10-Q 1 tfi2017q3-10q.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 September 30, 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   x No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 November 3, 2017, there were 29,805,453 shares, par value $0.001, of the registrant’s Class A common stock outstanding (excluding 5,197,551 shares of Class A common stock held by a subsidiary 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
September 30, 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 (terminated as of December 31, 2016).
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CLOs” means collateralized loan obligations.
“consolidated CLOs” means, for the 2017 period, Telos 6 and Telos 7 and for the 2016 period, Telos 5, 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.
“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.
“Siena” means Siena Capital Finance LLC.

F-1




“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.)
“Tricadia” means Tricadia Holdings, L.P.


F-2


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

Item 1. Financial Statements (Unaudited)
 
As of
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments:
 
 
 
Available for sale securities, at fair value
$
164,093

 
$
146,171

Loans, at fair value
323,122

 
373,089

Loans at amortized cost, net
150,596

 
113,838

Equity securities, trading, at fair value
28,106

 
48,612

Real estate, net
371,137

 
309,423

Other investments
27,191

 
25,467

Total investments
1,064,245

 
1,016,600

Cash and cash equivalents
111,751

 
63,010

Restricted cash
23,400

 
24,472

Notes and accounts receivable, net
178,726

 
157,500

Reinsurance receivables
333,023

 
296,234

Deferred acquisition costs
139,471

 
126,608

Goodwill and intangible assets, net
176,820

 
178,245

Other assets
48,544

 
37,886

Assets of consolidated CLOs
372,774

 
989,495

Total assets
$
2,448,754

 
$
2,890,050

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Debt, net
$
865,629

 
$
793,009

Unearned premiums
475,047

 
414,960

Policy liabilities and unpaid claims
110,928

 
103,391

Deferred revenue
53,930

 
52,254

Reinsurance payable
81,887

 
70,588

Other liabilities and accrued expenses
115,858

 
133,735

Liabilities of consolidated CLOs
354,337

 
931,969

Total liabilities
$
2,057,616

 
$
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, 35,003,004 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
296,476

 
297,391

Accumulated other comprehensive income (loss), net of tax
1,223

 
555

Retained earnings
28,913

 
37,974

Class A common stock held by subsidiaries, 5,209,523 and 6,596,000 shares, respectively
(34,664
)
 
(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
291,983

 
293,431

Non-controlling interests (including $74,074 and $76,077 attributable to Tiptree Financial Partners, L.P., respectively)
99,155

 
96,713

Total stockholders’ equity
391,138

 
390,144

Total liabilities and stockholders’ equity
$
2,448,754

 
$
2,890,050

See accompanying notes to condensed consolidated financial statements.

F-3


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



Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Earned premiums, net
$
96,073

 
$
47,609

 
$
272,781

 
$
138,516

Service and administrative fees
24,018

 
25,842

 
70,861

 
84,421

Ceding commissions
2,513

 
1,397

 
6,801

 
22,645

Net investment income
3,840

 
3,307

 
12,032

 
8,409

Net realized and unrealized gains (losses)
7,526

 
26,215

 
35,183

 
65,954

Rental and related revenue
19,170

 
15,371

 
54,819

 
43,389

Other income
11,379

 
12,419

 
33,820

 
31,725

Total revenues
164,519

 
132,160

 
486,297

 
395,059


 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Policy and contract benefits
31,570

 
25,881

 
94,364

 
72,436

Commission expense
63,066

 
24,032

 
176,405

 
91,906

Employee compensation and benefits
36,596

 
38,767

 
109,437

 
102,175

Interest expense
10,361

 
7,839

 
28,444

 
20,770

Depreciation and amortization
7,775

 
6,437

 
23,781

 
21,899

Other expenses
23,164

 
21,686

 
73,380

 
68,351

Total expenses
172,532

 
124,642

 
505,811

 
377,537


 
 
 
 
 
 
 
Results of consolidated CLOs:
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
7,216

 
12,556

 
24,024

 
34,713

Expenses attributable to consolidated CLOs
4,633

 
8,524

 
14,631

 
24,664

Net income (loss) attributable to consolidated CLOs
2,583

 
4,032

 
9,393

 
10,049

Income (loss) before taxes
(5,430
)
 
11,550

 
(10,121
)
 
27,571

Less: provision (benefit) for income taxes
(2,052
)
 
3,712

 
(2,761
)
 
5,298

Net income (loss) before non-controlling interests
(3,378
)
 
7,838

 
(7,360
)
 
22,273

Less: net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
(595
)
 
1,362

 
(1,432
)
 
4,660

Less: net income (loss) attributable to non-controlling interests - Other
331

 
571

 
529

 
20

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
$
(3,114
)
 
$
5,905

 
$
(6,457
)
 
$
17,593

 
 
 
 
 
 
 
 
Net income (loss) per Class A common share:
 
 
 
 
 
 
 
Basic earnings per share
$
(0.11
)
 
$
0.20

 
$
(0.22
)
 
$
0.53



 

 
 
 
 
Diluted earnings per share
$
(0.11
)
 
$
0.19

 
$
(0.22
)
 
$
0.53


 
 
 
 
 
 
 
Weighted average number of Class A common shares:
 
 
 
 
 
 
 
Basic
29,455,462

 
29,143,470

 
28,908,195

 
32,845,124

Diluted
29,455,462

 
37,230,650

 
28,908,195

 
32,912,516

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.030

 
$
0.025

 
$
0.090

 
$
0.075




See accompanying notes to condensed consolidated financial statements.

F-4


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



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss) before non-controlling interests
$
(3,378
)
 
$
7,838

 
$
(7,360
)
 
$
22,273

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
355

 
(553
)
 
1,800

 
3,779

Related tax (expense) benefit
(124
)
 
198

 
(635
)
 
(1,331
)
Reclassification of (gains) losses included in net income
(394
)
 
(960
)
 
(367
)
 
(1,100
)
Related tax expense (benefit)
138

 
336

 
129

 
385

Unrealized gains (losses) on available-for-sale securities, net of tax
(25
)
 
(979
)
 
927

 
1,733

 
 
 
 
 
 
 
 
Interest rate swaps (cash flow hedges):
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
(33
)
 
156

 
(411
)
 
(515
)
Related tax (expense) benefit
19

 
(46
)
 
115

 
158

Reclassification of (gains) losses included in net income
(25
)
 
172

 
212

 
(56
)
Related tax expense (benefit)
8

 
(54
)
 
(69
)
 
30

Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
(31
)
 
228

 
(153
)
 
(383
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(56
)
 
(751
)
 
774

 
1,350

Comprehensive income (loss)
(3,434
)
 
7,087

 
(6,586
)
 
23,623

Less: Comprehensive income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
(620
)
 
1,214

 
(1,278
)
 
4,897

Less: Comprehensive income (loss) attributable to non-controlling interests - Other
409

 
604

 
481

 
(9
)
Comprehensive income (loss) attributable to Tiptree Inc. Class A common stockholders
$
(3,223
)
 
$
5,269

 
$
(5,789
)
 
$
18,735






















See accompanying notes to condensed consolidated financial statements.

F-5


TIPTREE INC. AND SUBSIDIARIES
Condensed 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, 2015
34,899,833

 
8,049,029

 
$
35

 
$
8

 
$
297,063

 
$
(111
)
 
$
15,845

 

 
$

 

 
$

 
$
312,840

 
$
69,278

 
$
15,576

 
$
397,694

Stock-based compensation to directors and employees
189,896

 

 

 

 
1,810

 

 

 

 

 

 

 
1,810

 

 

 
1,810

Shares issued to settle
contingent consideration
72,868

 

 

 

 
377

 
 
 

 

 

 

 

 
377

 

 

 
377

Other comprehensive income, net of tax

 

 

 

 

 
1,142

 

 

 

 

 

 
1,142

 
237

 
(29
)
 
1,350

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
6,163

 
6,163

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(603
)
 
(1,456
)
 
(2,059
)
Shares purchased under stock purchase plan
(215,358
)
 

 

 

 
(1,230
)
 

 

 

 

 

 

 
(1,230
)
 

 

 
(1,230
)
Shares acquired by subsidiaries

 

 

 

 

 

 

 
(6,596,000
)
 
(42,524
)
 
(8,049,029
)
 
(8
)
 
(42,532
)
 

 

 
(42,532
)
Net changes in non-controlling interest

 

 

 

 
(746
)
 

 

 

 

 

 

 
(746
)
 
1,058

 
(335
)
 
(23
)
Dividends declared

 

 

 

 

 

 
(2,482
)
 

 

 

 

 
(2,482
)
 

 

 
(2,482
)
Net income

 

 

 

 

 

 
17,593

 

 

 

 

 
17,593

 
4,660

 
20

 
22,273

Balance at September 30, 2016
34,947,239

 
8,049,029

 
$
35

 
$
8

 
$
297,274

 
$
1,031

 
$
30,956

 
(6,596,000
)
 
$
(42,524
)
 
(8,049,029
)
 
$
(8
)
 
$
286,772

 
$
74,630

 
$
19,939

 
$
381,341


See accompanying notes to condensed consolidated financial statements.


F-6


TIPTREE INC. AND SUBSIDIARIES
Condensed 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

 

 

 

 
1,541

 

 

 

 

 

 

 
1,541

 

 
536

 
2,077

Vesting of share-based incentive compensation
19,388

 

 

 

 
(588
)
 

 

 
119,511

 
775

 

 

 
187

 

 

 
187

Shares issued to settle contingent consideration

 

 

 

 
(76
)
 

 

 
756,046

 
4,914

 

 

 
4,838

 

 

 
4,838

Issuance of common stock for cash upon exercise of stock options

 

 

 

 
(1,371
)
 

 

 
1,510,920

 
9,471

 

 

 
8,100

 

 

 
8,100

Other comprehensive income, net of tax

 

 

 

 

 
668

 

 

 

 

 

 
668

 
154

 
(48
)
 
774

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
2,464

 
2,464

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(725
)
 
(1,676
)
 
(2,401
)
Shares acquired by subsidiaries

 

 

 

 

 

 

 
(1,000,000
)
 
(7,300
)
 

 

 
(7,300
)
 

 

 
(7,300
)
Net changes in non-controlling interest

 

 

 

 
(421
)
 

 

 

 

 

 

 
(421
)
 

 
2,640

 
2,219

Dividends declared

 

 

 

 

 

 
(2,604
)
 

 

 

 

 
(2,604
)
 

 

 
(2,604
)
Net income

 

 

 

 

 

 
(6,457
)
 

 

 

 

 
(6,457
)
 
(1,432
)
 
529

 
(7,360
)
Balance at September 30, 2017
35,003,004

 
8,049,029

 
$
35

 
$
8

 
$
296,476

 
$
1,223

 
$
28,913

 
(5,209,523
)
 
$
(34,664
)
 
(8,049,029
)
 
$
(8
)
 
$
291,983

 
$
74,074

 
$
25,081

 
$
391,138


See accompanying notes to condensed consolidated financial statements.

F-7



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


 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss) available to common stockholders
$
(6,457
)
 
$
17,593

Net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
(1,432
)
 
4,660

Net income (loss) attributable to non-controlling interests - Other
529

 
20

Net income (loss)
(7,360
)
 
22,273

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net realized and unrealized (gains) losses
(35,183
)
 
(65,954
)
Net unrealized loss (gain) on interest rate swaps
(67
)
 
1,233

Change in fair value of contingent consideration
3,192

 
(262
)
Non cash compensation expense
4,275

 
1,696

Amortization/accretion of premiums and discounts
971

 
1,094

Depreciation and amortization expense
24,120

 
21,899

Provision for doubtful accounts
967

 
1,321

Amortization of deferred financing costs
2,178

 
1,326

Deferred tax expense (benefit)
(2,371
)
 
(327
)
Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(1,151,150
)
 
(1,258,931
)
Proceeds from the sale of mortgage loans originated for sale
1,205,868

 
1,259,091

(Increase) decrease in notes and accounts receivable
(26,262
)
 
(16,964
)
(Increase) decrease in reinsurance receivables
(33,312
)
 
(28,237
)
(Increase) decrease in deferred acquisition costs
(12,863
)
 
(2,292
)
(Increase) decrease in other assets
(8,205
)
 
(2,223
)
Increase (decrease) in unearned premiums
59,481

 
22,934

Increase (decrease) in policy liabilities and unpaid claims
4,666

 
21,250

Increase (decrease) in deferred revenue
1,267

 
(6,810
)
Increase (decrease) in reinsurance payable
11,299

 
(11,772
)
Increase (decrease) in other liabilities and accrued expenses
(14,297
)
 
12,499

Operating activities from consolidated CLOs
(2,684
)
 
(3,505
)
Net cash provided by (used in) operating activities
24,530

 
(30,661
)
 
 
 
 
Investing Activities:
 
 
 
Purchases of investments
(147,764
)
 
(178,599
)
Proceeds from sales and maturities of investments
201,754

 
159,773

(Increase) decrease in loans owned, at amortized cost, net
(37,166
)
 
(44,640
)
Purchases of real estate capital expenditures
(463
)
 
(4,372
)
Proceeds from the sale of real estate
11,396

 
2,526

Purchases of corporate fixed assets
(1,616
)
 
(991
)
Proceeds from the sale of subsidiaries (1)
4,846

 

Proceeds from notes receivable
40,273

 
25,193

Issuance of notes receivable
(35,109
)
 
(32,137
)
(Increase) decrease in restricted cash
1,072

 
(3,315
)
Business and asset acquisitions, net of cash and deposits
(75,489
)
 
(81,183
)
Investing activities from consolidated CLOs
224,107

 
(96,834
)
Net cash provided by (used in) investing activities
185,841

 
(254,579
)
 
 
 
 
Financing Activities:
 
 
 
Dividends paid
(2,604
)
 
(2,482
)
Non-controlling interest contributions
2,464

 
3,050

Non-controlling interest distributions
(1,657
)
 
(2,059
)
Payment of debt issuance costs
(1,738
)
 
(2,508
)

F-8


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


 
Nine Months Ended September 30,
 
2017
 
2016
Proceeds from borrowings and mortgage notes payable
1,297,203

 
1,477,446

Principal paydowns of borrowings and mortgage notes payable
(1,232,705
)
 
(1,368,585
)
Proceeds from the exercise of options for common stock
8,100

 

Repurchases of common stock
(7,300
)
 
(43,754
)
Financing activities from consolidated CLOs
(223,393
)
 
220,727

Net cash provided by (used in) financing activities
(161,630
)
 
281,835

Net increase (decrease) in cash and cash equivalents
48,741

 
(3,405
)
Cash and cash equivalents – beginning of period
63,010

 
69,400

Cash and cash equivalents – end of period
$
111,751

 
$
65,995

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
$
9,793

 
$
10,288

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 and redemption
$
407,323

 
$

Liabilities of consolidated CLOs deconsolidated due to sale and redemption
$
389,333

 
$

Debt assumed through asset acquisition
$
7,586

 
$

Settlement of contingent consideration payable with Class A common stock
$
4,838

 
$

(1) Represents the final payment received for the sale of Philadelphia Financial Group in 2015.





















See accompanying notes to condensed consolidated financial statements.

F-9



TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 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 the same voting rights as the Class A common stock 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 condensed 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 subsidiaries. The condensed consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited condensed 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 and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2017.

As a result of changes in presentation made in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations. The primary difference in the presentation of the condensed consolidated financial statements from the prior year is the aggregation of investments on the condensed consolidated balance sheets and the summation of the net investment income of our specialty insurance business in the condensed consolidated statements of operations. The condensed consolidated cash flow statement has also been conformed to this new presentation. In addition certain immaterial balances have been combined in the condensed consolidated balance sheet and condensed consolidated statement of operations.

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.


F-10


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


Non-controlling interests on the condensed consolidated balance sheets 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 the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed 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
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 condensed 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 expense in the condensed consolidated statements of operations. Acquisition and transaction costs 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, primarily due to the results of valuation studies 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

F-11


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


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.

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 condensed 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 condensed 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 condensed 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 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 condensed 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 condensed 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 condensed consolidated financial statements.

F-12


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



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 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 condensed 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 condensed 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 condensed 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 condensed 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 condensed 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

F-13


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


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 condensed 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 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 condensed 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 condensed 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 condensed 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 condensed 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

F-14


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


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 condensed 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 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 condensed 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 condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provided clarity as to what changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for the Company for interim and annual periods beginning after December 15, 2017, with early adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company will consider the impact that this standard may have on future stock-based payment award modifications should they occur.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the guidance on hedge accounting. The amendment will make more financial and nonfinancial hedging strategies eligible for hedge accounting and amend the presentation and disclosure requirements. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 can be adopted immediately in any interim or annual period. The mandatory effective date for calendar year-end public companies is January 1, 2019. The Company is currently evaluating the effect on its condensed consolidated financial statements.
(3) Acquisitions

Acquisitions during the nine months ended September 30, 2017
Senior Living
Managed Properties
During the nine months ended September 30, 2017, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate two senior living communities for total consideration of $25,999, of which $7,000 was financed through mortgage debt issued in connection with one of the acquisitions, $4,096 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 of one of these transactions 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 acquisitions of the senior living communities are to expand its real estate operations. For the period from acquisition until September 30, 2017, revenue and the net loss for the two properties acquired were $4,398 and $1,941, respectively.


F-15


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)



The following table summarizes the consideration paid and the amounts of the final determination, as described above, for the transactions completed during the nine months ended September 30, 2017:
 
2017 Acquisitions
 
Senior living
Consideration:
 
Cash
$
25,999

Fair value of total consideration
$
25,999

 
 
Acquisition costs
$
288

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Cash and cash equivalents
$
717

Real estate, net
21,800

Intangible assets, net
3,850

Other assets
76

 
 
Liabilities:
 
Deferred revenue
(409
)
Other liabilities and accrued expenses
(35
)
Total identifiable net assets assumed
$
25,999


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
1.38
 
$
3,850


Supplemental pro forma results of operations have not been presented for the above 2017 business acquisitions as they are not material in relation to the Company’s reported results.

Acquisitions during the nine months ended September 30, 2016
Senior Living
Managed Properties
During the nine months ended September 30, 2016, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate three senior living communities for total consideration of $84,605 (which includes deposits of $125 paid in the fourth quarter of 2015), of which $59,817 was financed through mortgage debt issued in connection with the acquisitions, $4,778 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 living communities is to expand its real estate operations. For the period from acquisition until September 30, 2016, revenue and the net loss for the three managed properties acquired were $7,247 and $1,899, respectively.


F-16


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table summarizes the consideration paid and the amounts of the final determination, as described above, for transactions completed during the nine months ended September 30, 2016:
 
2016 Acquisitions
 
Senior living
Consideration:
 
Cash
$
81,492

Non-cash non-controlling interests contributions
3,113

Fair value of total consideration
$
84,605

 
 
Acquisition costs
$
612

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Cash and cash equivalents
$
184

Real estate, net
77,787

Intangible assets, net
6,838

Other assets
248

 
 
Liabilities:
 
Deferred revenue
(290
)
Other liabilities and accrued expenses
(162
)
Total identifiable net assets assumed
$
84,605


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
1.61
 
$
6,838


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 September 30, 2016, $6,808 of pretax income (loss) previously reported in corporate and other was allocated $2,634 and $4,174 to the specialty insurance and asset management operating segments, respectively. For the three months ended September 30, 2016, inclusive of what was allocated to the asset management operating segment there was $3,312 of net income (loss) attributable to consolidated CLOs. For the

F-17


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


nine months ended September 30, 2016, $20,160 of pretax income (loss) previously reported in corporate and other was allocated $10,527 and $9,633 to the specialty insurance and asset management operating segments, respectively. For the nine months ended September 30, 2016, inclusive of what was allocated to the asset management operating segment there was $7,583 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 impact 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 investment portfolio also includes results related to corporate loans held at fair value and non-performing residential mortgage loans due to the aforementioned segment realignment.
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) 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) and the Company’s mortgage businesses, which consist of Luxury and Reliance. 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Total revenue
$
118,714

 
$
1,448

 
$
19,583

 
$
24,976

 
$
(202
)
 
$
164,519

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
121,059

 
1,058

 
21,118

 
22,381

 
6,916

 
172,532

Net income attributable to consolidated CLOs

 
2,583

 

 

 

 
2,583

Income (loss) before taxes
$
(2,345
)
 
$
2,973

 
$
(1,535
)
 
$
2,595

 
$
(7,118
)
 
$
(5,430
)
Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(2,052
)
Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
(3,378
)
Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
(264
)
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
(3,114
)

F-18


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
Specialty insurance(1)
 
Asset management(1)
 
Senior living
 
Specialty finance
 
Corporate and other(1)
 
Total
Total revenue
$
82,630

 
$
4,746

 
$
15,695

 
$
29,013

 
$
76

 
$
132,160

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
71,971

 
2,303

 
16,168

 
24,832

 
9,368

 
124,642

Net income attributable to consolidated CLOs

 
4,032

 

 

 

 
4,032

Income (loss) before taxes
$
10,659

 
$
6,475

 
$
(473
)
 
$
4,181

 
$
(9,292
)
 
$
11,550

Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
3,712

Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
7,838

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
1,933

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
5,905

(1) Reclassified to conform to current period presentation

 
Nine Months Ended September 30, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Total revenue
$
351,731

 
$
8,239

 
$
55,927

 
$
70,325

 
$
75

 
$
486,297

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
350,007

 
4,549

 
61,286

 
67,696

 
22,273

 
505,811

Net income (loss) attributable to consolidated CLOs

 
9,393

 

 

 

 
9,393

Income (loss) before taxes
$
1,724

 
$
13,083

 
$
(5,359
)
 
$
2,629

 
$
(22,198
)
 
$
(10,121
)
Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(2,761
)
Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
(7,360
)
Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
(903
)
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
(6,457
)
 
Nine Months Ended September 30, 2016
 
Specialty insurance(1)
 
Asset management(1)
 
Senior living
 
Specialty finance
 
Corporate and other(1)
 
Total
Total revenue
$
268,743

 
$
10,754

 
$
44,204

 
$
67,790

 
$
3,568

 
$
395,059

 
 
 
 
 
 
 
 
 
 
 
 
Total expense
233,116

 
6,131

 
49,691

 
62,280

 
26,319

 
377,537

Net income (loss) attributable to consolidated CLOs

 
10,049

 

 

 

 
10,049

Income (loss) before taxes
$
35,627

 
$
14,672

 
$
(5,487
)
 
$
5,510

 
$
(22,751
)
 
$
27,571

Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
5,298

Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
22,273

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
4,680

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
 
 
 
 
 
 
 
 
 
$
17,593

(1) Reclassified to conform to current period presentation
 
 
 
 
 
 
 
 
 
 
 
 

F-19


TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share data)


The following table presents the segment assets for the following periods:
 
Segment Assets as of September 30, 2017
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
Segment assets
$
1,319,165

 
$
21,175

 
$
390,818

 
$
303,203

 
$
41,619

 
$
2,075,980

Assets of consolidated CLOs

 
372,774

 

 

 

 
372,774

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,448,754

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of December 31, 2016
 
Specialty insurance
 
Asset management
 
Senior living
 
Specialty finance
 
Corporate and other
 
Total
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

(1) Reclassified to conform to current period presentation

(5) Investments

Available for Sale Securities, at fair value

All of the Company’s investments in available for sale securities as of September 30, 2017 and December 31, 2016 are held by subsidiaries in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
 
As of September 30, 2017
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
36,474

 
$
96

 
$
(216
)
 
$
36,354

Obligations of state and political subdivisions
47,542

 
415

 
(324
)
 
47,633

Corporate securities
53,589

 
447

 
(167
)
 
53,869

Asset backed securities
24,011

 
105

 
(16
)
 
24,100