLOs deconsolidated due to sale
$
405,263

 
$

Liabilities of consolidated CLOs deconsolidated due to sale
$
387,273

 
$

Debt assumed through asset acquisition
$
7,586

 
$






















See accompanying notes to consolidated financial statements.

F-8



TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



(1) Organization

Tiptree Inc. (formally known as Tiptree Financial Inc., together with its consolidated subsidiaries, collectively, Tiptree or the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree is a diversified holding company with four reporting segments: specialty insurance, asset management, senior living and specialty finance. Tiptree’s Class A common stock is traded on the NASDAQ Capital Market under the symbol “TIPT”. Tiptree’s primary asset is its ownership of Tiptree Financial Partners, L.P. (TFP) an intermediate holding company through which Tiptree operates its businesses. Tiptree reports a non-controlling interest representing the economic interest in TFP held by other limited partners of TFP.

As of January 1, 2016, Tiptree directly owned approximately 81% of TFP. The remaining 19% is reported as non-controlling interest. All of Tiptree’s Class B common stock is owned by TFP and is accounted for as treasury stock. Tiptree’s Class B common stock has voting but no economic rights. The limited partners of TFP (other than Tiptree itself) have the ability to exchange TFP partnership units for Tiptree Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit equal to the number of shares of Class B common stock outstanding. For every share of Class A common stock exchanged in this manner, a share of Class B common stock is canceled. The percentage of TFP owned by Tiptree may increase in the future to the extent TFP’s limited partners exchange their limited partnership units of TFP for Class A common stock of Tiptree. Changes in Tiptree’s ownership of TFP, as a result of such exchanges, will be accounted for as equity transactions, which increase Tiptree’s ownership of TFP and reduce non-controlling interest in TFP without changing total stockholders’ equity of Tiptree.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its controlled subsidiaries. The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2017.

Tiptree consolidates those entities in which it has an investment of 50% or more of voting rights or has control over significant operating, financial and investing decisions of the entity as well as variable interest entities (VIEs) in which Tiptree is determined to be the primary beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support from other parties.

A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Generally, Tiptree’s consolidated VIEs are entities which Tiptree is considered the primary beneficiary through its controlling financial interests.

Non-controlling interests on the Consolidated Statements of Operations represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Tiptree. Accounts and transactions between consolidated entities have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Management makes estimates and assumptions that include but are not limited to the determination of the following significant items:

Fair value of financial assets and liabilities, including, but not limited to, securities, loans and derivatives

F-9


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


Value of acquired assets and liabilities
Carrying value of goodwill and other intangibles, including estimated amortization period and useful lives
Reserves for unpaid losses and loss adjustment expenses, estimated future claims and losses, potential litigation and other claims
Valuation of contingent share issuances for compensation and purchase consideration, including estimates of number of shares and vesting schedules
Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service, administration fees, and loan origination fees and
Other matters that affect the reported amounts and disclosure of contingencies in the consolidated financial statements

Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.

Business Combination Accounting

The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other income in the Consolidated Statements of Operations. Acquisition and transaction costs are related primarily to completed and potential business combinations and include advisory, legal, accounting, valuation and other professional or consulting fees which are expensed as incurred.

In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a preliminary estimate of fair value, which may be adjusted during the measurement period based upon the results of a valuation study applicable to the business combination.

Acquisitions that do not meet the criteria for the acquisition method of accounting are accounted for as acquisitions of assets.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:

Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:

a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in nonactive markets;
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability;
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3 – Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data and assumptions that are used in pricing the asset or liability.

F-10


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



Fair Value Option

In addition to the financial instruments the Company is required to measure at fair value, the Company has elected to make an irrevocable election to utilize fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized and unrealized gains (losses) within the Consolidated Statements of Operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are reported separately in our Consolidated Balance Sheets from those instruments using another accounting method.

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments -Equity Method and Joint Ventures (Topic 323), which eliminates the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties that Are Under Common Control, which amends the consolidation guidance on how a reporting entity, that is the single decision maker of a VIE, evaluates whether it is the primary beneficiary of a VIE. This new guidance is effective for fiscal years beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. Reporting entities may choose to adopt the standard

F-11


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the recognition, measurement, presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial instruments. Among its provisions for public business entities, ASU 2016-01 eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires the separate presentation in other comprehensive income of the change in fair value of a liability due to instrument-specific credit risk for a liability for which the reporting entity has elected the fair value option, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) and clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for a limited number of provisions. The Company is currently evaluating the effect on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the effect on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarify the implementation guidance on principal versus net considerations. The effective date and transition requirements for this standard are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the effect on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. The Update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which  rescinds SEC paragraphs pursuant to the SEC Staff Announcement, “Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606,” and the SEC Staff Announcement, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity,” announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting.  The Company believes that that the adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides guidance on collectability, noncash consideration, and completed contracts at transition.  Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an

F-12


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the effect on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, including the adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the effect on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 does not change the qualitative assessment; however, it removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Therefore, as the FASB notes in the ASU’s Basis for Conclusions, the goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units. The Company is currently evaluating the effect on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The new guidance clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial

F-13


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


asset” and defines the term, “in-substance nonfinancial asset.” The ASU also adds guidance for partial sales of nonfinancial assets. The Company is currently evaluating the effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2017. The guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The Company is currently evaluating the effect on its consolidated financial statements.

(3) Acquisitions

Acquisitions during the three months ended March 31, 2017
Senior Living
Managed Properties
During the three months ended March 31, 2017, subsidiaries in our senior living business and their partners entered into an agreement to acquire and operate one senior housing community for total consideration of $14,960, of which $2,992 was financed by contributions from partners of our subsidiaries and the remainder was paid with cash on hand. Affiliates of the partners provide management services to the communities under management contracts.

The Company provided an advance to the partners of our subsidiary at closing for $1,036, which was part of their cash contribution for the property. Subsequent to the closing of this transaction, the property was financed with mortgage debt of $10,000. Our partner repaid the advance to the Company with proceeds from this financing, which was split based on the ownership of the property.

The primary reason for the Company’s acquisition of the senior housing community is to expand its real estate operations. For the period from acquisition until March 31, 2017, revenue and the net loss in the aggregate for the one managed property acquired were $1,016 and $363, respectively.

The following table summarizes the consideration paid and the amounts of the provisional determination, as described above, for the transaction completed during the three months ended March 31, 2017:
 
2017 Acquisitions
 
Senior Living
Consideration:
 
Cash
$
14,960

Fair value of total consideration
$
14,960

 
 
Acquisition costs
$
237

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Cash and cash equivalents
$
578

Real estate, net
12,450

Intangible assets, net
2,200

Other assets
37

 
 
Liabilities:
 
Deferred revenue
(296
)
Other liabilities and accrued expenses
(9
)
Total identifiable net assets assumed
$
14,960


F-14


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Senior Living
In-place lease
1.17
 
$
2,200



The amounts allocated to real estate, net and intangible assets are still provisional as we continue our review and also await the final appraisal report. Supplemental pro forma results of operations have not been presented for the above 2017 business acquisition as they are not material in relation to the Company’s reported results.

Acquisitions during the three months ended March 31, 2016
Senior Living
Managed Properties
During the three months ended March 31, 2016, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate two senior housing communities for total consideration of $55,074 (which includes deposits of $125 paid in the fourth quarter of 2015), of which $39,217 was financed through mortgage debt issued in connection with the acquisitions, $3,885 was financed by contributions from partners of our subsidiary, and the remainder was paid with cash on hand. Affiliates of the partners provide management services to the communities under management contracts.

The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations. For the period from acquisition until March 31, 2016, revenue and the net loss in the aggregate for the two managed properties acquired were $1,580 and $1,065, respectively.

The following table summarizes the consideration paid and the amounts of the final determination, as described above, for transactions completed during the three months ended March 31, 2016:
 
2016 Acquisitions
 
Senior Living
Consideration:
 
Cash
$
52,854

Non-cash non-controlling interests contributions
2,220

Fair value of total consideration
$
55,074

 
 
Acquisition costs
$
383

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Real estate, net
$
51,285

Intangible assets, net
3,940

Other assets
117

 
 
Liabilities:
 
Deferred revenue
(261
)
Other liabilities and accrued expenses
(7
)
Total identifiable net assets assumed
$
55,074



F-15


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Senior Living
In-place lease
1.30
 
$
3,940


Supplemental pro forma results of operations have not been presented for the above 2016 business acquisitions as they are not material in relation to the Company’s reported results.

(4) Operating Segment Data

The Company has four reportable operating segments, which are: (i) specialty insurance (formally known as insurance and insurance services), (ii) asset management, (iii) senior living (formally known as real estate), and (iv) specialty finance. The Company’s operating segments are organized in a manner that reflects how the chief operating decision maker, (CODM) views these strategic business units.

Each reportable segment’s income (loss) is reported before income taxes, discontinued operations and non-controlling interests.

Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.

In the fourth quarter of 2016, the Company made certain segment realignments in order to conform to the way the CODM internally evaluates segment performance. These realignments primarily consisted of the transfer of principal investments from corporate and other to the specialty insurance and asset management operating segments. As a result, corporate and other is no longer deemed to be an operating segment of the Company. For the three months ended March 31, 2016, $4,250 of pretax income (loss) previously reported in corporate and other was allocated $3,206 and $1,044 to the specialty insurance and asset management operating segments, respectively. For the three months ended March 31, 2016, inclusive of what was allocated to the asset management operating segment was $105 of net income (loss) attributable to consolidated CLOs. The Company has reclassified prior period amounts to provide visibility and comparability. This reclassification had no impact on the allocation of goodwill to reporting units. None of these changes impacts the Company’s previously reported consolidated net income or earnings per share.

Descriptions of each of the reportable segments are as follows:

Specialty Insurance operations are conducted through Fortegra Financial Corporation (Fortegra), an insurance holding company. Fortegra underwrites and provides specialty insurance products, primarily in the United States, and is a leading provider of credit insurance and asset protection products. Fortegra’s diverse range of products and services include products such as mobile protection, extended warranty and service, debt protection and credit insurance and select niche personal and commercial lines insurance. The specialty insurance segment also includes results related to our corporate loans and non-performing residential mortgage loans.
Asset Management operations are primarily conducted through Telos Asset Management LLC’s (Telos) management of CLOs. Telos is a subsidiary of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. Results include net income (loss) from consolidated CLOs.
Senior Living operations are conducted through Care Investment Trust LLC (Care), a wholly-owned subsidiary of Tiptree, which has a geographically diverse portfolio of seniors housing properties including senior apartments, assisted living, independent living, memory care and skilled nursing facilities in the U.S.
Specialty Finance operations are conducted through Siena Capital Finance LLC (Siena), which commenced operations in April 2013, and the Company’s mortgage businesses, which consist of Luxury, which was acquired in January 2014, and Reliance, which was acquired in July 2015. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs and FHA/VA. Siena’s business consists of structuring asset-based loan facilities across diversified industries.
The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following periods:
 
 
 
 
 
 
 
 
 
 
 
 

F-16


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Total revenue
$
121,846

 
$
2,973

 
$
17,719

 
$
21,453

 
$
(83
)
 
$
163,908

Total expense
117,045

 
1,307

 
19,249

 
20,985

 
6,729

 
165,315

Net income (loss) attributable to consolidated CLOs

 
3,915

 

 

 

 
3,915

Income (loss) before taxes
$
4,801

 
$
5,581

 
$
(1,530
)
 
$
468

 
$
(6,812
)
 
$
2,508

Less: provision for income taxes
 
 
 
 
 
 
 
 
 
 
1,166

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
1,342

Less: net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
242

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
1,100

 
Three Months Ended March 31, 2016
 
Specialty insurance(1)
 
Asset management(1)
 
Senior living
 
Specialty finance
 
Corporate and other(1)
 
Total
Total revenue
$
93,106

 
$
3,780

 
$
13,890

 
$
16,566

 
$
3,396

 
$
130,738

Total expense
80,903

 
2,181

 
17,749

 
17,549

 
8,486

 
126,868

Net income (loss) attributable to consolidated CLOs

 
1,105

 

 

 

 
1,105

Income (loss) before taxes
$
12,203

 
$
2,704

 
$
(3,859
)
 
$
(983
)
 
$
(5,090
)
 
$
4,975

Less: (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(2,439
)
Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
7,414

Less: net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
1,859

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
5,555

(1) Reclassified to conform to current period presentation
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents the segment assets for the following periods:
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Segment Assets as of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
1,291,744

 
$
19,226

 
$
346,449

 
$
209,538

 
$
24,089

 
$
1,891,046

Assets of consolidated CLOs

 
575,918

 

 

 

 
575,918

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,466,964

 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
1,268,152

 
$
17,427

 
$
323,169

 
$
271,795

 
$
20,012

 
$
1,900,555

Assets of consolidated CLOs

 
989,495

 

 

 

 
989,495

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,890,050



F-17


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


(5) Investments

Available for Sale Securities, at fair value

All of the Company’s investments in available for sale securities as of March 31, 2017 and December 31, 2016 are held by a subsidiary in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
 
As of March 31, 2017
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
28,315

 
$
61

 
$
(278
)
 
$
28,098

Obligations of state and political subdivisions
57,353

 
311

 
(417
)
 
57,247

Corporate securities
63,362

 
290

 
(326
)
 
63,326

Asset backed securities
1,407

 
7

 

 
1,414

Certificates of deposit
899

 

 

 
899

Equity securities
817

 
11

 
(15
)
 
813

Obligations of foreign governments
729

 
4

 
(1
)
 
732

Total
$
152,882

 
$
684

 
$
(1,037
)
 
$
152,529

 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
27,149

 
$
27

 
$
(377
)
 
$
26,799

Obligations of state and political subdivisions
57,425

 
107

 
(598
)
 
56,934

Corporate securities
58,769

 
204

 
(402
)
 
58,571

Asset backed securities
1,459

 
1

 

 
1,460

Certificates of deposit
895

 

 

 
895

Equity securities
818

 
3

 
(37
)
 
784

Obligations of foreign governments
733

 
3

 
(8
)
 
728

Total
$
147,248

 
$
345

 
$
(1,422
)
 
$
146,171



F-18


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


The following tables summarize the gross unrealized losses on available for sale securities in an unrealized loss position:
 
As of March 31, 2017
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
18,431

 
$
(277
)
 
95

 
$
14

 
$
(1
)
 
3

Obligations of state and political subdivisions
25,605

 
(416
)
 
118

 
1,661

 
(1
)
 
3

Corporate securities
26,640

 
(325
)
 
252

 
19

 
(1
)
 
1

Asset-backed securities

 

 

 

 

 

Equity securities
564

 
(13
)
 
4

 
19

 
(2
)
 
2

Obligations of foreign governments
155

 
(1
)
 
1

 

 

 

Total
$
71,395

 
$
(1,032
)
 
470

 
$
1,713

 
$
(5
)
 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
20,979

 
$
(376
)
 
115

 
$
16

 
$
(1
)
 
5

Obligations of state and political subdivisions
41,639

 
(597
)
 
170

 
1,334

 
(1
)
 
3

Corporate securities
29,856

 
(400
)
 
279

 
253

 
(2
)
 
3

Asset-backed securities
706

 

 
1

 

 

 

Equity securities
736

 
(35
)
 
5

 
19

 
(2
)
 
2

Obligations of foreign governments
338

 
(8
)
 
4

 

 

 

Total
$
94,254

 
$
(1,416
)
 
574

 
$
1,622

 
$
(6
)
 
13

The Company does not intend to sell the investments that were in an unrealized loss position at March 31, 2017, and management believes that it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. The unrealized losses were attributable to changes in interest rates and not credit-related issues. As of March 31, 2017 and March 31, 2016, based on the Company's review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the Company's analysis of the securities and its intent to hold the securities until recovery.

The amortized cost and fair values of investments in debt securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Excluded from this table are equity securities since they have no contractual maturity.
 
As of
 
March 31, 2017
 
December 31, 2016
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
27,242

 
$
27,224

 
$
22,846

 
$
22,833

Due after one year through five years
64,491

 
64,562

 
66,063

 
65,841

Due after five years through ten years
51,465

 
51,165

 
49,036

 
48,381

Due after ten years
7,460

 
7,350

 
7,026

 
6,872

Asset backed securities
1,407

 
1,415

 
1,459

 
1,460

Total
$
152,065

 
$
151,716

 
$
146,430

 
$
145,387



F-19


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company cannot remove invested assets from these accounts without prior approval of the contractual party or regulatory authority, as applicable. The following table presents the Company's restricted investments included in the Company's available for sale securities:
 
As of
 
March 31, 2017
 
December 31, 2016
Fair value of restricted investments for special deposits required by state insurance departments
$
10,024

 
$
10,111

Fair value of restricted investments in trust pursuant to reinsurance agreements
7,889

 
7,573

Total fair value of restricted investments
$
17,913

 
$
17,684


The following table presents additional information on the Company’s available for sale securities:
 
Three Months Ended March 31,
 
2017
 
2016
Purchases of available for sale securities
$
23,909

 
$
7,898

 
 
 
 
Proceeds from maturities, calls and prepayments of available for sale securities
$
4,223

 
$
9,535

 
 
 
 
Gains (losses) realized on maturities, calls and prepayments of available for sale securities
$
(3
)
 
$
57

 
 
 
 
Gross proceeds from sales of available for sale securities
$
13,494

 
$

 
 
 
 
Gains (losses) realized on sales of available for sale securities
$
(44
)
 
$


Investment in Loans

The following table presents the Company’s investments in loans, measured at fair value and amortized cost:
 
As of
 
March 31, 2017
 
December 31, 2016
Loans, at fair value
 
 
 
Corporate loans
$
173,076

 
$
175,558

Mortgage loans held for sale
79,867

 
121,439

Non-performing loans
73,281

 
74,923

Other loans receivable
1,169

 
1,169

Total loans, at fair value
$
327,393

 
$
373,089

 
 
 
 
Loans at amortized cost, net
 
 
 
Asset backed loans and other loans, net
95,609

 
115,033

Less: Allowance for loan losses
1,195

 
1,195

Total loans at amortized cost, net
$
94,414

 
$
113,838

 
 
 
 
Net deferred loan origination fees included in asset backed loans
$
4,789

 
$
5,244


Loans, at fair value

Corporate Loans

Corporate loans that have been pledged as collateral totaled $172,921 at March 31, 2017 and $175,365 at December 31, 2016. Corporate loans primarily include syndicated leveraged loans held by the Company, which consist of $173,076 and $175,558 in loans as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, the unpaid principal balance on these loans was $173,726 and $176,808, respectively.

F-20


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)



As of March 31, 2017 and December 31, 2016, the difference between fair value of the Corporate loans and the unpaid principal balance was $650 and $1,250, respectively.

Mortgage Loans Held for Sale

Mortgage loans held for sale that have been pledged as collateral totaled $76,189 at March 31, 2017 and $117,734 at December 31, 2016. As of March 31, 2017, the fair value of mortgage loans exceeded the unpaid principal balance of $76,739 by $3,128. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $66, respectively, as of March 31, 2017. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $66, respectively, as of December 31, 2016. The Company discontinues accruing interest on all loans that are 90 days or more past due.

Non-Performing Loans (NPLs)

Non-performing loans that have been pledged as collateral totaled $59,239 and $60,409 at March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, the Company’s investments included $73,281 and $74,923, respectively, of non-performing loans collateralized by real estate of which the unpaid principal balance was $107,040 and $113,892, respectively. As of March 31, 2017 and December 31, 2016, the difference between the fair value of the NPLs and the unpaid principal balance was $(33,758) and $(38,969), respectively. Included in real estate, net as of March 31, 2017 and December 31, 2016 are $14,250 and $13,366, respectively, of foreclosed residential real estate property resulting from the conversion of an NPL to REO.

Loans at amortized cost, net

Asset Backed Loans

Asset backed loans that have been pledged as collateral totaled $99,699 at March 31, 2017 and $119,558 at December 31, 2016. As of March 31, 2017 and December 31, 2016, the Company held $93,714 and $113,138, respectively, of loans receivable, net, attributable to a subsidiary in our specialty finance business. Our subsidiary structures asset-based loan facilities in the $1,000 to $25,000 range for small to mid-sized companies. Collateral for asset-backed loan receivables, as of March 31, 2017 and December 31, 2016, consisted primarily of inventory, equipment and accounts receivable. Management reviews collateral for these loans on at least a monthly basis or more frequently if a draw is requested and management has determined that no impairment existed as of March 31, 2017. As of March 31, 2017, there were no delinquencies in the portfolio and all loans were classified as performing.

Real Estate, net

The following table contains information regarding the Company’s investment in real estate as of the following periods:
 
As of March 31, 2017
 
Land
 
Buildings and equipment
 
Accumulated depreciation
 
Total
Managed properties
$
18,267

 
$
200,444

 
$
(12,848
)
 
$
205,863

Triple net lease properties
15,396

 
100,900

 
(7,395
)
 
108,901

Foreclosed residential real estate property

 
14,250

 

 
14,250

Total
$
33,663

 
$
315,594

 
$
(20,243
)
 
$
329,014

 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
Land
 
Buildings and equipment
 
Accumulated depreciation
 
Total
Managed properties
$
16,347

 
$
189,463

 
$
(11,212
)
 
$
194,598

Triple net lease properties
13,778

 
94,291

 
(6,610
)
 
101,459

Foreclosed residential real estate property

 
13,366

 

 
13,366

Total
$
30,125

 
$
297,120

 
$
(17,822
)
 
$
309,423


F-21


TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


For the three months ended March 31, 2017, the Company acquired one senior living facility accounted for as an asset acquisition, with $8,178 of real estate acquired, and $2,049 of identifiable intangible assets related to in-place leases which will be amortized over approximately 12 years. This one property is in addition to the one acquisition disclosed in Note—(3) Acquisitions, which was accounted for as business combinations.

Depreciation expense related to the Company’s real estate investments was $2,421 and $1,693 for the three months ended March 31, 2017 and 2016, respectively.

Future Minimum Rental Revenue

The following table presents the future minimum rental revenue under the noncancelable terms of all operating leases as of:
 
March 31, 2017
Remainder of 2017
$
6,967

2018
9,289

2019
9,289

2020
9,289

2021
9,289

Thereafter
42,016

Total
$
86,139


The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenues from residential leases were $13,659 and $10,880 for the three months ended March 31, 2017 and 2016, respectively.

Net Investment Income

Net investment income represents income primarily from the following sources:

Interest income, and dividends related to available for sale securities, at fair value;
Interest income related to loans, at fair value;
Dividend income from equity securities, trading, at fair value;
Rental and related revenue from real estate, net; and
Earnings from other investments.

The following table presents the components of net investment income related to our specialty insurance business recorded on the Consolidated Statements of Operations:
 
Three Months Ended March 31,
Net investment income
2017
 
2016
Available for sale securities, at fair value
$
818

 
$
847

Loans, at fair value
2,905

 
1,491

Equity securities, trading, at fair value
725

 
222

Real estate, net
175

 

Other investments
69

 
74

Total investment income
4,692

 
2,634

Less: investment expenses
187

 
229

Net investment income
$
4,505

 
$
2,405


F-22




The following table presents the components of net realized and unrealized gains (losses) recorded on the Consolidated Statements of Operations:
 
Three Months Ended March 31,
Net realized and unrealized gains (losses)
2017
 
2016
Net realized gains (losses)
10,878

 
6,271

Net unrealized gains (losses)
5,334

 
12,489

Net realized and unrealized gains (losses)
$
16,212

 
$
18,760


Included in net realized gains (losses) is net gain on sale of loans held for sale of $14,881 and $13,515 for the three months ended March 31, 2017 and 2016, respectively, related to our specialty finance business.

Net unrealized gains (losses) recognized during the three months ended March 31, 2017 and 2016 on equity securities, trading, at fair value still held at March 31, 2017 and 2016 was $(661) and $8,329, respectively.

(6) Notes and Accounts Receivable, net

The following table summarizes the total Notes and Accounts receivable, net:
 
As of
 
March 31, 2017
 
December 31, 2016
Notes receivable, net
$
29,669

 
$
24,775

Accounts and premiums receivable, net
57,760

 
45,041

Retrospective commissions receivable
61,011

 
59,175

Other receivables
24,207

 
28,509

Total
$
172,647

 
$
157,500


Notes Receivable, net

Specialty insurance

As of March 31, 2017 and December 31, 2016, the Company’s specialty insurance business held $25,807 and $20,913 in notes receivable, net, respectively. The majority of these notes totaling $25,613 and $20,615 at March 31, 2017 and December 31, 2016, respectively, consist of receivables from specialty insurance business’s premium financing program. At March 31, 2017 and December 31, 2016, respectively, a total of $194 and $298 was for notes receivable under its Pay us Later Program, which allows customers to finance the purchase of electronic mobile devices and/ or the costs of the protection programs on these devices. The Company has established an allowance for uncollectible amounts against its notes receivable of $1,496 and $1,444 as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, there were $1,929 and $2,188 in balances classified as 90 days plus past due, respectively.

Senior living

The Company’s senior living business owns a 75% interest in a managed property. In connection therewith, subsidiaries of the senior living business received notes from affiliates of the 25% partner. The cost basis of these notes at March 31, 2017 and December 31, 2016 was approximately $3,862 and $3,862, respectively. As of March 31, 2017, all of these notes were performing.

Accounts and premiums receivable, net, Retrospective commissions receivable and Other receivables
Accounts and premiums receivable, net, retrospective commissions receivable and other receivables are primarily trade receivables from the specialty insurance segment that are carried at their approximate fair value. The Company has established a valuation allowance against its accounts and premiums receivable of $195 and $225 as of March 31, 2017 and December 31, 2016, respectively.

F-23



TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2017
(in thousands, except share data)


(7) Reinsurance Receivables

The following table presents the effect of reinsurance on premiums written and earned by our specialty insurance business for the following periods:
 
Direct Amount
 
Ceded to Other Companies
 
Assumed from Other Companies
 
Net Amount
 
Percentage of Amount - Assumed to Net
For the Three Months ended March 31, 2017
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
12,296

 
$
5,730

 
$
437

 
$
7,003

 
6.2
%
Accident and health insurance   
25,170

 
16,306

 
710

 
9,574

 
7.4
%
Property and liability insurance
121,757

 
56,968

 
4,982

 
69,771

 
7.1
%
Total premiums written            
159,223

 
79,004

 
6,129

 
86,348

 
7.1
%
 
 
 
 
 
 
 
 
 
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Life insurance                  
15,188

 
7,412

 
493

 
8,269

 
6.0
%
Accident and health insurance   
27,369

 
19,058

 
775

 
9,086

 
8.5
%
Property and liability insurance
114,064

 
46,506

 
4,318

 
71,876

 
6.0
%
Total premiums earned
$
156,621

 
$
72,976

 
$
5,586

 
$
89,231

 
6.3
%
 
 
 
 
 
 
 
 
 
 
For the Three Months ended March 31, 2016
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance                  
$
13,262

 
$
6,530

 
$
639

 
$
7,371

 
8.7
%
Accident and health insurance   
26,008

 
17,522

 
779

 
9,265

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